form10-k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
(Mark
One)
X
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the fiscal year ended December 31, 2008
or
|
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
of incorporation)
|
(I.R.S.
Employer Identification No.)
|
1201
S. Beckham Avenue, Tyler, Texas
|
75701
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
Registrant's
telephone number, including area code: (903) 531-7111
Securities
registered pursuant to Section 12(b) of the Act:
|
Name
of each exchange
|
Title
of each class
|
on
which registered
|
COMMON
STOCK, $1.25 PAR VALUE
|
NASDAQ
Global Select Market
|
Securities
registered pursuant to Section 12(g) of the Act:
NONE
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes [ ] No
[X]
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes [ ] No [X]
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 [
]
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.
[ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer
[ ] Accelerated
filer [ü]
Non-accelerated
filer (do not check if a smaller reporting
company) [ ] Smaller
reporting company [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X]
The
aggregate market value of the common stock held by non-affiliates of the
registrant as of June 30, 2008 was $215,736,272.
As of
February 13, 2009, 14,024,526 shares of common stock of Southside Bancshares,
Inc. were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain
portions of the Registrant's proxy statement to be filed for the Annual Meeting
of Shareholders to be held April 16, 2009 are incorporated by reference into
Part III of this Annual Report on Form 10-K. Other than those
portions of the proxy statement specifically incorporated by reference pursuant
to Items 10-14 of Part III hereof, no other portions of the proxy statement
shall be deemed so incorporated.
IMPORTANT INFORMATION ABOUT
THIS REPORT
In this
report, the words “the Company,” “we,” “us,” and “our” refer to the combined
entities of Southside Bancshares, Inc. and its subsidiaries. The
words “Southside” and “Southside Bancshares” refer to Southside Bancshares,
Inc. The words “Southside Bank” and “the Bank” refer to Southside
Bank (which, subsequent to the internal merger of Fort Worth National Bank
(“FWNB”) with and into Southside Bank, includes FWNB). The word
“FWBS” refers to Fort Worth Bancshares, Inc. The word “SFG” refers to
Southside Financial Group, LLC. of which Southside owns a 50%
interest.
PART
I
FORWARD-LOOKING
INFORMATION
The disclosures set forth in this item
are qualified by the section captioned “Forward-Looking Information” in “Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations” of this Annual Report on Form 10-K and other cautionary
statements set forth elsewhere in this report.
GENERAL
Southside Bancshares, Inc.,
incorporated in Texas in 1982, is a bank holding company for Southside Bank, a
Texas state bank headquartered in Tyler, Texas. Tyler has a
metropolitan area population of approximately 195,000 and is located
approximately 90 miles east of Dallas, Texas and 90 miles west of Shreveport,
Louisiana.
At December 31, 2008, our total assets
were $2.70 billion, total loans were $1.02 billion, deposits were $1.56 billion,
and shareholders’ equity was $160.6 million. For the years ended
December 31, 2008 and 2007, our net income was $30.7 million and $16.7 million,
respectively, and diluted earnings per common share were $2.16 and $1.18,
respectively. We have paid a cash dividend every year since
1970.
We are a community-focused financial
institution that offers a full range of financial services to individuals,
businesses, municipal entities, and non-profit organizations in the communities
we serve. These services include consumer and commercial loans,
deposit accounts, trust services, safe deposit services and brokerage
services.
Our consumer loan services include 1-4
family residential mortgage loans, home equity loans, home improvement loans,
automobile loans and other installment loans. Commercial loan
services include short-term working capital loans for inventory and accounts
receivable, short and medium-term loans for equipment or other business capital
expansion, commercial real estate loans and municipal loans. We also
offer construction loans for 1-4 family residential and commercial real
estate.
We offer a variety
of deposit accounts with a wide range of interest rates and terms, including
savings, money market, interest and noninterest bearing checking accounts and
certificates of deposit (“CDs”). Our trust services include
investment, management, administration and advisory services, primarily for
individuals and, to a lesser extent, partnerships and
corporations. At December 31, 2008, our trust department managed
approximately $628 million of trust assets.
We and our subsidiaries are subject to
comprehensive regulation, examination and supervision by the Board of Governors
of the Federal Reserve System (the “Federal Reserve”), the Texas Department of
Banking (the “TDB”) and the Federal Deposit Insurance Corporation (the “FDIC”)
and are subject to numerous laws and regulations relating to internal controls,
the extension of credit, making of loans to individuals, deposits, and all other
facets of our operations.
On October
10, 2007, Southside completed the acquisition of FWBS and its wholly-owned
subsidiaries, Fort Worth Bancorporation, Inc., FWNB and Magnolia Trust Company
I. Southside purchased all of the outstanding capital stock of FWBS
for approximately $37 million. FWNB operated two banking offices in
Fort Worth, one banking office in Arlington and a loan production office in
Austin. At the time of purchase FWNB had approximately $124 million
in total assets, $105 million in loans and $103 million in
deposits.
Our administrative offices are located
at 1201 South Beckham Avenue, Tyler, Texas 75701, and our telephone number
is 903-531-7111. Our website can be found at www.southside.com. Our
public filings with the Securities and Exchange Commission (the “SEC”) may be
obtained free of charge at either our website or the SEC’s website, www.sec.gov, as soon as reasonably
practicable after filing with the SEC.
RECENT
DEVELOPMENTS
During September 2008, we completed the
merger of FWNB, which operated two branches in Fort Worth, one branch in
Arlington and a loan production office in Austin, into Southside
Bank. This resulted in the termination of the FWNB charter and the
integration of FWNB into our branch network.
MARKET
AREA
We consider our primary market area to
be all of Smith, Gregg, Tarrant, Travis, Cherokee, Anderson, Kaufman, Henderson
and Wood Counties in Texas, and to a lesser extent, portions of adjoining
counties. Our expectation is that our presence in all of the market
areas we serve will continue to grow in the future. In addition, we
continue to explore new markets in which we believe we can expand
successfully.
The principal economic activities in
our market areas include retail, distribution, manufacturing, medical services,
education and oil and gas industries. Additionally, the industry base
includes conventions and tourism, as well as retirement
relocation. These economic activities support a growing regional
system of medical service, retail and education centers. Tyler,
Longview, Fort Worth, Austin and Arlington are home to several nationally
recognized health care systems that represent all major
specialties.
We serve our markets through 44 branch
locations, 18 of which are located in grocery stores. The branches
are located in and around Tyler, Longview, Lindale, Gresham, Jacksonville,
Bullard, Chandler, Hawkins, Seven Points, Palestine, Forney, Gun Barrel City,
Athens, Whitehouse, Fort Worth, Arlington and Austin. Our advertising
is designed to target the market areas we serve. The type and amount
of advertising done in each market area is directly attributable to our market
share in that market area combined with overall cost.
We also maintain 11 motor bank
facilities. Our customers may also access various banking services
through our 47 automated teller machines (“ATMs”) and ATMs owned by others,
through debit cards, and through our automated telephone, internet and
electronic banking products. These products allow our customers to
apply for loans from their computers, access account information and conduct
various other transactions from their telephones and computers.
THE
BANKING INDUSTRY IN TEXAS
The banking industry is affected by
general economic conditions such as interest rates, inflation, recession,
unemployment and other factors beyond our control. During the last
ten to 15 years the Texas economy has continued to diversify, decreasing the
overall impact of fluctuations in oil and gas prices; however, the oil and gas
industry is still a significant component of the Texas
economy. During 2008, our market areas began to experience the
effects of the housing-led slowdown that were impacting other regions of the
United States. Beginning in the fourth quarter, as oil prices
declined significantly and consumers all across the United States were impacted
even more severely by the economic slowdown, our market areas began to
experience a greater slowdown in economic activity. We cannot predict
whether current economic conditions will improve, remain the same or
decline.
COMPETITION
The activities we are engaged in are
highly competitive. Financial institutions such as savings and loan
associations, credit unions, consumer finance companies, insurance companies,
brokerage companies and other financial institutions with varying degrees of
regulatory restrictions compete vigorously for a share of the financial services
market. During 2008, the number of financial institutions in our
market areas increased, a trend that we expect will
continue. Brokerage and insurance companies continue to become more
competitive in the financial services arena and pose an ever increasing
challenge to banks. Legislative changes also greatly affect the level
of competition we face. Federal legislation allows credit unions to
use their expanded membership capabilities, combined with tax-free status, to
compete more fiercely for traditional bank business. The tax-free
status granted to credit unions provides them a significant competitive
advantage. Many of the largest banks operating in Texas, including
some of the largest banks in the country, have offices in our market
areas. Many of these institutions have capital resources, broader
geographic markets, and legal lending limits substantially in excess of those
available to us. We face competition from institutions that offer
products and services we do not or cannot currently offer. Some
institutions we compete with offer interest rate levels on loan and deposit
products that we are unwilling to offer due to interest rate risk and overall
profitability concerns. We expect the level of competition to
increase.
EMPLOYEES
At February 13, 2009, we employed
approximately 546 full time equivalent persons. None of the employees
are represented by any unions or similar groups, and we have not experienced any
type of strike or labor dispute. We consider the relationship with
our employees to be good.
EXECUTIVE
OFFICERS OF THE REGISTRANT
Our executive officers as of
December 31, 2008 and as of February 13, 2009 were as follows:
B. G.
Hartley (Age 79), Chairman of the Board and Chief Executive Officer of Southside
Bancshares, Inc. since 1983. He also serves as Chairman of the Board
and Chief Executive Officer of Southside Bank, having served in these capacities
since Southside Bank's inception in 1960.
Sam
Dawson (Age 61), President, Secretary and Director of Southside Bancshares, Inc.
since 1998. He also has served as President, Chief Operations Officer
and Director of Southside Bank since 1996. He became an officer of
Southside Bancshares, Inc. in 1982 and of Southside Bank in 1975.
Robbie N.
Edmonson (Age 77), Vice Chairman of the Board of Southside Bancshares, Inc. and
Southside Bank since 1998. He joined Southside Bank as a vice
president in 1968.
Jeryl
Story (Age 57), Executive Vice President of Southside Bancshares, Inc. since
2000, and Senior Executive Vice President - Loan Administration, Senior Lending
Officer and Director of Southside Bank since 1996. He joined
Southside Bank in 1979 as an officer in Loan Documentation.
Lee R.
Gibson (Age 52), Executive Vice President and Chief Financial Officer of
Southside Bancshares, Inc. and of Southside Bank since 2000. He is
also a Director of Southside Bank. He became an officer of Southside
Bancshares, Inc. in 1985 and of Southside Bank in 1984.
All the individuals named above serve
in their capacity as officers of Southside Bancshares, Inc. and Southside Bank
and are appointed annually by the board of directors of each
entity.
SUPERVISION
AND REGULATION
General
Banking is a complex, highly regulated
industry. As bank holding companies under federal law, Southside
Bancshares, Inc. and its wholly-owned subsidiary, Southside Delaware Financial
Corporation, (collectively, the “Holding Companies”) are subject to regulation,
supervision and examination by the Board of Governors of the Federal Reserve
System (“Federal Reserve”). As a Texas-chartered state bank,
Southside Bank is subject to regulation, supervision and examination by the
Texas Department of Banking (“TDB”), as its chartering authority, and by the
Federal Deposit Insurance Corporation (“FDIC”), as its primary federal regulator
and deposit insurer. This system of regulation and supervision
applicable to us establishes a comprehensive framework for our operations and is
intended primarily for the protection of the FDIC’s Deposit Insurance Fund
(“DIF”) and the public rather than our shareholders and creditors.
The earnings of Southside Bank and,
therefore, the earnings of the Holding Companies, are affected by general
economic conditions, changes in federal and state laws and regulations and
actions of various regulatory authorities, including those referenced
above. Proposals to change the laws and regulations applicable to us
are frequently introduced at both the federal and state
levels. Current proposals include an extensive restructuring of the
regulatory framework within which we operate. The likelihood and
timing of any such change and the impact any such change may have on us are
impossible to determine with any certainty. Set forth below is a
brief description of the significant federal and state laws and regulations to
which we are currently subject. These descriptions do not purport to
be complete and are qualified in their entirety by reference to the particular
statutory or regulatory provision.
Holding Company
Regulation
As bank holding companies under the
Bank Holding Company Act of 1956 (“BHCA”), as amended, the Holding Companies are
registered with and subject to regulation, supervision and examination by the
Federal Reserve. The Holding Companies are required to file annual
and other reports with, and furnish information to, the Federal Reserve, which
makes periodic inspections of the Holding Companies.
Permitted
Activities.
Under the BHCA, a bank holding company is generally permitted to engage in, or
acquire direct or indirect control of more than 5 percent of the voting
shares of any company engaged in the following activities:
·
|
banking
or managing or controlling banks;
|
·
|
furnishing
services to or performing services for our subsidiaries;
and
|
·
|
any
activity that the Federal Reserve determines to be so closely related to
banking as to be a proper incident to the business of banking,
including:
|
o
|
factoring
accounts receivable;
|
o
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making,
acquiring, brokering or servicing loans and usual related
activities;
|
o
|
leasing
personal or real property;
|
o
|
operating
a nonbank depository institution, such as a savings
association;
|
o
|
trust
company functions;
|
o
|
financial
and investment advisory activities;
|
o
|
conducting
discount securities brokerage
activities;
|
o
|
underwriting
and dealing in government obligations and money market
instruments;
|
o
|
providing
specified management consulting and counseling
activities;
|
o
|
performing
selected data processing services and support
services;
|
o
|
acting
as agent or broker in selling credit life insurance and other types of
insurance in connection with credit transactions;
and
|
o
|
performing
selected insurance underwriting
activities.
|
The Federal
Reserve has the authority to order a bank holding company or its subsidiaries to
terminate any of these activities or to terminate its ownership or control of
any subsidiary when it has reasonable cause to believe that the bank holding
company’s continued ownership, activity or control constitutes a serious risk to
the financial safety, soundness or stability of it or any of its bank
subsidiaries.
Bank
holding companies meeting certain eligibility requirements may elect to become a
“financial holding company.” A financial holding company and
companies under its control may engage in activities that are “financial in
nature,” as defined by the Gramm-Leach-Bliley Act (“GLBA”) and Federal Reserve
interpretations, and therefore may engage in a broader range of activities than
those permitted for bank holding companies and their
subsidiaries. Financial activities specifically include insurance
brokerage and underwriting, securities underwriting and dealing, merchant
banking, investment advisory and lending activities. Financial
holding companies and their subsidiaries also may engage in additional
activities that are determined by the Federal Reserve, in consultation with the
Treasury Department, to be “financial in nature or incidental to” a financial
activity or are determined by the Federal Reserve unilaterally to be
“complimentary” to financial activities. The Holding Companies have
not sought financial holding company status. However, there can be no
assurance that they will not make such an election in the future. If
the Holding Companies were to elect financial holding company status, the Bank
and any other insured depository institution the Holding Companies control would
have to be well capitalized, well managed, and have at least a satisfactory
rating under the Community Reinvestment Act (discussed below).
Capital
Adequacy. Each of the federal banking agencies, including the
Federal Reserve and the FDIC, has issued substantially similar risk-based and
leverage capital guidelines applicable to the banking organizations they
supervise.
The
agencies’ risk-based guidelines define a three-tier capital
framework. Tier 1 capital includes common shareholders’ equity; trust
preferred securities, minority interests and qualifying preferred stock, less
goodwill and other adjustments. Tier 2 capital consists of preferred
stock not qualifying as Tier 1 capital, mandatorily convertible debt, limited
amounts of subordinated debt, other qualifying term debt, a limited amount of
the allowance for credit losses and other adjustments. Tier 3 capital
includes subordinated debt that is unsecured, fully paid, has an original
maturity of at least two years, is not redeemable before maturity without prior
approval by the Federal Reserve and includes a lock-in clause precluding payment
of either interest or principal if the payment would cause the issuing bank’s
risk-based capital ratio to fall or remain below the requirement
minimum. The sum of Tier 1 and Tier 2 capital less investments in
unconsolidated subsidiaries represents qualifying total capital.
Risk-based
capital ratios are calculated by dividing, as appropriate, total capital and
Tier 1 capital by risk-weighted assets. Assets and off-balance sheet
exposures are assigned to one of four categories of risk-weights, based
primarily on relative credit risk. Under these risk-based capital
requirements, the Holding Companies and Southside Bank are each generally
required to maintain a minimum ratio of total capital to risk-weighted assets of
at least 8% and a minimum ratio of Tier 1 capital to risk-weighted assets of at
least 4%. To the extent we engage in trading activities, we are
required to adjust our risk-based capital ratios to take into consideration
market risks that may result from movements in market prices of covered trading
positions in trading accounts, or from foreign exchange or commodity positions,
whether or not in trading accounts, including changes in interest rates, equity
prices, foreign exchange rates or commodity prices. Any capital
required to be maintained under these provisions may consist of Tier 3
capital.
Each of the federal bank regulatory
agencies, including the Federal Reserve and the FDIC, also have established
minimum leverage capital requirements for the banking organizations they
supervise. These requirements provide that banking organizations that
meet certain criteria, including excellent asset quality, high liquidity, low
interest rate exposure and good earnings, and that have received the highest
regulatory rating must maintain a ratio of Tier 1 capital to total adjusted
average assets of at least 3%. Institutions not meeting these
criteria, as well as institutions with supervisory, financial or operational
weaknesses, are expected to maintain a minimum Tier 1 capital to total adjusted
average assets ratio equal to 100 to 200 basis points above that stated
minimum. Holding companies experiencing internal growth or making
acquisitions are expected to maintain strong capital positions substantially
above the minimum supervisory levels without significant reliance on intangible
assets. The Federal Reserve also continues to consider a “tangible
Tier 1 capital leverage ratio” (deducting all intangibles) and other indicators
of capital strength in evaluating proposals for expansion or new
activity.
In 2004,
the Basel Committee on Banking Supervision published a new set of risk-based
capital standards (“Basel II”) in order to update the original international
capital standards that had been put in place in 1988 (“Basel
I”). Basel II adopts a three-pillar framework comprised of minimum
capital requirements, supervisory assessment of capital adequacy and market
discipline. Basel II provides several options for determining capital
requirements for credit and operational risk. In December 2007, the
agencies adopted a final rule implementing Basel II’s advanced
approach. The final rule became effective on April 1,
2008. Compliance with the final rule is mandatory only for “core
banks” - U.S. banking organizations with over $250 billion in banking assets or
on-balance-sheet foreign exposures of at least $10 billion. Other
U.S. banking organizations that meet applicable qualification requirements may
elect, but are not required, to comply with the final rule. The final
rule also allows a banking organization’s primary federal regulator to determine
that application of the rule would not be appropriate in light of the
organization’s asset size, level of complexity, risk profile or scope of
operations. In July 2008, in order to address the potential
competitive inequalities resulting from the now bifurcated risk-based capital
system in the United States, the agencies agreed to issue a proposed rule that
would provide non-core banks with the option to adopt an approach consistent
with Basel II’s standardized approach. This proposed new rule will
replace the agencies’ earlier proposed amendments to existing Basel I risk-based
capital rules (referred to as the “Basel I-A” approach). At
this time, U.S. banking organizations not subject to the final rule are required
to continue to use the existing Basel I risk-based capital rules. The
Holding Companies are not required, and have not elected, to comply with the
final rule.
The
ratios of Tier 1 capital, total capital to risk-adjusted assets, and leverage
capital of the Company and the Bank as of December 31, 2008, are shown in
the following table.
|
|
Capital
Adequacy Ratios
|
|
|
|
Regulatory
Minimums
|
|
|
Regulatory
Minimums
to
be Well-Capitalized
|
|
|
Southside
Bancshares, Inc.
|
|
|
Southside
Bank
|
|
|
Risk-based
capital ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Capital (1)
|
|
|
4.0
|
% |
|
|
6.0
|
% |
|
|
16.04
|
% |
|
|
16.10
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
risk-based capital (2)
|
|
|
8.0 |
|
|
|
10.0 |
|
|
|
17.66 |
|
|
|
17.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 leverage ratio (3)
|
|
|
4.0 |
|
|
|
5.0 |
|
|
|
7.48 |
|
|
|
7.51 |
|
(1)
|
|
Common
shareholders’ equity excluding unrealized gains or losses on debt
securities available for sale, unrealized gains on equity securities
available for sale and unrealized gains or losses on cash flow hedges, net
of deferred income taxes; plus certain mandatorily redeemable capital
securities, less nonqualifying intangible assets net of applicable
deferred income taxes, and certain nonfinancial equity investments;
computed as a ratio of risk-weighted assets, as defined in the risk-based
capital guidelines.
|
(2)
|
|
The
sum of Tier 1 capital, a qualifying portion of the allowance for credit
losses, qualifying subordinated debt and qualifying unrealized gains on
available for sale equity securities; computed as a ratio of risk-weighted
assets, as defined in the risk-based capital
guidelines.
|
(3)
|
|
Tier
1 capital computed as a percentage of fourth quarter average assets less
nonqualifying intangibles and certain nonfinancial equity
investments.
|
Source
of Strength. Federal Reserve policy requires a bank holding
company to act as a source of financial strength and to take measures to
preserve and protect bank subsidiaries in situations where additional
investments in a troubled bank may not otherwise be warranted. As a
result, a bank holding company may be required to contribute additional capital
to its subsidiaries in the form of capital notes or other instruments which
qualify as capital under regulatory rules. Any such loans from the
holding company to its subsidiary banks likely will be unsecured and
subordinated to the bank’s depositors and perhaps to other creditors of the
bank. See also Bank
Regulation - Prompt Corrective Action.
Dividends. The
principal source of our liquidity at the parent company level is dividends from
Southside Bank. Southside Bank is subject to federal and state
restrictions on its ability to pay dividends to Southside Delaware Financial
Corporation, the direct parent of Southside Bank, which in turn may affect the
ability of Southside Delaware to pay dividends to the Company. We
must pay essentially all of our operating expenses from funds we receive from
Southside Bank. Therefore, shareholders may receive dividends from us
only to the extent that funds are available after payment of our operating
expenses. Consistent with its “source of strength” policy, the
Federal Reserve discourages bank holding companies from paying dividends except
out of operating earnings and prefers that dividends be paid only if, after the
payment, the prospective rate of earnings retention appears consistent with the
bank holding company’s capital needs, asset quality and overall financial
condition.
Change
in Control. Under the Change in Bank Control Act (“CBCA”),
persons who intend to acquire direct or indirect control of a depository
institution, must give 60 days prior notice to the appropriate federal banking
agency. With respect to the Holding Companies, “control” would exist
where an acquiring party directly or indirectly owns, controls or has the power
to vote at least 25% of our voting securities. Under the Federal
Reserve’s CBCA regulations, a rebuttable presumption of control would arise with
respect to an acquisition where, after the transaction, the acquiring party
owns, controls or has the power to vote at least 10% (but less than 25%) of our
voting securities.
Acquisitions. The
BHCA provides that a bank holding company must obtain the prior approval of the
Federal Reserve (i) for the acquisition of more than five percent of the voting
stock in any bank or bank holding company, (ii) for the acquisition of
substantially all the assets of any bank or bank holding company or (iii) in
order to merge or consolidate with another bank holding company.
Regulatory
Examination. Federal and state
banking agencies require the Holding Companies and Southside Bank to prepare
annual reports on financial condition and to conduct an annual audit of
financial affairs in compliance with minimum standards and
procedures. Southside Bank, and in some cases the Holding Companies
and any nonbank affiliates, must undergo regular on-site examinations by the
appropriate banking agency. The cost of examinations may be assessed
against the examined organization as the agency deems necessary or
appropriate. The FDIC has developed a method for insured depository
institutions to provide supplemental disclosure of the estimated fair market
value of assets and liabilities, to the extent feasible and practicable, in any
balance sheet, financial statement, report of condition or any other
report.
Enforcement
Authority. The Federal
Reserve has broad enforcement powers over bank holding companies and their
nonbank subsidiaries and has authority to prohibit activities that represent
unsafe or unsound banking practices or constitute knowing or reckless violations
of laws or regulations. These powers may be exercised through the
issuance of cease and desist orders, civil money penalties or other
actions. Civil money penalties can be as high as $1,000,000 for each
day the activity continues.
Bank
Regulation
Southside Bank is a Texas-chartered
commercial bank, the deposits of which are insured up to the applicable limits
by the DIF of the FDIC. It is not a member of the Federal Reserve
System. The Bank is subject to extensive regulation, examination and
supervision by the TDB, as its chartering authority, and by the FDIC, as its
primary federal regulator and deposit insurer. The federal and state
laws applicable to banks regulate, among other things, the scope of their
business and investments, lending and deposit-taking activities, borrowings,
maintenance of retained earnings and reserve accounts, distribution of earnings
and payment of dividends.
Permitted
Activities and Investments. Under the Federal Deposit
Insurance Act (“FDIA”), the activities and investments of state nonmember banks
are generally limited to those permissible for national banks, notwithstanding
state law. With FDIC approval, a state nonmember bank may engage in activities
not permissible for a national bank if the FDIC determines that the activity
does not pose a significant risk to the DIF and that the bank meets its minimum
capital requirements. Similarly, under Texas law, a state bank may
engage in those activities permissible for national banks domiciled in
Texas. The TDB may permit a Texas state bank to engage in additional
activities so long as the performance of the activity by the bank would not
adversely affect the safety and soundness of the bank.
Brokered
Deposits. Southside Bank also may be restricted in its ability
to accept brokered deposits, depending on its capital
classification. Only “well capitalized” banks are permitted to accept
brokered deposits. The FDIC may, on a case-by-case basis, permit
banks that are adequately capitalized to accept brokered deposits if the FDIC
determines that acceptance of such deposits would not constitute an unsafe or
unsound banking practice with respect to the bank.
Loans-to-One-Borrower. Under
Texas law, without the approval of the TDB and subject to certain limited
exceptions, the maximum aggregate amount of loans that Southside Bank is
permitted to make to any one borrower is 25% of Tier 1 capital.
Insider
Loans. Under Regulation O of the Federal Reserve, as made
applicable to state nonmember banks by section 18(j)(2) of the FDIA, Southside
Bank is subject to quantitative restrictions on extensions of credit to its
executive officers and directors, the executive officers and directors of the
Holding Companies, any owner of 10% or more of its stock or the stock of
Southside Bancshares, Inc., and certain entities affiliated with any such
persons. Any such extensions of credit must (i) be made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with
third
parties and (ii) not involve more than the normal risk of repayment or present
other unfavorable features. Additional restrictions are imposed on
extensions of credit to executive officers.
Deposit
Insurance. The deposits of Southside Bank are insured by the
DIF of the FDIC, up to the applicable limits established by law and are subject
to the deposit insurance premium assessments of the DIF. The FDIC
uses a risk-based premium assessment system, which was amended by the Federal
Deposit Insurance Reform Act of 2005 (the “Reform Act”). Under this
system, assessment rates for insured depository institutions vary according to
the institution’s level of risk. To arrive at an assessment rate, the
FDIC assigns an institution to one of four risk categories (with the first
category having two subcategories based on the institution’s most recent
supervisory and capital evaluations) designed to measure
risk. Assessment rates in 2008 ranged from 0.05% of deposits (for
institutions in the highest category) to 0.43% of deposits (for institutions in
the lowest category), but could be higher under certain
conditions. The FDIC is authorized to raise the assessment rates as
necessary to maintain the required reserve ratio of 1.25%. Under the
current system, premiums are assessed quarterly. The Reform Act also
provided for a one-time premium assessment credit for eligible depository
institutions, including those institutions in existence and paying deposit
insurance premiums at December 31, 1996, and is applied automatically to reduce
the institution’s quarterly premium assessment to the maximum extent allowed,
until the credit is exhausted.
In
addition, all FDIC-insured institutions are required to pay a pro rata portion
of the interest due on bonds issued by the Financing Corporation (“FICO”) to
fund the closing and disposal of failed thrift institutions by the Resolution
Trust Corporation. FICO assessments are set quarterly, and in 2008
ranged from 1.14 basis points in the first quarter to 1.10 basis
points in the fourth quarter. These assessments will continue until
the FICO bonds mature in 2017 through 2019.
Effective
November 21, 2008 and until December 31, 2009, the FDIC expanded deposit
insurance limits for certain accounts under the FDIC’s Temporary Liquidity
Guarantee Program. Provided an institution has not opted out of the
Temporary Liquidity Guarantee Program, the FDIC will fully guarantee funds
deposited in noninterest bearing transaction accounts, including
(i) interest on Lawyer Trust Accounts or IOLTA accounts, and
(ii) negotiable order of withdrawal or NOW accounts with rates no higher
than 0.50 percent if the institution has committed to maintain the interest
rate at or below that rate. In conjunction with the increased deposit
insurance coverage, insurance assessments also increase. Southside
Bank has not opted out of the Temporary Liquidity Guarantee
Program.
Capital
Adequacy. See Holding Company Regulation – Capital
Adequacy.
Prompt
Corrective Action. The Federal Deposit Insurance Improvement
Act of 1991 (“FDICIA”), among other things, identifies five capital categories
for insured depository institutions (well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized). FDICIA requires the federal banking agencies,
including the FDIC, to implement systems for “prompt corrective action” for
insured depository institutions that do not meet minimum capital requirements
within these categories. The FDICIA imposes progressively more
restrictive restraints on operations, management and capital distributions, as
the classification of a bank or thrift deteriorates. Failure to meet
the capital guidelines also could subject a depository institution to capital
raising requirements. An “undercapitalized” bank must develop a
capital restoration plan and its parent holding company must guarantee the
bank’s compliance with the plan. The liability of the parent holding
company under any such guarantee is limited to the lesser of 5% of the bank’s
assets at the time it became “undercapitalized” or the amount needed to comply
with the plan. Furthermore, in the event of the bankruptcy of the
parent holding company, such guarantee would take priority over the parent’s
general unsecured creditors. The Bank currently meets the criteria
for “well-capitalized.”
Within the “prompt corrective action”
regulations, the federal banking agencies also have established procedures for
“downgrading” an institution to a lower capital category based on supervisory
factors other than capital. Specifically, a federal banking agency
may, after notice and an opportunity for a hearing, reclassify a
well-capitalized institution as adequately capitalized and may require an
adequately capitalized institution or an undercapitalized institution to comply
with supervisory actions as if it were in the next lower
category
if the institution is operating in an unsafe or unsound condition or engaging in
an unsafe or unsound practice. The FDIC may not, however, reclassify
a significantly undercapitalized institution as critically
undercapitalized.
In
addition to the “prompt corrective action” directives, failure to meet capital
guidelines may subject a banking organization to a variety of other enforcement
remedies, including additional substantial restrictions on its operations and
activities, termination of deposit insurance by the FDIC and, under certain
conditions, the appointment of a conservator or receiver.
Standards
for Safety and Soundness. The FDIA also requires the federal
banking regulatory agencies to prescribe, by regulation or guideline,
operational and managerial standards for all insured depository institutions
relating to: (i) internal controls, information systems and internal audit
systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest
rate risk exposure; and (v) asset growth. The agencies also must
prescribe standards for asset quality, earnings, and stock valuation, as well as
standards for compensation, fees and benefits. The federal banking
agencies have adopted regulations and Interagency Guidelines Prescribing
Standards for Safety and Soundness (“Guidelines”) to implement these required
standards. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes
impaired. Under the regulations, if the FDIC determines that the Bank
fails to meet any standards prescribed by the Guidelines, it may require the
Bank to submit an acceptable plan to achieve compliance, consistent with
deadlines for the submission and review of such safety and soundness compliance
plans.
Dividends. All
dividends paid by Southside Bank are paid to the Company, as sole indirect
shareholder of Southside Bank, through Southside Delaware. The
ability of Southside Bank, as a Texas state bank, to pay dividends is restricted
under federal and state law and regulations. As an initial matter,
the FDICIA and the regulations of the FDIC generally prohibit an insured
depository institution from making a capital distribution (including payment of
dividend) if, thereafter, the institution would not be at least adequately
capitalized. Under Texas law, Southside Bank generally may not pay a
dividend reducing its capital and surplus without the prior approval of the
Texas Banking Commissioner. All dividends must be paid out of net
profits then on hand, after deducting expenses, including losses and provisions
for loan losses.
Southside
Bank’s general dividend policy is to pay dividends at levels consistent with
maintaining liquidity and preserving applicable capital ratios and servicing
obligations. Southside Bank’s dividend policies are subject to the
discretion of its board of directors and will depend upon such factors as future
earnings, financial conditions, cash needs, capital adequacy, compliance with
applicable statutory and regulatory requirements and general business
conditions. The exact amount of future dividends paid by Southside
Bank will be a function of its general profitability (which cannot be accurately
estimated or assured), applicable tax rates in effect from year to year and the
discretion of its board of directors.
Transactions
with Affiliates. Southside Bank is subject to
sections 23A and 23B of the Federal Reserve Act (“FRA”) and the Federal
Reserve’s Regulation W, as made applicable to state nonmember banks by section
18(j) of the FDIA. Sections 23A and 23B of the FRA restrict a bank’s
ability to engage in certain transactions with its affiliates. An
affiliate of a bank is any company or entity that controls, is controlled by or
is under common control with the bank. In a holding company context,
the parent bank holding company and any companies controlled by such parent
holding company are generally affiliates of the bank.
Specifically,
section 23A places limits on the amount of “covered transactions,” which
include loans or extensions of credit to, and investments in or certain other
transactions with, affiliates. It also limits the amount of any
advances to third parties that are collateralized by the securities or
obligations of affiliates. The aggregate of all covered transactions
is limited to 10 percent of the bank’s capital and surplus for any one
affiliate and 20 percent for all affiliates. Additionally,
within the foregoing limitations, each covered transaction must meet specified
collateral requirements ranging from 100 to 130 percent of the loan amount,
depending on the type of collateral. Further, banks are prohibited
from purchasing low quality assets from an affiliate.
Section
23B, among other things, prohibits a bank from engaging in certain transactions
with affiliates unless the transactions are on terms substantially the same, or
at least as favorable to the bank, as those prevailing at the time for
comparable transactions with nonaffiliated companies.
Anti-Tying
Regulations. Under the BHCA and Federal Reserve’s regulations,
a bank is prohibited from engaging in certain tying or reciprocity arrangements
with its customers. In general, a bank may not extend credit, lease,
sell property, or furnish any services or fix or vary the consideration for
these products or services on the condition that either: (i) the customer obtain
or provide some additional credit, property, or services from or to the bank,
the bank holding company or subsidiaries thereof or (ii) the customer not obtain
credit, property, or service from a competitor, except to the extent reasonable
conditions are imposed to assure the soundness of the credit
extended. A bank may, however, offer combined-balance products and
may otherwise offer more favorable terms if a customer obtains two or more
traditional bank products.
Community
Reinvestment Act. Under the Community Reinvestment Act
(“CRA”), Southside Bank has a continuing and affirmative obligation, consistent
with safe and sound banking practices, to help meet the needs of our entire
community, including low- and moderate-income neighborhoods. The CRA
does not establish specific lending requirements or programs for banks nor does
it limit a bank’s discretion to develop the types of products and services that
it believes are best suited to its particular community.
On a periodic basis, the FDIC is
charged with preparing a written evaluation of our record of meeting the credit
needs of the entire community and assigning a rating - outstanding,
satisfactory, needs to improve or substantial noncompliance. Banks
are rated based on their actual performance in meeting community credit
needs. The FDIC will take that rating into account in its evaluation
of any application made by the bank for, among other things, approval of the
acquisition or establishment of a branch or other deposit facility, an office
relocation, a merger or the acquisition of shares of capital stock of another
financial institution. A bank’s CRA rating may be used as the basis
to deny or condition an application. In addition, as discussed above,
a bank holding company may not become a financial holding company unless each of
its subsidiary banks has a CRA rating of at least
“Satisfactory.” Southside Bank was last examined for compliance with
the CRA on March 12, 2007 and received a rating of “Outstanding.”
Branch
Banking. Pursuant to the Texas Finance Code, all banks located
in Texas are authorized to branch statewide. Accordingly, a bank
located anywhere in Texas has the ability, subject to regulatory approval, to
establish branch facilities near any of our facilities and within our market
area. If other banks were to establish branch facilities near our
facilities, it is uncertain whether these branch facilities would have a
material adverse effect on our business.
The Reigle-Neal Interstate Banking and
Branching Efficiency Act of 1994 provides for nationwide interstate banking and
branching, subject to certain age and deposit concentration limits that may be
imposed under applicable state laws. Texas law permits interstate
branching in two manners, with certain exceptions. First, a bank with
its main office outside of Texas may establish a branch in the State of Texas by
merging with a bank located in Texas that is at least five years old, so long as
the resulting institution and its affiliates would not hold more than 20% of the
total deposits in the state after the acquisition. In addition, a
bank with its main office outside of Texas generally may establish a branch in
the State of Texas on a de novo basis if the bank’s main office is located in a
state that would permit Texas banks to establish a branch on a de novo basis in
that state.
The FDIC has adopted regulations under
the Reigle-Neal Act to prohibit an out-of-state bank from using the interstate
branching authority primarily for the purpose of deposit
production. These regulations include guidelines to insure that
interstate branches operated by an out-of-state bank in a host state are
reasonably helping to meet the credit needs of the communities served by the
out-of-state bank.
Consumer
Regulation. The activities of Southside Bank are subject to a
variety of statutes and regulations designed to protect
consumers. Interest and other charges collected or contracted for by
the banks are subject to state usury laws and federal laws concerning interest
rates. Loan operations are also subject to federal laws applicable to credit
transactions, such as:
·
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the
federal Truth-In-Lending Act, governing disclosures of credit terms to
consumer borrowers;
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·
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the
Home Mortgage Disclosure Act, requiring financial institutions to provide
information to enable the public and public officials to determine whether
a financial institution is fulfilling its obligation to help meet the
housing needs of the community it
serves;
|
·
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the
Equal Credit Opportunity Act, prohibiting discrimination on the basis of
race, creed or other prohibited factors in extending
credit;
|
·
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the
Fair Credit Reporting Act, governing the use and provision of information
to credit reporting agencies;
|
·
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the
Fair Debt Collection Act, governing the manner in which consumer debts may
be collected by collection agencies;
and
|
·
|
the
rules and regulations of the various federal agencies charged with the
responsibility of implementing such federal
laws.
|
The
deposit operations also are subject to:
·
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the
Truth in Savings Act and Regulation DD, governing disclosure of deposit
account terms to consumers;
|
·
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the
Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures
for complying with administrative subpoenas of financial records;
and
|
·
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the
Electronic Funds Transfer Act and Regulation E issued by the Federal
Reserve Board, which governs automatic deposits to and withdrawals from
deposit accounts and customers’ rights and liabilities arising from the
use of automated teller machines and other electronic banking
services.
|
In
addition, Southside Bank also may be subject to certain state laws and
regulations designed to protect consumers.
Commercial
Real Estate Lending. Lending operations that
involve concentration of commercial real estate loans are subject to enhanced
scrutiny by federal banking regulators. The regulators have issued
guidance with respect to the risks posed by commercial real estate lending
concentrations. Real estate loans generally include land development,
construction loans, loans secured by multi-family property and nonfarm
nonresidential real property where the primary source of repayment is derived
from rental income associated with the property. The guidance
prescribes the following guidelines for examiners to help identify institutions
that are potentially exposed to concentration risk and may warrant greater
supervisory scrutiny:
·
|
total
reported loans for construction, land development and other land represent
100 percent or more of the institutions total capital,
or
|
·
|
total
commercial real estate loans represent 300 percent or more of the
institution’s total capital and the outstanding balance of the
institution’s commercial real estate loan portfolio has increased by
50 percent or more during the prior 36
months.
|
Anti-Money
Laundering. Southside Bank is subject to the regulations of
the Financial Crimes Enforcement Network (“FinCEN”), which implement the Bank
Secrecy Act, as amended by the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or
the “USA Patriot Act.” The USA Patriot Act gives the federal
government the power to address terrorist threats through enhanced domestic
security measures, expanded surveillance powers, increased information sharing,
and broadened anti-money laundering requirements. Title III of the
USA Patriot Act includes measures intended to encourage information sharing
among banks, regulatory agencies and law enforcement bodies. Further,
certain provisions of Title III impose affirmative obligations on a broad range
of financial institutions, including state-chartered banks like Southside
Bank.
The USA Patriot Act and the related
FinCEN regulations impose the following requirements with respect to financial
institutions:
·
|
establishment
of anti-money laundering programs, including adoption of written
procedures, designation of a compliance officer and auditing of the
program;
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·
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establishment
of a program specifying procedures for obtaining information from
customers seeking to open new accounts, including verifying the identity
of customers within a reasonable period of
time;
|
·
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establishment
of enhanced due diligence policies, procedures and controls designed to
detect and report money laundering;
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·
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prohibitions
on correspondent accounts for foreign shell banks and compliance with
recordkeeping obligations with respect to correspondent accounts of
foreign banks; and
|
·
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requirements
that bank regulators consider bank holding company or bank compliance in
connection with merger or acquisition
transactions.
|
Bank regulators routinely examine
institutions for compliance with these obligations and have been active in
imposing “cease and desist” orders and money penalty sanctions against
institutions found to be violating these obligations.
The
Federal Bureau of Investigation can send bank regulatory agencies lists of the
names of persons suspected of involvement in terrorist activities. Southside
Bank can be requested to search its records for any relationships or
transactions with persons on those lists and required to report any identified
relationships or transactions.
OFAC. The Office of Foreign
Assets Control (“OFAC”) is responsible for helping to insure that U.S. entities
do not engage in transactions with certain prohibited parties, as defined by
various Executive Orders and Acts of Congress. OFAC has sent, and
will continue to send, bank regulatory agencies lists of names of persons and
organizations suspected of aiding, harboring or engaging in terrorist acts,
known as Specially Designated Nationals and Blocked Persons. If we
find a name on any transaction, account or wire transfer that is on an OFAC
list, we must freeze such account, file a suspicious activity report and notify
the appropriate authorities.
Privacy
and Data Security. Under federal law, financial institutions
are generally prohibited from disclosing consumer information to non-affiliated
third parties unless the consumer has been given the opportunity to object and
has not objected to such disclosure. Financial institutions are
further required to disclose their privacy policies to consumers
annually. To the extent state laws are more protective of consumer
privacy, financial institutions must comply with state law privacy
provisions.
In addition, federal and state banking
agencies have prescribed standards for maintaining the security and
confidentiality of consumer information. Southside Bank is subject to
such standards, as well as standards for notifying consumers in the event of a
security breach. Under federal law, Southside Bank must disclose its
privacy policy to consumers, permit consumers to “opt out” of having non-public
customer information disclosed to third parties, and allow customers to opt out
of receiving marketing solicitations based on information about the customer
received from another subsidiary. States may adopt more extensive
privacy protections. Southside Bank is similarly required to have an
information security program to safeguard the confidentiality and security of
customer information and to ensure proper disposal. Customers must be
notified when unauthorized disclosure involves sensitive customer information
that may be misused.
Regulatory
Examination. See Holding Company
Regulation.
Enforcement
Authority. Southside Bank and its “institution-affiliated
parties,” including management, employees, agents, independent contractors and
consultants, such as attorneys and accountants and others who participate in the
conduct of the institution’s affairs, are subject to potential civil and
criminal penalties for violations of law, regulations or written orders of a
government agency. These practices can include failure to timely file
required reports, filing false or misleading information or submitting
inaccurate reports. Civil penalties may be as high as $1,000,000 a
day for such violations, and criminal penalties for some financial institution
crimes may include imprisonment for 20 years. Regulators have
flexibility to commence enforcement actions against institutions and
institution-affiliated parties, including termination of deposit
insurance. When issued by a banking agency, cease-and-desist orders
may, among other things, require affirmative action to correct any harm
resulting from a violation or practice, including restitution, reimbursement,
indemnifications or guarantees against loss. A financial institution
may also be ordered to restrict its growth, dispose of certain assets, rescind
agreements or contracts, or take other actions determined to be appropriate by
the ordering agency.
Governmental
Monetary Policies. The commercial banking business is affected
not only by general economic conditions but also by the monetary policies of the
Federal Reserve. Changes in the discount rate on member bank
borrowings, control of borrowings, open market operations, the imposition of and
changes in reserve requirements against member banks, deposits and assets of
foreign branches, the imposition of and changes in reserve requirements against
certain borrowings by banks and their affiliates and the placing of limits on
interest rates which member banks may pay on time and savings deposits are some
of the instruments of monetary policy available to the Federal
Reserve. Those monetary policies influence to a significant extent
the overall growth of all bank loans, investments and deposits and the interest
rates charged on loans or paid on time and savings deposits. The
nature of future monetary policies and the effect of such policies on Southside
Bank’s future business and earnings, therefore, cannot be predicted
accurately.
Capital
Purchase Program. Under Title I of
the Emergency Economic Stabilization Act (“EESA”) enacted in October 2008, the
U.S. Treasury Department (“Treasury”) has established the Troubled Asset Relief
Program (“TARP”), which includes the Capital Purchase Program
(“CPP”). Under the CPP, the Treasury will, upon application by a bank
holding company and approval by the Federal Reserve Board and the primary
federal regulator of the subsidiary bank or banks, purchase senior preferred
stock from the company. Because of our sound financial condition and
the conditions that are or may be imposed on use of the CPP funds or on the
institutions that received CPP funds, we have chosen not to apply for such
funds.
ITEM
1A. RISK
FACTORS
An investment in our common stock is
subject to risks inherent to our business. The material risks and
uncertainties that management believes affect us are described
below. Before making an investment decision, you should carefully
consider the risks and uncertainties described below together with all of the
other information included or incorporated by reference in this
report. The risks and uncertainties described below are not the only
ones facing us. Additional risks and uncertainties that management is
not aware of or focused on or that management currently deems immaterial may
also impair our business operations. This report is qualified in its
entirety by these risk factors.
If any of the following risks actually
occur, our financial condition and results of operations could be materially and
adversely affected. If this were to happen, the value of our common
stock could decline significantly, and you could lose all or part of your
investment.
RISKS
RELATED TO OUR BUSINESS
We are subject to the current economic
environment which poses significant challenges for us and could adversely affect
our financial condition and results of operations.
We are operating in a challenging and
uncertain economic environment. Financial institutions continue to be
affected by declines in the real estate market and constrained financial
markets. We retain direct exposure to the residential and commercial
real estate markets, and we could be affected by these
events. Continued declines in real estate values, home sales volumes
and financial stress on borrowers as a result of the uncertain economic
environment, including job losses, could have an adverse effect on our borrowers
or their customers, which could adversely affect our financial condition and
results of operations. In addition, the national economic recession
and any deterioration in local economic conditions in our markets could drive
losses beyond those which are provided for in our allowance for loan losses and
result in the following consequences:
·
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increase
in loan delinquencies;
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·
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increases
in nonperforming assets and
foreclosures;
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·
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decreases
in demand for our products and services, which could adversely affect our
liquidity position;
|
·
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decreases
in the value of the collateral securing our loans, especially real estate,
which could reduce customers’ borrowing power;
and
|
·
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decrease
in the credit quality of our non U.S. Government and non U.S. Agency
investment securities, especially our trust preferred, corporate and
municipal securities, could adversely affect our financial condition and
results of operations.
|
We
are faced with current levels of market volatility that are unprecedented and
could adversely impact our results of operations and access to
capital.
The capital and credit markets have
been experiencing volatility and disruption for more than one
year. In recent months, volatility in, and disruption of, these
markets have reached unprecedented levels. In some cases, the markets
have produced downward pressure on stock prices and credit capacity without
regard to an issuer’s underlying financial strength. If current
levels of market disruption and volatility continue or worsen, there can be no
assurance that we will not experience adverse effects, which may be material, on
our ability to access capital and on our results of operations and financial
condition, including our liquidity position.
There can be no assurance that
recently enacted or future legislation will stabilize the U.S. financial system,
and we cannot predict the effect such legislation may have on
us.
The EESA
was the result of a proposal by the Treasury in response to the financial crises
affecting the banking system and financial markets and threats to investment
banks and other financial institutions. Pursuant to the EESA, the Treasury has
the authority to spend up to $700 billion to purchase equity in financial
institutions, purchase mortgages, mortgage-backed securities and certain other
financial instruments from financial institutions for the purpose of stabilizing
and providing liquidity to the U.S. financial markets. On October 14,
2008, the Treasury announced the CPP, a program under the EESA pursuant to which
it would purchase senior preferred stock and warrants to purchase common stock
from participating financial institutions. On November 21, 2008, the
FDIC adopted a final rule with respect to its Temporary Liquidity Guarantee
Program pursuant to which the FDIC will guarantee certain “newly-issued
unsecured debt” of banks and certain holding companies and also guarantee, on an
unlimited basis, noninterest bearing bank transaction accounts. On
February 10, 2009, Treasury Secretary Geithner announced a new stimulus plan,
the Financial Stability Plan, which is intended, among other things, to create a
public-private investment fund used to purchase distressed assets, create a
consumer and business lending initiative, provide further capital assistance to
financial institutions, stem foreclosures and restructure
mortgages.
Each of
these programs, as well as others adopted under the EESA, was implemented to
help stabilize and provide liquidity to the financial system. There can be no
assurance, however, as to the actual impact that the EESA, the FDIC programs,
the Financial Stability Plan or any other governmental program will have on the
financial markets. We cannot predict the effect of the EESA, the
FDIC, the Financial Stability Plan or other governmental programs, but the
failure of these programs to stabilize the financial markets and a continuation
or worsening of current financial market conditions likely will materially and
adversely affect our business, financial condition, results of operations,
access to credit and the trading price of our common stock.
The
EESA may impact the fair value determinations of our invested assets and may
lead to regulatory limitations, impositions and restrictions upon
us.
Several provisions of the EESA could
affect us. Purchase prices under the EESA could impact market-place
fair values of similar securities, thereby impacting our fair value
determinations. Also, the mandatory plan adopted to recoup the net
losses of the EESA within the next five years may target financial institutions
such as us and may lead to regulatory limitations, impositions and future
assessments. All of these factors may have an adverse material impact
on our results of operations, equity, business and insurer financial strength
and debt ratings.
We
are subject to interest rate risk.
Our earnings and cash flows are largely
dependent upon our net interest income. Net interest income is the
difference between interest income earned on interest earning assets such as
loans and securities and interest expense paid on interest bearing liabilities
such as deposits and borrowed funds. Interest rates are highly
sensitive to many factors that are beyond our control, including general
economic conditions and policies of various governmental and regulatory agencies
and, in particular, the Board of Governors of the Federal Reserve
System. Changes in monetary policy, changes in interest rates,
changes in the yield curve, changes in market risk spreads, and a prolonged
inverted yield curve could influence not only the interest we receive on loans
and securities and the amount of interest we pay on deposits and borrowings, but
such changes could also affect:
·
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our
ability to originate loans and obtain
deposits;
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·
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net
interest rate spreads and net interest rate
margins;
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·
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our
ability to enter into instruments to hedge against interest rate
risk;
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·
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the
fair value of our financial assets and liabilities;
and
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·
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the
average duration of our loan and mortgage-backed securities
portfolio.
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If the interest rates paid on deposits
and other borrowings increase at a faster rate than the interest rates received
on loans and other investments, our net interest income, and therefore earnings,
could be adversely affected. Earnings could also be adversely
affected if the interest rates received on loans and other investments fall more
quickly than the interest rates paid on deposits and other
borrowings.
Any substantial, unexpected or
prolonged change in market interest rates could have a material adverse effect
on our financial condition and results of operations. See the section
captioned “Net Interest Income” in “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations” for further
discussion related to our management of interest rate risk.
We
are subject to credit quality risks and our credit policies may not be
sufficient to avoid losses.
We are subject to the risk of losses
resulting from the failure of borrowers, guarantors and related parties to pay
interest and principal amounts on their loans. Although we maintain
credit policies and credit underwriting and monitoring and collection
procedures, these policies and procedures may not prevent losses, particularly
during periods in which the local, regional or national economy suffers a
general decline. If borrowers fail to repay their loans, our
financial condition and results of operations would be adversely
affected.
Our
interest rate risk, liquidity, market value of securities and profitability are
subject to risks associated with the successful implementation of our leverage
strategy.
We implemented a leverage strategy in
1998 for the purpose of enhancing overall profitability by maximizing the use of
our capital. The effectiveness of our leverage strategy, and
therefore our profitability, may be adversely affected by a number of factors,
including reduced net interest margin and spread, adverse market value changes
to the investment and mortgage-backed and related securities, incorrect modeling
results 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. In addition, we may not be able to obtain wholesale
funding to profitably and properly fund the leverage program. If our
leverage strategy is flawed or poorly implemented, we may incur significant
losses. See the section captioned “Leverage Strategy” in “Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”
We
have a high concentration of loans secured by real estate and a continued
downturn in the real estate market, for any reason, could result in losses and
materially and adversely affect our business, financial condition, results of
operations and future prospects.
A significant portion of our loan
portfolio is dependent on real estate. In addition to the financial
strength and cash flow characteristics of the borrower in each case, often loans
are secured with real estate collateral. At December 31, 2008,
approximately 53.1% of our loans have real estate as a primary or secondary
component of collateral. The real estate in each case provides an
alternate source of repayment in the event of default by the borrower and may
deteriorate in value during the time the credit is
extended. Beginning in the third quarter of 2007 and continuing
throughout 2008 and into 2009, there were well-publicized developments in the
credit markets, beginning with a decline in the sub-prime mortgage lending
market, which later extended to the markets for collateralized mortgage
obligations, mortgage-backed securities and the lending markets
generally. This decline has resulted in restrictions in the resale
markets for non-conforming loans and has had an adverse effect on retail
mortgage lending operations in many markets. A continued decline in
the credit markets generally could adversely affect our financial condition and
results of operations if we are unable to extend credit or sell loans in the
secondary market. An adverse change in the economy affecting values
of real estate generally or in our primary markets specifically could
significantly impair the value of collateral and our ability to sell the
collateral upon foreclosure. Furthermore, it is likely that, in a
declining real estate market, we would be required to further increase our
allowance for loan losses. If we are required to liquidate the
collateral
securing
a loan to satisfy the debt during a period of reduced real estate values or to
increase our allowance for loan losses, our profitability and financial
condition could be adversely impacted.
We
have a high concentration of loans directly related to the medical community in
our market area, primarily in Smith and Gregg counties. A negative
change adversely impacting the medical community, for any reason, could result
in losses and materially and adversely affect our business, financial condition,
results of operations and future prospects.
A significant portion of our loan
portfolio is dependent on the medical community. The primary source
of repayment for loans in the medical community is cash flow from continuing
operations. However, changes in the amount the government pays the
medical community through the various government health insurance programs could
adversely impact the medical community, which in turn could result in higher
default rates by borrowers in the medical industry. Increased
regulation of the medical community could also negatively impact profitability
and cash flow in the medical community. It is likely that, should
there be any significant adverse impact to the medical community, our
profitability and financial condition would also be adversely
impacted.
Our allowance for probable loan losses
may be insufficient.
We maintain an allowance for probable
loan losses, which is a reserve established through a provision for probable
loan losses charged to expense. This allowance represents
management’s best estimate of probable losses that may exist within the existing
portfolio of loans. The allowance, in the judgment of management, is
necessary to reserve for estimated loan losses and risks inherent in the loan
portfolio. The level of the allowance reflects management’s
continuing evaluation of industry concentrations; specific credit risks; loan
loss experience; current loan portfolio quality; present economic, political and
regulatory conditions; and unidentified losses inherent in the current loan
portfolio. The determination of the appropriate level of the
allowance for probable loan losses inherently involves a high degree of
subjectivity and requires us to make significant estimates and assumptions
regarding current credit risks and future trends, all of which may undergo
material changes. Changes in economic conditions affecting borrowers,
new information regarding existing loans, identification of additional problem
loans and other factors, both within and outside our control, may require an
increase in the allowance for probable loan losses. In addition, bank
regulatory agencies periodically review our allowance for loan losses and may
require an increase in the provision for probable loan losses or the recognition
of further loan charge-offs, based on judgments different than those of
management. In addition, if charge-offs in future periods exceed the
allowance for probable loan losses, we will need additional provisions to
increase the allowance for probable loan losses. Any increases in the
allowance for probable loan losses will result in a decrease in net income and,
possibly, capital, and may have a material adverse effect on our financial
condition and results of operations. See the section captioned “Loan
Loss Experience and Allowance for Loan Losses” in
“Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations” for further discussion related to our
process for determining the appropriate level of the allowance for probable loan
losses.
We
are subject to environmental liability risk associated with lending
activities.
A significant portion of our loan
portfolio is secured by real property. During the ordinary course of
business, we may foreclose on and take title to properties securing certain
loans. There is a risk that hazardous or toxic substances could be
found on these properties. If hazardous or toxic substances are
found, we may be liable for remediation costs, as well as for personal injury
and property damage. Environmental laws may require us to incur
substantial expenses and may materially reduce the affected property’s value or
limit our ability to use or sell the affected property. In addition,
future laws or more stringent interpretations or enforcement policies with
respect to existing laws may increase our exposure to environmental
liability. Although we have policies and procedures to perform an
environmental review before initiating any foreclosure action on nonresidential
real property, these reviews may not be sufficient to detect all potential
environmental hazards. The remediation costs and any other financial
liabilities associated with an environmental hazard could have a material
adverse effect on our financial condition and results of
operations.
Our
profitability depends significantly on economic conditions in the State of
Texas.
Our success depends primarily on the
general economic conditions of the State of Texas and the specific local markets
in which we operate. Unlike larger national or other regional banks
that are more geographically diversified, we provide banking and
financial services to customers primarily in the Texas areas of Tyler, Longview,
Lindale, Whitehouse, Chandler, Gresham, Athens, Palestine, Jacksonville,
Hawkins, Bullard, Forney, Seven Points, Gun Barrel City, Fort Worth, Austin and
Arlington. The local economic conditions in these areas have a
significant impact on the demand for our products and services, as well as the
ability of our customers to repay loans, the value of the collateral securing
loans and the stability of our deposit funding sources. A significant
decline in general economic conditions, caused by inflation, recession, acts of
terrorism, outbreak of hostilities or other international or domestic
occurrences, unemployment, changes in securities markets or other factors could
impact these local economic conditions and, in turn, have a material adverse
effect on our financial condition and results of operations.
We
operate in a highly competitive industry and market area.
We face substantial competition in all
areas of our operations from a variety of different competitors, many of which
are larger and may have more financial resources. Such competitors
primarily include national, regional, and community banks within the various
markets we operate. Additionally, various out-of-state banks have
entered or have announced plans to enter the market areas in which we currently
operate. We also face competition from many other types of financial
institutions, including, without limitation, savings and loans, credit unions,
finance companies, brokerage firms, insurance companies, factoring companies and
other financial intermediaries. The financial services industry could
become even more competitive as a result of legislative, regulatory and
technological changes, continued consolidation and recent trends in the credit
and mortgage lending markets. Banks, securities firms and insurance
companies can merge under the umbrella of a financial holding company, which can
offer virtually any type of financial service, including banking, securities
underwriting, insurance (both agency and underwriting) and merchant
banking. Also, technology has lowered barriers to entry and made it
possible for nonbanks to offer products and services traditionally provided by
banks, such as automatic transfer and automatic payment systems. Many
of our competitors have fewer regulatory constraints and may have lower cost
structures. Additionally, due to their size, many competitors may be
able to achieve economies of scale and, as a result, may offer a broader range
of products and services as well as better pricing for those products and
services than we can.
Our ability to compete successfully
depends on a number of factors, including, among other things:
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the
ability to develop, maintain and build upon long-term customer
relationships based on top quality service, high ethical standards and
safe, sound assets;
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the
ability to expand our market
position;
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the
scope, relevance and pricing of products and services offered to meet
customer needs and demands;
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the
rate at which we introduce new products and services relative to our
competitors;
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customer
satisfaction with our level of service;
and
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industry
and general economic trends.
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Failure to perform in any of these
areas could significantly weaken our competitive position, which could adversely
affect our growth and profitability, which, in turn, could have a material
adverse effect on our financial condition and results of
operations.
We
are subject to extensive government regulation and supervision.
Southside Bancshares, Inc., primarily
through Southside Bank, and certain nonbank subsidiaries, is subject to
extensive federal and state regulation and supervision. Banking
regulations are primarily intended to protect depositors’ funds, federal deposit
insurance funds and the banking system as a whole, not
shareholders. These regulations affect our lending practices, capital
structure, investment practices and dividend policy and growth, among other
things. Congress and federal and state regulatory agencies
continually review banking laws, regulations and policies for possible
changes. Changes to statutes, regulations or regulatory policies,
including changes in interpretation or implementation of statutes, regulations
or policies, could affect us in substantial and unpredictable
ways. Such changes could subject us to additional costs, limit the
types of financial services and products we may offer and/or increase the
ability of nonbanks to offer competing financial services and products, among
other things. Failure to comply with laws, regulations or policies
could result in sanctions by regulatory agencies, civil money penalties and/or
reputation damage, which could have a material adverse effect on our business,
financial condition and results of operations. While our policies and
procedures are designed to prevent any such violations, there can be no
assurance that such violations will not occur. See the section
captioned “Supervision and Regulation” in “Item 1. Business” and
“Note 16 –
Shareholders’ Equity” to our consolidated financial statements included in this
report.
Our
controls and procedures may fail or be circumvented.
Management regularly reviews and
updates our internal controls, disclosure controls and procedures, and corporate
governance policies and procedures. Any system of controls, however
well designed and operated, is based in part on certain assumptions and can
provide only reasonable, not absolute, assurances that the objectives of the
system are met. Any failure or circumvention of our controls and
procedures or failure to comply with regulations related to controls and
procedures could have a material adverse effect on our business, results of
operations and financial condition.
New
lines of business or new products and services may subject us to additional
risks.
From time to time, we may implement new
delivery systems, such as internet banking, or offer new products and services
within existing lines of business. In August 2007, through a subsidiary of
Southside Bank, we entered into a joint venture engaged in the purchase of
portfolios of automobile loans nationwide. Although we have retained
a management team with expertise in this industry, we cannot provide any
assurance as to our ability to profitably operate this line of
business. There are substantial risks and uncertainties associated
with these efforts, particularly in instances where the markets are not fully
developed. In developing and marketing new delivery systems and/or
new products and services, we may invest significant time and resources. Initial
timetables for the introduction and development of new lines of business and/or
new products or services may not be achieved and price and profitability targets
may not prove feasible. External factors, such as compliance with
regulations, competitive alternatives, and shifting market preferences, may also
impact the successful implementation of a new line of business or a new product
or service. Furthermore, any new line of business and/or new product
or service could have a significant impact on the effectiveness of our system of
internal controls. Failure to successfully manage these risks in the
development and implementation of new lines of business or new products or
services could have a material adverse effect on our business, results of
operations and financial condition.
We
rely on dividends from our subsidiaries for most of our revenue.
Southside Bancshares, Inc. is a
separate and distinct legal entity from our subsidiaries. We receive
substantially all of our revenue from dividends from our
subsidiaries. These dividends are the principal source of funds to
pay dividends on our common stock and interest and principal on our
debt. Various federal and/or state laws and regulations limit the
amount of dividends that Southside Bank, and certain nonbank subsidiaries may
pay to Southside Bancshares, Inc. Also, Southside Bancshares, Inc.’s
right to participate in a distribution of assets upon a subsidiary’s liquidation
or reorganization is subject to the prior claims of the subsidiary’s
creditors. In the event Southside Bank is unable to pay dividends
to
Southside
Bancshares, Inc., Southside Bancshares, Inc. may not be able to service debt,
pay obligations or pay dividends on common stock. The inability to
receive dividends from Southside Bank could have a material adverse effect on
Southside Bancshares, Inc.’s business, financial condition and results of
operations. See the section captioned “Supervision and Regulation” in
“Item 1. Business” and “Note 16 – Shareholders’ Equity” to our
consolidated financial statements included in this report.
We
may not be able to access capital on favorable terms, including cost of
funds.
The availability and cost of funds may
increase as a result of general economic condition, increased interest rates and
competitive pressures and we may be unable to obtain funds on terms that are
favorable to us. We chose not to participate in the CPP, and in the
future if we need to obtain additional funds, we may not be able to obtain them
on terms as favorable to us as the CPP would have been. If we are
unable to obtain funds, we could be restricted in our ability to extend credit,
and may not be able to obtain sufficient funds to support growth through
branching or acquisition initiatives.
The
holders of our junior subordinated debentures have rights that are senior to
those of our shareholders.
On September 4, 2003, we issued $20.6
million of floating rate junior subordinated debentures in connection with a
$20.0 million trust preferred securities issuance by our subsidiary, Southside
Statutory Trust III. These junior subordinated debentures mature in
September 2033. On August 8 and 10, 2007, we issued $23.2 million and
$12.9 million, respectively, of five-year fixed rate converting to floating rate
thereafter, junior subordinated debentures in connection with $22.5 million and
$12.5 million, respectively, trust preferred securities issuances by our
subsidiaries Southside Statutory Trust IV and V, respectively. Trust
IV matures October 2037 and Trust V matures September 2037. As part
of the acquisition of FWBS on October 10, 2007, we assumed a $3.6 million of
floating rate junior subordinated debentures issued to Magnolia Trust Company I
in connection with $3.5 million of trust preferred securities issued in 2005
that matures in 2035.
We conditionally guarantee payments of
the principal and interest on the trust preferred securities. Our
junior subordinated debentures are senior to our shares of common
stock. As a result, we must make payments on the junior subordinated
debentures (and the related trust preferred securities) before any dividends can
be paid on our common stock and, in the event of bankruptcy, dissolution or
liquidation, the holders of the debentures must be satisfied before any
distributions can be made to the holders of common stock. We have the
right to defer distributions on our junior subordinated debentures (and the
related trust preferred securities) for up to five years, during which time no
dividends may be paid to holders of common stock.
Acquisitions
and potential acquisitions may disrupt our business and dilute shareholder
value.
During 2007, we completed the
acquisition of FWBS. This was our first acquisition. Aside
from this acquisition, we occasionally investigate potential merger or
acquisition partners that appear to be culturally similar, have experienced
management and possess either significant or attractive market presence or have
potential for improved profitability through financial management, economies of
scale or expanded services. Acquiring other banks, businesses or
branches involves various risks commonly associated with acquisitions,
including, among other things:
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potential
exposure to unknown or contingent liabilities of the target
company;
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exposure
to potential asset quality issues of the target
company;
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difficulty
and expense of integrating the operations and personnel of the target
company;
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potential
disruption to our business;
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potential
diversion of our management’s time and
attention;
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the
possible loss of key employees and customers of the target
company;
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difficulty
in estimating the value of the target company;
and
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potential
changes in banking or tax laws or regulations that may affect the target
company.
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We occasionally evaluate merger and
acquisition opportunities and conduct due diligence activities related to
possible transactions with other financial institutions and financial services
companies. As a result, merger or acquisition discussions and, in
some cases, negotiations may take place and future mergers or acquisitions
involving cash, debt or equity securities may occur at any
time. Acquisitions typically involve the payment of a premium over
book and market values, and, therefore, some dilution of our tangible book value
and net income per common share may occur in connection with any future
transaction. Furthermore, failure to realize the expected revenue
increases, cost savings, increases in geographic or product presence, and/or
other projected benefits and synergies from an acquisition could have a material
adverse effect on our financial condition and results of
operations. Failure to integrate FWBS’s operations, personnel,
policies and procedures into Southside’s could have a material and adverse
effect on our financial condition and results of operations.
We
may not be able to attract and retain skilled people.
Our success depends, in large part, on
our ability to attract and retain key people. Competition for the
best people in most activities we engage in can be intense, and we may not be
able to hire people or to retain them. The unexpected loss of
services of one or more of our key personnel could have a material adverse
impact on our business because of their skills, knowledge of our market,
relationships in the communities we serve, years of industry experience and the
difficulty of promptly finding qualified replacement
personnel. Although we have employment agreements with certain of our
executive officers, there is no guarantee that these officers will remain
employed with the Company.
Our information
systems may experience an interruption or breach in security.
We rely heavily on communications and
information systems to conduct our business. Any failure,
interruption or breach in security of these systems could result in failures or
disruptions in our customer relationship management, general ledger, deposit,
loan and other systems. While we have policies and procedures
designed to prevent or limit the effect of the failure, interruption or security
breach of our information systems, there can be no assurance that we can prevent
any such failures, interruptions or security breaches or, if they do occur, that
they will be adequately addressed. The occurrence of any failures,
interruptions or security breaches of our information systems could damage our
reputation, result in a loss of customer business, subject us to additional
regulatory scrutiny, or expose us to civil litigation and possible financial
liability, any of which could have a material adverse effect on our financial
condition and results of operations.
We
continually encounter technological change.
The financial services industry is
continually undergoing rapid technological change with frequent introductions of
new technology-driven products and services. The effective use of
technology increases efficiency and enables financial institutions to better
serve customers and to reduce costs. Our future success depends, in
part, upon our ability to address the needs of our customers by using technology
to provide products and services that will satisfy customer demands, as well as
to create additional efficiencies in our operations. Many of our
competitors have substantially greater resources to invest in technological
improvements. We may not be able to effectively implement new
technology-driven products and services or be successful in marketing these
products and services to our customers and even if we implement such products
and services, we may incur substantial costs in doing so. Failure to
successfully keep pace with technological change affecting the financial
services industry could have a material adverse impact on our business,
financial condition and results of operations.
We
are subject to claims and litigation pertaining to fiduciary
responsibility.
From time to time, customers make
claims and take legal action pertaining to our performance of our fiduciary
responsibilities. Whether customer claims and legal action related to
our performance of our fiduciary responsibilities are founded or unfounded,
defending claims is costly and diverts management’s attention, and if such
claims and legal actions are not resolved in a manner favorable to us, they may
result in significant financial liability and/or adversely affect our market
perception and products and services as well as impact customer demand for those
products and services. Any financial liability or reputation damage
could have a material adverse effect on our business, financial condition and
results of operations.
Severe
weather, natural disasters, acts of war or terrorism and other external events
could significantly impact our business.
Severe weather, natural disasters, acts
of war or terrorism and other adverse external events could have a significant
impact on our ability to conduct business. Such events could affect
the stability of our deposit base, impair the ability of borrowers to repay
outstanding loans, impair the value of collateral securing loans, cause
significant property damage, result in loss of revenue and/or cause us to incur
additional expenses. For example, because of our location and the
location of the market areas we serve, severe weather is more likely than in
other areas of the country. Although management has established
disaster recovery policies and procedures, there can be no assurance of the
effectiveness of such policies and procedures, and the occurrence of any such
event could have a material adverse effect on our business, financial condition
and results of operations.
Current
market developments may adversely affect our industry, business and results of
operations.
Dramatic
declines in the housing market during the prior year, with falling home prices
and increasing foreclosures and unemployment, have resulted in significant
write-downs of asset values by financial institutions, including
government-sponsored entities and major commercial and investment
banks. These write-downs, initially of mortgage-backed securities but
spreading to credit default swaps and other derivative securities have caused
many financial institutions to seek additional capital, to merge with larger and
stronger institutions and, in some cases, to fail. Reflecting concern
about the stability of the financial markets generally and the strength of
counterparties, many lenders and institutional investors have reduced, and in
some cases, ceased to provide funding to borrowers including other financial
institutions. The resulting lack of available credit, lack of
confidence in the financial sector, increased volatility in the financial
markets and reduced business activity could materially and adversely affect our
business, financial condition and results of operations.
Funding
to provide liquidity may not be available to us on favorable terms or at
all.
Liquidity
is the ability to meet cash flow needs on a timely basis at a reasonable
cost. The liquidity of the Bank is used to make loans and leases to
repay deposit liabilities as they become due or are demanded by
customers. Liquidity policies and limits are established by the board
of directors. Management and our investment committee regularly
monitor the overall liquidity position of the Bank and the Company to ensure
that various alternative strategies exist to cover unanticipated events that
could affect liquidity. Management and our investment committee also
establish policies and monitor guidelines to diversify the Bank’s funding
sources to avoid concentrations in any one market source. Funding
sources include federal funds purchased; securities sold under repurchase
agreements, non-core deposits, and short- and long-term debt. The
Bank is also a member of the Federal Home Loan Bank System, which provides
funding through advances to members that are collateralized with
mortgage-related assets.
We
maintain a portfolio of securities that can be used as a secondary source of
liquidity. There are other sources of liquidity available to us
should they be needed. These sources include sales or securitizations
of loans, our ability to acquire additional national market, non-core deposits,
additional collateralized borrowings such as Federal Home Loan Bank advances,
the issuance and sale of debt
securities,
and the issuance and sale of preferred or common securities in public or private
transactions. The Bank also can borrow from the Federal Reserve’s
discount window.
We have
historically had access to a number of alternative sources of liquidity, but
given the recent and dramatic downturn in the credit and liquidity markets,
there is no assurance that we will be able to obtain such liquidity on terms
that are favorable to us, or at all. For example, the cost of
out-of-market deposits may exceed the cost of deposits of similar maturity in
our local market area, making them unattractive sources of funding; financial
institutions may be unwilling to extend credit to banks because of concerns
about the banking industry and the economy generally; there may not be a market
for the issuance of additional trust preferred securities; and, given recent
downturns in the economy, there may not be a viable market for raising equity
capital.
If we
were unable to access any of these funding sources when needed, we might be
unable to meet customers’ needs, which could adversely impact our financial
condition, results of operations, cash flows and liquidity, and level of
regulatory-qualifying capital.
Current
levels of market volatility are unprecedented, which may have an adverse effect
on our ability to access capital.
The
capital and credit markets have been experiencing volatility and disruption for
more than 12 months. In recent weeks, the volatility and disruption has reached
unprecedented levels. In some cases, the markets have produced
downward pressure on stock prices and credit availability for certain issuers
without regard to those issuers’ underlying financial strength. If
current levels of market disruption and volatility continue or worsen, there can
be no assurance that the Company will not experience an adverse effect, which
may be material, on the Company’s ability to access capital and on its business,
financial condition and results of operations.
RISKS
ASSOCIATED WITH OUR COMMON STOCK
Our
stock price can be volatile.
Stock price volatility may make it more
difficult for you to resell your common stock when you want and at prices you
find attractive. Our stock price can fluctuate significantly in
response to a variety of factors including, among other things:
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actual
or anticipated variations in quarterly results of
operations;
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recommendations
by securities analysts;
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operating
and stock price performance of other companies that investors deem
comparable to us;
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news
reports relating to trends, concerns and other issues in the financial
services industry;
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perceptions
in the marketplace regarding us and/or our
competitors;
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new
technology used, or services offered, by
competitors;
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significant
acquisitions or business combinations, strategic partnerships, joint
ventures or capital commitments by or involving us or our
competitors;
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failure
to integrate acquisitions or realize anticipated benefits from
acquisitions;
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changes
in government regulations; and
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geopolitical
conditions such as acts or threats of terrorism or military
conflicts.
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General market fluctuations, industry
factors and general economic and political conditions and events, such as
economic slowdowns or recessions, interest rate changes or credit loss trends,
could also cause our stock price to decrease regardless of operating
results.
The
trading volume in our common stock is less than that of other larger financial
services companies.
Although our common stock is listed for
trading on the NASDAQ Global Select Market, the trading volume is low, and you
are not assured liquidity with respect to transactions in our common
stock. A public trading market having the desired characteristics of
depth, liquidity and orderliness depends on the presence in the marketplace of
willing buyers and sellers of our common stock at any given
time. This presence depends on the individual decisions of investors
and general economic and market conditions over which we have no
control. Given the lower trading volume of our common stock,
significant sales of our common stock, or the expectation of these sales, could
cause our stock price to fall.
An
investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit
and, therefore, is not insured against loss by the FDIC, any other deposit
insurance fund or by any other public or private entity. Investment
in our common stock is inherently risky for the reasons described in this “Risk
Factors” section and elsewhere in this report and is subject to the same market
forces that affect the price of common stock in any company. As a
result, if you acquire our common stock, you may lose some or all of your
investment.
Provisions
of our articles of incorporation and amended and restated bylaws, as well as
state and federal banking regulations, could delay or prevent a takeover of us
by a third party.
Our articles of incorporation and
amended and restated bylaws could delay, defer or prevent a third party from
acquiring us, despite the possible benefit to our shareholders, or otherwise
adversely affect the price of our common stock. These provisions
include, among others, requiring advance notice for raising business matters or
nominating directors at shareholders’ meetings and staggered board
elections.
Any individual, acting alone or with
other individuals, who are seeking to acquire, directly or indirectly, 10.0% or
more of our outstanding common stock must comply with the Change in Bank Control
Act, which requires prior notice to the Federal Reserve for any
acquisition. Additionally, any entity that wants to acquire 5.0% or
more of our outstanding common stock, or otherwise control us, may need to
obtain the prior approval of the Federal Reserve under the BHCA of 1956, as
amended. As a result, prospective investors in our common stock need
to be aware of and comply with those requirements, to the extent
applicable.
We
may issue additional securities, which could dilute your ownership
percentage.
In certain situations, our board of
directors has the authority, without any vote of our shareholders, to issue
shares of our authorized but unissued stock. In the future, we may
issue additional securities, through public or private offerings, to raise
additional capital or finance acquisitions. Any such issuance would
dilute the ownership of current holders of our common stock.
RISKS
ASSOCIATED WITH THE BANKING INDUSTRY
The
earnings of financial services companies are significantly affected by general
business and economic conditions.
Our operations and profitability are
impacted by general business and economic conditions in the United States and
abroad. These conditions include short-term and long-term interest
rates, inflation, money supply, political issues, legislative and regulatory
changes, fluctuations in both debt and equity capital markets, broad trends in
industry and finance, and the strength of the U.S. economy and the
local
economies
in which we operate, all of which are beyond our control. A
deterioration in economic conditions could result in an increase in loan
delinquencies and nonperforming assets, decreases in loan collateral values and
a decrease in demand for our products and services, among other things, any of
which could have a material adverse impact on our financial condition and
results of operations.
Financial
services companies depend on the accuracy and completeness of information about
customers and counterparties.
In deciding whether to extend credit or
enter into other transactions, we may rely on information furnished by or on
behalf of customers and counterparties, including financial statements, credit
reports and other financial information. We may also rely on
representations of those customers, counterparties or other third parties, such
as independent auditors, as to the accuracy and completeness of that
information. Reliance on inaccurate or misleading financial
statements, credit reports or other financial information could have a material
adverse impact on our business, financial condition and results of
operations.
Consumers
may decide not to use banks to complete their financial
transactions.
Technology and other changes are
allowing parties to complete financial transactions that historically have
involved banks through alternative methods. For example, consumers
can now maintain funds that would have historically been held as bank deposits
in brokerage accounts or mutual funds. Consumers can also complete
transactions such as paying bills and/or transferring funds directly without the
assistance of banks. The process of eliminating banks as
intermediaries could result in the loss of fee income, as well as the loss of
customer deposits and the related income generated from those
deposits. The loss of these revenue streams and the lower cost
deposits as a source of funds could have a material adverse effect on our
financial condition and results of operations.
The
soundness of other financial institutions could adversely affect
us.
Financial
services institutions are interrelated as a result of trading, clearing,
counterparty or other relationships. We have exposure to many
different industries and counterparties, and we routinely execute transactions
with counterparties in the financial services industry, including brokers and
dealers, commercial banks, investment banks, mutual and hedge funds, and other
institutional clients. Many of these transactions expose us to credit
risk in the event of default of our counterparty or client. In
addition, our credit risk may be exacerbated when the collateral held by us
cannot be realized or is liquidated at prices not sufficient to recover the full
amount of the loan or derivative exposure due us. There is no
assurance that any such losses would not materially and adversely affect our
results of operations or earnings.
ITEM 1B. UNRESOLVED STAFF
COMMENTS
None
Southside Bank owns and operates the
following properties:
·
|
Southside
Bank main branch at 1201 South Beckham Avenue, Tyler,
Texas. The executive offices of Southside Bancshares, Inc. are
located at this location;
|
·
|
Southside
Bank Annex at 1211 South Beckham Avenue, Tyler, Texas. The
Southside Bank Annex is directly adjacent to the main bank
building. Human Resources, The Trust Department and other
support areas are located in this
building;
|
·
|
Operations
Annex at 1221 South Beckham Avenue, Tyler, Texas. Various back
office, lending and training facilities and other support areas are
located in this building;
|
·
|
Southside
main branch motor bank facility at 1010 East First Street, Tyler,
Texas;
|
·
|
South
Broadway branch at 6201 South Broadway, Tyler,
Texas;
|
·
|
South
Broadway branch motor bank facility at 6019 South Broadway, Tyler,
Texas;
|
·
|
Downtown
branch at 113 West Ferguson Street, Tyler,
Texas;
|
·
|
Gentry
Parkway branch and motor bank facility at 2121 West Gentry Parkway, Tyler,
Texas;
|
·
|
Longview
main branch and motor bank facility at 2001 Judson Road, Longview,
Texas;
|
·
|
Lindale
main branch and motor bank facility at 2510 South Main Street, Lindale,
Texas;
|
·
|
Whitehouse
main branch and motor bank facility at 901 Highway 110 North, Whitehouse,
Texas;
|
·
|
Jacksonville
main branch and motor bank at 1015 South Jackson Street, Jacksonville,
Texas;
|
·
|
Gun
Barrel City main branch and motor bank facility at 901 West Main, Gun
Barrel City, Texas;
|
·
|
Arlington
branch and motor bank facility at 2831 West Park Row, Arlington,
Texas;
|
·
|
Fort
Worth branch and motor bank facility at 9516 Clifford Street, Fort Worth,
Texas;
|
·
|
47
ATM’s located throughout our market
areas.
|
Southside
Bank currently operates full service banks in leased space in 18 grocery stores
and three lending centers and two full service branches in leased office space
in the following locations:
·
|
one
in Whitehouse, Texas;
|
·
|
one
in Chandler, Texas;
|
·
|
one
in Seven Points, Texas;
|
·
|
one
in Palestine, Texas;
|
·
|
three
in Longview, Texas;
|
·
|
Fort
Worth branch and motor bank facility at 701 West Magnolia, Fort Worth,
Texas;
|
·
|
Fort
Worth branch at 707 West Magnolia, Fort Worth,
Texas;
|
·
|
Gresham
loan production office at 16637 FM 2493, Tyler,
Texas;
|
·
|
Forney
loan production office at 413 North McGraw, Forney, Texas;
and
|
·
|
Austin
loan production office at 8200 North Mopac, Suite 130, Austin,
Texas.
|
SFG
currently operates its business in leased office space in the following
location:
·
|
1600
East Pioneer Parkway, Suite 300, Arlington,
Texas.
|
All of the properties detailed above
are suitable and adequate to provide the banking services intended based on the
type of property described. In addition, the properties for the most
part are fully utilized but designed with productivity in mind and can handle
the additional business volume we anticipate they will generate. As
additional potential needs are identified, individual property enhancements or
the need to add properties will be evaluated.
ITEM
3. LEGAL
PROCEEDINGS
We are party to legal proceedings
arising in the normal conduct of business. Management believes that
such litigation is not material to our financial position or results of
operations.
ITEM
4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
During
the three months ended December 31, 2008, there were no meetings, annual or
special, of our shareholders. No matters were submitted to a vote of
the shareholders, nor were proxies solicited by management or any other
person.
PART
II
ITEM
5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS
AND ISSUER PURCHASES OF
EQUITY SECURITIES
MARKET
INFORMATION
Our common stock trades on the NASDAQ
Global Select Market under the symbol "SBSI." The high/low prices
shown below represent the daily weighted average prices on the NASDAQ Global
Select Market for the period from January 1, 2007 to December 31,
2008. During the first quarter of 2008 and the second quarter of
2007, we declared and paid a 5% stock dividend. Stock prices listed
below have been adjusted to give retroactive recognition to such stock
dividends.
Year
Ended
|
|
1st
Quarter
|
|
|
2nd
Quarter
|
|
|
3rd
Quarter
|
|
|
4th
Quarter
|
|
December
31, 2008
|
|
$ |
23.20
– 18.24 |
|
|
$ |
24.61
– 18.60 |
|
|
$ |
25.74
– 15.70 |
|
|
$ |
24.76
– 19.21 |
|
December
31, 2007
|
|
$ |
23.33
– 19.92 |
|
|
$ |
21.32
– 19.99 |
|
|
$ |
22.65
– 18.22 |
|
|
$ |
22.47
– 17.72 |
|
See "Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Capital Resources" for a discussion of our common stock repurchase
program.
SHAREHOLDERS
There were approximately 1,000 holders
of record of our common stock, the only class of equity securities currently
issued and outstanding, as of February 13, 2009.
DIVIDENDS
Cash dividends declared and paid were
$0.60 and $0.50 per share for the years ended December 31, 2008 and 2007,
respectively. Stock dividends of 5% were also declared and paid
during each of the years ended December 31, 2008, 2007 and 2006. We
have paid a cash dividend at least once every year since 1970. Future
dividends will depend on our earnings, financial condition and other factors
that our board of directors considers to be relevant. In addition, we
must make payments on our junior subordinated debentures before any dividends
can be paid on the common stock. For additional discussion relating
to restrictions that limit our ability to pay dividends refer to “Supervision
and Regulation” in “Item 1. Business” and in “Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations –Capital
Resources.” The cash dividends were paid quarterly each year as
listed below.
Quarterly Cash Dividends
Paid
Year
Ended
|
|
1st
Quarter
|
|
|
2nd
Quarter
|
|
|
3rd
Quarter
|
|
|
4th
Quarter
|
|
December
31, 2008
|
|
$ |
0.12 |
|
|
$ |
0.13 |
|
|
$ |
0.16 |
|
|
$ |
0.19 |
|
December
31, 2007
|
|
$ |
0.11 |
|
|
$ |
0.12 |
|
|
$ |
0.12 |
|
|
$ |
0.15 |
|
STOCK-BASED
COMPENSATION PLANS
Information regarding stock-based
compensation awards outstanding and available for future grants as of
December 31, 2008, is presented in “Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters” of this Annual
Report on Form 10-K. Additional information regarding stock-based
compensation plans is presented in “Note 14 – Employee Benefits" to
our consolidated financial statements included in this report.
UNREGISTERED
SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER SECURITY
REPURCHASES
During 2008, we did not approve any
additional funding for our stock repurchase plan. No common stock was
purchased during the fourth quarter ended December 31, 2008.
FINANCIAL
PERFORMANCE
The following performance graph does
not constitute soliciting material and should not be deemed filed or
incorporated by reference into any other Company under the Securities Act of
1933 or the Securities Exchange Act of 1934, except to the extent the filing
Company specifically incorporates the performance graph by reference
therein.
Southside
Bancshares, Inc.
|
|
Period
Ending
|
|
Index
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
Southside
Bancshares, Inc.
|
100.00
|
132.47
|
125.72
|
171.69
|
146.82
|
182.03
|
Russell
2000
|
100.00
|
118.33
|
123.72
|
146.44
|
144.15
|
95.44
|
Southside
Bancshares Peer Group 2007*
|
100.00
|
116.65
|
123.08
|
136.34
|
113.88
|
113.36
|
Southside
Bancshares Peer Group 2008**
|
100.00
|
118.02
|
125.02
|
138.26
|
120.28
|
121.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Southside
Bancshares Peer Group 2007 contains the following banks, all of which are
based in Texas: Cullen/Frost Bankers, Inc., First Financial Bankshares,
Inc., International Bancshares Corporation, MetroCorp Bancshares, Inc.,
Prosperity Bancshares, Inc., Sterling Bancshares, Inc., Texas Capital
Bancshares, Inc. and Franklin Bank Corp.
|
|
|
|
|
|
|
|
|
**Southside
Bancshares Peer Group 2008 contains the following banks, all of which are
based in Texas: Cullen/Frost Bankers, Inc., First Financial Bankshares,
Inc., International Bancshares Corporation, MetroCorp Bancshares, Inc.,
Prosperity Bancshares, Inc., Sterling Bancshares, Inc., and Texas Capital
Bancshares, Inc.
|
|
Source
: SNL Financial LC, Charlottesville, VA
|
|
|
|
|
|
|
ITEM
6. SELECTED
FINANCIAL DATA
The following table sets forth selected
financial data regarding our results of operations and financial position for,
and as of the end of, each of the fiscal years in the five-year period ended
December 31, 2008. This information should be read in conjunction
with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and “Item 8. Financial
Statements and Supplementary Data,” as set forth in this report. Please refer to
“Item 1. Business” for a discussion of our acquisition of FWBS in
2007.
|
|
As
of and For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities
|
|
$ |
278,856 |
|
|
$ |
110,403 |
|
|
$ |
100,303 |
|
|
$ |
121,240 |
|
|
$ |
133,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
and Related Securities
|
|
$ |
1,183,800 |
|
|
$ |
917,518 |
|
|
$ |
869,326 |
|
|
$ |
821,756 |
|
|
$ |
720,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
Net of Allowance for Loan Losses
|
|
$ |
1,006,437 |
|
|
$ |
951,477 |
|
|
$ |
751,954 |
|
|
$ |
673,274 |
|
|
$ |
617,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
2,700,238 |
|
|
$ |
2,196,322 |
|
|
$ |
1,890,976 |
|
|
$ |
1,783,462 |
|
|
$ |
1,619,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$ |
1,556,131 |
|
|
$ |
1,530,491 |
|
|
$ |
1,282,475 |
|
|
$ |
1,110,813 |
|
|
$ |
940,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
Obligations
|
|
$ |
715,800 |
|
|
$ |
146,558 |
|
|
$ |
149,998 |
|
|
$ |
229,032 |
|
|
$ |
351,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
& Deposit Service Income
|
|
$ |
154,571 |
|
|
$ |
123,021 |
|
|
$ |
112,434 |
|
|
$ |
94,275 |
|
|
$ |
80,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
30,696 |
|
|
$ |
16,684 |
|
|
$ |
15,002 |
|
|
$ |
14,592 |
|
|
$ |
16,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
2.21 |
|
|
$ |
1.22 |
|
|
$ |
1.11 |
|
|
$ |
1.10 |
|
|
$ |
1.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
2.16 |
|
|
$ |
1.18 |
|
|
$ |
1.07 |
|
|
$ |
1.05 |
|
|
$ |
1.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Dividends Paid Per Common Share
|
|
$ |
0.60 |
|
|
$ |
0.50 |
|
|
$ |
0.47 |
|
|
$ |
0.46 |
|
|
$ |
0.42 |
|
ITEM
7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF
OPERATIONS
The following
discussion and analysis provides a comparison of our results of operations for
the years ended December 31, 2008, 2007, and 2006 and financial condition as of
December 31, 2008 and 2007. This discussion should be read in
conjunction with the financial statements and related notes included elsewhere
in this report. All share data has been adjusted to give retroactive
recognition to stock splits and stock dividends.
CAUTIONARY
NOTICE REGARDING 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. See “Item 1. Business” and “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.” 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 and other regulatory
responses to current economic
conditions;
|
·
|
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;
|
·
|
adverse
changes in the credit portfolio of other U. S. financial institutions
relative to the performance of certain of our investment
securities;
|
·
|
impact
of future legislation and increases in depositors insurance premiums due
to FDIC regulation changes;
|
·
|
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;
|
·
|
increases
in the Company’s nonperforming
assets;
|
·
|
the
Company’s ability to maintain adequate liquidity to fund its operations
and growth;
|
·
|
failure
of assumptions underlying allowance for loan losses and other
estimates;
|
·
|
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; and
|
·
|
risks
related to loans secured by real estate, including the risk that the value
and marketability of collateral could
decline.
|
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 United States generally accepted accounting principles (“GAAP”) and
general practices within the financial services industry. The preparation of
financial statements in conformity with GAAP not previously defined 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
of future expected cash flows 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 specifically reserved 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 the 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 all may affect
the required level of the allowance for losses on loans and the associated
provision for loan losses.
As of December 31, 2008, our review of
the loan portfolio indicated that a loan loss allowance of $16.1 million was
adequate to cover probable losses in the portfolio.
Refer to “Loan Loss Experience and
Allowance for Loan Losses” and “Note 1 – Summary of Significant Accounting and
Reporting Policies” to our consolidated financial statements included in this
report 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 Statements of Financial
Accounting Standards (“SFAS”) 157, “Fair Value Measurements”, as presented in
“Note 15 – Fair Value Measurement” to our consolidated financial statements
included in this report. We also adopted SFAS 157-3, which was
released on October 10, 2008. 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 or our estimate of fair value by using a range of
fair value estimates in the market place as a result of the illiquid market
specific to the type of security.
At September 30, 2008 and continuing at
December 31, 2008, the valuation inputs for our available for sale (“AFS”) trust
preferred securities (“TRUPs”) became unobservable as a result of the
significant market dislocation and illiquidity in the
marketplace. Although we continue to rely on non-binding prices
compiled by third party vendors, the visibility of the observable market data
(Level 2) to determine the values of these securities has become less clear.
SFAS 157 assumes that fair values of financial assets are determined in an
orderly transaction and not a forced liquidation or distressed sale at the
measurement date. While we feel the financial market conditions
during the latter half of the year reflect the market illiquidity from forced
liquidation or distressed sales for these TRUPs, we determined that the fair
value provided by our pricing service continues to be an appropriate fair value
for financial statement measurement and therefore, as we verified the
reasonableness of that fair value, we have not otherwise adjusted the fair value
provided by our vendor. However, the severe decline in estimated fair
value caused by the significant illiquidity in this market contrasts sharply
with our assessment of the fundamental performance of these
securities. Therefore, we believe the estimated fair value is no
longer clearly based on observable market data and is based on a range of fair
value data points from the market place as a result of the illiquid market
specific to this type of security. Accordingly, we have now
determined that the TRUPs security valuation is based on Level 3 inputs in
accordance with SFAS 157.
Impairment of Investment Securities
and Mortgage-backed Securities. Investment and mortgage-backed
securities classified as 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, a change in
interest rate or a change in the market discount 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. For
certain assets we consider expected cash flows of the investment in determining
if impairment exists. The turmoil in the capital markets had a significant
impact on our estimate of fair value for certain of our
securities. We believe the market values are reflective of
illiquidity as opposed to credit impairment. At December 31, 2008, we
have in AFS Other Stocks and Bonds, $6.0 million cost basis in pooled
TRUPs. Those securities are structured products with cash flows
dependent upon securities issued by U.S. financial institutions, including banks
and insurance companies. Our estimate of fair value at December 31, 2008 is
approximately $646,000 and reflects the market illiquidity. We performed
detailed cash flow modeling for each TRUP using an industry accepted model.
Prior to loading the required assumptions into the model we reviewed the
financial condition of each of the issuing banks that had not deferred or
defaulted as of December 31, 2008. In addition, a base deferral assumption and
pessimistic deferral assumption was assigned to each issuing bank based on the
category in which it fell. Our analysis of the underlying cash flows
contemplated various default, deferral and recovery scenarios, and based on that
detailed analysis, we have concluded that there is no other-than-temporary
impairment at December 31, 2008. Management considered other qualitative
factors, which included the credit rating and the severity and duration of the
mark-to-market loss. After considering these qualitative factors,
management believes the quantitative factors, including the detailed review of
the collateral and cash flow modeling, outweigh the qualitative factors to
support the impairment conclusion that there is no other-than-temporary
impairment at December 31, 2008. We will continue to update our assumptions
and the resulting analysis each reporting period, to reflect changing market
conditions.
Goodwill. Goodwill
represents the excess of cost over the fair value of the net assets of
businesses acquired. Goodwill and intangible assets acquired in a business
combination and determined to have an
indefinite
useful life are tested for impairment annually, or if an event occurred or
circumstances changed that more likely than not reduced the fair value of the
reporting unit.
The annual impairment analysis of
goodwill included identification of reporting units, the determination of the
carrying value of each reporting unit and the estimation of the fair value of
each reporting unit. We tested for impairment of goodwill as of
December 31, 2008. Step one of the impairment test involves comparing the fair
value of the reporting unit to the carrying value of the reporting
unit. If the fair value of the reporting unit is greater than the
carrying value of the reporting unit, no additional testing is
required. If the carrying amount of the reporting unit exceeds its
fair value, we are required to perform a second step to the impairment test to
measure the extent of the impairment. At December 31, 2008, the fair
value of the reporting unit exceeded the carrying value of the reporting
unit. As a result, we did not record any goodwill impairment for the
year ended December 31, 2008.
Defined Benefit Pension
Plan. The plan obligations and related assets of our defined
benefit pension plan (the “Plan”) are presented in “Note 14 – Employee Benefits”
to our consolidated financial statements included in this
report. Entry into the Plan by new employees was frozen effective
December 31, 2005. Plan assets, which consist primarily of marketable equity and
debt instruments, are valued using observable market quotations. Plan
obligations and the annual pension expense are determined by independent
actuaries and through the use of a number of assumptions. Key
assumptions in measuring the plan obligations include the discount rate, the
rate of salary increases and the estimated future return on plan
assets. In determining the discount rate, we utilized a cash flow
matching analysis to determine a range of appropriate discount rates for our
defined benefit pension and restoration plans. In developing the cash
flow matching analysis, we constructed a portfolio of high quality non-callable
bonds (rated AA- or better) to match as close as possible the timing of future
benefit payments of the plans at December 31, 2008. 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 December 31, 2008, the weighted-average
actuarial assumptions of the Plan were: a discount rate of 6.10%; 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.
OPERATING RESULTS
During the year ended December 31,
2008, our net income increased $14.0 million, or 84.0%, to $30.7 million, from
$16.7 million for the same period in 2007. The increase in net income
was primarily attributable to the increase in net interest income and
noninterest income partially offset by an increase in the provision for loan
losses and noninterest expense. The increase in noninterest income
driven primarily by gain on sale of AFS securities that are non-recurring was
offset by an increase in noninterest expense due primarily to increases in
salaries and employee benefits due to the acquisition of FWBS during the fourth
quarter of 2007 and an interest in SFG in the third quarter of 2007 as well as
normal salary increases and new employees. Earnings per diluted share
increased $0.98, or 83.1% to $2.16, for the year ended December 31, 2008, from
$1.18 for the same period in 2007.
During the year ended December 31,
2007, our net income increased $1.7 million, or 11.2%, to $16.7 million, from
$15.0 million for the same period in 2006. The increase in net income
was primarily attributable to the increase in net interest income and
noninterest income partially offset by an increase in
the
provision for loan losses and noninterest expense. The increase in
noninterest income was offset by an increase in noninterest expense due
primarily to increases in salaries and employee benefits due to the acquisition
of FWBS during the fourth quarter of 2007 and an interest in SFG in the third
quarter of 2007. Earnings per diluted share were $1.18 and $1.07, respectively,
for the years ended December 31, 2007 and 2006.
FINANCIAL
CONDITION
Our total assets increased $503.9
million, or 22.9%, to $2.70 billion at December 31, 2008 from $2.20 billion at
December 31, 2007. The increase was attributable to growth in our
investment and mortgage-backed securities as well as loan growth. At
December 31, 2008, loans were $1.02 billion compared to $961.2 million at
December 31, 2007. Our securities portfolio increased by $434.7
million, or 42.3%, to $1.46 billion as compared to $1.03 billion at December 31,
2007. The increase in our securities were comprised entirely of U.S.
Agency debentures, U.S. Agency mortgage-backed and related securities and
municipal securities. Our increase in loans and securities was funded
by increases in deposits and FHLB advances.
Our nonperforming assets at December
31, 2008 increased to $15.8 million, and represented 0.58% of total assets,
compared to $3.9 million, or 0.18%, of total assets at December 31,
2007. Nonaccruing loans increased to $14.3 million and the ratio of
nonaccruing loans to total loans increased to 1.40% at December 31, 2008 as
compared to $2.9 million and 0.30% at December 31, 2007. Other Real
Estate Owned (“OREO”) increased to $318,000 at December 31, 2008 from $153,000
at December 31, 2007. Loans 90 days past due at December 31, 2008
increased to $593,000 compared to $400,000 at December 31,
2007. Repossessed assets increased to $433,000 at December 31, 2008
from $255,000 at December 31, 2007. Restructured performing loans at
December 31, 2008 decreased to $148,000 compared to $225,000 at December 31,
2007.
Our deposits increased $25.6 million to
$1.56 billion at December 31, 2008 from $1.53 billion at December 31,
2007. The increase was primarily due to branch expansion and
increased market penetration. During 2008 brokered deposits decreased
$92.9 million. As a result our deposits, net of brokered deposits,
increased $118.6 million. Due to the increase in securities and loans
and the decrease in brokered deposits during 2008, FHLB advances increased
$444.8 million to $884.9 million at December 31, 2008, from $440.0 million at
December 31, 2007. Short-term FHLB advances decreased $124.4 million
to $229.4 million at December 31, 2008 from $353.8 million at December 31,
2007. Long-term FHLB advances increased $569.2 million to $655.5
million at December 31, 2008 from $86.2 million at December 31,
2007. Other borrowings at December 31, 2008 and 2007 totaled $72.8
million and $69.8 million, respectively, and at December 31, 2008 consisted of
$12.5 million of short-term borrowings and $60.3 million of long-term
debt.
Assets under management in our trust
department decreased during 2008 and were approximately $628 million at December
31, 2008 compared to $718 million at December 31, 2007. The decrease
is a result of a decrease in money market funds managed by the trust
department.
Shareholders’ equity at December 31,
2008 totaled $160.6 million compared to $132.3 million at December 31,
2007. The increase primarily reflects the net income of $30.7 million
recorded for the year ended December 31, 2008, and the common stock issued of
$2.1 million as a result of our incentive stock option and dividend reinvestment
plans, a decrease in the accumulated other comprehensive loss of $3.6 million,
all of which were partially offset by the payment of cash dividends to our
shareholders of $8.3 million. The decrease in accumulated other
comprehensive loss is comprised of a $10.7 million, net of tax, unrealized gain
on securities, net of reclassification adjustment which was partially offset by
a decrease of $7.1 million, net of tax, related to the change in the unfunded
status of our defined benefit plan. See “Note 4 – Comprehensive
Income (Loss)” to our consolidated financial statements included in this
report.
During the first nine months of 2008
the economy in our market area began to reflect the effects of the housing led
economic slowdown impacting other regions of the United
States. During the fourth quarter as oil prices declined
significantly and consumers all across the United States were impacted more
severely by
the
economic slowdown, our market areas began to experience a greater slowdown in
economic activity. We cannot predict whether current economic
conditions will improve, remain the same or decline.
Key financial indicators management
follows include, but are not limited to, numerous interest rate sensitivity and
interest rate risk indicators, credit risk, operations risk, liquidity risk,
capital risk, regulatory risk, competition risk, yield curve risk, and economic
risk.
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. This balance sheet
strategy consists of borrowing a combination of long and short-term funds from
the FHLB and, when determined appropriate, issuing brokered
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 either the implicit or explicit guarantees of the U.S. Government,
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 this balance sheet 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, changes in volatility spreads associated with
the mortgage-backed securities and municipal securities, and the unpredictable
nature of mortgage-backed securities prepayments. See “Part I - Item
1A. Risk Factors – Risks Related to Our Business” in this Annual
Report on Form 10-K for the fiscal year ended December 31, 2008 for a discussion
of risks related to interest rates. 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 7A. 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. For several quarters up to and ending June 30,
2007, the size of our balance sheet was in a period of no growth or actual
shrinkage. Beginning with the third quarter of 2007, we began
deliberately increasing the size of our balance sheet taking advantage of the
increasingly attractive economics of financial intermediation and as of December
31, 2008 assets had grown from $1.8 billion at June 30, 2007 to $2.7
billion. Asset growth during this period included $152.3 million due
to the acquisition of FWBS in October of 2007, $148.2 million in loan growth
(including SFG) and a $560.6 million increase in the securities
portfolio. Funding for these earning assets was accomplished through
an increase in deposits (net of brokered CDs) of $303.2 million, $100.9 million
of which were due to the acquisition of FWBS, an increase in wholesale funding
of $472.2 million and an increase in capital of $83.6 million (including trust
preferred securities).
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 December 31, 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 and municipal securities. While we
experienced modest loan growth during 2008, we took advantage of buying
opportunities for securities which resulted in an increase in securities as a
percentage of assets. At December 31, 2008, the securities portfolio
as a percentage of total assets increased to 55.7% from 47.8% at December 31,
2007 as the increase in the securities portfolio exceeded the growth in loans
during 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 first quarter of 2009. During 2008, we increased
our investment and U. S. Government agency mortgage-backed securities $434.7
million as investment and U. S. Government agency mortgage-backed securities
increased from $1.03 billion at December 31, 2007 to $1.46 billion at December
31, 2008. During 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 55 basis points from
December 31, 2007 to approximately 6.22% at December 31, 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. Should the economics of asset accumulation decrease, we
might allow the balance sheet to shrink through run-off or asset
sales. However, should the economics become more attractive, we will
strategically increase the balance sheet.
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 brokered CDs represent
wholesale funding sources we are currently utilizing. Our FHLB
borrowings at December 31, 2008 increased 101.1%, or $444.8 million, to $884.9
million from $440.0 million at December 31, 2007 primarily as a result
of an increase in securities and a refunding of $92.9 million in
brokered CDs called. At December 31, 2007, our callable brokered CDs
totaled $123.4 million and our other brokered CDs, all of which were acquired
through FWBS, 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 2008, we called $125.4 million of the callable brokered
CDs. During 2008, another $7.5 million of brokered CDs issued by FWNB
matured. As of December 31, 2008 we had $40.0 million in short-term
brokered CDs. We utilized long-term brokered CDs in prior years
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. During 2008, the increase in FHLB borrowings, net of
brokered deposits, exceeded the overall growth in deposits, net of brokered
deposits, which resulted in an increase in our total wholesale funding as a
percentage of deposits, not including brokered CDs, from 41.0% at December 31,
2007, to 61.0% at December 31, 2008.
RESULTS
OF OPERATIONS
Our results of operations are dependent
primarily on net interest income, which is the difference between the interest
income earned on assets (loans and investments) and interest expense due on our
funding sources (deposits and borrowings) during a particular
period. Results of operations are also affected by our noninterest
income, provision for loan losses, noninterest expenses and income tax
expense. General economic and competitive conditions, particularly
changes in interest rates, changes in interest rate yield curves, prepayment
rates of mortgage-backed securities and loans, repricing of loan relationships,
government policies and actions of regulatory authorities, also significantly
affect our results of operations. Future changes in applicable law,
regulations or government policies may also have a material impact on
us.
COMPARISON OF OPERATING
RESULTS FOR THE YEARS ENDED DECEMBER 31, 2008 COMPARED TO DECEMBER 31,
2007
NET INTEREST INCOME
Net interest income is one of the
principal sources of a financial institution's earnings stream and represents
the difference or spread between interest and fee income generated from interest
earning assets and the interest expense paid on deposits and borrowed
funds. Fluctuations in interest rates or interest rate yield curves,
as well as repricing characteristics and volume and changes in the mix of
interest earning assets and interest bearing liabilities, materially impact net
interest income.
Net interest income for the year ended
December 31, 2008 was $75.8 million, an increase of $31.9 million or 72.8%,
compared to the same period in 2007. The overall increase in net
interest income was primarily the result of increases in interest income from
loans and tax exempt investment securities, mortgage-backed and related
securities and a decrease in interest expense on deposits and short-term
obligations that was partially offset by an increase in interest expense on
long-term obligations.
During the year ended December 31,
2008, total interest income increased $30.4 million, or 28.8%, from $105.7
million to $136.2 million. The increase in total interest income was
the result of an increase in average interest earning assets of $421.3 million,
or 23.6%, from $1.79 billion to $2.21 billion, and the increase in average yield
on average interest earning assets from 6.10% for the year ended December 31,
2007 to 6.38% for the year ended December 31, 2008. Total interest
expense decreased $1.5 million, or 2.4%, to $60.4 million during the year ended
December 31, 2008 as compared to $61.9 million during the same period in
2007. The decrease was attributable to a decrease in the average
yield on interest bearing liabilities for the year ended December 31, 2008, to
3.30% from 4.30% for the same period in 2007 while offset by an increase in
average interest bearing liabilities of $389.3 million, or 27.0%, from $1.44
billion to $1.83 billion.
Net interest income increased during
2008 as a result of increases in our average interest earning assets and net
interest margin on average earning assets during 2008 when compared to
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 $23.7 million of high
yield automobile loans by SFG, a 22 basis point increase in the yield on our
securities portfolio and an increase in average interest earning assets of
$421.3 million, or 23.6%. The decrease in the average yield on
interest bearing liabilities is a result of an overall decrease in interest
rates and calling $125.4 million of high yield brokered deposits during
2008. For the year ended December 31, 2008, our net interest spread
increased to 3.08% from 1.80%, and our net interest margin increased to 3.64%
from 2.64% when compared to the same period in 2007.
During the year ended December 31,
2008, average loans increased $173.4 million, or 21.4% from $809.9 million to
$983.3 million, compared to the same period in 2007. Automobile loans
purchased through SFG represent the largest part of this
increase. The average yield on loans increased from 7.16% for the
year ended December 31, 2007 to 7.67% for the year ended December 31,
2008. The increase in interest income on loans of $17.2 million, or
30.8%, to $73.1 million for the year ended
December
31, 2008, when compared to $55.9 million for the same period in 2007 was the
result of an increase in average loans and the average yield. The
increase in the yield on loans was due to the increase in credit spreads, the
repricing characteristics of Southside Bank’s loan portfolio and the addition of
higher yielding subprime automobile loan portfolios purchased during the second
half of 2007 and throughout all of 2008.
Average investment and mortgage-backed
securities increased $236.0 million, or 24.9%, from $948.5 million to $1.18
billion, for the year ended December 31, 2008 when compared to the same period
in 2007. This increase was the result of securities purchased due to
buying opportunities available during the last half of 2007 and throughout all
of the year ended 2008. The overall yield on average investment and
mortgage-backed securities increased to 5.43% during the year ended December 31,
2008 from 5.21% during the same period in 2007. Interest income on
investment and mortgage-backed securities increased $13.6 million in 2008, or
28.2%, compared to 2007 due to the increase in the average balance and the
increase in average yield. The increase in the average yield
primarily reflects purchases of higher-yielding U.S. Agency mortgage-backed and
municipal securities combined with the reinvestment of proceeds from
lower-yielding matured or sold securities into higher-yielding
securities. This was due primarily to increased credit and volatility
spreads on U.S. Agency mortgage-backed and municipal securities during the last
half of 2007 and most of 2008. 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 repricings.
Average FHLB stock and other
investments increased $11.7 million, or 58.0%, to $31.9 million, for the year
ended December 31, 2008, when compared to $20.2 million for
2007. Interest income from our FHLB stock and other investments
decreased $352,000, or 29.5%, during 2008, when compared to 2007, due to the
decrease in average yield from 5.91% for the year ended December 31, 2007
compared to 2.64% for the same period in 2008. 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.
Average federal funds sold and other
interest earning assets increased $1.3 million, or 36.3%, to $5.0 million, for
the year ended December 31, 2008, when compared to $3.7 million for
2007. Interest income from federal funds sold and other interest
earning assets decreased $73,000, or 39.5%, for the year ended December 31,
2008, when compared to 2007, as a result of the decrease in the average yield
from 5.00% in 2007 to 2.22% in 2008.
During the year ended December 31,
2008, our average securities increased more than our average
loans. As a result, the mix of our average interest earning assets
reflected an increase in average total securities as a percentage of total
average interest earning assets compared to the prior year as securities
averaged 55.1% during 2008 compared to 54.2% during 2007, a direct result of
securities purchases. Average loans were 44.7% of average total
interest earning assets and other interest earning asset categories averaged
0.2% for December 31, 2008. During 2007, the comparable mix was 45.6%
in loans and 0.2% in the other interest earning asset categories.
Total interest expense decreased $1.5
million, or 2.4%, to $60.4 million during the year ended December 31, 2008 as
compared to $61.9 million during the same period in 2007. The
decrease was primarily attributable to decreased funding costs as the average
yield on interest bearing liabilities decreased from 4.30% for 2007 to 3.30% for
the year ended December 31, 2008, which more than offset an increase in average
interest bearing liabilities. The increase in average bearing
liabilities included an increase in deposits, FHLB advances and long-term debt
of $389.3 million, or 27.0%. FHLB advance increases during 2008 were
used to purchase additional securities and to refund brokered CDs
called.
Average interest bearing deposits
increased $63.5 million, or 6.2%, from $1.03 billion to $1.09 billion, while the
average rate paid decreased from 4.02% for the year ended December 31, 2007 to
3.01% for the year ended December 31, 2008. Average time deposits
decreased $28.7 million, or 5.1%, from $564.6 million to $535.9 million due to
our calling $125.4 of callable brokered CDs, and the average rate paid
decreasing 85 basis points. Average interest bearing demand deposits
increased $86.7 million, or 20.9%, while the average rate paid decreased 109
basis points. Average savings deposits increased
$5.5
million, or 10.5%, while the average rate paid decreased two basis
points. Interest expense for interest bearing deposits for the year
ended December 31, 2008, decreased $8.6 million, or 20.7%, when compared to the
same period in 2007 due to the decrease in the average yield which more than
offset the increase in the average balance. Average noninterest
bearing demand deposits increased $43.4 million, or 13.2%, during
2008. The latter three categories, which are considered the lowest
cost deposits, comprised 63.5% of total average deposits during the year ended
December 31, 2008 compared to 58.5% during 2007. The increase in our
average total deposits is the result of overall bank growth, branch expansion
and the acquisition of FWBS which more than offset the brokered CDs called
during 2008.
During the year ended December 31,
2008, we issued $40.0 million of short-term brokered CDs; however, our brokered
CDs decreased due to the fact we called all of our long-term brokered CDs during
2008. At December 31, 2008, all of our brokered CDs had maturities of
less than six months. At December 31, 2007, $123.4 million of these
brokered CDs had maturities from approximately one to four years and had calls
that we controlled, all of which were currently six months or
less. The $9.5 million previously issued by FWNB were either called
or matured during 2008. At December 31, 2008, we had $40.0 million in
brokered CDs that represented 2.6% of deposits compared to $132.9 million, or
8.7% of deposits, at December 31, 2007. Our current policy allows for
a maximum of $150 million in brokered CDs. The potential higher
interest cost and lack of customer loyalty are risks associated with the use of
brokered CDs.
The
following table sets forth our deposit averages by category for the years ended
December 31, 2008, 2007 and 2006:
|
|
COMPOSITION
OF DEPOSITS
|
|
|
|
|
|
|
|
Years
Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
(dollars
in thousands)
|
|
|
|
AVG
BALANCE
|
|
AVG
YIELD
|
|
AVG
BALANCE
|
AVG
YIELD
|
|
AVG
BALANCE
|
AVG
YIELD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
Bearing Demand Deposits
|
|
$
|
372,160
|
|
N/A
|
|
$
|
328,711
|
N/A
|
|
$
|
314,241
|
N/A
|
|
Interest
Bearing Demand Deposits
|
|
|
500,955
|
|
2.08
|
%
|
|
414,293
|
3.17
|
%
|
|
349,375
|
2.73
|
%
|
Savings
Deposits
|
|
|
57,587
|
|
1.28
|
%
|
|
52,106
|
1.30
|
%
|
|
50,764
|
1.27
|
%
|
Time
Deposits
|
|
|
535,921
|
|
4.05
|
%
|
|
564,613
|
4.90
|
%
|
|
467,174
|
4.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Deposits
|
|
$
|
1,466,623
|
|
2.24
|
%
|
$
|
1,359,723
|
3.05
|
%
|
$
|
1,181,554
|
2.60
|
%
|
Average short-term interest bearing
liabilities, consisting primarily of FHLB advances and federal funds purchased
and repurchase agreements, were $290.9 million, an increase of $12.9 million, or
4.6%, for the year ended December 31, 2008 when compared to the same period in
2007. Interest expense associated with short-term interest bearing
liabilities decreased $4.3 million, or 32.4%, and the average rate paid
decreased 169 basis points to 3.08% for the year ended December 31, 2008, when
compared to 4.77% for the same period in 2007. The decrease in the
interest expense was due to a decrease in the average rate paid which more than
offset the increase in the average balance of short-term interest bearing
liabilities.
Average long-term interest bearing
liabilities consisting of FHLB advances increased $288.4 million, or 302.7%,
during the year ended December 31, 2008 to $383.7 million as compared to $95.3
million at December 31, 2007. The increase in the average long-term
FHLB advances occurred primarily as a result of lower long-term rates during
2008 and our decision to call outstanding long-term brokered CDs and replace
them with long-term FHLB borrowings. Interest expense associated with
long-term FHLB advances increased $10.1 million, or 231.7%, while the average
rate paid decreased 80 basis points to 3.77% for the year ended December 31,
2008 when compared to 4.57% 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 FWBS, was $60.3 million and
$35.8 million for the years ended December 31, 2008 and 2007,
respectively. 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 FWBS, which occurred on October 10, 2007. Interest
expense increased $1.3 million, or 45.4%, to $4.0 million for the year ended
December 31, 2008 when compared to $2.8 million for the same period in 2007 as a
result of the increase in the average balance during 2008 when compared to
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 Trust IV and the $12.9
million of long-term debentures issued to Southside Statutory 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 FWBS, adjusts quarterly at a rate equal to
three-month LIBOR plus 180 basis points.
AVERAGE
BALANCES AND YIELDS
The following table presents average
balance sheet amounts and average yields for the years ended December 31, 2008,
2007 and 2006. The information should be reviewed in conjunction with
the consolidated financial statements for the same years then
ended. Two major components affecting our earnings are the interest
earning assets and interest bearing liabilities. A summary of average
interest earning assets and interest bearing liabilities is set forth below,
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)
|
|
|
|
Years
Ended
|
|
|
|
December
31, 2008
|
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
|
|
AVG.
BALANCE
|
|
|
INTEREST
|
|
|
AVG.
YIELD
|
|
|
AVG.
BALANCE
|
|
|
INTEREST
|
|
|
AVG.
YIELD
|
|
|
AVG.
BALANCE
|
|
|
INTEREST
|
|
|
AVG.
YIELD
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans(1)
(2)
|
|
$ |
983,336 |
|
|
$ |
75,445 |
|
|
|
7.67
|
% |
|
$ |
809,906 |
|
|
$ |
58,002 |
|
|
|
7.16
|
% |
|
$ |
722,252 |
|
|
$ |
48,397 |
|
|
|
6.70
|
% |
Loans
Held For Sale
|
|
|
2,487 |
|
|
|
121 |
|
|
|
4.87
|
% |
|
|
3,657 |
|
|
|
191 |
|
|
|
5.22
|
% |
|
|
4,651 |
|
|
|
246 |
|
|
|
5.29
|
% |
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inv.
Sec. (Taxable)(4)
|
|
|
46,537 |
|
|
|
1,723 |
|
|
|
3.70
|
% |
|
|
52,171 |
|
|
|
2,580 |
|
|
|
4.95
|
% |
|
|
54,171 |
|
|
|
2,498 |
|
|
|
4.61
|
% |
Inv.
Sec. (Tax-Exempt)(3)(4)
|
|
|
103,608 |
|
|
|
7,074 |
|
|
|
6.83
|
% |
|
|
43,486 |
|
|
|
3,065 |
|
|
|
7.05
|
% |
|
|
43,931 |
|
|
|
3,134 |
|
|
|
7.13
|
% |
Mortgage-backed
and related
Sec.(4)
|
|
|
1,034,406 |
|
|
|
55,470 |
|
|
|
5.36
|
% |
|
|
852,880 |
|
|
|
43,767 |
|
|
|
5.13
|
% |
|
|
891,015 |
|
|
|
44,401 |
|
|
|
4.98
|
% |
Total
Securities
|
|
|
1,184,551 |
|
|
|
64,267 |
|
|
|
5.43
|
% |
|
|
948,537 |
|
|
|
49,412 |
|
|
|
5.21
|
% |
|
|
989,117 |
|
|
|
50,033 |
|
|
|
5.06
|
% |
FHLB
stock and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investments,
at cost
|
|
|
31,875 |
|
|
|
841 |
|
|
|
2.64
|
% |
|
|
20,179 |
|
|
|
1,193 |
|
|
|
5.91
|
% |
|
|
27,969 |
|
|
|
1,409 |
|
|
|
5.04
|
% |
Interest
Earning Deposits
|
|
|
1,006 |
|
|
|
22 |
|
|
|
2.19
|
% |
|
|
769 |
|
|
|
41 |
|
|
|
5.33
|
% |
|
|
692 |
|
|
|
35 |
|
|
|
5.06
|
% |
Federal
Funds Sold
|
|
|
4,039 |
|
|
|
90 |
|
|
|
2.23
|
% |
|
|
2,933 |
|
|
|
144 |
|
|
|
4.91
|
% |
|
|
1,148 |
|
|
|
57 |
|
|
|
4.97
|
% |
Total
Interest Earning Assets
|
|
|
2,207,294 |
|
|
|
140,786 |
|
|
|
6.38
|
% |
|
|
1,785,981 |
|
|
|
108,983 |
|
|
|
6.10
|
% |
|
|
1,745,829 |
|
|
|
100,177 |
|
|
|
5.74
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST
EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Due From Banks
|
|
|
45,761 |
|
|
|
|
|
|
|
|
|
|
|
42,724 |
|
|
|
|
|
|
|
|
|
|
|
42,906 |
|
|
|
|
|
|
|
|
|
Bank
Premises and Equipment
|
|
|
40,449 |
|
|
|
|
|
|
|
|
|
|
|
35,746 |
|
|
|
|
|
|
|
|
|
|
|
33,298 |
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
89,473 |
|
|
|
|
|
|
|
|
|
|
|
51,968 |
|
|
|
|
|
|
|
|
|
|
|
42,716 |
|
|
|
|
|
|
|
|
|
Less: Allowance
for Loan Loss
|
|
|
(11,318
|
) |
|
|
|
|
|
|
|
|
|
|
(7,697
|
) |
|
|
|
|
|
|
|
|
|
|
(7,231
|
) |
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
2,371,659 |
|
|
|
|
|
|
|
|
|
|
$ |
1,908,722 |
|
|
|
|
|
|
|
|
|
|
$ |
1,857,518 |
|
|
|
|
|
|
|
|
|
(1)
|
Interest
on loans includes fees on loans that are not material in
amount.
|
(2)
|
Interest
income includes taxable-equivalent adjustments of $2,446, $2,289 and
$2,230 for the years ended December 31, 2008, 2007 and 2006,
respectively.
|
(3)
|
Interest
income includes taxable-equivalent adjustments of $2,164, $953 and $995
for the years ended December 31, 2008, 2007 and 2006,
respectively.
|
(4)
|
For
the purpose of calculating the average yield, the average balance of
securities is presented at historical
cost.
|
Note:
|
As
of December 31, 2008, 2007 and 2006, loans totaling $14,289, $2,913 and
$1,333, 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)
|
|
|
|
Years
Ended
|
|
|
|
December
31, 2008
|
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
|
|
AVG.
BALANCE
|
|
|
INTEREST
|
|
|
AVG.
YIELD
|
|
|
AVG.
BALANCE
|
|
|
INTEREST
|
|
|
AVG.
YIELD
|
|
|
AVG.
BALANCE
|
|
|
INTEREST
|
|
|
AVG.
YIELD
|
|
LIABILITIES
AND
SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
BEARING
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
Deposits
|
|
$ |
57,587 |
|
|
$ |
736 |
|
|
|
1.28
|
% |
|
$ |
52,106 |
|
|
$ |
676 |
|
|
|
1.30
|
% |
|
$ |
50,764 |
|
|
$ |
645 |
|
|
|
1.27
|
% |
Time
Deposits
|
|
|
535,921 |
|
|
|
21,727 |
|
|
|
4.05
|
% |
|
|
564,613 |
|
|
|
27,666 |
|
|
|
4.90
|
% |
|
|
467,174 |
|
|
|
20,516 |
|
|
|
4.39
|
% |
Interest
Bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
Deposits
|
|
|
500,955 |
|
|
|
10,428 |
|
|
|
2.08
|
% |
|
|
414,293 |
|
|
|
13,116 |
|
|
|
3.17
|
% |
|
|
349,375 |
|
|
|
9,529 |
|
|
|
2.73
|
% |
Total
Interest Bearing
Deposits
|
|
|
1,094,463 |
|
|
|
32,891 |
|
|
|
3.01
|
% |
|
|
1,031,012 |
|
|
|
41,458 |
|
|
|
4.02
|
% |
|
|
867,313 |
|
|
|
30,690 |
|
|
|
3.54
|
% |
Short-term
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bearing
Liabilities
|
|
|
290,895 |
|
|
|
8,969 |
|
|
|
3.08
|
% |
|
|
278,002 |
|
|
|
13,263 |
|
|
|
4.77
|
% |
|
|
376,696 |
|
|
|
16,534 |
|
|
|
4.39
|
% |
Long-term
Interest Bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities-FHLB
Dallas
|
|
|
383,677 |
|
|
|
14,454 |
|
|
|
3.77
|
% |
|
|
95,268 |
|
|
|
4,357 |
|
|
|
4.57
|
% |
|
|
154,983 |
|
|
|
6,379 |
|
|
|
4.12
|
% |
Long-term
Debt (5)
|
|
|
60,311 |
|
|
|
4,049 |
|
|
|
6.71
|
% |
|
|
35,802 |
|
|
|
2,785 |
|
|
|
7.78
|
% |
|
|
20,619 |
|
|
|
1,681 |
|
|
|
8.04
|
% |
Total
Interest Bearing
Liabilities
|
|
|
1,829,346 |
|
|
|
60,363 |
|
|
|
3.30
|
% |
|
|
1,440,084 |
|
|
|
61,863 |
|
|
|
4.30
|
% |
|
|
1,419,611 |
|
|
|
55,284 |
|
|
|
3.89
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST
BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
Deposits
|
|
|
372,160 |
|
|
|
|
|
|
|
|
|
|
|
328,711 |
|
|
|
|
|
|
|
|
|
|
|
314,241 |
|
|
|
|
|
|
|
|
|
Other
Liabilities
|
|
|
26,497 |
|
|
|
|
|
|
|
|
|
|
|
20,997 |
|
|
|
|
|
|
|
|
|
|
|
12,403 |
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
2,228,003 |
|
|
|
|
|
|
|
|
|
|
|
1,789,792 |
|
|
|
|
|
|
|
|
|
|
|
1,746,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
Interest in SFG
|
|
|
487 |
|
|
|
|
|
|
|
|
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY
|
|
|
143,169 |
|
|
|
|
|
|
|
|
|
|
|
118,779 |
|
|
|
|
|
|
|
|
|
|
|
111,263 |
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND
SHAREHOLDERS'
EQUITY
|
|
$ |
2,371,659 |
|
|
|
|
|
|
|
|
|
|
$ |
1,908,722 |
|
|
|
|
|
|
|
|
|
|
$ |
1,857,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INTEREST INCOME
|
|
|
|
|
|
$ |
80,423 |
|
|
|
|
|
|
|
|
|
|
$ |
47,120 |
|
|
|
|
|
|
|
|
|
|
$ |
44,893 |
|
|
|
|
|
NET
INTEREST MARGIN ON AVERAGE EARNING ASSETS
|
|
|
|
|
|
|
|
|
|
|
3.64
|
% |
|
|
|
|
|
|
|
|
|
|
2.64
|
% |
|
|
|
|
|
|
|
|
|
|
2.57
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INTEREST SPREAD
|
|
|
|
|
|
|
|
|
|
|
3.08
|
% |
|
|
|
|
|
|
|
|
|
|
1.80
|
% |
|
|
|
|
|
|
|
|
|
|
1.85
|
% |
(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 FWBS to Magnolia Trust Company I
in connection with the issuance by Magnolia Trust Company I of $3.5
million of trust preferred
securities.
|
ANALYSIS
OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
The following tables set forth the
dollar amount of increase (decrease) in interest income and interest expense
resulting from changes in the volume of interest earning assets and interest
bearing liabilities and from changes in yields (in thousands):
|
|
Years
Ended December 31,
|
|
|
|
2008
Compared to 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Increase
|
|
|
|
Volume
|
|
|
Yield
|
|
|
(Decrease)
|
|
INTEREST
INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
(1)
|
|
$
|
13,085
|
|
|
$
|
4,358
|
|
|
$
|
17,443
|
|
Loans
Held For
Sale
|
|
|
(58
|
)
|
|
|
(12
|
)
|
|
|
(70
|
)
|
Investment
Securities (Taxable)
|
|
|
(258
|
)
|
|
|
(599
|
)
|
|
|
(857
|
)
|
Investment
Securities (Tax Exempt) (1)
|
|
|
4,108
|
|
|
|
(99
|
)
|
|
|
4,009
|
|
Mortgage-backed
Securities
|
|
|
9,661
|
|
|
|
2,042
|
|
|
|
11,703
|
|
FHLB
stock and other investments
|
|
|
496
|
|
|
|
(848
|
)
|
|
|
(352
|
)
|
Interest
Earning
Deposits
|
|
|
10
|
|
|
|
(29
|
)
|
|
|
(19
|
)
|
Federal
Funds
Sold
|
|
|
42
|
|
|
|
(96
|
)
|
|
|
(54
|
)
|
Total
Interest
Income
|
|
|
27,086
|
|
|
|
4,717
|
|
|
|
31,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
Deposits
|
|
|
70
|
|
|
|
(10
|
)
|
|
|
60
|
|
Time
Deposits
|
|
|
(1,351
|
)
|
|
|
(4,588
|
)
|
|
|
(5,939
|
)
|
Interest
Bearing Demand Deposits
|
|
|
2,387
|
|
|
|
(5,075
|
)
|
|
|
(2,688
|
)
|
Short-term
Interest Bearing Liabilities
|
|
|
590
|
|
|
|
(4,884
|
)
|
|
|
(4,294
|
)
|
Long-term
FHLB
Advances
|
|
|
10,993
|
|
|
|
(896
|
)
|
|
|
10,097
|
|
Long-term
Debt
|
|
|
1,689
|
|
|
|
(425
|
)
|
|
|
1,264
|
|
Total
Interest
Expense
|
|
|
14,378
|
|
|
|
(15,878
|
)
|
|
|
(1,500
|
)
|
Net
Interest
Income
|
|
$
|
12,708
|
|
|
$
|
20,595
|
|
|
$
|
33,303
|
|
|
|
Years
Ended December 31,
|
|
|
|
2007
Compared to 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Increase
|
|
|
|
Volume
|
|
|
Yield
|
|
|
(Decrease)
|
|
INTEREST
INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
(1)
|
|
$
|
6,131
|
|
|
$
|
3,474
|
|
|
$
|
9,605
|
|
Loans
Held For
Sale
|
|
|
(52
|
)
|
|
|
(3
|
)
|
|
|
(55
|
)
|
Investment
Securities (Taxable)
|
|
|
(85
|
)
|
|
|
167
|
|
|
|
82
|
|
Investment
Securities (Tax Exempt) (1)
|
|
|
(32
|
)
|
|
|
(37
|
)
|
|
|
(69
|
)
|
Mortgage-backed
Securities
|
|
|
(1,934
|
)
|
|
|
1,300
|
|
|
|
(634
|
)
|
FHLB
stock and other investments
|
|
|
(434
|
)
|
|
|
218
|
|
|
|
(216
|
)
|
Interest
Earning
Deposits
|
|
|
4
|
|
|
|
2
|
|
|
|
6
|
|
Federal
Funds
Sold
|
|
|
88
|
|
|
|
(1
|
)
|
|
|
87
|
|
Total
Interest
Income
|
|
|
3,686
|
|
|
|
5,120
|
|
|
|
8,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
Deposits
|
|
|
17
|
|
|
|
14
|
|
|
|
31
|
|
Time
Deposits
|
|
|
4,598
|
|
|
|
2,552
|
|
|
|
7,150
|
|
Interest
Bearing Demand Deposits
|
|
|
1,923
|
|
|
|
1,664
|
|
|
|
3,587
|
|
Short-term
Interest Bearing Liabilities
|
|
|
(4,615
|
)
|
|
|
1,344
|
|
|
|
(3,271
|
)
|
Long-term
FHLB
Advances
|
|
|
(2,670
|
)
|
|
|
648
|
|
|
|
(2,022
|
)
|
Long-term
Debt
|
|
|
1,184
|
|
|
|
(80
|
)
|
|
|
1,104
|
|
Total
Interest
Expense
|
|
|
437
|
|
|
|
6,142
|
|
|
|
6,579
|
|
Net
Interest
Income
|
|
$
|
3,249
|
|
|
$
|
(1,022
|
)
|
|
$
|
2,227
|
|
(1)
|
Interest
yields on loans and securities that are nontaxable for federal income tax
purposes are presented on a taxable equivalent
basis.
|
NOTE: Volume/Yield
variances (change in volume times change in yield) have been allocated to
amounts attributable to changes in volumes and to changes in yields in
proportion to the amounts directly attributable to those
changes.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the
year ended December 31, 2008 was $13.7 million compared to $2.4 million for
December 31, 2007. Approximately $8.7 million of this increase is
provision expense related to the SFG automobile loan portfolio. For
the year ended December 31, 2008, net charge-offs of loans increased $6.6
million, to $7.3 million when compared to $700,000 for the same period in
2007.
The increase in net charge-offs for
2008 was due to a combination of an increase in total charge-offs of $6.5
million and a decrease in total recoveries of $166,000. Net
charge-offs for commercial loans increased $476,000 from 2007 primarily as a
result of an overall increase in charge-offs and decrease in
recoveries. Net charge-offs for loans to individuals increased $6.0
million, to $6.7 million for the year ended December 31, 2008 which included
$5.9 million in net charge-offs from the SFG automobile loan
portfolio.
As of December 31, 2008, our review of
the loan portfolio indicated that a loan loss allowance of $16.1 million was
adequate to cover probable losses in the portfolio.
NONINTEREST INCOME
Noninterest income consists of revenues
generated from a broad range of financial services and activities including fee
based services. The following schedule lists the accounts from which
noninterest income was derived, gives totals for these accounts for the year
ended December 31, 2008 and the comparable year ended December 31, 2007 and
indicates the percentage changes:
|
|
|
|
|
|
Years
Ended
|
|
|
|
|
December
31,
|
|
Percent
|
|
|
2008
|
|
|
2007
|
|
Change
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Deposit
services
|
|
$ |
18,395 |
|
|
$ |
17,280 |
|
|
|
6.5
|
% |
Gain
on sale of securities available for sale
|
|
|
12,334 |
|
|
|
897 |
|
|
|
1,275.0
|
% |
Gain
on sale of
loans
|
|
|
1,757 |
|
|
|
1,922 |
|
|
|
(8.6
|
%) |
Trust
income
|
|
|
2,465 |
|
|
|
2,106 |
|
|
|
17.0
|
% |
Bank
owned life insurance income
|
|
|
2,246 |
|
|
|
1,142 |
|
|
|
96.7
|
% |
Other
|
|
|
3,105 |
|
|
|
3,071 |
|
|
|
1.1
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
noninterest income
|
|
$ |
40,302 |
|
|
$ |
26,418 |
|
|
|
52.6
|
% |
Total noninterest income for the year
ended December 31, 2008 increased 52.6%, or $13.9 million, compared to
2007. During the year ended December 31, 2008, we had a gain on sale
of AFS securities of $12.3 million compared to $897,000 for the same period in
2007. The market value of the AFS securities portfolio at December
31, 2008 was $1.30 billion with a net unrealized gain on that date of $21.9
million. The net unrealized gain is comprised of $30.8 million in
unrealized gains and $8.9 million in unrealized losses. We sold
securities out of our AFS portfolio to accomplish ALCO and investment portfolio
objectives aimed at repositioning a portion of the securities portfolio in an
attempt to maximize the total return of the securities
portfolio. During 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 the housing market deteriorates. Selected long duration municipal
securities that were purchased during periods of market stress when spreads were
wide, were sold during periods when municipal credit spreads
tightened. A lesser amount of specific higher coupon mortgage-backed
securities were sold due to prepayment concerns due to the collateral
characteristics and the risk reward profile based on price.
Deposit services income increased $1.1
million, or 6.5%, for the year ended December 31, 2008, when compared to the
same period in 2007, primarily as a result of increases in overdraft income,
increased
numbers
of deposit accounts and an increase in debit card income, a portion of which is
attributable to the acquisition of FWBS during 2007.
Trust income increased $359,000, or
17.0%, for the year ended December 31, 2008, when compared to the same period in
2007 due to the change in the mix of the assets under management in the trust
department and the related fees charged.
Gain on sale of loans decreased
$165,000, or 8.6%, for the year ended December 31, 2008, when compared to the
same period in 2007.
Bank owned life insurance (“BOLI”)
income increased $1.1 million, or 96.7%, for the year ended December 31, 2008,
when compared to the same period in 2007 primarily as a result of two death
benefits received, one for a retired covered officer and one for a covered
officer.
NONINTEREST EXPENSE
The following schedule lists the
accounts which comprise noninterest expense, gives totals for these accounts for
the years ended December 31, 2008 and 2007 and indicates the percentage
changes:
|
|
|
|
|
|
|
|
|
Years
Ended
|
|
|
|
|
|
|
December
31,
|
|
|
Percent
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
$ |
37,228 |
|
|
$ |
29,361 |
|
|
|
26.8
|
% |
Occupancy
expense
|
|
|
5,704 |
|
|
|
4,881 |
|
|
|
16.9
|
% |
Equipment
expense
|
|
|
1,305 |
|
|
|
1,017 |
|
|
|
28.3
|
% |
Advertising,
travel and entertainment
|
|
|
2,097 |
|
|
|
1,812 |
|
|
|
15.7
|
% |
ATM
and debit card expense
|
|
|
1,211 |
|
|
|
1,006 |
|
|
|
20.4
|
% |
Director
fees
|
|
|
674 |
|
|
|
605 |
|
|
|
11.4
|
% |
Supplies
|
|
|
812 |
|
|
|
692 |
|
|
|
17.3
|
% |
Professional
fees
|
|
|
1,864 |
|
|
|
1,268 |
|
|
|
47.0
|
% |
Postage
|
|
|
755 |
|
|
|
662 |
|
|
|
14.0
|
% |
Telephone
and communications
|
|
|
1,050 |
|
|
|
800 |
|
|
|
31.3
|
% |
FDIC
insurance
|
|
|
966 |
|
|
|
285 |
|
|
|
238.9
|
% |
Other
|
|
|
6,828 |
|
|
|
4,896 |
|
|
|
39.5
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
noninterest expense
|
|
$ |
60,494 |
|
|
$ |
47,285 |
|
|
|
27.9
|
% |
Noninterest expense for the year ended
December 31, 2008 increased $13.2 million, or 27.9%, when compared to the year
ended December 31, 2007. Salaries and employee benefits expense
increased $7.9 million, or 26.8%, during the year ended December 31, 2008, when
compared to the same period in 2007. Direct salary expense and
payroll taxes increased $6.7 million, or 27.5%, for the year ended December 31,
2008, when compared to the same period in 2007. These increases were
the result of the addition of FWNB and SFG combined with normal salary increases
and new employees of Southside Bank.
Retirement expense, included in salary
and benefits, increased $1.5 million, or 77.8%, for the year ended December 31,
2008, when compared to the same period in 2007. The increase was
related to a retirement agreement for the Chairman and Chief Executive Officer,
payable over a five-year period, only after the executive retires, which
replaces a previous postretirement agreement. In addition to the $1.2 million
retirement agreement discussed above, we contributed $250,000 to our Employee
Stock Option Plan, together, which more than offset the decreases to the defined
benefit plan 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 $341,000, or 11.1%, for the year
ended December 31, 2008, when compared to the same period in 2007 due to
decreased health claims expense during 2008. We have a self-insured
health plan which is supplemented with stop loss insurance
policies. Health insurance costs are rising nationwide and these
costs may increase during 2009.
Occupancy
expense increased $823,000, or 16.9%, for the year ended December 31, 2008, when
compared to the same period in 2007 due primarily to the acquisition of FWBS and
investment in SFG combined with the opening of two de novo branches during 2007
and one branch during the third quarter of 2008.
ATM and
debit card expense increased $205,000, or 20.4%, for the year ended December 31,
2008, compared to the same period in 2007 primarily as a result of the
acquisition of FWBS combined with overall growth in Southside’s
usage.
Director
fees increased $69,000, or 11.4%, for the year ended December 31, 2008, compared
to the same period in 2007 due primarily to year-end bonuses paid to our
directors.
Professional
fees increased $596,000, or 47.0%, for the year ended December 31, 2008,
compared to the same period in 2007 primarily as a result of increases in legal
fees.
FDIC insurance increased $681,000, or
238.9%, for the year ended December 31, 2008, compared to the same period in
2007 as a result of implementations from the FDIC Reform Act of
2005. Beginning in June of 2007, FDIC billed every institution for
deposit insurance in addition to the FICO assessment previously
assessed. The FDIC issued credits to eligible insured depository
institutions which offset most of our deposit insurance premiums for
2007.
When comparing the year ended December
31, 2008 to the same period in 2007, the following expense categories
experienced increases as a direct result of the acquisition of FWBS and
investment in SFG: equipment expense increased $288,000, or 28.3%; advertising,
travel and entertainment increased $285,000, or 15.7%; supplies increased
$120,000, or 17.3%; postage increased $93,000, or 14.0%; and telephone and
communications increased $250,000, or 31.3%.
Other expense increased $1.9 million,
or 39.5%, for the year ended December 31, 2008, compared to the same period in
2007. The increase occurred primarily due to amortization expense of
the core deposit intangible, increases in OREO and repossession asset expense,
bank analysis fees, collection fees, computer fees, bank exam fees, credit card
rebate program, losses on OREO and the acquisition of FWBS and investment in
SFG.
INCOME
TAXES
Pre-tax income for the year ended
December 31, 2008 was $41.9 million compared to $20.7 million and $19.1 million
for the years ended December 31, 2007 and 2006, respectively.
Income tax expense was $11.3 million
for the year ended December 31, 2008 and represented an increase of $7.3
million, or 182.9%, when compared to the year ended December 31,
2007. The effective tax rate as a percentage of pre-tax income was
26.8% in 2008, 19.2% in 2007 and 21.5% in 2006. The increase in the
effective tax rate and income tax expense for 2008 was due to a decrease in
tax-exempt income as a percentage of taxable income as compared to the same
period in 2007 and the one-time state tax credit resulting from a change in
Texas tax law related to the new margin tax during the quarter ended June 30,
2007.
COMPARISON OF OPERATING
RESULTS FOR THE YEARS ENDED DECEMBER 31, 2007 COMPARED TO DECEMBER 31,
2006
NET INTEREST INCOME
Net interest income for the year ended
December 31, 2007 was $43.9 million, an increase of $2.2 million, or 5.3%,
compared to the same period in 2006. The overall increase in net
interest income was primarily the result of increases in interest income from
loans and a decrease in interest expense on short-term and long-term obligations
that was partially offset by an increase in interest expense on deposits and a
decrease in interest income from mortgage-backed and related securities and FHLB
stock and other investments. During the year ended December 31, 2007,
total interest income increased $8.8 million, or 9.1%, from $97.0 million to
$105.7 million. The increase in total interest income was the result
of an increase in average interest earning assets of $40.2 million, or 2.3%,
from $1.75 billion to $1.79 billion, and the increase in average yield on
average interest earning assets from 5.74% for the year ended December 31, 2006
to 6.10% for the year ended December 31, 2007. Total interest expense
increased $6.6 million, or 11.9%, to $61.9 million during the year ended
December 31, 2007 as compared to $55.3 million during the same period in
2006. The increase was attributable to an increase in the average
yield on interest bearing liabilities for the year ended December 31, 2007, to
4.30% from 3.89% for the same period in 2006 and an increase in average interest
bearing liabilities of $20.5 million, or 1.4%, from $1.42 billion to $1.44
billion.
Net interest income increased during
2007 as a result of increases in our average interest earning assets during 2007
when compared to 2006, and the increase in our net interest margin during the
year ended December 31, 2007 to 2.64%, when compared to 2.57% for the same
period in 2006. The net interest spread decreased to 1.80% as
compared to 1.85% for the same period in 2006. The increase in our
net interest margin reflects the volume changes combined with the rate
changes. The decrease in our net interest spread reflects an increase
in the average short-term borrowing and long-term FHLB advances rates that
exceeded the increase in the yields on the average earning
assets. Future changes in the interest rates or yield curve could
influence our net interest margin and net interest spread during future
quarters. Future changes in interest rates could also impact
prepayment speeds on our mortgage-backed securities, which could influence our
net interest margin and net interest spread during future quarters.
During
the year ended December 31, 2007, average loans increased $87.7 million, or
12.1% from $722.3 million to $809.9 million, compared to the same period in
2006. The average yield on loans increased from 6.70% at December 31,
2006 to 7.16% at December 31, 2007. The increase in the yield on
loans was due to the increase in credit spreads, the repricing characteristics
of Southside Bank’s loan portfolio, the higher yielding automobile portfolios
purchased during the second half of 2007 and the higher yielding FWNB loan
portfolio acquired October 10, 2007. The increase in interest income
on loans of $9.5 million, or 20.4%, resulted from the increase in average loans
and the average yield on loans.
Average investment and mortgage-backed
securities decreased $40.6 million, or 4.1%, from $989.1 million to $948.5
million, for the year ended December 31, 2007 when compared to the same period
in 2006. This decrease was attributable to the deleveraging strategy
in place from June 2006 to June 2007. Southside began to releverage
the balance sheet during the second half of 2007. The overall yield on average
investment and mortgage-backed securities increased to 5.21% during the year
ended December 31, 2007 from 5.06% during the same period in
2006. Interest income on investment and mortgage-backed securities
decreased $579,000 in 2007, or 1.2%, compared to 2006 due to the decrease in the
average balances while partially offset by the increase in overall
yield. The increase in the average yield primarily reflects higher
credit and swap spreads and decreased prepayment rates on mortgage-backed
securities, which led to decreased amortization expense, combined with the
reinvestment of proceeds from lower-yielding matured securities into
higher-yielding securities due to the overall higher credit and swap
spreads. An overall housing slowdown nationwide during 2007 when
compared to 2006 contributed to a decrease in residential mortgage refinancing
nationwide and in our market area. A return to a lower long-term
interest rate level similar to that experienced during 2003 could impact our net
interest margin in the future due to increased prepayments and
repricings.
Average
FHLB stock and other investments decreased $7.8 million, or 27.9%, to $20.2
million, for the year ended December 31, 2007, when compared to $28.0 million
for 2006, primarily due to the average decrease in FHLB advances during 2007
when compared to 2006. Interest income from our FHLB stock and other
investments decreased $216,000, or 15.3%, during 2007, when compared to 2006,
due to the decrease in average balance which was offset by the increase in
average yield from 5.04% for the year ended December 31, 2006 compared to 5.91%
for the same period in 2007. Average federal funds sold and other
interest earning assets increased $1.9 million, or 101.2%, to $3.7 million, for
the year ended December 31, 2007, when compared to $1.8 million for
2006. Interest income from federal funds sold and other interest
earning assets increased $93,000, or 101.1%, for the year ended December 31,
2007, when compared to 2006, as a result of the increase in the average balance
while the average yield remained at 5.00% for both 2006 and 2007.
During the year ended December 31,
2007, average loans increased while average securities decreased. As
a result, the mix of our average interest earning assets reflected an increase
in average total loans as a percentage of total average interest earning assets
compared to the prior year as loans averaged 45.6% during 2007 compared to 41.6%
during 2006, a direct result of loan growth, including the acquisition of FWBS
and the investment in SFG. Average securities were 54.2% of average
total interest earning assets and other interest earning asset categories
averaged 0.2% for December 31, 2007. During 2006, the comparable mix
was 58.3% in securities and 0.1% in the other interest earning asset
categories.
Total interest expense increased $6.6
million, or 11.9%, to $61.9 million during the year ended December 31, 2007 as
compared to $55.3 million during the same period in 2006. The
increase was primarily attributable to increased funding costs associated with
an increase in average interest bearing liabilities, including an increase in
deposits and FHLB advances of $20.5 million, or 1.4%, and an increase in the
average yield on interest bearing liabilities from 3.89% for 2006 to 4.30% for
the year ended December 31, 2007.
Average
interest bearing deposits increased $163.7 million, or 18.9%, from $867.3
million to $1.03 billion, and the average rate paid increased from 3.54% for the
year ended December 31, 2006 compared to 4.02% for the year ended December 31,
2007. Average time deposits increased $97.4 million, or 20.9%, from
$467.2 million to $564.6 million, and the average rate paid increased 51 basis
points. Of the average increase in time deposits, $42.1 million was
attributable to the issuance of callable brokered CDs during
2006. Average interest bearing demand deposits increased $64.9
million, or 18.6%, and the average rate paid increased 44 basis
points. Average savings deposits increased $1.3 million, or 2.6%, and
the average rate paid increased three basis points. Interest expense
for interest bearing deposits for the year ended December 31, 2007, increased
$10.8 million, or 35.1%, when compared to the same period in 2006 due to the
increase in the average balance and yield. Average noninterest
bearing demand deposits increased $14.5 million, or 4.6%, during
2007. The latter three categories, which are considered the lowest
cost deposits, comprised 58.5% of total average deposits during the year ended
December 31, 2007 compared to 60.5% during 2006. The increase in our
average total deposits is the result of overall bank growth and branch expansion
and the acquisition of FWBS.
During the year ended December 31,
2007, we did not issue brokered CDs; however, our brokered CDs increased $9.5
million through the acquisition of FWBS. At December 31, 2007, $123.4
million of these brokered CDs had maturities from approximately one to four
years and had calls that we control, all of which are currently six months or
less. The $9.5 million previously issued through FWNB do not have
calls and have a maturity of approximately one year. At December 31,
2007, we had $132.9 million in brokered CDs that represented 8.7% of deposits
compared to $123.5 million, or 9.6% of deposits, at December 31,
2006. During 2006, we utilized long-term brokered CDs to a greater
extent than long-term FHLB funding as the brokered CDs better matched overall
ALCO objectives due to the calls we controlled. Our current policy
allows for a maximum of $150 million in brokered CDs. The potential
higher interest cost and lack of customer loyalty are risks associated with the
use of brokered CDs.
Average short-term interest bearing
liabilities, consisting primarily of FHLB advances and federal funds purchased
and repurchase agreements, were $278.0 million, a decrease of $98.7 million, or
26.2%,
for the
year ended December 31, 2007 when compared to the same period in
2006. Interest expense associated with short-term interest bearing
liabilities decreased $3.3 million, or 19.8%, while the average rate paid
increased 38 basis points to 4.77% for the year ended December 31, 2007, when
compared to 4.39% for the same period in 2006. The decrease in the
interest expense was due to a decrease in the average balance which more than
offset the increase in the average yield for short-term interest bearing
liabilities.
Average long-term interest bearing
liabilities consisting of FHLB advances decreased $59.7 million, or 38.5%,
during the year ended December 31, 2007 to $95.3 million as compared to $155.0
million at December 31, 2006. Interest expense associated with
long-term FHLB advances decreased $2.0 million, or 31.7%, while the average rate
paid increased 45 basis points to 4.57% for the year ended December 31, 2007
when compared to 4.12% for the same period in 2006. The decrease in
interest expense was due to a decrease in the average balance of long-term
interest bearing liabilities that more than offset the increase in the average
rate paid. FHLB advances are collateralized by FHLB stock, securities
and nonspecific real estate loans.
Average
long-term debt, consisting of our junior subordinated debentures issued in 2003
and August 2007 and junior subordinated debentures acquired in the purchase of
FWBS, was $35.8 million and $20.6 million for the years ended December 31, 2007
and 2006, respectively. 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 FWBS, which occurred on October 10,
2007. Interest expense increased $1.1 million, or 65.7%, to $2.8
million for the year ended December 31, 2007 when compared to $1.7 million for
the same period in 2006 primarily as a result of the increase in the average
balance during 2007 when compared to 2006. 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 Trust IV and the $12.9 million of long-term debentures
issued to Southside Statutory Trust V have fixed rates of 6.518% and 7.48%,
respectively, for a period of five years, 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 FWBS,
adjusts quarterly at a rate equal to three-month LIBOR plus 180 basis
points.
PROVISION
FOR LOAN LOSSES
The provision for loan losses for the
year ended December 31, 2007 was $2.4 million compared to $1.1 million for
December 31, 2006. Approximately $933,000 of this increase is related
to the loans that were purchased by SFG during 2007. Approximately
$152,000 of this increase is provision expense related to our branches acquired
as a result of our acquisition of FWBS. For the year ended December
31, 2007, net charge-offs of loans decreased $277,000, or 28.4%, to $700,000
when compared to $977,000 for the same period in 2006.
The decrease in net charge-offs for
2007 was due to a combination of an increase in total recoveries of $52,000 and
a decrease in total charge-offs of $225,000. Net charge-offs for
commercial loans decreased $161,000 from 2006 primarily as a result of an
overall decrease in charge-offs and increase in recoveries. Net
charge-offs for loans to individuals decreased $46,000 during 2007 due to an
overall increase in recoveries and decrease in charge-offs when compared to
2006.
As of December 31, 2007, our review of
the loan portfolio indicated that a loan loss allowance of $9.8 million was
adequate to cover probable losses in the portfolio.
NONINTEREST
INCOME
Noninterest income consists of revenues
generated from a broad range of financial services and activities including fee
based services. The following schedule lists the accounts from which
noninterest income was derived, gives totals for these accounts for the year
ended December 31, 2007 and the comparable year ended December 31, 2006 and
indicates the percentage changes:
|
|
|
|
|
|
Years
Ended
|
|
|
|
|
December
31,
|
|
Percent
|
|
|
2007
|
|
|
2006
|
|
Change
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Deposit
services
|
|
$ |
17,280 |
|
|
$ |
15,482 |
|
|
|
11.6
|
% |
Gain
on sale of securities available for sale
|
|
|
897 |
|
|
|
743 |
|
|
|
20.7
|
% |
Gain
on sale of
loans
|
|
|
1,922 |
|
|
|
1,817 |
|
|
|
5.8
|
% |
Trust
income
|
|
|
2,106 |
|
|
|
1,711 |
|
|
|
23.1
|
% |
Bank
owned life insurance income
|
|
|
1,142 |
|
|
|
1,067 |
|
|
|
7.0
|
% |
Other
|
|
|
3,071 |
|
|
|
2,661 |
|
|
|
15.4
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
noninterest income
|
|
$ |
26,418 |
|
|
$ |
23,481 |
|
|
|
12.5
|
% |
Total noninterest income for the year
ended December 31, 2007 increased 12.5%, or $2.9 million, compared to
2006. During the year ended December 31, 2007, we had a gain on sale
of AFS securities of $897,000 compared to $743,000 for the same period in
2006. The market value of the AFS securities portfolio at December
31, 2007 was $837.5 million with a net unrealized gain on that date of $5.9
million. The net unrealized gain is comprised of $8.7 million in
unrealized gains and $2.8 million in unrealized losses. We sold
securities out of our AFS portfolio to accomplish ALCO and investment portfolio
objectives aimed at repositioning a portion of the securities portfolio in an
attempt to maximize the total return of the securities portfolio and reduce
alternative minimum tax. During 2007, we primarily sold selected
mortgage-backed securities where the risk reward profile had
changed. We recorded an impairment charge of $58,000 on $4.8 million
of whole loan collateralized mortgage obligations (“CMOs”) at December 31,
2007. After the sale of these CMOs during January 2008, all of our
remaining mortgage-backed securities are agency mortgage-backed securities
(“MBS”).
Deposit services income increased $1.8
million, or 11.6%, for the year ended December 31, 2007, when compared to the
same period in 2006, primarily as a result of increases in overdraft income, an
increase in the number of deposit accounts and an increase in debit card
income.
Trust income increased $395,000, or
23.1%, for the year ended December 31, 2007, when compared to the same period in
2006 due to growth experienced in our trust department.
Gain on sale of loans increased
$105,000, or 5.8%, for the year ended December 31, 2007, when compared to the
same period in 2006. The increase was primarily due to an increase in
premiums on student loans and the sale of nonaccrual loans from a pool of
automobile loans purchased by SFG which was partially offset by a decrease in
the mortgage loans sold during 2007 when compared to 2006.
BOLI income increased $75,000, or 7.0%,
for the year ended December 31, 2007, when compared to the same period in 2006
primarily as a result of an increase in the average balance of cash surrender
value associated with our BOLI.
Other noninterest income increased
$410,000, or 15.4%, for the year ended December 31, 2007, when compared to the
same period in 2006. The increase was primarily a result of increases
in brokerage services income, credit card fee income, and merchant banking
income which was offset by decreases in other recoveries including a recovery of
$150,000 received during the second quarter of 2006 that was related to a loss
on a check during 2005.
NONINTEREST
EXPENSE
The following schedule lists the
accounts which comprise noninterest expense, gives totals for these accounts for
the years ended December 31, 2007 and 2006 and indicates the percentage
changes:
|
|
|
|
|
|
|
|
|
Years
Ended
|
|
|
|
|
|
|
December
31,
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
$ |
29,361 |
|
|
$ |
28,275 |
|
|
|
3.8 |
% |
Occupancy
expense
|
|
|
4,881 |
|
|
|
4,777 |
|
|
|
2.2 |
% |
Equipment
expense
|
|
|
1,017 |
|
|
|
899 |
|
|
|
13.1 |
% |
Advertising,
travel and entertainment
|
|
|
1,812 |
|
|
|
1,742 |
|
|
|
4.0 |
% |
ATM
and debit card expense
|
|
|
1,006 |
|
|
|
955 |
|
|
|
5.3 |
% |
Director
fees
|
|
|
605 |
|
|
|
587 |
|
|
|
3.1 |
% |
Supplies
|
|
|
692 |
|
|
|
637 |
|
|
|
8.6 |
% |
Professional
fees
|
|
|
1,268 |
|
|
|
1,386 |
|
|
|
(8.5 |
%) |
Postage
|
|
|
662 |
|
|
|
618 |
|
|
|
7.1 |
% |
Telephone
and communications
|
|
|
800 |
|
|
|
723 |
|
|
|
10.7 |
% |
FDIC
insurance
|
|
|
285 |
|
|
|
141 |
|
|
|
102.1 |
% |
Other
|
|
|
4,896 |
|
|
|
4,227 |
|
|
|
15.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
noninterest expense
|
|
$ |
47,285 |
|
|
$ |
44,967 |
|
|
|
5.2 |
% |
Noninterest expense for the year ended
December 31, 2007 increased $2.3 million, or 5.2%, when compared to the year
ended December 31, 2006. Salaries and employee benefits expense
increased $1.1 million, or 3.8%, during the year ended December 31, 2007, when
compared to the same period in 2006. Direct salary expense and
payroll taxes increased $1.2 million, or 5.1%, for the year ended December 31,
2007, when compared to the same period in 2006. These increases were
the result of the acquisition of FWBS and investment in SFG.
Retirement expense, included in salary
and benefits, decreased $533,000, or 21.7%, for the year ended December 31,
2007, when compared to the same period in 2006, primarily as a result of the
amendments to the Plan in the fourth quarter of 2005 that became effective in
2006. Our actuarial assumptions used to determine net periodic
pension costs for 2007 included an assumed long-term rate of return of 7.50% and
an assumed discount rate of 6.05%. This compares to an assumed
long-term rate of return of 7.875% and an assumed discount rate of 5.625% for
2006. We will continue to evaluate the assumed long-term rate of
return and the discount rate to determine if either should be changed in the
future. If either of these assumptions were decreased, the cost and
funding required for the retirement plan could increase.
Health and life insurance expense,
included in salary and benefits, increased $436,000, or 16.6%, for the year
ended December 31, 2007, when compared to the same period in 2006 due to
increased health claims expense during 2007. We have a self-insured
health plan which is supplemented with stop loss insurance
policies. Health insurance costs are rising nationwide and these
costs may increase during 2008.
Equipment expense increased $118,000,
or 13.1%, for the year ended December 31, 2007, compared to the same period in
2006 due primarily to various increases on equipment service
contracts.
Telephone and communications expense
increased $77,000, or 10.7%, for the year ended December 31, 2007, compared to
the same period in 2006 primarily due to the opening of two de novo branch
locations in 2007 and the capture of a full year of expenses of three locations
added in 2006. The acquisition of FWNB and the investment in SFG also
contributed to the increase over last year.
FDIC
insurance increased $144,000, or 102.1%, for the year ended December 31, 2007,
compared to the same period in 2006 as a result of implementations from the FDIC
Reform Act of 2005. Beginning in June 2007, FDIC billed every
institution for deposit insurance in addition to the FICO assessment previously
assessed. The FDIC issued credits to eligible insured depository
institutions which offset most of our deposit insurance premiums for
2007.
Other expense increased $669,000, or
15.8%, for the year ended December 31, 2007, compared to the same period in
2006. The increase occurred primarily due to increases in computer
fees, bank analysis and exam fees, brokerage service expense, student loan
origination and lender fee expense, and the amortization expense related to the
core deposit intangible that resulted from the acquisition of FWBS during
2007.
INCOME
TAXES
Pre-tax income for the year ended
December 31, 2007 was $20.7 million compared to $19.1 million and $17.9 million
for the years ended December 31, 2006 and 2005, respectively.
Income tax expense was $4.0 million for
the year ended December 31, 2007 and represented a $124,000, or 3.0%, decrease
from the year ended December 31, 2006. The effective tax rate as a
percentage of pre-tax income was 19.2% in 2007, 21.5% in 2006 and 18.4% in
2005. The decrease in the effective tax rate and income tax expense
for 2007 was due to a one-time state tax credit resulting from a change in Texas
tax law related to the new margin tax during the quarter ended June 30,
2007. The state tax credit was $779,000, which was partially offset
by an increase in our estimated margin tax of $70,000, net of federal income
tax. Excluding the effect of the state tax credit and estimated
margin tax, the effective rate for the year ended December 31, 2007 would have
been 22.6%.
The remaining alternative minimum tax
position reversed during 2007. We will continue to review the
appropriate level of tax free income so as to minimize any alternative minimum
tax position in the future.
LENDING
ACTIVITIES
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 December 31,
2008, the SFG loans totaled approximately $80.1 million. We look forward to the
possibility that our loan growth will continue to accelerate in the future as we
work to identify and develop additional markets and strategies that will allow
us to expand our lending territory. Total loans as of December 31,
2008 increased $61.3 million, or 6.4%, and the average loan balance was up
$173.4 million, or 21.4%, when compared to 2007.
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.
Construction loans increased $12.8
million, or 11.9%, from December 31, 2007. 1-4 Family
residential loans increased $714,000, or 0.3%, from December 31,
2007. Other real estate loans decreased $15.5 million, or 7.8%, from
December 31, 2007 to December 31, 2008. Commercial loans increased
$11.4 million, or 7.4%, from December 31, 2007. Loans to individuals
increased $29.5 million, or 19.8%, from December 31, 2007. Municipal
loans as of December 31, 2008 increased $22.5 million, or 20.0%, from December
31, 2007.
The
increase in our commercial loans is reflective of our expanding markets and
economic growth in our market area. The increase in loans to
individuals reflects automobile loan portfolios purchased by SFG, and to a much
lesser extent, success in penetrating this competitive market in our market
areas. In our loan portfolio, loans dependent upon private household
income represent a significant concentration. Due to the number of
customers involved who work in all sectors of the numerous local, state and
national economies, we believe the risk in this portion of the portfolio is
adequately spread throughout the economic community, which assists in mitigating
this concentration.
The aggregate amount of loans that we
are permitted to make under applicable bank regulations to any one borrower,
including non-affiliate related entities is 25% of Tier 1
capital. Our legal lending limit at December 31, 2008, was
approximately $48 million. Our largest loan relationship at December
31, 2008 was approximately $24 million.
The average yield on loans for the year
ended December 31, 2008, increased to 7.67% from 7.16% for the year ended
December 31, 2007. This increase was reflective of an increase in the
average balance of higher yielding SFG loans and the repricing characteristics
of loans and interest rates at the time loans repriced.
LOAN
PORTFOLIO COMPOSITION AND ASSOCIATED RISK
The following table sets forth loan
totals by category for the years presented:
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$ |
120,153 |
|
|
$ |
107,397 |
|
|
$ |
39,588 |
|
|
$ |
35,765 |
|
|
$ |
32,877 |
|
1-4
Family Residential
|
|
|
238,693 |
|
|
|
237,979 |
|
|
|
227,354 |
|
|
|
199,812 |
|
|
|
168,784 |
|
Other
|
|
|
184,629 |
|
|
|
200,148 |
|
|
|
181,047 |
|
|
|
162,147 |
|
|
|
153,998 |
|
Commercial
Loans
|
|
|
165,558 |
|
|
|
154,171 |
|
|
|
118,962 |
|
|
|
91,456 |
|
|
|
80,808 |
|
Municipal
Loans
|
|
|
134,986 |
|
|
|
112,523 |
|
|
|
106,155 |
|
|
|
109,003 |
|
|
|
103,963 |
|
Loans
to Individuals
|
|
|
178,530 |
|
|
|
149,012 |
|
|
|
86,041 |
|
|
|
82,181 |
|
|
|
83,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Loans
|
|
$ |
1,022,549 |
|
|
$ |
961,230 |
|
|
$ |
759,147 |
|
|
$ |
680,364 |
|
|
$ |
624,019 |
|
For purposes of this discussion, our
loans are divided into four categories: Real Estate Loans, Commercial
Loans, Municipal Loans and Loans to Individuals.
REAL
ESTATE LOANS
Real estate loans represent our
greatest concentration of loans. We attempt to mitigate the amount of
risk associated with this group of loans through the type of loans originated
and geographic distribution. At December 31, 2008, the majority
of our real estate loans were collateralized by properties located in our market
areas. Of the $543.5 million in real estate loans, $238.7 million, or
43.9%, represent loans collateralized by residential dwellings that are
primarily owner occupied. Historically, the amount of losses suffered
on this type of loan has been significantly less than those on other
properties. Beginning in the third quarter of 2007, there were
well-publicized developments in the credit markets, beginning with a decline in
the sub-prime mortgage lending market, which later extended to the markets for
collateralized mortgage obligations, mortgage-backed securities and the lending
markets generally. We believe our markets have been relatively
resilient and we have not experienced
significant effects associated with these market trends; however, beginning in
the fourth quarter of 2008 as consumers all across the United States were
impacted by the economic slowdown, our market areas began to experience more of
a slowdown in economic activity. A continued decline in credit markets generally
could adversely affect our
financial
condition and results of operation if we are unable to extend credit or sell
loans into the secondary market. Our loan policy requires an
appraisal or evaluation on the property, based on the size and complexity of the
transaction, prior to funding any real estate loan and also outlines the
requirements for appraisals on renewals.
We pursue an aggressive policy of
reappraisal on any real estate loan that is in the process of foreclosure and
potential exposures are recognized and reserved for or charged off as soon as
they are identified. Our ability to liquidate certain types of
properties that may be obtained through foreclosure could adversely affect the
volume of our nonperforming real estate loans.
Real estate loans are divided into
three categories: 1-4 Family Residential Mortgage Loans, Construction Loans and
Other. The Other category consists of $179.0 million of commercial
real estate loans, $3.1 million of loans secured by multi-family properties and
$2.5 million of loans secured by farm land. The Commercial Real
Estate portion of Other will be discussed in more detail below.
1-4 Family Residential Mortgage
Loans
Residential loan originations are
generated by our loan officers, in-house origination staff, marketing efforts,
present customers, walk-in customers and referrals from real estate agents and
builders. We focus our lending efforts primarily on the origination
of loans secured by first mortgages on owner-occupied, 1-4 family
residences. Substantially all of our 1-4 family residential mortgage
originations are secured by properties located in our market
area. Historically, we have originated a portion of our residential
mortgage loans for sale into the secondary market. These loans are
reflected on the balance sheet as loans held for sale. These
secondary market investors typically pay us a service release premium in
addition to a predetermined price based on the interest rate of the loan
originated. We retain liabilities related to early prepayments,
defaults, failure to adhere to origination and processing guidelines and other
issues. We have internal controls in place to mitigate many of these
liabilities and historically our realized liability has been extremely
low. In addition, many of the retained liabilities expire inside of
one year from the date a loan is sold. We warehouse these loans until
they are transferred to the secondary market investor, which usually occurs
within 45 days.
Our 1-4 family residential mortgage
loans generally have maturities ranging from five to 30 years. These
loans are typically fully amortizing with monthly payments sufficient to repay
the total amount of the loan or amortizing with a balloon feature, typically due
in fifteen years or less. Our 1-4 family residential mortgage loans
are made at both fixed and adjustable interest rates.
We review information concerning the
income, financial condition, employment and credit history when evaluating the
creditworthiness of the applicant.
We also
make home equity loans, which are included as part of the 1-4 Family Residential
Mortgage Loans, and at December 31, 2008, these loans totaled $66.7
million. Under Texas law, these loans are capped at 80% of appraised
value.
Construction Loans
Our commercial construction loans and
construction loans to individuals are collateralized by property located
primarily in the market areas we serve. A majority of our
construction loans are directed toward properties that will be owner
occupied. Construction loans for projects built on speculation are
financed, but these typically have secondary sources of repayment and
collateral. Our construction loans have both adjustable and fixed
interest rates during the construction period. Construction loans to
individuals are typically priced and made with the intention of granting the
permanent loan on the property. During 2008 this loan category
experienced additional stress due to the general downturn in market conditions
associated with this type of lending.
Commercial
Real Estate Loans
Commercial real estate loans primarily
include commercial office buildings, retail, medical facilities and offices,
warehouse facilities, hotels and churches. In determining whether to
originate commercial real estate loans, we generally consider such factors as
the financial condition of the borrower and the debt service coverage of the
property. Commercial real estate loans are made at both fixed and
adjustable interest rates for terms generally up to 20 years.
COMMERCIAL
LOANS
Our commercial loans are diversified to
meet most business needs. Loan types include short-term working
capital loans for inventory and accounts receivable and short- and medium-term
loans for equipment or other business capital expansion. Management
does not consider there to be any material concentration of risk in any one
industry type, other than the medical industry. Loans to borrowers in
the medical industry include all loan types listed above for commercial
loans. Collateral for these loans varies depending on the type of
loan and financial strength of the borrower. The primary source of
repayment for loans in the medical community is cash flow from continuing
operations. The medical community represents a concentration of
risk in our Commercial loan and Commercial Real Estate loan
portfolio. See “Item 1. Business – Market
Area.” See “Item 1A. Risk Factors – We have a high concentration
of loans directly related to the medical community in our market area, primarily
in Smith and Gregg Counties.” We believe that risk in the
medical community is mitigated because it is spread among multiple practice
types and multiple specialties. Should the government change the
amount it pays the medical community through the various government health
insurance programs or if new government regulation impacts the profitability of
the medical community, the medical community could be adversely impacted, which
in turn could result in higher default rates by borrowers in the medical
industry.
In our commercial loan underwriting, we
assess the creditworthiness, ability to repay, and the value and liquidity of
the collateral being offered. Terms of commercial loans are generally
commensurate with the useful life of the collateral offered.
MUNICIPAL
LOANS
We have a specific lending department
that makes loans to municipalities and school districts throughout the state of
Texas. The majority of the loans to municipalities and school
districts have tax or revenue pledges and in some cases are additionally
supported by collateral. Municipal loans made without a direct pledge
of taxes or revenues are usually made based on some type of collateral that
represents an essential service. Lending money directly to these
municipalities allows us to earn a higher yield for similar durations than we
could if we purchased municipal securities. Total loans to
municipalities and school districts as of December 31, 2008 increased $22.5
million when compared to 2007. At December 31, 2008, we had total
loans to municipalities and school districts of $135.0 million.
LOANS TO
INDIVIDUALS
Substantially all of our consumer loan
originations are made to consumers in our market areas. The majority
of consumer loans outstanding are collateralized by titled equipment and
primarily vehicles, which accounted for approximately $131.9 million, or 73.9%,
of total loans to individuals at December 31, 2008. Home equity
loans, which are included in 1-4 family residential loans, have replaced some of
the traditional loans to individuals.
In addition, we make loans for a full
range of other consumer purposes, which may be secured or unsecured depending on
the credit quality and purpose of the loan. Automobile loans
purchased by SFG are also included in this category. The total of SFG
automobile loans included in loans to individuals at December 31, 2008 was $80.1
million. These high yield loans represent existing subprime
automobile loans with payment histories that are primarily collateralized by
used automobiles. Loan pools purchased through SFG are subjected to a
modeling system to determine the risk associated with the
expected
defaults. Among
other things, the model takes into consideration credit scores and estimated
collateral values to determine the risk inherent in each pool.
Consumer loan terms vary according to
the type and value of collateral, length of contract and creditworthiness of the
borrower. The underwriting standards we employ for consumer loans
include an application, a determination of the applicant's payment history on
other debts, with the greatest weight being given to payment history with us,
and an assessment of the borrower's ability to meet existing obligations and
payments on the proposed loan. Although creditworthiness of the
applicant is a primary consideration, the underwriting process also includes a
comparison of the value of the collateral, if any, in relation to the proposed
loan amount. Most of our loans to individuals are collateralized, which
management believes should assist in limiting our exposure.
LOAN
MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
The following table represents loan
maturities and sensitivity to changes in interest rates. The amounts
of total loans outstanding at December 31, 2008, which, based on remaining
scheduled repayments of principal, are due in (1) one year or less, (2) more
than one year but less than five years, and (3) more than five years, are shown
in the following table. The amounts due after one year are classified
according to the sensitivity to changes in interest rates.
|
Due
in One
|
|
|
After
One but
|
|
|
|
|
Year
or
|
|
|
within
Five
|
|
After
Five
|
|
|
Less*
|
|
|
Years
|
|
Years
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
Real
Estate Loans –
Construction
|
|
$ |
57,564 |
|
|
$ |
20,208 |
|
|
$ |
42,381 |
|
Real
Estate Loans – 1-4 Family Residential
|
|
|
53,414 |
|
|
|
75,074 |
|
|
|
110,205 |
|
Real
Estate Loans –
Other
|
|
|
42,945 |
|
|
|
59,744 |
|
|
|
81,940 |
|
Commercial
Loans
|
|
|
93,466 |
|
|
|
64,190 |
|
|
|
7,902 |
|
Municipal
Loans
|
|
|
9,203 |
|
|
|
25,821 |
|
|
|
99,962 |
|
Loans
to
Individuals
|
|
|
70,207 |
|
|
|
102,022 |
|
|
|
6,301 |
|
Total
Loans
|
|
$ |
326,799 |
|
|
$ |
347,059 |
|
|
$ |
348,691 |
|
Loans
with Maturities After
|
|
|
|
|
One
Year for Which:
|
Interest
Rates are Fixed or Predetermined
|
|
$ |
396,986 |
|
|
Interest
Rates are Floating or Adjustable
|
|
$ |
298,764 |
|
|
*
|
The
volume of commercial loans due within one year reflects our general policy
of attempting to limit a majority of these loans to a short-term
maturity. Nonaccrual loans totaling $14.3 million are reflected
in the due after five years column.
|
LOANS TO
AFFILIATED PARTIES
In the normal course of business, we
make loans to certain of our own executive officers and directors and their
related interests. As of December 31, 2008 and 2007, these loans
totaled $3.7 million and $2.2 million, or 2.3% and 1.6% of shareholders' equity,
respectively. Such loans are made in the normal course of business at
normal credit terms, including interest rate and collateral requirements and do
not represent more than normal credit risks contained in the rest of the loan
portfolio for loans of similar types.
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 which, 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
of future expected cash flows 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 specifically reserved loans or 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 indicates 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 which 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 December 31, 2008, our review of
the loan portfolio indicated that a loan loss allowance of $16.1 million was
adequate to cover probable losses in the portfolio.
The
following table presents information regarding the average amount of net loans
outstanding, changes in the allowance for loan losses, the ratio of net loans
charged-off to average net loans outstanding and an allocation of the allowance
for loan losses.
LOAN LOSS
EXPERIENCE AND ALLOWANCE FOR LOAN LOSSES
|
|
Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Net Loans
Outstanding
|
|
$ |
983,336 |
|
|
$ |
809,906 |
|
|
$ |
722,252 |
|
|
$ |
657,938 |
|
|
$ |
604,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
of Allowance for Loan Losses at Beginning of Period
|
|
$ |
9,753 |
|
|
$ |
7,193 |
|
|
$ |
7,090 |
|
|
$ |
6,942 |
|
|
$ |
6,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
Charge-Offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate-Construction
|
|
|
(111
|
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Real
Estate-1-4 Family
Residential
|
|
|
(11
|
) |
|
|
(33
|
) |
|
|
(59
|
) |
|
|
(36
|
) |
|
|
(142
|
) |
Real
Estate-Other
|
|
|
– |
|
|
|
(7
|
) |
|
|
(18
|
) |
|
|
(53
|
) |
|
|
(3
|
) |
Commercial
Loans
|
|
|
(505
|
) |
|
|
(95
|
) |
|
|
(245
|
) |
|
|
(438
|
) |
|
|
(375
|
) |
Loans
to
Individuals
|
|
|
(8,570
|
) |
|
|
(2,612
|
) |
|
|
(2,650
|
) |
|
|
(2,469
|
) |
|
|
(523
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Loan
Charge-Offs
|
|
|
(9,197
|
) |
|
|
(2,747
|
) |
|
|
(2,972
|
) |
|
|
(2,996
|
) |
|
|
(1,043
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery
of Loans Previously Charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate-Construction
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Real
Estate-1-4 Family
Residential
|
|
|
1 |
|
|
|
30 |
|
|
|
7 |
|
|
|
20 |
|
|
|
– |
|
Real
Estate-Other
|
|
|
6 |
|
|
|
10 |
|
|
|
– |
|
|
|
– |
|
|
|
27 |
|
Commercial
Loans
|
|
|
32 |
|
|
|
98 |
|
|
|
87 |
|
|
|
54 |
|
|
|
323 |
|
Loans
to
Individuals
|
|
|
1,842 |
|
|
|
1,909 |
|
|
|
1,901 |
|
|
|
1,607 |
|
|
|
296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Recovery of Loans Previously Charged-Off
|
|
|
1,881 |
|
|
|
2,047 |
|
|
|
1,995 |
|
|
|
1,681 |
|
|
|
646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loan
Charge-Offs
|
|
|
(7,316
|
) |
|
|
(700
|
) |
|
|
(977
|
) |
|
|
(1,315
|
) |
|
|
(397
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Loan Losses
Acquired
|
|
|
– |
|
|
|
909 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Loan
Losses
|
|
|
13,675 |
|
|
|
2,351 |
|
|
|
1,080 |
|
|
|
1,463 |
|
|
|
925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
of Allowance for Loan Losses at End of Period
|
|
$ |
16,112 |
|
|
$ |
9,753 |
|
|
$ |
7,193 |
|
|
$ |
7,090 |
|
|
$ |
6,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
for Unfunded Loan Commitments at Beginning of Period
|
|
$ |
50 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
Provision
for Losses on Unfunded Loan Commitments
|
|
|
(43
|
) |
|
|
50 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Reserve
for Unfunded Loan Commitments at End of Period
|
|
$ |
7 |
|
|
$ |
50 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of Net Charge-Offs to Average Net Loans Outstanding
|
|
|
0.74
|
% |
|
|
0.09
|
% |
|
|
0.14
|
% |
|
|
0.20
|
% |
|
|
0.07
|
% |
Allocation
of Allowance for Loan Losses (dollars in thousands):
|
|
Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
of
|
|
|
|
|
|
of
|
|
|
|
|
|
of
|
|
|
|
|
|
of
|
|
|
|
|
|
of
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
Loans
|
|
|
|
|
|
Loans
|
|
|
|
|
|
Loans
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
to
Total
|
|
|
|
|
|
to
Total
|
|
|
|
|
|
to
Total
|
|
|
|
|
|
to
Total
|
|
|
|
|
|
to
Total
|
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
Real
Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$ |
2,757 |
|
|
|
11.7
|
% |
|
$ |
1,031 |
|
|
|
11.2
|
% |
|
$ |
366 |
|
|
|
5.2
|
% |
|
$ |
329 |
|
|
|
5.3
|
% |
|
$ |
518 |
|
|
|
5.3
|
% |
1-4
Family
Residential
|
|
|
1,567 |
|
|
|
23.3
|
% |
|
|
1,313 |
|
|
|
24.8
|
% |
|
|
1,221 |
|
|
|
30.0
|
% |
|
|
1,101 |
|
|
|
29.4
|
% |
|
|
909 |
|
|
|
27.0
|
% |
Other
|
|
|
2,701 |
|
|
|
18.1
|
% |
|
|
2,594 |
|
|
|
20.8
|
% |
|
|
2,327 |
|
|
|
23.8
|
% |
|
|
2,397 |
|
|
|
23.8
|
% |
|
|
2,186 |
|
|
|
24.6
|
% |
Commercial
Loans
|
|
|
2,496 |
|
|
|
16.2
|
% |
|
|
2,126 |
|
|
|
16.0
|
% |
|
|
1,536 |
|
|
|
15.7
|
% |
|
|
1,482 |
|
|
|
13.4
|
% |
|
|
1,485 |
|
|
|
13.0
|
% |
Municipal
Loans
|
|
|
341 |
|
|
|
13.2
|
% |
|
|
277 |
|
|
|
11.7
|
% |
|
|
262 |
|
|
|
14.0
|
% |
|
|
269 |
|
|
|
16.0
|
% |
|
|
318 |
|
|
|
16.7
|
% |
Loans
to Individuals
|
|
|
6,206 |
|
|
|
17.5
|
% |
|
|
2,391 |
|
|
|
15.5
|
% |
|
|
1,394 |
|
|
|
11.3
|
% |
|
|
1,498 |
|
|
|
12.1
|
% |
|
|
1,516 |
|
|
|
13.4
|
% |
Unallocated
|
|
|
44 |
|
|
|
0.0
|
% |
|
|
21 |
|
|
|
0.0
|
% |
|
|
87 |
|
|
|
0.0
|
% |
|
|
14 |
|
|
|
0.0
|
% |
|
|
10 |
|
|
|
0.0
|
% |
Ending
Balance
|
|
$ |
16,112 |
|
|
|
100.0
|
% |
|
$ |
9,753 |
|
|
|
100.0
|
% |
|
$ |
7,193 |
|
|
|
100.0
|
% |
|
$ |
7,090 |
|
|
|
100.0
|
% |
|
$ |
6,942 |
|
|
|
100.0
|
% |
See
"Consolidated Financial Statements - Note 7. Loans and Allowance for
Probable Loan Losses."
NONPERFORMING
ASSETS
Nonperforming assets consist of
delinquent loans 90 days or more past due, nonaccrual loans, OREO, repossessed
assets and restructured loans. Nonaccrual loans are those loans which
are 90 days or more delinquent and collection in full of both the principal and
interest is in doubt. Additionally, some loans that are not
delinquent may be placed on nonaccrual status due to doubts about full
collection of principal or interest. When a loan is categorized as
nonaccrual, the accrual of interest is discontinued and the accrued balance is
reversed for financial statement purposes. Restructured loans
represent loans that have been renegotiated to provide a reduction or deferral
of interest or principal because of deterioration in the financial position of
the borrowers. Categorization of a loan as nonperforming is not in
itself a reliable indicator of potential loan loss. Other factors,
such as the value of collateral securing the loan and the financial condition of
the borrower must be considered in judgments as to potential loan
loss. OREO represents real estate taken in full or partial
satisfaction of debts previously contracted. The dollar amount of
OREO is based on a current evaluation 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.
Total
nonperforming assets at December 31, 2008 were $15.8 million, representing an
increase of $11.8 million, or 299.9%, from $3.9 million at December 31,
2007. OREO increased $165,000, or 107.8%, to $318,000 from December
31, 2007 to December 31, 2008. We are actively marketing all
properties and none are being held for investment purposes. From
December 31, 2007 to December 31, 2008, nonaccrual loans increased $11.4
million, or 390.5%, to $14.3 million. Of this total, 6.0% are
residential real estate loans, 6.2% are commercial real estate loans, 5.9% are
commercial loans, 41.8% are loans to individuals and 40.1% are construction
loans. Not including the $3.9 million increase in nonperforming
assets attributable to the SFG automobile loans and $6.4 million in loans
acquired through FWNB, nonperforming assets for Southside would have increased
by $1.5 million. Included in the nonaccrual loans at December 31,
2008 are SFG loans that total $3.6 million that were restructured and placed in
nonaccrual status. Restructured performing loans decreased $77,000,
or 34.2%, to $148,000. Loans 90 days past due or more increased
$193,000, or 48.3%, to $593,000. Repossessed assets increased
$178,000, or 69.8%, to $433,000.
The
following table presents information on nonperforming assets:
|
|
NONPERFORMING
ASSETS
|
|
|
|
Years
Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
90 Days Past Due:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate
|
|
$ |
404 |
|
|
$ |
286 |
|
|
$ |
64 |
|
|
$ |
912 |
|
|
$ |
785 |
|
Loans
to Individuals
|
|
|
53 |
|
|
|
114 |
|
|
|
64 |
|
|
|
33 |
|
|
|
22 |
|
Commercial
|
|
|
136 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
20 |
|
|
|
|
593 |
|
|
|
400 |
|
|
|
128 |
|
|
|
945 |
|
|
|
827 |
|
Loans
on Nonaccrual:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate
|
|
|
7,469 |
|
|
|
636 |
|
|
|
975 |
|
|
|
970 |
|
|
|
753 |
|
Loans
to Individuals
|
|
|
5,976 |
|
|
|
2,119 |
|
|
|
262 |
|
|
|
381 |
|
|
|
432 |
|
Commercial
|
|
|
844 |
|
|
|
158 |
|
|
|
96 |
|
|
|
380 |
|
|
|
1,063 |
|
|
|
|
14,289 |
|
|
|
2,913 |
|
|
|
1,333 |
|
|
|
1,731 |
|
|
|
2,248 |
|
Restructured
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate
|
|
|
91 |
|
|
|
94 |
|
|
|
97 |
|
|
|
99 |
|
|
|
102 |
|
Loans
to Individuals
|
|
|
39 |
|
|
|
120 |
|
|
|
105 |
|
|
|
127 |
|
|
|
85 |
|
Commercial
|
|
|
18 |
|
|
|
11 |
|
|
|
18 |
|
|
|
– |
|
|
|
6 |
|
|
|
|
148 |
|
|
|
225 |
|
|
|
220 |
|
|
|
226 |
|
|
|
193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Nonperforming Loans
|
|
|
15,030 |
|
|
|
3,538 |
|
|
|
1,681 |
|
|
|
2,902 |
|
|
|
3,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Real Estate Owned
|
|
|
318 |
|
|
|
153 |
|
|
|
351 |
|
|
|
145 |
|
|
|
214 |
|
Repossessed
Assets
|
|
|
433 |
|
|
|
255 |
|
|
|
78 |
|
|
|
10 |
|
|
|
41 |
|
Total
Nonperforming Assets
|
|
$ |
15,781 |
|
|
$ |
3,946 |
|
|
$ |
2,110 |
|
|
$ |
3,057 |
|
|
$ |
3,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of Total Assets
|
|
|
0.58
|
% |
|
|
0.18
|
% |
|
|
0.11
|
% |
|
|
0.17
|
% |
|
|
0.22
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of Loans and Leases,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
of Unearned Discount
|
|
|
1.54
|
% |
|
|
0.41
|
% |
|
|
0.28
|
% |
|
|
0.45
|
% |
|
|
0.56
|
% |
Nonperforming assets at December 31,
2008, as a percentage of total assets increased to 0.58% from the previous year
and as a percentage of loans increased to 1.54%. Nonperforming assets
hinder our ability to earn money. Decreases in earnings can result
from both the loss of interest income and the costs associated with maintaining
the OREO, for taxes, insurance and other operating expenses. In
addition to the nonperforming assets, at December 31, 2008 in the opinion of
management, we had $436,000 of loans identified as potential problem
loans. A potential problem loan is a loan where information about
possible credit problems of the borrower is known, causing management to have
serious doubts about the ability of the borrower to comply with the present loan
repayment terms and which may result in a future classification of the loan in
one of the nonperforming asset categories.
The
following is a summary of our recorded investment in loans (primarily nonaccrual
loans) for which impairment has been recognized in accordance with SFAS 114 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
|
|
Carrying
|
|
|
Total
|
|
|
Allowance
|
|
Value
|
|
|
|
|
|
|
|
|
|
Real
Estate Loans
|
|
$ |
7,469 |
|
|
$ |
1,082 |
|
|
$ |
6,387 |
|
Loans
to Individuals
|
|
|
6,003 |
|
|
|
2,259 |
|
|
|
3,744 |
|
Commercial
Loans
|
|
|
862 |
|
|
|
171 |
|
|
|
691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
$ |
14,334 |
|
|
$ |
3,512 |
|
|
$ |
10,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
|
|
Carrying
|
|
|
Total
|
|
|
Allowance
|
|
Value
|
|
|
|
|
|
|
|
|
|
Real
Estate Loans
|
|
$ |
636 |
|
|
$ |
92 |
|
|
$ |
544 |
|
Loans
to Individuals
|
|
|
2,230 |
|
|
|
396 |
|
|
|
1,834 |
|
Commercial
Loans
|
|
|
170 |
|
|
|
65 |
|
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
$ |
3,036 |
|
|
$ |
553 |
|
|
$ |
2,483 |
|
The balances of impaired loans included
above with no valuation allowances were approximately $6,000 and $14,000 at
December 31, 2008 and 2007, respectively.
For the years ended December 31, 2008
and 2007, the average recorded investment in impaired loans was approximately
$6,458,000 and $1,749,000, respectively.
The amount of interest recognized on
loans that were nonaccruing or restructured during the year was $1.1 million,
$102,000 and $113,000 for the years ended December 31, 2008, 2007 and 2006,
respectively. If these loans had been accruing interest at their
original contracted rates, related income would have been $1.8 million, $231,000
and $142,000 for the years ended December 31, 2008, 2007 and 2006,
respectively.
For the years ended December 31, 2008,
2007 and 2006 we did not have an allowance for losses on OREO.
SECURITIES
ACTIVITY
Our securities portfolio plays a
primary role in management of our interest rate sensitivity and, therefore, is
managed in the context of the overall balance sheet. The securities
portfolio generates a substantial percentage of our interest income and serves
as a necessary source of liquidity.
We
account for debt and equity securities as follows:
|
·
|
Held
to Maturity (“HTM”). Debt securities that management has the
current intent and ability to hold until maturity are classified as HTM
and are carried at their remaining unpaid principal balance, net of
unamortized premiums or unaccreted discounts. Premiums are
amortized and discounts are accreted using the level interest yield method
over the estimated remaining term of the underlying
security.
|
|
·
|
Available
for Sale (“AFS”). Debt and equity securities that will be held
for indefinite periods of time, including securities that may be sold in
response to changes in market interest or prepayment rates, needs for
liquidity and changes in the availability of and the yield of alternative
investments are classified as AFS. These assets are carried at
market value. Market value is determined using quoted market
prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices for similar
securities or estimates from independent pricing
services. Unrealized gains and losses on AFS securities are
excluded from earnings and reported net of tax as a separate component of
shareholders' equity until
realized.
|
Purchase of premiums and discounts are
recognized in interest income using the interest method over the terms of the
securities. Declines in the fair value of HTM and AFS securities
below their cost that are deemed to be other-than-temporary are reflected in
earnings as realized losses. In estimating other-than-temporary
impairment losses, management considers (1) the length of time and the extent to
which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) our intent and ability to retain our
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. Gains and losses on the sale of
securities are recorded on the trade date and are determined using the specific
identification method.
Securities with limited marketability,
such as FHLB stock and other investments, are carried at cost, which
approximates its fair value and assessed for other-than-temporary
impairment.
Management attempts to deploy
investable funds into instruments that are expected to provide a reasonable
overall return on the portfolio given the current assessment of economic and
financial conditions, while maintaining acceptable levels of capital, interest
rate and liquidity risk. At December 31, 2008, the securities
portfolio as a percentage of total assets was 55.7% and was larger than loans,
which were 37.9% of total assets. For a discussion of our strategy in
relation to the securities portfolio, see “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Leverage
Strategy.”
The
following table sets forth the carrying amount of investment securities and
mortgage-backed securities at December 31, 2008, 2007 and 2006:
|
|
December
31,
|
|
Available
for Sale:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
$ |
5,031 |
|
|
$ |
4,886 |
|
|
$ |
26,383 |
|
Government
Sponsored Enterprise Debentures
|
|
|
60,551 |
|
|
|
31,759 |
|
|
|
9,923 |
|
State
and Political
Subdivisions
|
|
|
211,594 |
|
|
|
66,244 |
|
|
|
55,135 |
|
Other
Stocks and
Bonds
|
|
|
1,202 |
|
|
|
7,039 |
|
|
|
7,511 |
|
Mortgage-backed
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government
Agencies
|
|
|
168,299 |
|
|
|
89,720 |
|
|
|
71,399 |
|
Government
Sponsored
Enterprises
|
|
|
858,214 |
|
|
|
633,060 |
|
|
|
564,650 |
|
Other
Private
Issues
|
|
|
– |
|
|
|
4,773 |
|
|
|
7,115 |
|
Total
|
|
$ |
1,304,891 |
|
|
$ |
837,481 |
|
|
$ |
742,116 |
|
|
|
December
31,
|
|
Held
to Maturity:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
Other
Stocks and
Bonds
|
|
$ |
478 |
|
|
$ |
475 |
|
|
$ |
1,351 |
|
Mortgage-backed
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government
Agencies
|
|
|
22,778 |
|
|
|
25,965 |
|
|
|
30,788 |
|
Government
Sponsored
Enterprises
|
|
|
134,509 |
|
|
|
164,000 |
|
|
|
195,374 |
|
Total
|
|
$ |
157,765 |
|
|
$ |
190,440 |
|
|
$ |
227,513 |
|
We invest in mortgage-backed and
related securities, including mortgage participation certificates, which are
insured or guaranteed by U.S. Government agencies and GSEs, and CMOs and real
estate mortgage investment conduits (“REMICs”). Mortgage-backed
securities (which also are known as mortgage participation certificates or
pass-through certificates) represent a participation interest in a pool of
single-family or multi-family mortgages, the principal and interest payments on
which are passed from the mortgage originators, through intermediaries
(generally U.S. Government agencies and GSEs) that pool and repackage the
participation interests in the form of securities, to investors such as
us. U.S. Government agencies, primarily Government National Mortgage
Association (“GNMA”) and GSEs, primarily Freddie Mac, and Federal National
Mortgage Association (“FNMA”) guarantee the payment of principal and interest to
investors. GSEs are not backed by the full faith and credit of the
United States government. Freddie Mac, FNMA and FHLB are the primary
GSEs with which we purchase securities. At December 31, 2008 all of
our mortgage-backed securities were collateralized by U.S. Government agencies
or GSE’s.
Mortgage-backed securities typically
are issued with stated principal amounts, and the securities are backed by pools
of mortgages that have loans with varying maturities. The
characteristics of the underlying pool of mortgages, such as fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder. The term of a mortgage-backed pass-through security thus
approximates the term of the underlying mortgages and can vary significantly due
to prepayments.
Our mortgage-backed securities include
CMOs, which include securities issued by entities that have qualified under the
Internal Revenue Code of 1986, as amended, as REMICs. CMOs and REMICs
(collectively CMOs) were developed in response to investor concerns regarding
the uncertainty of cash flows associated with the prepayment option of the
underlying mortgagor and are typically issued by governmental agencies, GSEs and
special purpose entities, such as trusts, corporations or partnerships,
established by financial institutions or other similar
institutions. A CMO can be collateralized by loans
or
securities
which are insured or guaranteed by FNMA, Freddie Mac or GNMA. In
contrast to pass-through mortgage-backed securities, in which cash flow is
received pro rata by all security holders, the cash flow from the mortgages
underlying a CMO is segmented and paid in accordance with a predetermined
priority to investors holding various CMO classes. By allocating the
principal and interest cash flows from the underlying collateral among the
separate CMO classes, different classes of bonds are created, each with its own
stated maturity, estimated average life, coupon rate and prepayment
characteristics.
Like most fixed-income securities,
mortgage-backed and related securities are subject to interest rate
risk. However, unlike most fixed-income securities, the mortgage
loans underlying a mortgage-backed or related security generally may be prepaid
at any time without penalty. The ability to prepay a mortgage loan
generally results in significantly increased price and yield volatility (with
respect to mortgage-backed and related securities) than is the case with
non-callable fixed income securities. Furthermore, mortgage-backed
derivative securities often are more sensitive to changes in interest rates and
prepayments than traditional mortgage-backed securities and are, therefore, even
more volatile.
The combined investment securities,
mortgage-backed securities, and FHLB stock and other investments portfolio
increased to $1.50 billion at December 31, 2008, compared to $1.05 billion
at December 31, 2007, an increase of $454.3 million, or
43.3%. This is a result of an increase in mortgage-backed securities
of $266.3 million, or 29.0%, during 2008 when compared to
2007. Another change in our securities portfolio during 2008 included
a $145.4 million, or 219.4%, increase in our ownership of securities issued by
state and political subdivisions. FHLB stock increased $19.6 million,
or 98.5%, due to stock purchases as our long-term FHLB advances
increased. The changes in U. S. Treasury and U. S. Government agency
securities were related to collateral needs for public fund
deposits. Other stocks and bonds are comprised primarily of
TRUPs. The reason for the decrease in other stocks and bonds at
December 31, 2008 when compared to December 31, 2007 is the decrease in market
value of the TRUP investments due to illiquidity.
During 2008, short-term and long-term
interest rates decreased significantly while at the same time credit and
volatility spreads increased. We used this environment to increase
the securities portfolio and to also reposition a portion of the securities
portfolio.
The combined market value of the AFS
and HTM securities portfolio at December 31, 2008 was $1.46 billion, which
represented a net unrealized gain as of that date of $24.1
million. The net unrealized gain was comprised of $33.0 million in
unrealized gains and $8.9 million of unrealized losses. The market
value of the AFS securities portfolio at December 31, 2008 was $1.30 billion,
which represented a net unrealized gain as of that date of $21.9
million. The net unrealized gain was comprised of $30.8 million of
unrealized gains and $8.9 million of unrealized losses. The $8.9
million of unrealized losses is primarily resulting from our investment in three
tranches of TRUPs. Net unrealized gains and losses on AFS securities,
which is a component of shareholders’ equity on the consolidated balance sheet,
can fluctuate significantly as a result of changes in interest
rates. Because management cannot predict the future direction of
interest rates, the effect on shareholders’ equity in the future cannot be
determined; however, this risk is monitored through the use of shock tests on
the AFS securities portfolio using an array of interest rate
assumptions.
There
were no securities transferred from AFS to HTM during 2008, 2007 and
2006. There were no sales from the HTM portfolio during the years
ended December 31, 2008, 2007 or 2006. There were $157.8 million and
$190.4 million of securities classified as HTM for the years ended December 31,
2008 and 2007, respectively.
The
maturities classified according to the sensitivity to changes in interest rates
of the December 31, 2008 securities portfolio and the weighted yields are
presented below. Tax-exempt obligations are shown on a taxable
equivalent basis. Mortgage-backed securities are included in maturity
categories based on their stated maturity date. Expected maturities
may differ from contractual maturities because issuers may have the right to
call or prepay obligations.
|
|
MATURING
|
|
|
|
Within
1 Year
|
|
After
1 But
Within
5 Years
|
|
After
5 But
Within
10 Years
|
|
After
10 Years
|
|
Available
For Sale:
|
|
Amount
|
|
Yield
|
|
Amount
|
Yield
|
|
Amount
|
Yield
|
|
Amount
|
Yield
|
|
|
|
(dollars
in thousands)
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
$
|
5,031
|
|
1.02
|
%
|
$
|
–
|
–
|
|
$
|
–
|
–
|
|
$
|
–
|
–
|
|
Government
Sponsored Enterprise Debentures
|
|
|
60,551
|
|
0.93
|
%
|
|
–
|
–
|
|
|
–
|
–
|
|
|
–
|
–
|
|
State
and Political Subdivisions
|
|
|
2,161
|
|
5.84
|
%
|
|
13,953
|
6.42
|
%
|
|
22,616
|
6.30
|
%
|
|
172,864
|
6.89
|
%
|
Other
Stocks and Bonds
|
|
|
–
|
|
–
|
|
|
–
|
–
|
|
|
–
|
–
|
|
|
1,202
|
23.96
|
%
|
Mortgage-backed
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Agencies
|
|
|
–
|
|
–
|
|
|
–
|
–
|
|
|
6,691
|
4.71
|
%
|
|
161,608
|
5.96
|
%
|
Government
Sponsored Enterprises
|
|
|
214
|
|
5.12
|
%
|
|
8,155
|
4.99
|
%
|
|
101,188
|
5.10
|
%
|
|
748,657
|
5.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
67,957
|
|
1.11
|
%
|
$
|
22,108
|
5.89
|
%
|
$
|
130,495
|
5.29
|
%
|
$
|
1,084,331
|
5.92
|
%
|
|
|
MATURING
|
|
|
|
Within
1 Year
|
|
After
1 But
Within
5 Years
|
|
After
5 But
Within
10 Years
|
|
After
10 Years
|
|
Held
to Maturity:
|
|
Amount
|
|
Yield
|
|
Amount
|
Yield
|
|
Amount
|
Yield
|
|
Amount
|
Yield
|
|
|
|
(dollars
in thousands)
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Stocks and Bonds
|
|
$
|
–
|
|
–
|
|
$
|
–
|
–
|
|
$
|
–
|
–
|
|
$
|
478
|
6.78
|
%
|
Mortgage-backed
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Agencies
|
|
|
–
|
|
–
|
|
|
–
|
–
|
|
|
4,233
|
4.92
|
%
|
|
18,545
|
4.99
|
%
|
Government
Sponsored Enterprises
|
|
|
–
|
|
–
|
|
|
19,202
|
4.44
|
%
|
|
75,552
|
4.87
|
%
|
|
39,755
|
5.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
–
|
|
–
|
|
$
|
19,202
|
4.44
|
%
|
$
|
79,785
|
4.87
|
%
|
$
|
58,778
|
5.23
|
%
|
At December 31, 2008, there were no
holders of any one issuer, other than the U. S. government and its agencies, in
an amount greater than 10% of our shareholders’ equity.
DEPOSITS
AND BORROWED FUNDS
Deposits provide us with our primary
source of funds. The increase of $25.6 million, or 1.7%, in total
deposits during 2008 provided us with funds for the growth in
loans. Deposits increased during 2008 primarily due to branch
expansion and increased market penetration. At December 31, 2008,
brokered CDs reflected a decrease of approximately $92.9 million when compared
to December 31, 2007. Deposits net of brokered deposits, at December 31, 2008,
increased $118.6 million, or 8.5% when compared to December 31,
2007. Time deposits decreased a total of $70.3 million, or 11.3%,
during 2008 when compared to 2007. Noninterest bearing demand
deposits increased $33.7 million, or 9.4%, during 2008. Interest
bearing demand deposits increased $54.3 million, or 10.9%, and saving deposits
increased $7.9 million, or 14.9%, during 2008. The latter three
categories, which are considered the lowest cost deposits, comprised 64.5% of
total deposits at December 31, 2008 compared to 59.3% at December 31,
2007.
The following table sets forth deposits
by category at December 31, 2008, 2007, and 2006:
|
|
Years
Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
Bearing Demand
Deposits
|
|
$ |
390,823 |
|
|
$ |
357,083 |
|
|
$ |
325,771 |
|
Interest
Bearing Demand
Deposits
|
|
|
552,532 |
|
|
|
498,221 |
|
|
|
382,265 |
|
Savings
Deposits
|
|
|
60,852 |
|
|
|
52,975 |
|
|
|
50,454 |
|
Time
Deposits
|
|
|
551,924 |
|
|
|
622,212 |
|
|
|
523,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Deposits
|
|
$ |
1,556,131 |
|
|
$ |
1,530,491 |
|
|
$ |
1,282,475 |
|
During the year ended December 31,
2008, total time deposits of $100,000 or more increased $31.0 million, or 12.0%,
to $288.0 million, from December 31, 2007.
The table below sets forth the maturity
distribution of time deposits of $100,000 or more at December 31, 2008 and
2007:
|
December
31, 2008
|
|
December
31, 2007
|
|
|
Time
Certificates of Deposit
|
|
Other
Time Deposits
|
|
Total
|
|
Time
Certificates of Deposit
|
|
Other
Time Deposits
|
|
Total
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months or
less
|
|
$ |
90,813 |
|
|
$ |
27,900 |
|
|
$ |
118,713 |
|
|
$ |
79,461 |
|
|
$ |
21,000 |
|
|
$ |
100,461 |
|
Over
three to six
months
|
|
|
58,120 |
|
|
|
18,000 |
|
|
|
76,120 |
|
|
|
44,919 |
|
|
|
21,000 |
|
|
|
65,919 |
|
Over
six to twelve months
|
|
|
47,139 |
|
|
|
7,000 |
|
|
|
54,139 |
|
|
|
46,458 |
|
|
|
7,000 |
|
|
|
53,458 |
|
Over
twelve
months
|
|
|
39,075 |
|
|
|
– |
|
|
|
39,075 |
|
|
|
37,257 |
|
|
|
– |
|
|
|
37,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
235,147 |
|
|
$ |
52,900 |
|
|
$ |
288,047 |
|
|
$ |
208,095 |
|
|
$ |
49,000 |
|
|
$ |
257,095 |
|
At December 31, 2008, we had a total of
$40.0 million in brokered CDs that represented 2.6% of our
deposits. During the year ended December 31, 2008, we issued $40.0
million in short-term brokered CDs. Our brokered CDs at December 31,
2008 have maturities of less than six months. During 2008, due to the
significant decrease in interest rates, we called $125.4 million of our
long-term brokered CDs. At December 31, 2007, we had $132.9 million
in brokered CDs and at December 31, 2006, we had $123.5 million in brokered
CDs. Our current policy allows for a maximum of $150 million in
brokered CDs. The potential higher interest cost and lack of customer
loyalty are risks associated with the use of brokered CDs.
Short-term
obligations, consisting primarily of FHLB advances and federal funds purchased
and repurchase agreements, decreased $121.4 million, or 33.4%, during 2008 when
compared to 2007. FHLB advances are collateralized by FHLB stock,
nonspecified loans and securities. Short-term obligations are
summarized as follows:
|
|
Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds purchased and repurchase agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of
period
|
|
$
|
10,629
|
|
|
$
|
7,023
|
|
|
$
|
5,675
|
|
Average
amount outstanding during the period (1)
|
|
|
11,789
|
|
|
|
4,519
|
|
|
|
8,727
|
|
Maximum
amount outstanding during the period (3)
|
|
|
16,432
|
|
|
|
10,250
|
|
|
|
13,775
|
|
Weighted
average interest rate during the period (2)
|
|
|
3.7
|
%
|
|
|
5.3
|
%
|
|
|
5.2
|
%
|
Interest
rate at end of
period
|
|
|
3.8
|
%
|
|
|
4.7
|
%
|
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
advances
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of
period
|
|
$
|
229,385
|
|
|
$
|
353,792
|
|
|
$
|
322,241
|
|
Average
amount outstanding during the period (1)
|
|
|
278,164
|
|
|
|
272,711
|
|
|
|
367,068
|
|
Maximum
amount outstanding during the period (3)
|
|
|
367,823
|
|
|
|
383,059
|
|
|
|
396,416
|
|
Weighted
average interest rate during the period (2)
|
|
|
3.1
|
%
|
|
|
4.8
|
%
|
|
|
4.4
|
%
|
Interest
rate at end of
period
|
|
|
2.6
|
%
|
|
|
4.1
|
%
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of
period
|
|
$
|
1,857
|
|
|
$
|
2,500
|
|
|
$
|
1,605
|
|
Average
amount outstanding during the period (1)
|
|
|
942
|
|
|
|
772
|
|
|
|
901
|
|
Maximum
amount outstanding during the period (3)
|
|
|
2,500
|
|
|
|
2,500
|
|
|
|
2,500
|
|
Weighted
average interest rate during the period (2)
|
|
|
1.6
|
%
|
|
|
5.0
|
%
|
|
|
4.8
|
%
|
Interest
rate at end of
period
|
|
|
–
|
|
|
|
3.6
|
%
|
|
|
5.0
|
%
|
(1)
|
The
average amount outstanding during the period was computed by dividing the
total daily outstanding principal balances by the number of days in the
period.
|
(2)
|
The
weighted average interest rate during the period was computed by dividing
the actual interest expense by the average balance outstanding during the
period.
|
(3)
|
The
maximum amount outstanding at any month-end during the
period.
|
Long-term
obligations are summarized as follows:
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Federal
Home Loan Bank Advances (1)
|
|
|
|
|
|
|
Varying
maturities to
2017
|
|
$ |
655,489 |
|
|
$ |
86,247 |
|
|
|
|
|
|
|
|
|
|
Long-term
Debt (2)
|
|
|
|
|
|
|
|
|
Southside
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
|
|
$ |
715,800 |
|
|
$ |
146,558 |
|
(1) At
December 31, 2008, the weighted average cost of these advances was
3.6%.
|
(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 4.39875% through March 30, 2009 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 3.953% through February 22, 2009 and
adjusts quarterly at a rate equal to three-month LIBOR plus 180 basis
points.
|
Long-term FHLB advances increased
$569.2 million, or 660.0%, during 2008 to $655.5 million when compared to $86.2
million in 2007. The increase was the result of an increase in
long-term FHLB advances purchased during 2008 to fund the increase in the
securities portfolio and to replace the brokered CDs called.
Long-term debt was $60.3 million for
the years ended December 31, 2008 and 2007. Long-term debt consists of our
junior subordinated debentures issued in 2003 and August 2007 in connection with
the issuance of trust preferred securities by Southside Statutory Trusts III, IV
and V and the assumption in October 2007 of $3.6 million of junior
subordinated debentures issued by FWBS to Magnolia Trust Company
I. In August 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.
CAPITAL
RESOURCES
Our total shareholders' equity at
December 31, 2008 of $160.6 million increased 21.4%, or $28.3 million, from
December 31, 2007 and represented 5.9% of total assets at December 31, 2008
compared to 6.0% at December 31, 2007.
Net income for 2008 of $30.7 million
was the major contributor to the increase in shareholders' equity at December
31, 2008 along with the issuance of $2.1 million in common stock (231,749
shares) through our incentive stock option and dividend reinvestment plans, and
a decrease of $3.6 million in accumulated other comprehensive loss which more
than offset $8.3 million in cash dividends paid. The decrease in
accumulated other comprehensive loss is composed of a $10.7 million, net of tax,
unrealized gain on securities, net of reclassification adjustment (see “Note 4
– Comprehensive Income
(Loss)”) and a decrease of $7.1 million, net of tax, related to the change in
the unfunded status of our defined benefit plans. Our dividend policy
requires that any cash dividend payments may not exceed consolidated 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 will depend upon future earnings,
our financial condition, and other related factors including the discretion of
the board of directors.
We are
subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly
additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on our financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, we must
meet specific capital guidelines that involve quantitative measures of our
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. Our capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by
regulation to ensure capital adequacy require us to maintain minimum amounts and
ratios (set forth in the table below) of Total and Tier 1 Capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier 1 Capital (as
defined) to average assets (as defined). Tier 1 Capital is defined as
the sum of shareholders’ equity and qualifying subordinated debt, excluding
unrealized gains or losses on debt securities available for sale, unrealized
gains on equity securities available for sale and unrealized gains or losses on
cash flow hedges, net of deferred income taxes; plus certain mandatorily
redeemable capital securities, less nonqualifying intangible assets net of
applicable deferred income taxes, and certain nonfinancial equity
investments. Total capital is defined as the sum of Tier 1 Capital, a
qualifying portion of the allowance for loan losses, and qualifying subordinated
debt. Management believes, as of December 31, 2008, that we meet all
capital adequacy requirements to which we are subject.
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:
|
|
|
|
|
|
|
|
To
Be Well
|
|
|
|
|
|
|
|
|
|
Capitalized
Under
|
|
|
|
|
|
|
For
Capital Adequacy
|
|
|
Prompt
Corrective
|
|
|
|
Actual
|
|
|
Purposes
|
|
|
Action
Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
As
of December 31, 2008:
|
|
|
|
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
212,082 |
|
|
|
17.66
|
% |
|
$ |
96,097 |
|
|
|
8.00
|
% |
|
|
N/A |
|
|
|
N/A |
|
Southside
Bank
Only
|
|
$ |
208,394 |
|
|
|
17.35
|
% |
|
$ |
96,067 |
|
|
|
8.00
|
% |
|
$ |
120,084 |
|
|
|
10.00
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
192,615 |
|
|
|
16.04
|
% |
|
$ |
48,049 |
|
|
|
4.00
|
% |
|
|
N/A |
|
|
|
N/A |
|
Southside
Bank
Only
|
|
$ |
193,370 |
|
|
|
16.10
|
% |
|
$ |
48,033 |
|
|
|
4.00
|
% |
|
$ |
72,050 |
|
|
|
6.00
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Capital (to Average Assets) (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
192,615 |
|
|
|
7.48
|
% |
|
$ |
103,036 |
|
|
|
4.00
|
% |
|
|
N/A |
|
|
|
N/A |
|
Southside
Bank
Only
|
|
$ |
193,370 |
|
|
|
7.51
|
% |
|
$ |
102,960 |
|
|
|
4.00
|
% |
|
$ |
128,700 |
|
|
|
5.00
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
182,148 |
|
|
|
17.02
|
% |
|
$ |
85,603 |
|
|
|
8.00
|
% |
|
|
N/A |
|
|
|
N/A |
|
Southside
Bank
Only
|
|
$ |
157,854 |
|
|
|
16.41
|
% |
|
$ |
76,936 |
|
|
|
8.00
|
% |
|
$ |
96,170 |
|
|
|
10.00
|
% |
Fort
Worth National Bank Only
|
|
$ |
16,745 |
|
|
|
15.51
|
% |
|
$ |
8,639 |
|
|
|
8.00
|
% |
|
$ |
10,798 |
|
|
|
10.00
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
159,690 |
|
|
|
14.92
|
% |
|
$ |
42,802 |
|
|
|
4.00
|
% |
|
|
N/A |
|
|
|
N/A |
|
Southside
Bank
Only
|
|
$ |
149,099 |
|
|
|
15.50
|
% |
|
$ |
38,468 |
|
|
|
4.00
|
% |
|
$ |
57,702 |
|
|
|
6.00
|
% |
Fort
Worth National Bank Only
|
|
$ |
15,697 |
|
|
|
14.54
|
% |
|
$ |
4,319 |
|
|
|
4.00
|
% |
|
$ |
6,479 |
|
|
|
6.00
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Capital (to Average Assets) (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
159,690 |
|
|
|
7.73
|
% |
|
$ |
82,625 |
|
|
|
4.00
|
% |
|
|
N/A |
|
|
|
N/A |
|
Southside
Bank
Only
|
|
$ |
149,099 |
|
|
|
7.67
|
% |
|
$ |
77,797 |
|
|
|
4.00
|
% |
|
$ |
97,246 |
|
|
|
5.00
|
% |
Fort
Worth National Bank Only
|
|
$ |
15,697 |
|
|
|
13.13
|
% |
|
$ |
4,783 |
|
|
|
4.00
|
% |
|
$ |
5,979 |
|
|
|
5.00
|
% |
(1) Refers to quarterly average assets as
calculated by bank regulatory agencies.
The table
below summarizes our key equity ratios for the years ended December 31,
2008, 2007 and 2006:
|
|
Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on Average
Assets
|
|
|
1.29
|
%
|
|
|
0.87
|
%
|
|
|
0.81
|
%
|
Return
on Average Shareholders' Equity
|
|
|
21.44
|
%
|
|
|
14.05
|
%
|
|
|
13.48
|
%
|
Dividend
Payout Ratio -
Basic
|
|
|
27.15
|
%
|
|
|
40.98
|
%
|
|
|
42.34
|
%
|
Dividend
Payout Ratio -
Diluted
|
|
|
27.78
|
%
|
|
|
42.37
|
%
|
|
|
43.93
|
%
|
Average
Shareholders' Equity to Average Total Assets
|
|
|
6.04
|
%
|
|
|
6.22
|
%
|
|
|
5.99
|
%
|
ACCOUNTING
PRONOUNCEMENTS
See “Note 1 – Summary of Significant
Accounting and Reporting Policies” to our consolidated financial statements
included in this report.
EFFECTS
OF INFLATION
Our consolidated financial statements,
and their related notes, have been prepared in accordance with GAAP that require
the measurement of financial position and operating results in terms of
historical dollars, without considering the change in the relative purchasing
power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of our
operations. Unlike many industrial companies, nearly all of our
assets and liabilities are monetary. As a result, interest rates have
a greater impact on our performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and
services. Inflation can affect the amount of money customers have for
deposits, as well as ability to repay loans.
MANAGEMENT
OF LIQUIDITY
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
December 31, 2008, these investments were 27.5% of total assets, as compared
with 19.0% for December 31, 2007, and 16.1% for December 31,
2006. The increase to 27.5% at December 31, 2008 is reflective of
changes in the investment portfolio. During 2008, we sold lower
coupon mortgage-backed securities and purchased higher coupon mortgage-backed
securities where the assumed prepayments are greater. 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. There were no federal funds purchased at December 31,
2008. At December 31, 2008, the amount of additional funding
Southside Bank could obtain from FHLB using unpledged securities at FHLB was
approximately $104 million net of FHLB stock purchases required.
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 of net interest income of
several different
interest
rate scenarios. By utilizing this technology, we can determine
changes that need to be made to the asset and liability mixes to minimize the
change in net interest income under these various interest rate
scenarios.
OFF-BALANCE-SHEET
ARRANGEMENTS
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 $137.0 million and $127.2 million at December 31, 2008 and
2007, respectively. Each commitment has a maturity date or an annual
cancellation 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
December 31, 2008 and 2007 were $9.0 million and $8.8 million, respectively, and
are reflected in the due after one year category. We had outstanding
standby letters of credit of $4.7 million and $5.1 million at December 31, 2008
and 2007, respectively.
The scheduled maturities of unused
commitments as of December 31, 2008 and 2007 were as follows (in
thousands):
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Unused
commitments:
|
|
|
|
|
|
|
Due
in one year or
less
|
|
$ |
77,789 |
|
|
$ |
96,264 |
|
Due
after one
year
|
|
|
59,214 |
|
|
|
30,954 |
|
Total
|
|
$ |
137,003 |
|
|
$ |
127,218 |
|
We apply the same credit policies in
making commitments and standby letters of credit as we do for on-balance-sheet
instruments. We evaluate each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary, upon extension of credit is based on management's credit evaluation
of the borrower. Collateral held varies but may include cash or cash
equivalents, negotiable instruments, real estate, accounts receivable,
inventory, property, plant, and equipment.
COMMITMENTS
AND CONTRACTUAL OBLIGATIONS
The following summarizes our
contractual cash obligations and commercial commitments at December 31, 2008,
and the effect such obligations are expected to have on liquidity and cash flow
in future periods. Payments for borrowings do not include
interest.
|
|
Payments
Due By Period
|
|
|
|
Less
than 1 Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
More
than 5 Years
|
|
|
Total
|
|
Contractual
obligations:
|
|
(in
thousands)
|
|
|
|
|
|
Long-term
debt, including current maturities (1)
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
60,311 |
|
|
$ |
60,311 |
|
FHLB
advances
(2)
|
|
|
226,518 |
|
|
|
331,691 |
|
|
|
318,522 |
|
|
|
8,143 |
|
|
|
884,874 |
|
Operating
leases
(3)
|
|
|
1,161 |
|
|
|
1,849 |
|
|
|
752 |
|
|
|
– |
|
|
|
3,762 |
|
Deferred
compensation agreements (4)
|
|
|
891 |
|
|
|
886 |
|
|
|
1,029 |
|
|
|
5,618 |
|
|
|
8,424 |
|
Time
deposits
(5)
|
|
|
468,448 |
|
|
|
64,778 |
|
|
|
18,251 |
|
|
|
447 |
|
|
|
551,924 |
|
Securities
purchased not paid
for
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Capital
lease
obligations
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Purchase
obligations
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Total
contractual
obligations
|
|
$ |
697,018 |
|
|
$ |
399,204 |
|
|
$ |
338,554 |
|
|
$ |
74,519 |
|
|
$ |
1,509,295 |
|
(1) The
total balance of long-term debt was $60.3 million at December 31,
2008. The scheduled maturities and interest rates were as
follows:
·
|
Floating
rate debt of $20.6 million with a scheduled maturity of 2033, that was
indexed to three-month LIBOR and adjusts on a quarterly
basis. The rate of interest for the first quarter of 2009
associated with this debt is
4.39875%.
|
·
|
Floating
rate debt of $3.6 million with a scheduled maturity of 2035, that was
indexed to three-month LIBOR and adjusts on a quarterly
basis. The rate of interest for the first quarter of 2009
associated with this debt is
3.953%.
|
·
|
Debt
of $23.2 million with a scheduled maturity of 2037, which carries a fixed
rate of 6.518% through October 2012 and thereafter adjusts quarterly at a
rate equal to three-month LIBOR plus 130 basis
points.
|
·
|
Debt
of $12.9 million with a scheduled maturity of 2037, which carries a fixed
rate of 7.48% through December 2012 and thereafter adjusts quarterly at a
rate equal to three-month LIBOR plus 225 basis
points.
|
(2) We
had FHLB advances with maturity dates ranging from 2009 through 2017, with a
total balance of $884.9 million at December 31, 2008. Callable FHLB
advances with a total balance of $15.0 million are presented based on
contractual maturity.
(3) We
had various operating leases for our office machines that total $430,000 and
expire on or before the end of 2012. In addition, we have operating
leases totaling $3.3 million on our retail branch locations and loan production
offices which have future commitments of up to five years and additional
options, that we control, beyond the commitment period.
(4) We
have deferred compensation agreements (the “agreements”) with 18 officers
totaling $8.4 million. Payments from the agreements are to commence
at the time of retirement. As of December 31, 2008, $110,000 in
payments had been made from such agreements. Of the 18 officers
included in the agreements, two were eligible for retirement at December 31,
2008 and one retired officer is currently receiving benefits. One
officer becomes eligible in 2012. The remaining 15 officers are
eligible at various dates after five years. The totals reflected
under five years assume the retirement of the two eligible officers at December
31, 2008 and the retirement of the eligible officer in
2012. Additional information regarding executive compensation is
incorporated into “Item 11. Executive Compensation” of this Annual
Report on Form 10-K.
(5) We
had short term non-callable brokered CDs, with a total balance of $40.0 million
at December 31, 2008.
On February 8, 2008 we filed a Form 8-K
reporting our entry into a Master Software License Maintenance Services
Agreement with Jack Henry & Associates for approximately $2.0 million and
annual maintenance and licensing fees for approximately $346,000 per
year.
We expect to contribute $6.0 million to
our defined benefit plan during 2009. We also expect to contribute to
our defined benefit plan in future years, however, those amounts are
indeterminable at this time.
ITEM
7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the banking
industry, a major risk exposure is changing interest rates. The
primary objective of monitoring our interest rate sensitivity, or risk, is
to provide management the tools necessary to manage the balance sheet to
minimize adverse changes in net interest income as a result of changes in the
direction and level of interest rates. Federal Reserve Board monetary
control efforts, the effects of deregulation, the current economic downturn
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. We utilize 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 12 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 12 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 December 31, 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
1.82% and 1.67%, respectively, relative to the base case over the next 12
months, while a decrease in interest rates of 100 and 200 basis points would
result in a positive variance in net interest income of 1.66% and 3.69%,
respectively, relative to the base case over the next 12 months. As
of December 31, 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 4.84% and 4.92%, respectively, relative to the base case over
12 months, while decreases in interest rates of 100 and 200 basis points would
result in positive variances in net interest income of 7.16% and 9.72%,
respectively, relative to the base case over the next 12 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.
The ALCO
monitors the desired gap along with various liquidity ratios to ensure a
satisfactory liquidity position for us. Management continually
evaluates the condition of the economy, the pattern of market interest rates and
other economic data to determine the types of investments that should be made
and at what maturities. Using this analysis, management from time to
time assumes calculated interest sensitivity gap positions to maximize net
interest income based upon anticipated movements in the general level of
interest rates. Regulatory authorities also monitor our gap position
along with other liquidity ratios. In addition, we utilize a
simulation model to determine the impact of net interest income under 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.
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
|
The
information required by this item is set forth in Part
IV.
|
ITEM
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL
DISCLOSURE
None.
ITEM
9A. CONTROLS AND
PROCEDURES
Evaluation
of Disclosure Controls and Procedures
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
Exchange Act of 1934, as amended) as of December 31, 2008 and concluded that our
disclosure controls and procedures were effective as of that date.
Management’s
Report on Internal Control Over Financial Reporting
Management is responsible for
establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as
amended, as a process designed by, or under the supervision of, our CEO and CFO
and effected by our board of directors, management and other personnel to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and
procedures that:
|
·
|
pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our
assets;
|
|
·
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of our management and
directors; and
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial
statements.
|
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management assessed the effectiveness
of our internal control over financial reporting as of December 31,
2008. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control-Integrated Framework.
Based on this assessment, management concluded that we maintained effective
internal control over financial reporting as of December 31, 2008.
The effectiveness of our internal
control over financial reporting as of December 31, 2008 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which appears herein.
Changes
in Internal Control Over Financial Reporting
No changes were made to our internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act of 1934, as amended) during the last fiscal quarter of the period
covered by this report that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
ITEM
9B. OTHER
INFORMATION
None.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE
The information required by this Item
is incorporated herein by reference to our Proxy Statement (Schedule 14A) for
our 2009 Annual Meeting of shareholders to be filed with the SEC within 120 days
of our fiscal year-end.
ITEM
11. EXECUTIVE
COMPENSATION
The information required
by this Item is incorporated herein by reference to our Proxy Statement
(Schedule 14A) for our 2009 Annual Meeting of shareholders to be filed with the
SEC within 120 days of our fiscal year-end.
ITEM
12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required
by this Item is incorporated herein by reference to our Proxy Statement
(Schedule 14A) for our 2009 Annual Meeting of shareholders to be filed with the
SEC within 120 days of our fiscal year-end.
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required
by this Item is incorporated herein by reference to our Proxy Statement
(Schedule 14A) for our 2009 Annual Meeting of shareholders to be filed with the
SEC within 120 days of our fiscal year-end.
ITEM
14. PRINCIPAL ACCOUNTANT FEES
AND SERVICES
The information required
by this Item is incorporated herein by reference to our Proxy Statement
(Schedule 14A) for our 2009 Annual Meeting of shareholders to be filed with the
SEC within 120 days of our fiscal year-end.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES
(a)
|
The
following consolidated financial statements of Southside Bancshares, Inc.
and its subsidiaries are filed as part of this
report.
|
|
Consolidated
Balance Sheets as of December 31, 2008 and
2007.
|
|
Consolidated
Statements of Income for the years ended December 31, 2008, 2007 and
2006.
|
|
Consolidated
Statements of Shareholders’ Equity for the years ended December 31, 2008,
2007 and 2006.
|
|
Consolidated
Statements of Cash Flow for the years ended December 31, 2008, 2007 and
2006.
|
|
Notes
to Consolidated Financial
Statements.
|
|
2.
|
Financial
Statement Schedules
|
|
All
schedules are omitted because they are not applicable or not required, or
because the required information is included in the consolidated financial
statements or notes thereto.
|
|
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).
|
|
|
|
|
|
4
|
–
|
Management
agrees to furnish to the Securities and Exchange Commission, upon request,
a copy of any other agreements or instruments of Southside Bancshares,
Inc. and its subsidiaries defining the rights of holders of any long-term
debt whose authorization does not exceed 10% of total
assets.
|
|
** 10
(a)(i)
|
–
|
Deferred
Compensation Plan for B. G. Hartley effective February 13, 1984, as
amended June 28, 1990, December 15, 1994, November 20, 1995, December
21,1999 and June 29, 2001 (filed as Exhibit 10(a)(i) to the Registrant’s
Form 10-Q for the quarter ended June 30, 2001, and incorporated herein by
reference).
|
|
|
|
|
|
** 10
(a)(ii)
|
–
|
Deferred
Compensation Plan for Robbie N. Edmonson effective February 13, 1984,
as amended June 28, 1990 and March 16, 1995 (filed as Exhibit 10(a)(ii) to
the Registrant's Form 10-K for the year ended December 31, 1995, and
incorporated herein by reference).
|
|
|
|
|
|
10
(a)(iii)
|
–
|
Agreement
and Plan of Merger dated May 17, 2007, as amended, by and among Southside
Bancshares, Inc., Southside Merger Sub, Inc. and FWBS (filed as Exhibit
10(a) to the Registrant’s Form 10-Q for the quarter ended September 30,
2007, and incorporated herein by reference).
|
|
|
|
|
|
** 10
(b)
|
–
|
Officers
Long-term Disability Income Plan effective June 25, 1990 (filed as Exhibit
10(b) to the Registrant's Form 10-K for the year ended June 30, 1990,
and incorporated herein by reference).
|
|
|
|
|
|
** 10
(c)
|
–
|
Retirement
Plan Restoration Plan for the subsidiaries of SoBank, Inc. (now named
Southside Bancshares, Inc.) (filed as Exhibit 10(c) to the Registrant's
Form 10-K for the year ended December 31, 1992, and incorporated
herein by reference).
|
|
|
|
|
|
** 10
(d)
|
–
|
Form
of Deferred Compensation Agreements dated June 30, 1994 with each of Sam
Dawson, Lee Gibson and Jeryl Story as amended October 15, 1997 (filed as
Exhibit 10(f) to the Registrant’s Form 10-K for the year ended December
31, 1997, and incorporated herein by reference).
|
|
|
|
|
|
** 10
(e)
|
–
|
Split
dollar compensation plan dated October 13, 2004, with Jeryl Wayne Story
(filed as exhibit 10(h) to the Registrant’s Form 8-K, filed October 19,
2004, and incorporated herein by reference).
|
|
|
|
|
|
** 10
(f)
|
–
|
Split
dollar compensation plan dated September 7, 2004, with Lee R. Gibson, III
(filed as exhibit 10(i) to the Registrant’s Form 8-K, filed October 19,
2004, and incorporated herein by reference).
|
|
|
|
|
|
** 10
(g)
|
–
|
Split
dollar compensation plan dated August 27, 2004, with B. G. Hartley (filed
as exhibit 10 (j) to the Registrant’s Form 8-K, filed October 19, 2004,
and incorporated herein by reference).
|
|
|
|
|
|
** 10
(h)
|
–
|
Split
dollar compensation plan dated August 31, 2004, with Charles E. Dawson
(filed as exhibit 10(k) to the Registrant’s Form 8-K, filed October 19,
2004, and incorporated herein by reference).
|
|
|
|
|
|
** 10
(i)
|
–
|
Employment
agreement dated October 22, 2007, by and between Southside Bank and Lee R.
Gibson (filed as exhibit 10 (l) to the Registrant’s Form 8-K, filed
October 26, 2007, and incorporated herein by
reference).
|
|
|
|
|
|
**
10 (j)
|
–
|
Employment
agreement dated October 22, 2007, by and between Southside Bank and Sam
Dawson (filed as exhibit 10 (m) to the Registrant’s Form 8-K, filed
October 26, 2007, and incorporated herein by
reference).
|
|
10
(k)
|
–
|
Master
Software License Maintenance and Services Agreement dated February 4,
2008, by and between Southside Bank and Jack Henry & Associates, Inc.
(filed as Item 1.01 to the Registrant’s Form 8-K, filed February 8, 2008,
and incorporated herein by reference).
|
|
|
|
|
|
** 10 (l)
|
–
|
Retirement
Agreement dated November 7, 2008, by and between Southside Bank, Southside
Bancshares, Inc. and B. G. Hartley (filed as exhibit 10 (o) to the
Registrant’s Form 10-Q, filed November 7, 2008, and incorporated herein by
reference).
|
|
|
|
|
|
* 21
|
–
|
Subsidiaries
of the Registrant.
|
|
|
|
|
|
* 23
|
–
|
Consent
of Independent Registered Public Accounting Firm.
|
|
|
|
|
|
* 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.
|
|
**Compensation
plan, benefit plan or employment contract or
arrangement.
|
SIGNATURES
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)
|
|
|
|
|
|
|
|
BY: /s/
|
LEE
R. GIBSON
|
|
|
Lee
R. Gibson, CPA, Executive Vice President
|
|
|
and
Chief Financial Officer (Principal Financial
|
|
|
and
Accounting Officer)
|
|
|
|
|
DATE:
March 3, 2009
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
|
Signature
|
Title
|
Date
|
|
|
|
|
|
|
|
|
/s/
|
B.
G. HARTLEY
|
|
|
|
(B.
G. Hartley)
|
Chief
Executive Officer,
|
March
3, 2009
|
|
|
Chairman
of the Board
|
|
|
|
and
Director
|
|
|
|
|
|
/s/
|
ROBBIE
N. EDMONSON
|
|
|
|
(Robbie
N. Edmonson)
|
Vice
Chairman of the Board
|
March
3, 2009
|
|
|
and
Director
|
|
|
|
|
|
/s/
|
SAM
DAWSON
|
|
|
|
(Sam
Dawson)
|
President,
Secretary
|
March
3, 2009
|
|
|
and
Director
|
|
|
|
|
|
/s/
|
HERBERT
C. BUIE
|
|
|
|
(Herbert
C. Buie)
|
Director
|
March
3, 2009
|
|
|
|
|
|
|
|
|
/s/
|
ALTON
CADE
|
|
|
|
(Alton
Cade)
|
Director
|
March
3, 2009
|
|
|
|
|
|
|
|
|
/s/
|
MICHAEL
D. GOLLOB
|
|
|
|
(Michael
D. Gollob)
|
Director
|
March
3, 2009
|
|
|
|
|
|
|
|
|
/s/
|
MELVIN
B. LOVELADY
|
|
|
|
(Melvin
B. Lovelady)
|
Director
|
March
3, 2009
|
|
|
|
|
|
|
|
|
/s/
|
JOE
NORTON
|
|
|
|
(Joe
Norton)
|
Director
|
March
3, 2009
|
|
|
|
|
|
|
|
|
/s/
|
PAUL
W. POWELL
|
|
|
|
(Paul
W. Powell)
|
Director
|
March
3, 2009
|
|
|
|
|
|
|
|
|
/s/
|
WILLIAM
SHEEHY
|
|
|
|
(William
Sheehy)
|
Director
|
March
3, 2009
|
Report
of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of
Southside
Bancshares, Inc.
In our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flow present
fairly, in all material respects, the financial position of Southside
Bancshares, Inc. and its subsidiaries at December 31, 2008 and 2007, and the
results of their operations and their cash flow for each of the three years in
the period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2008, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible
for these financial statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in Management's Report on Internal
Control Over Financial Reporting appearing under Item 9A. Our
responsibility is to express opinions on these financial statements and on the
Company's internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our
opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/
PRICEWATERHOUSECOOPERS LLP
Dallas,
Texas
March 2,
2009
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
(in
thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
|
|
|
December
31, 2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from
banks
|
|
$ |
64,067 |
|
|
|
|
|
$ |
74,040 |
|
Interest
earning
deposits
|
|
|
557 |
|
|
|
|
|
|
1,414 |
|
Federal
funds
sold
|
|
|
2,150 |
|
|
|
|
|
|
550 |
|
Total
cash and cash
equivalents
|
|
|
66,774 |
|
|
|
|
|
|
76,004 |
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale, at estimated fair
value
|
|
|
278,378 |
|
|
|
|
|
|
109,928 |
|
Held
to maturity, at
cost
|
|
|
478 |
|
|
|
|
|
|
475 |
|
Mortgage-backed
and related securities:
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale, at estimated fair
value
|
|
|
1,026,513 |
|
|
|
|
|
|
727,553 |
|
Held
to maturity, at
cost
|
|
|
157,287 |
|
|
|
|
|
|
189,965 |
|
Federal
Home Loan Bank stock, at
cost
|
|
|
39,411 |
|
|
|
|
|
|
19,850 |
|
Other
investments, at
cost
|
|
|
2,065 |
|
|
|
|
|
|
2,069 |
|
Loans
held for
sale
|
|
|
511 |
|
|
|
|
|
|
3,361 |
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
1,022,549 |
|
|
|
|
|
|
961,230 |
|
Less: allowance
for loan
losses
|
|
|
(16,112 |
) |
|
|
|
|
|
|
(9,753
|
) |
Net
Loans
|
|
|
1,006,437 |
|
|
|
|
|
|
|
951,477 |
|
Premises
and equipment,
net
|
|
|
42,722 |
|
|
|
|
|
|
|
40,249 |
|
Goodwill
|
|
|
22,034 |
|
|
|
|
|
|
|
21,639 |
|
Other
intangible assets,
net
|
|
|
1,479 |
|
|
|
|
|
|
|
1,925 |
|
Interest
receivable
|
|
|
16,352 |
|
|
|
|
|
|
|
11,784 |
|
Deferred
tax
asset
|
|
|
2,852 |
|
|
|
|
|
|
|
4,320 |
|
Other
assets
|
|
|
36,945 |
|
|
|
|
|
|
|
35,723 |
|
TOTAL
ASSETS
|
|
$ |
2,700,238 |
|
|
|
|
|
|
$ |
2,196,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
bearing
|
|
$ |
390,823 |
|
|
|
|
|
|
$ |
357,083 |
|
Interest
bearing
|
|
|
1,165,308 |
|
|
|
|
|
|
|
1,173,408 |
|
Total
Deposits
|
|
|
1,556,131 |
|
|
|
|
|
|
|
1,530,491 |
|
Short-term
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds purchased and repurchase
agreements
|
|
|
10,629 |
|
|
|
|
|
|
|
7,023 |
|
FHLB
advances
|
|
|
229,385 |
|
|
|
|
|
|
|
353,792 |
|
Other
obligations
|
|
|
1,857 |
|
|
|
|
|
|
|
2,500 |
|
Total
Short-term
obligations
|
|
|
241,871 |
|
|
|
|
|
|
|
363,315 |
|
Long-term
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
advances
|
|
|
655,489 |
|
|
|
|
|
|
|
86,247 |
|
Long-term
debt
|
|
|
60,311 |
|
|
|
|
|
|
|
60,311 |
|
Total
Long-term
obligations
|
|
|
715,800 |
|
|
|
|
|
|
|
146,558 |
|
Other
liabilities
|
|
|
25,347 |
|
|
|
|
|
|
|
23,132 |
|
TOTAL
LIABILITIES
|
|
|
2,539,149 |
|
|
|
|
|
|
|
2,063,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance-Sheet
Arrangements, Commitments and Contingencies (Note 19)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
Interest in Southside Financial
Group
|
|
|
472 |
|
|
|
|
|
|
|
498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock: ($1.25 par, 20,000,000 shares authorized, 15,756,096 and
14,865,134 shares issued)
|
|
|
19,695 |
|
|
|
|
|
|
|
18,581 |
|
Paid-in
capital
|
|
|
131,112 |
|
|
|
|
|
|
|
115,250 |
|
Retained
earnings
|
|
|
34,021 |
|
|
|
|
|
|
|
26,187 |
|
Treasury
stock (1,731,570 and 1,724,857 shares at
cost)
|
|
|
(23,115 |
) |
|
|
|
|
|
|
(22,983
|
) |
Accumulated
other comprehensive
loss
|
|
|
(1,096 |
) |
|
|
|
|
|
|
(4,707
|
) |
TOTAL
SHAREHOLDERS'
EQUITY
|
|
|
160,617 |
|
|
|
|
|
|
|
132,328 |
|
TOTAL
LIABILITIES AND SHAREHOLDERS'
EQUITY
|
|
$ |
2,700,238 |
|
|
|
|
|
|
$ |
2,196,322 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
(in
thousands, except per share data)
|
|
Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
73,120
|
|
|
$
|
55,904
|
|
|
$
|
46,413
|
|
Investment
securities –
taxable
|
|
|
1,723
|
|
|
|
2,580
|
|
|
|
2,498
|
|
Investment
securities - tax
exempt
|
|
|
4,910
|
|
|
|
2,112
|
|
|
|
2,139
|
|
Mortgage-backed
and related
securities
|
|
|
55,470
|
|
|
|
43,767
|
|
|
|
44,401
|
|
Federal
Home Loan Bank stock and other investments
|
|
|
841
|
|
|
|
1,193
|
|
|
|
1,409
|
|
Other
interest earning
assets
|
|
|
112
|
|
|
|
185
|
|
|
|
92
|
|
Total
interest
income
|
|
|
136,176
|
|
|
|
105,741
|
|
|
|
96,952
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
32,891
|
|
|
|
41,458
|
|
|
|
30,690
|
|
Short-term
obligations
|
|
|
8,969
|
|
|
|
13,263
|
|
|
|
16,534
|
|
Long-term
obligations
|
|
|
18,503
|
|
|
|
7,142
|
|
|
|
8,060
|
|
Total
interest
expense
|
|
|
60,363
|
|
|
|
61,863
|
|
|
|
55,284
|
|
Net
interest
income
|
|
|
75,813
|
|
|
|
43,878
|
|
|
|
41,668
|
|
Provision
for loan
losses
|
|
|
13,675
|
|
|
|
2,351
|
|
|
|
1,080
|
|
Net
interest income after provision for loan losses
|
|
|
62,138
|
|
|
|
41,527
|
|
|
|
40,588
|
|
Noninterest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit
services
|
|
|
18,395
|
|
|
|
17,280
|
|
|
|
15,482
|
|
Gain
on sale of securities available for sale
|
|
|
12,334
|
|
|
|
897
|
|
|
|
743
|
|
Gain
on sale of
loans
|
|
|
1,757
|
|
|
|
1,922
|
|
|
|
1,817
|
|
Trust
income
|
|
|
2,465
|
|
|
|
2,106
|
|
|
|
1,711
|
|
Bank
owned life insurance
income
|
|
|
2,246
|
|
|
|
1,142
|
|
|
|
1,067
|
|
Other
|
|
|
3,105
|
|
|
|
3,071
|
|
|
|
2,661
|
|
Total
noninterest
income
|
|
|
40,302
|
|
|
|
26,418
|
|
|
|
23,481
|
|
Noninterest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee
benefits
|
|
|
37,228
|
|
|
|
29,361
|
|
|
|
28,275
|
|
Occupancy
expense
|
|
|
5,704
|
|
|
|
4,881
|
|
|
|
4,777
|
|
Equipment
expense
|
|
|
1,305
|
|
|
|
1,017
|
|
|
|
899
|
|
Advertising,
travel and
entertainment
|
|
|
2,097
|
|
|
|
1,812
|
|
|
|
1,742
|
|
ATM
and debit card
expense
|
|
|
1,211
|
|
|
|
1,006
|
|
|
|
955
|
|
Director
fees
|
|
|
674
|
|
|
|
605
|
|
|
|
587
|
|
Supplies
|
|
|
812
|
|
|
|
692
|
|
|
|
637
|
|
Professional
fees
|
|
|
1,864
|
|
|
|
1,268
|
|
|
|
1,386
|
|
Postage
|
|
|
755
|
|
|
|
662
|
|
|
|
618
|
|
Telephone
and
communications
|
|
|
1,050
|
|
|
|
800
|
|
|
|
723
|
|
FDIC
Insurance
|
|
|
966
|
|
|
|
285
|
|
|
|
141
|
|
Other
|
|
|
6,828
|
|
|
|
4,896
|
|
|
|
4,227
|
|
Total
noninterest
expense
|
|
|
60,494
|
|
|
|
47,285
|
|
|
|
44,967
|
|
Income
before income tax
expense
|
|
|
41,946
|
|
|
|
20,660
|
|
|
|
19,102
|
|
Provision
(benefit) for income tax
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
15,601
|
|
|
|
4,068
|
|
|
|
8,582
|
|
Deferred
|
|
|
(4,351
|
)
|
|
|
(92
|
)
|
|
|
(4,482
|
)
|
Total
income
taxes
|
|
|
11,250
|
|
|
|
3,976
|
|
|
|
4,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
30,696
|
|
|
$
|
16,684
|
|
|
$
|
15,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share –
basic
|
|
$
|
2.21
|
|
|
$
|
1.22
|
|
|
$
|
1.11
|
|
Earnings
per common share –
diluted
|
|
$
|
2.16
|
|
|
$
|
1.18
|
|
|
$
|
1.07
|
|
Dividends
declared per common
share
|
|
$
|
0.60
|
|
|
$
|
0.50
|
|
|
$
|
0.47
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compre-hensive
Income
|
|
|
Common
Stock
|
|
|
Paid
In Capital
|
|
|
Retained
Earnings
|
|
|
Treasury
Stock
|
|
|
Accu-
mulated
Other Compre-
hensive
Income
(Loss)
|
|
|
Total
Share-
holders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
|
|
$ |
16,633 |
|
|
$ |
87,962 |
|
|
$ |
32,054 |
|
|
$ |
(22,850 |
) |
|
$ |
(4,509 |
) |
|
$ |
109,290 |
|
Net
Income
|
|
$ |
15,002 |
|
|
|
|
|
|
|
|
|
|
|
15,002 |
|
|
|
|
|
|
|
|
|
|
|
15,002 |
|
Other
comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
losses on securities, net of reclassification adjustment
|
|
|
(1,883
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,883
|
) |
|
|
(1,883
|
) |
Minimum
pension liability adjustment
|
|
|
298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
298 |
|
|
|
298 |
|
Comprehensive
income
|
|
$ |
13,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
to initially apply SFAS 158, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,430
|
) |
|
|
(8,430
|
) |
Common
stock issued (186,658 shares)
|
|
|
|
|
|
|
233 |
|
|
|
1,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,750 |
|
Stock
compensation expense
|
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27 |
|
Tax
benefit of incentive stock options
|
|
|
|
|
|
|
|
|
|
|
252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
252 |
|
Dividends
paid on common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,702
|
) |
|
|
|
|
|
|
|
|
|
|
(5,702
|
) |
Stock
dividend
|
|
|
|
|
|
|
728 |
|
|
|
10,978 |
|
|
|
(11,706
|
) |
|
|
|
|
|
|
|
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
|
|
|
|
17,594 |
|
|
|
100,736 |
|
|
|
29,648 |
|
|
|
(22,850
|
) |
|
|
(14,524
|
) |
|
|
110,604 |
|
Net
Income
|
|
$ |
16,684 |
|
|
|
|
|
|
|
|
|
|
|
16,684 |
|
|
|
|
|
|
|
|
|
|
|
16,684 |
|
Other
comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on securities, net of reclassification adjustment
|
|
|
8,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,691 |
|
|
|
8,691 |
|
Adjustment
to net periodic benefit cost
|
|
|
1,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,126 |
|
|
|
1,126 |
|
Comprehensive
income
|
|
$ |
26,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued (168,543 shares)
|
|
|
|
|
|
|
211 |
|
|
|
1,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,641 |
|
Stock
compensation expense
|
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27 |
|
Tax
benefit of incentive stock options
|
|
|
|
|
|
|
|
|
|
|
154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154 |
|
Dividends
paid on common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,466
|
) |
|
|
|
|
|
|
|
|
|
|
(6,466
|
) |
Purchase
of 6,120 shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(133
|
) |
|
|
|
|
|
|
(133
|
) |
Stock
dividend
|
|
|
|
|
|
|
776 |
|
|
|
12,903 |
|
|
|
(13,679
|
) |
|
|
|
|
|
|
|
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
|
|
|
|
18,581 |
|
|
|
115,250 |
|
|
|
26,187 |
|
|
|
(22,983
|
) |
|
|
(4,707
|
) |
|
|
132,328 |
|
Net
Income
|
|
$ |
30,696 |
|
|
|
|
|
|
|
|
|
|
|
30,696 |
|
|
|
|
|
|
|
|
|
|
|
30,696 |
|
Other
comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on securities, net of reclassification adjustment
|
|
|
10,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,663 |
|
|
|
10,663 |
|
Adjustment
to net periodic benefit cost
|
|
|
(7,052
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,052
|
) |
|
|
(7,052
|
) |
Comprehensive
income
|
|
$ |
34,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued (231,749 shares)
|
|
|
|
|
|
|
290 |
|
|
|
1,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,084 |
|
Stock
compensation expense
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
Tax
benefit of incentive stock options
|
|
|
|
|
|
|
|
|
|
|
639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
639 |
|
Cumulative
effect of adoption of a new accounting principle on January 1,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(351
|
) |
|
|
|
|
|
|
|
|
|
|
(351
|
) |
Dividends
paid on common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,265
|
) |
|
|
|
|
|
|
|
|
|
|
(8,265
|
) |
Purchase
of 6,713 shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(132
|
) |
|
|
|
|
|
|
(132
|
) |
Stock
dividend
|
|
|
|
|
|
|
824 |
|
|
|
13,422 |
|
|
|
(14,246
|
) |
|
|
|
|
|
|
|
|
|
|
– |
|
Balance
at December 31, 2008
|
|
|
|
|
|
$ |
19,695 |
|
|
$ |
131,112 |
|
|
$ |
34,021 |
|
|
$ |
(23,115 |
) |
|
$ |
(1,096 |
) |
|
$ |
160,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOW
|
|
|
|
(in
thousands)
|
|
Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
30,696
|
|
|
$
|
16,684
|
|
|
$
|
15,002
|
|
Adjustments
to reconcile net income to net cash provided by
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,458
|
|
|
|
2,255
|
|
|
|
2,275
|
|
Amortization
of
premium
|
|
|
7,148
|
|
|
|
4,952
|
|
|
|
5,741
|
|
Accretion
of discount and loan
fees
|
|
|
(4,483
|
)
|
|
|
(2,667
|
)
|
|
|
(2,089
|
)
|
Provision
for loan
losses
|
|
|
13,675
|
|
|
|
2,351
|
|
|
|
1,080
|
|
Stock
compensation
expense
|
|
|
7
|
|
|
|
27
|
|
|
|
27
|
|
Increase
in interest
receivable
|
|
|
(4,561
|
)
|
|
|
(1,113
|
)
|
|
|
(806
|
)
|
(Increase)
decrease in other
assets
|
|
|
(1,596
|
)
|
|
|
2,405
|
|
|
|
(3,436
|
)
|
Net
change in deferred
taxes
|
|
|
(378
|
)
|
|
|
(532
|
)
|
|
|
(292
|
)
|
Increase
in interest
payable
|
|
|
468
|
|
|
|
259
|
|
|
|
931
|
|
(Decrease)
increase in other
liabilities
|
|
|
(5,324
|
)
|
|
|
(1,644
|
)
|
|
|
1,104
|
|
Decrease
in loans held for
sale
|
|
|
2,850
|
|
|
|
548
|
|
|
|
372
|
|
Gain
on sale of securities available for
sale
|
|
|
(12,334
|
)
|
|
|
(897
|
)
|
|
|
(743
|
)
|
Loss
(gain) on sale of
assets
|
|
|
77
|
|
|
|
(41
|
)
|
|
|
5
|
|
Impairment
of other real estate
owned
|
|
|
–
|
|
|
|
13
|
|
|
|
–
|
|
Earnings
allocated to minority
interest
|
|
|
142
|
|
|
|
(2
|
)
|
|
|
–
|
|
Net
cash provided by operating
activities
|
|
|
28,845
|
|
|
|
22,598
|
|
|
|
19,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sales of investment securities available for sale
|
|
|
137,826
|
|
|
|
25,202
|
|
|
|
52,640
|
|
Proceeds
from sales of mortgage-backed securities available for
sale
|
|
|
449,537
|
|
|
|
90,323
|
|
|
|
75,354
|
|
Proceeds
from maturities of investment securities available for
sale
|
|
|
86,790
|
|
|
|
95,890
|
|
|
|
24,460
|
|
Proceeds
from maturities of mortgage-backed securities available for
sale
|
|
|
127,008
|
|
|
|
102,584
|
|
|
|
107,029
|
|
Proceeds
from maturities of mortgage-backed securities held to
maturity
|
|
|
33,613
|
|
|
|
37,481
|
|
|
|
35,806
|
|
Proceeds
from maturities of investment securities held to maturity
|
|
|
–
|
|
|
|
900
|
|
|
|
–
|
|
Proceeds
from redemption of FHLB and FRB
stock
|
|
|
897
|
|
|
|
11,206
|
|
|
|
4,457
|
|
Proceeds
from sale of other
investments
|
|
|
–
|
|
|
|
44
|
|
|
|
–
|
|
Purchases
of investment securities available for sale
|
|
|
(381,801
|
)
|
|
|
(130,113
|
)
|
|
|
(55,155
|
)
|
Purchases
of investment securities held to
maturity
|
|
|
–
|
|
|
|
–
|
|
|
|
(1,348
|
)
|
Purchases
of mortgage-backed securities available for sale
|
|
|
(867,793
|
)
|
|
|
(254,613
|
)
|
|
|
(237,001
|
)
|
Purchases
of mortgage-backed securities held to maturity
|
|
|
(1,664
|
)
|
|
|
(2,180
|
)
|
|
|
(41,282
|
)
|
Purchases
of FHLB stock and other
investments
|
|
|
(20,454
|
)
|
|
|
(5,686
|
)
|
|
|
(1,346
|
)
|
Net
increase in
loans
|
|
|
(69,149
|
)
|
|
|
(96,898
|
)
|
|
|
(81,248
|
)
|
Net
cash paid in
acquisition
|
|
|
–
|
|
|
|
(32,030
|
)
|
|
|
–
|
|
Purchases
of premises and
equipment
|
|
|
(5,315
|
)
|
|
|
(4,581
|
)
|
|
|
(1,306
|
)
|
Proceeds
from sales of premises and
equipment
|
|
|
384
|
|
|
|
–
|
|
|
|
1
|
|
Proceeds
on bank owned life
insurance
|
|
|
713
|
|
|
|
–
|
|
|
|
–
|
|
Proceeds
from sales of other real estate
owned
|
|
|
515
|
|
|
|
334
|
|
|
|
514
|
|
Proceeds
from sales of repossessed
assets
|
|
|
3,465
|
|
|
|
439
|
|
|
|
426
|
|
Net
cash used in investing
activities
|
|
|
(505,428
|
)
|
|
|
(161,698
|
)
|
|
|
(117,999
|
)
|
(continued)
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOW (continued)
|
|
(in
thousands)
|
|
Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in demand and savings accounts
|
|
|
95,928
|
|
|
|
114,612
|
|
|
|
38,864
|
|
Net
(decrease) increase in certificates of deposit
|
|
|
(71,174
|
)
|
|
|
32,183
|
|
|
|
132,636
|
|
Net
increase (decrease) in federal funds purchased and repurchase
agreements
|
|
|
3,606
|
|
|
|
(4,901
|
)
|
|
|
3,275
|
|
Proceeds
from FHLB advances
|
|
|
15,498,447
|
|
|
|
7,908,163
|
|
|
|
7,456,291
|
|
Repayment
of FHLB advances
|
|
|
(15,053,612
|
)
|
|
|
(7,921,744
|
)
|
|
|
(7,525,355
|
)
|
Proceeds
from issuance of long-term debt
|
|
|
–
|
|
|
|
36,083
|
|
|
|
–
|
|
Net
capital contributions from minority interest investment in
consolidated entities
|
|
|
–
|
|
|
|
500
|
|
|
|
–
|
|
Net
capital distributions to minority interest investment in consolidated
entities
|
|
|
(168
|
)
|
|
|
–
|
|
|
|
–
|
|
Tax
benefit of incentive stock options
|
|
|
639
|
|
|
|
154
|
|
|
|
252
|
|
Purchase
of common stock
|
|
|
(132
|
)
|
|
|
(133
|
)
|
|
|
–
|
|
Proceeds
from the issuance of common stock
|
|
|
2,084
|
|
|
|
1,641
|
|
|
|
1,750
|
|
Dividends
paid
|
|
|
(8,265
|
)
|
|
|
(6,466
|
)
|
|
|
(5,702
|
)
|
Net
cash provided by financing activities
|
|
|
467,353
|
|
|
|
160,092
|
|
|
|
102,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(9,230
|
)
|
|
|
20,992
|
|
|
|
3,183
|
|
Cash
and cash equivalents at beginning of year
|
|
|
76,004
|
|
|
|
55,012
|
|
|
|
51,829
|
|
Cash
and cash equivalents at end of year
|
|
$
|
66,774
|
|
|
$
|
76,004
|
|
|
$
|
55,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES FOR CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
59,895
|
|
|
$
|
61,603
|
|
|
$
|
54,353
|
|
Income
taxes paid
|
|
$
|
11,525
|
|
|
$
|
4,200
|
|
|
$
|
3,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of other repossessed assets and real estate through
foreclosure
|
|
$
|
6,078
|
|
|
$
|
741
|
|
|
$
|
1,220
|
|
Adjustment
to initially apply SFAS 158
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
6,276
|
|
Adjustment
to pension liability
|
|
$
|
11,025
|
|
|
$
|
(1,707
|
)
|
|
$
|
(451
|
)
|
Payment
of 5% stock dividend
|
|
$
|
14,246
|
|
|
$
|
13,679
|
|
|
$
|
11,706
|
|
Unsettled
trades to purchase securities
|
|
$
|
–
|
|
|
$
|
(6,141
|
)
|
|
$
|
–
|
|
We
purchased all of the common stock of FWBS for $37.0 million during
2007. In conjunction with the acquisition, liabilities were assumed
as follows:
Fair
value of assets acquired
|
|
$
|
–
|
|
|
$
|
152,344
|
|
|
$
|
–
|
|
Cash
paid for the common stock
|
|
|
–
|
|
|
|
(36,956
|
)
|
|
|
–
|
|
Liabilities
assumed
|
|
$
|
–
|
|
|
$
|
115,388
|
|
|
$
|
–
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NOTES
TO FINANCIAL
STATEMENTS Southside
Bancshares, Inc. and Subsidiaries
|
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES
|
The
significant accounting and reporting policies of Southside Bancshares, Inc. (the
"Company"), and its wholly owned subsidiaries, Southside Delaware Financial
Corporation, Southside Bank (“Southside Bank”), FWBS, Fort Worth Bancorporation,
Inc., and the nonbank subsidiary, are summarized below.
Organization and Basis of
Presentation. The consolidated financial statements include
the accounts of Southside Bancshares, Inc., Southside Delaware Financial
Corporation, Southside Bank, Southside Financial Group and the nonbank
subsidiaries. We offer a full range of financial services to
commercial, industrial, financial and individual customers. All
significant intercompany accounts and transactions are eliminated in
consolidation. The preparation of these consolidated financial
statements in conformity with United States 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.
Cash
Equivalents. Cash equivalents, for purposes of reporting cash
flow, include cash, amounts due from banks and federal funds sold.
Basic and Diluted Earnings
per Common Share. Basic earnings per common share is based on
net income divided by the weighted-average number of common shares outstanding
during the period. Diluted earnings per common share include the
dilutive effect of stock options granted using the treasury stock
method. A reconciliation of the weighted-average shares used in
calculating basic earnings per common share and the weighted average common
shares used in calculating diluted earnings per common share for the reported
periods is provided in “Note 3 – Earnings Per Share.”
Comprehensive
Income. Comprehensive income includes all changes in
shareholders’ equity during a period, except those resulting from transactions
with shareholders. Besides net income, other components of
comprehensive income include the after tax effect of changes in the fair value
of securities available for sale and changes in the funded status of defined
benefit retirement plans. Comprehensive income is reported in the
accompanying consolidated statements of changes in shareholders’ equity and in
“Note 4 – Comprehensive Income (Loss).”
Loans. All
loans are stated at principal outstanding net of unearned discount and other
deferred expenses or fees. Interest income on loans is recognized
using the level yield method. Loans receivable that management has
the intent and ability to hold for the foreseeable future or until maturity or
pay-off are reported at their outstanding principal adjusted for any
charge-offs, the allowance for loan losses, and any unamortized deferred fees or
costs on originated loans and unamortized premiums or discounts on purchased
loans. A loan is considered impaired, based on current information
and events, if 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. Substantially all of our impaired loans are
collateral-dependent, and as such, are measured for impairment based on the fair
value of the collateral.
Loans Acquired Through
Transfer. Loans acquired through the completion of a transfer,
including loans acquired in a business combination, that have evidence of
deterioration of credit quality since origination and for which it is probable,
at acquisition, that we will be unable to collect all contractually required
payment receivable are initially recorded at fair value (as determined by the
present value of expected future cash flows) with no valuation allowance. The
difference between the undiscounted cash flows expected at acquisition and the
investment in the loan, or the “accretable yield,” is recognized as interest
income on a level-yield method over the life of the loan. Contractually required
payments for interest and principal that exceed the undiscounted cash flows
expected at acquisition, or the “non-accretable difference,” are not recognized
as a yield adjustment or as a loss accrual or a valuation allowance. Increases
in expected cash flows subsequent to the initial investment are recognized
prospectively through adjustment of the yield on the loan over its remaining
life. Decreases in expected cash flows are recognized as impairment.
Valuation
allowances
on these impaired loans reflect only losses incurred after the acquisition
(meaning the present value of all cash flows expected at acquisition that
ultimately are not to be received).
Loans Held For
Sale. Loans originated and intended for sale in the secondary
market are carried at the lower of aggregate cost or fair value, as determined
by aggregate outstanding commitments from investors or current investor yield
requirements. Net unrealized losses are recognized through a
valuation allowance by charges to income.
Gains or
losses on sales of mortgage loans are recognized based on the difference between
the selling price and the carrying value of the related mortgage loans
sold.
Loan
Fees. We treat loan fees, net of direct costs, as an
adjustment to the yield of the related loan over its term.
Allowance for Loan
Losses. An allowance for loan losses is provided through
charges to income in the form of a provision for loan losses. Loans
which management believes are uncollectible are charged against this account
with subsequent recoveries, if any, credited to the account. The
amount of the allowance for loan losses is determined by management's evaluation
of the quality and inherent risks in the loan portfolio, economic conditions and
other factors which warrant current recognition.
Nonaccrual
Loans. A loan is placed on nonaccrual when principal or
interest is contractually past due 90 days or more unless, in the determination
of management, the principal and interest on the loan are well collateralized
and in the process of collection. In addition, a loan is placed on
nonaccrual when, in the opinion of management, the future collectibility of
interest and principal is in serious doubt. When classified as
nonaccrual, accrued interest receivable on the loan is reversed and the future
accrual of interest is suspended. Payments of contractual interest
are recognized as income only to the extent that full recovery of the principal
balance of the loan is reasonably certain.
Other Real Estate
Owned. Other Real Estate Owned (“OREO”) includes real estate
acquired in full or partial settlement of loan obligations. OREO is
carried at the lower of (1) the recorded amount of the loan for which the
foreclosed property previously served as collateral or (2) the fair market value
of the property net of estimated selling costs. Prior to foreclosure,
the recorded amount of the loan is written down, if necessary, to the appraised
fair market value of the real estate to be acquired, less selling costs, by
charging the allowance for loan losses. Any subsequent reduction in
fair market value is charged to results of operations through the Allowance for
Losses on OREO account. Costs of maintaining and operating foreclosed properties
are expensed as incurred. Expenditures to complete or improve
foreclosed properties are capitalized only if expected to be recovered;
otherwise, they are expensed.
Securities. We
use the specific identification method to determine the basis for computing
realized gain or loss. We account for debt and equity securities as
follows:
Held to
Maturity (“HTM”). Debt securities that management has the positive
intent and ability to hold until maturity are classified as HTM and are carried
at their remaining unpaid principal balance, net of unamortized premiums or
unaccreted discounts. Premiums are amortized and discounts are
accreted using the level interest yield method over the estimated remaining term
of the underlying security.
Available
for Sale (“AFS”). Debt and equity securities that will be held for
indefinite periods of time, including securities that may be sold in response to
changes in market interest or prepayment rates, needs for liquidity and changes
in the availability of and the yield of alternative investments are classified
as AFS. These assets are carried at market value. Market
value is determined using published quotes as of the close of
business. If quoted market prices are not available, fair values are
based on quoted market prices for similar securities or estimates from
independent pricing services. Unrealized gains and losses on AFS
securities are excluded from earnings and reported net of tax in Accumulated
Other Comprehensive Income until realized.
Purchase
premiums and discounts are recognized in interest income using the interest
method over the terms of the securities. Declines in the fair value
of HTM and AFS securities below their cost that are deemed to be
other-than-temporary are reflected in earnings as realized losses. In
estimating other-than-temporary impairment losses, management considers (1) the
length of time and the extent to which the fair value has been less than cost,
(2) the financial condition and near-term prospects of the issuer, and (3) our
intent and ability to retain our investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value. Gains
and losses on the sale of securities are recorded on the trade date and are
determined using the specific identification method.
Securities
with limited marketability, such as stock in the FHLB, are carried at cost and
assessed for other-than-temporary impairment.
Premises and
Equipment. Bank premises and equipment are stated at cost, net
of accumulated depreciation. Depreciation is computed on a straight
line basis over the estimated useful lives of the related
assets. Useful lives are estimated to be 15 to 40 years for premises
and three to 10 years for equipment. Leasehold improvements are
generally depreciated over the lesser of the term of the respective leases or
the estimated useful lives of the improvements. Maintenance and
repairs are charged to income as incurred while major improvements and
replacements are capitalized.
Goodwill and Other
Intangibles. Intangible assets consist primarily of core
deposits and customer relationships. Intangible assets with definite useful
lives are amortized on an accelerated basis over their estimated life. Goodwill
and intangible assets that have indefinite useful lives are subject to at least
an annual impairment test and more frequently if a triggering event occurs. If
any such impairment is determined, a write-down is recorded.
Repurchase
Agreements. We sell certain securities under agreements to
repurchase. The agreements are treated as collateralized financing
transactions and the obligations to repurchase securities sold are reflected as
a liability in the accompanying consolidated balance sheets. The
dollar amount of the securities underlying the agreements remains in the asset
account.
Income
Taxes. We file a consolidated federal income tax
return. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of changes
in tax rates is recognized in income in the period the change
occurs.
Use of
Estimates. In preparing consolidated financial statements in
conformity with GAAP, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the allowance
for loan losses, assumptions used in the defined benefit plan, the fair values
of financial instruments, the status of contingencies are particularly subject
to change and significant assumptions used in periodic evaluation of securities
for other-than-temporary impairment.
Fair Value of Financial
Instruments. Fair values of financial instruments are
estimated using relevant market information and other
assumptions. Fair value estimates involve uncertainties and matters
of significant judgment. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
estimation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows.
Stock
Options. We adopted the provisions of SFAS 123R, “Share-Based
Payment (Revised 2004),” on January 1, 2006 using a modified version of
prospective application in accordance with SFAS 123R. Among other
things, SFAS 123R eliminates the ability to account for stock-based compensation
using Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued
to Employees,” and related
interpretations
and requires that such transactions be recognized as compensation cost in the
income statement based on their fair values on the date of the
grant.
Loss
Contingencies. Loss contingencies, including claims and legal
actions arising in the ordinary course of business are recorded as liabilities
when the likelihood of loss is probable and an amount or range of loss can be
reasonably estimated.
Trust
Assets. Assets of our trust department, other than cash on
deposit at Southside Bank, are not included in the accompanying financial
statements because they are not our assets.
General. Certain
prior period amounts have been reclassified to conform to current year
presentation and had no impact on net income, equity, or cash
flows.
Accounting
Pronouncements:
Statements
of Financial Accounting Standards (“SFAS”)
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 ARB No. 51, “Consolidated
Financial Statements,” to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for deconsolidation of a
subsidiary. SFAS 160 clarifies that a noncontrolling 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
noncontrolling 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 Financial Accounting Standards Board (“FASB”)
Statement No. 115.” SFAS 159, issued by the 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. The application of SFAS 157 in situations where
the market for a financial asset is not active
was
clarified by the issuance of FASB Staff Position (“FSP”) No. SFAS 157-3,
“Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active,” in October 2008. FSP No. SFAS 157-3 became effective
for our interim financial statements as of September 30, 2008 and did not
significantly impact the methods by which we determine the fair value of our
financial assets.
FASB
Staff Positions (“FSP”)
FSP No.
FAS 140-4 and FIN 46(R)-8, “Disclosure by Public Entities (Enterprises) about
Transfers of Financial Assets and Interests in Variable Interest
Entities.” On December 11, 2008 the FASB issued FSP 140-4 and
FIN 46(R)-8, which requires additional disclosure regarding Transfers of
Financial Assets and Variable Interest Entities. FSP 140-4 and FIN 46(R)-8
became effective for the first interim or annual reporting period ending after
December 15, 2008. We do not securitize our loans or other financial
assets, therefore, the portion of FSP in relation to FAS 140-4 did not have a
material impact on our consolidated financial statements. We included
additional disclosure in relation to our variable interest entity in our
consolidated financial statements. We adopted FSP No. FAS 140-4 and
FIN 46(R)-8 as of December 31, 2008. The adoption did not have a
material impact on our consolidated financial statements.
FSP
No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan
Assets.” FSP 132(R)-1
provides guidance related to an employer’s disclosures about plan assets of
defined benefit pension or other postretirement benefit plans. Under
FSP 132(R)-1, disclosures should provide users of financial statements with
an understanding of how investment allocation decisions are made, the factors
that are pertinent to an understanding of investment policies and strategies,
the major categories of plan assets, the inputs and valuation techniques used to
measure the fair value of plan assets, the effect of fair value measurements
using significant unobservable inputs on changes in plan assets for the period
and significant concentrations of risk within plan assets. The disclosures
required by FSP 132(R)-1 will be included in our consolidated financial
statements beginning with the financial statements for the year-ended
December 31, 2009.
FSP No. EITF 99-20-1, "Amendments to
the Impairment and Interest Income Measurement Guidance of EITF Issue No.
99-20." On January 12, 2009, the FASB issued FSP No. EITF 99-20-1. FSP EITF
99-20-1 changed the guidance for the determination of whether an impairment of certain
non-investment grade, beneficial interests in securitized financial assets is
considered other-than-temporary. The adoption of
FSP EITF 99-20-1, effective December 31, 2008, was applied and considered during
management's December 31, 2008 other-than-temporary impairment analysis and
conclusion.
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.
SEC Staff
Accounting Bulletins (“SAB”)
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.
2. MERGERS
AND ACQUISITIONS
The
acquisition described below was accounted for as a purchase transaction in
accordance with SFAS No. 141, “Business Combinations” with all cash
consideration funded through the issuance of $36.1 million of junior
subordinated debentures. The purchase price has been allocated to the
underlying assets and liabilities based on estimated fair values at the date of
acquisition. The operating results of the acquired company are
included with our results of operations since their date of
acquisition.
Fort Worth Bancshares,
Inc. On October 10, 2007, we acquired Fort Worth Bancshares,
Inc. (“FWBS”) and its wholly owned subsidiaries, Fort Worth Bancorporation, Inc.
and Fort Worth National Bank (“FWNB”). FWBS was a privately-held bank holding
company located in Fort Worth, Texas. We purchased all of the
outstanding shares for approximately $37.0 million. The purchase
price includes $36.7 million in cash and approximately $0.3 million in
acquisition-related costs.
The total
purchase price paid for the acquisition of FWBS was allocated based on the
estimated fair values of the assets acquired and liabilities assumed, as of the
acquisition date, as set forth below (in thousands).
|
|
FWBS
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$ |
4,926 |
|
Securities
available for
sale
|
|
|
5,544 |
|
FHLB
stock and other
investments
|
|
|
946 |
|
Loans
|
|
|
105,605 |
|
Premises
and
equipment
|
|
|
5,282 |
|
Core
deposit intangible
asset
|
|
|
2,047 |
|
Goodwill
|
|
|
21,639 |
|
Other
assets
|
|
|
6,355 |
|
Deposits
|
|
|
(100,930
|
) |
Other
borrowings
|
|
|
(11,858
|
) |
Other
liabilities
|
|
|
(2,600
|
) |
|
|
$ |
36,956 |
|
With this
acquisition, Tarrant County became our second largest lending market and third
largest deposit market.
3. EARNINGS
PER SHARE
Earnings
per share on a basic and diluted basis as required by SFAS No. 128, "Earnings
Per Share" (“SFAS 128”), has been adjusted to give retroactive recognition to
stock splits and stock dividends and is calculated as follows (in thousands,
except per share amounts):
|
|
Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings and Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
30,696
|
|
|
$
|
16,684
|
|
|
$
|
15,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
basic shares
outstanding
|
|
|
13,891
|
|
|
|
13,711
|
|
|
|
13,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
2.21
|
|
|
$
|
1.22
|
|
|
$
|
1.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings and Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
30,696
|
|
|
$
|
16,684
|
|
|
$
|
15,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
basic shares
outstanding
|
|
|
13,891
|
|
|
|
13,711
|
|
|
|
13,519
|
|
Add:
Stock
options
|
|
|
309
|
|
|
|
406
|
|
|
|
519
|
|
Weighted-average
diluted shares
outstanding
|
|
|
14,200
|
|
|
|
14,117
|
|
|
|
14,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
2.16
|
|
|
$
|
1.18
|
|
|
$
|
1.07
|
|
For the
years ended December 31, 2008, 2007 and 2006, there were no antidilutive
options.
4. COMPREHENSIVE
INCOME (LOSS)
The
components of other comprehensive income (loss) as required by SFAS No. 130,
"Reporting Comprehensive Income” (“SFAS 130”) are as follows (in
thousands):
|
Year
Ended December 31, 2008
|
|
|
Before-Tax
|
|
Tax
(Expense)
|
|
Net-of-Tax
|
|
|
Amount
|
|
Benefit
|
|
Amount
|
|
Unrealized
gains on securities:
|
|
|
|
|
|
|
Unrealized
holding gains arising during period
|
|
$ |
28,805 |
|
|
$ |
(10,125 |
) |
|
$ |
18,680 |
|
Less: reclassification
adjustment for gains realized in net income
|
|
|
12,334 |
|
|
|
(4,317
|
) |
|
|
8,017 |
|
Net
unrealized gains on securities
|
|
|
16,471 |
|
|
|
(5,808
|
) |
|
|
10,663 |
|
Change
in pension plans
|
|
|
(11,025
|
) |
|
|
3,973 |
|
|
|
(7,052
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
$ |
5,446 |
|
|
$ |
(1,835 |
) |
|
$ |
3,611 |
|
|
Year
Ended December 31, 2007
|
|
|
Before-Tax
|
|
Tax
(Expense)
|
|
Net-of-Tax
|
|
|
Amount
|
|
Benefit
|
|
Amount
|
|
Unrealized
gains on securities:
|
|
|
|
|
|
|
Unrealized
holding gains arising during period
|
|
$ |
14,064 |
|
|
$ |
(4,781 |
) |
|
$ |
9,283 |
|
Less: reclassification
adjustment for gains realized in net income
|
|
|
897 |
|
|
|
(305
|
) |
|
|
592 |
|
Net
unrealized gains on securities
|
|
|
13,167 |
|
|
|
(4,476
|
) |
|
|
8,691 |
|
Change
in pension plans
|
|
|
1,707 |
|
|
|
(581
|
) |
|
|
1,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
$ |
14,874 |
|
|
$ |
(5,057 |
) |
|
$ |
9,817 |
|
|
Year
Ended December 31, 2006
|
|
|
Before-
Tax
|
|
Tax
(Expense)
|
|
Net-of-Tax
|
|
|
Amount
|
|
Benefit
|
|
Amount
|
|
Unrealized
losses on securities:
|
|
|
|
|
|
|
Unrealized
holding losses arising during period
|
|
$ |
(2,110 |
) |
|
$ |
717 |
|
|
$ |
(1,393 |
) |
Less: reclassification
adjustment for gains realized in net income
|
|
|
743 |
|
|
|
(253
|
) |
|
|
490 |
|
Net
unrealized losses on securities
|
|
|
(2,853
|
) |
|
|
970 |
|
|
|
(1,883
|
) |
Change
in pension plans
|
|
|
451 |
|
|
|
(153
|
) |
|
|
298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss
|
|
$ |
(2,402 |
) |
|
$ |
817 |
|
|
$ |
(1,585 |
) |
The
components of accumulated other comprehensive loss as of December 31, 2008 and
2007, are reflected in the table below (in thousands):
|
|
Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on AFS securities
|
|
$ |
13,499 |
|
|
$ |
2,836 |
|
Net
unfunded liability for defined benefit plans
|
|
|
(14,595
|
) |
|
|
(7,543
|
) |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(1,096 |
) |
|
$ |
(4,707 |
) |
5.
|
CASH
AND DUE FROM BANKS
|
We are
required to maintain cash reserve balances with the Federal Reserve
Bank. The reserve balances were $250,000 as of December 31, 2008 and
2007.
The
amortized cost and estimated market value of investment and mortgage-backed
securities as of December 31, 2008 and 2007, are reflected in the tables below
(in thousands):
|
AVAILABLE
FOR SALE
|
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Market
|
|
December
31, 2008
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
$ |
5,008 |
|
|
$ |
23 |
|
|
$ |
– |
|
|
$ |
5,031 |
|
Government
Sponsored Enterprise Debentures
|
|
|
60,325 |
|
|
|
227 |
|
|
|
1 |
|
|
|
60,551 |
|
State
and Political Subdivisions
|
|
|
203,052 |
|
|
|
10,154 |
|
|
|
1,612 |
|
|
|
211,594 |
|
Other
Stocks and Bonds
|
|
|
6,711 |
|
|
|
– |
|
|
|
5,509 |
|
|
|
1,202 |
|
Mortgage-backed
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Agencies
|
|
|
166,123 |
|
|
|
2,405 |
|
|
|
229 |
|
|
|
168,299 |
|
Government
Sponsored Enterprises
|
|
|
841,737 |
|
|
|
17,984 |
|
|
|
1,507 |
|
|
|
858,214 |
|
Total
|
|
$ |
1,282,956 |
|
|
$ |
30,793 |
|
|
$ |
8,858 |
|
|
$ |
1,304,891 |
|
|
HELD
TO MATURITY
|
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Market
|
|
December
31, 2008
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Stocks and
Bonds
|
|
$ |
478 |
|
|
$ |
9 |
|
|
$ |
– |
|
|
$ |
487 |
|
Mortgage-backed
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government
Agencies
|
|
|
22,778 |
|
|
|
300 |
|
|
|
– |
|
|
|
23,078 |
|
Government
Sponsored
Enterprises
|
|
|
134,509 |
|
|
|
1,890 |
|
|
|
26 |
|
|
|
136,373 |
|
Total
|
|
$ |
157,765 |
|
|
$ |
2,199 |
|
|
$ |
26 |
|
|
$ |
159,938 |
|
|
|
AVAILABLE
FOR SALE
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
December
31, 2007
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
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 |
|
|
HELD
TO MATURITY
|
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Market
|
|
December
31, 2007
|
Cost
|
|
Gains
|
|
Losses
|
|
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
following table represents the unrealized loss on securities for the years ended
December 31, 2008 and 2007 (in thousands):
|
Less
Than 12 Months
|
|
More
Than 12 Months
|
|
Total
|
|
|
Fair
Value
|
|
Unrealized
Loss
|
|
Fair
Value
|
|
Unrealized
Loss
|
|
Fair
Value
|
|
Unrealized
Loss
|
|
As
of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
Sponsored Enterprise Debentures
|
|
$ |
29,999 |
|
|
$ |
1 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
29,999 |
|
|
$ |
1 |
|
State
and Political Subdivisions
|
|
|
45,686 |
|
|
|
1,496 |
|
|
|
1,193 |
|
|
|
116 |
|
|
|
46,879 |
|
|
|
1,612 |
|
Other
Stocks and Bonds
|
|
|
253 |
|
|
|
89 |
|
|
|
949 |
|
|
|
5,420 |
|
|
|
1,202 |
|
|
|
5,509 |
|
Mortgage-Backed
Securities
|
|
|
116,616 |
|
|
|
1,517 |
|
|
|
17,174 |
|
|
|
219 |
|
|
|
133,790 |
|
|
|
1,736 |
|
Total
|
|
$ |
192,554 |
|
|
$ |
3,103 |
|
|
$ |
19,316 |
|
|
$ |
5,755 |
|
|
$ |
211,870 |
|
|
$ |
8,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-Backed
Securities
|
|
$ |
1,212 |
|
|
$ |
1 |
|
|
$ |
4,540 |
|
|
$ |
25 |
|
|
$ |
5,752 |
|
|
$ |
26 |
|
Total
|
|
$ |
1,212 |
|
|
$ |
1 |
|
|
$ |
4,540 |
|
|
$ |
25 |
|
|
$ |
5,752 |
|
|
$ |
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
$ |
394 |
|
|
$ |
2 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
394 |
|
|
$ |
2 |
|
Government
Sponsored Enterprise Debentures
|
|
|
13,237 |
|
|
|
8 |
|
|
|
– |
|
|
|
– |
|
|
|
13,237 |
|
|
|
8 |
|
State
and Political Subdivisions
|
|
|
537 |
|
|
|
29 |
|
|
|
12,918 |
|
|
|
194 |
|
|
|
13,455 |
|
|
|
223 |
|
Other
Stocks and Bonds
|
|
|
3,332 |
|
|
|
254 |
|
|
|
3,707 |
|
|
|
293 |
|
|
|
7,039 |
|
|
|
547 |
|
Mortgage-Backed
Securities
|
|
|
71,071 |
|
|
|
154 |
|
|
|
146,458 |
|
|
|
1,852 |
|
|
|
217,529 |
|
|
|
2,006 |
|
Total
|
|
$ |
88,571 |
|
|
$ |
447 |
|
|
$ |
163,083 |
|
|
$ |
2,339 |
|
|
$ |
251,654 |
|
|
$ |
2,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-Backed
Securities
|
|
$ |
10,975 |
|
|
$ |
29 |
|
|
$ |
74,568 |
|
|
$ |
560 |
|
|
$ |
85,543 |
|
|
$ |
589 |
|
Total
|
|
$ |
10,975 |
|
|
$ |
29 |
|
|
$ |
74,568 |
|
|
$ |
560 |
|
|
$ |
85,543 |
|
|
$ |
589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declines
in the fair value of HTM and AFS securities below their cost that are deemed to
be other-than-temporary are reflected in earnings as realized losses. In
estimating other-than-temporary impairment losses, management considers, among
other things, (i) the length of time and the extent to which the fair value has
been less than cost, (ii) the financial condition and near-term prospects of the
issuer, and (iii) our intent and ability to retain our investment in the issuer
for a period of time sufficient to allow for any anticipated recovery in fair
value.
The
turmoil in the capital markets had a significant impact on our estimate of fair
value for certain of our securities. We believe the market values for
those securities (discussed below) are reflective of
illiquidity
as
opposed to credit impairment. At December 31, 2008, we have in AFS
Other Stocks and Bonds, $6.0 million cost basis in pooled trust preferred
securities (“TRUPs”). Those securities are structured products with
cash flows dependent upon securities issued by U.S. financial institutions,
including banks and insurance companies. Our estimate of fair value at December
31, 2008 is approximately $646,000 and reflects the market illiquidity. We
performed detailed cash flow modeling for each TRUP using an industry accepted
model. Prior to loading the required assumptions into the model we reviewed the
financial condition of each of the issuing banks that had not deferred or
defaulted as of December 31, 2008. In addition a base deferral assumption and
pessimistic deferral assumption was assigned to each issuing bank based on the
category in which it fell. Our analysis of the underlying cash flows
contemplated various default, deferral and recovery scenarios, and based on that
detailed analysis we have concluded that there is no other-than-temporary
impairment at December 31, 2008. Management considered other qualitative
factors, which included the credit rating and the severity and duration of the
mark-to-market loss. After considering these qualitative factors,
management believes the quantitative factors, including the detailed review of
the collateral and cash flow modeling outweigh the qualitative factors to
support the conclusion that there is no other-than-temporary impairment at
December 31, 2008. To the best of management’s knowledge, there were
no securities in our investment and mortgage-backed securities portfolio at
December 31, 2008 with an other-than-temporary impairment. We will
continue to update our assumptions and the resulting analysis each reporting
period to reflect changing market conditions.
During
2007, management determined that $4.8 million of whole loan mortgage-backed
securities, that represented the only nonagency collateralized mortgage-backed
securities, had an other-than-temporary impairment due to credit concerns at
December 31, 2007. The impairment charge recognized was $58,000 and
was reflected in gain (loss) on securities available for sale for the year ended
December 31, 2007.
Management
has the ability and intent to hold the securities classified as HTM until they
mature, at which time we will receive full value for the securities.
Furthermore, as of December 31, 2008, management also had the ability and intent
to hold the securities classified as AFS for a period of time sufficient for a
recovery of cost. The unrealized losses are largely due to increases in market
interest rates over the yields available at the time the underlying securities
were purchased. The fair value is expected to recover as the bonds approach
their maturity date or repricing date or if market yields for such investments
decline. Management does not believe any of the securities are impaired due to
reasons of credit quality.
Interest
income recognized on AFS and HTM securities for the years
presented:
|
|
Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
$
|
115
|
|
|
$
|
715
|
|
|
$
|
1,042
|
|
U.S.
Government
Agencies
|
|
|
690
|
|
|
|
671
|
|
|
|
337
|
|
State
and Political
Subdivisions
|
|
|
5,414
|
|
|
|
2,692
|
|
|
|
2,727
|
|
Other
Stocks and
Bonds
|
|
|
414
|
|
|
|
614
|
|
|
|
531
|
|
Mortgage-backed
Securities
|
|
|
55,470
|
|
|
|
43,767
|
|
|
|
44,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest income on
securities
|
|
$
|
62,103
|
|
|
$
|
48,459
|
|
|
$
|
49,038
|
|
There
were no securities transferred from AFS to HTM during 2007 and
2008. There were no sales from the HTM portfolio during the years
ended December 31, 2008, 2007 or 2006. There were $157.8 million and
$190.4 million of securities classified as HTM for the years ended December 31,
2008 and 2007, respectively.
Of the
$12.3 million in net securities gains from the AFS portfolio in 2008, there were
$12.5 million in realized gains and $0.2 million in realized
losses. Of the $0.9 million in net securities gains from the AFS
portfolio in 2007, there were $1.0 million in realized gains and $0.1 million in
realized losses. Of the $0.7
million
in net securities gains from the AFS portfolio in 2006, there were $1.6 million
in realized gains and $0.9 million in realized losses.
The
amortized cost and fair value of securities at December 31, 2008, are presented
below by contractual maturity. Expected maturities may differ from
contractual maturities because issuers may have the right to call or prepay
obligations. Mortgage-backed securities are presented in total by
category due to the fact that mortgage-backed securities typically are issued
with stated principal amounts, and the securities are backed by pools of
mortgages that have loans with varying maturities. The
characteristics of the underlying pool of mortgages, such as fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder. The term of a mortgage-backed pass-through security thus
approximates the term of the underlying mortgages and can vary significantly due
to prepayments.
|
|
December
31, 2008
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Available
for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities
|
|
|
|
|
|
|
Due
in one year or
less
|
|
$ |
67,490 |
|
|
$ |
67,743 |
|
Due
after one year through five years
|
|
|
13,739 |
|
|
|
13,953 |
|
Due
after five years through ten years
|
|
|
22,532 |
|
|
|
22,616 |
|
Due
after ten
years
|
|
|
171,335 |
|
|
|
174,066 |
|
|
|
|
275,096 |
|
|
|
278,378 |
|
Mortgage-backed
securities
|
|
|
1,007,860 |
|
|
|
1,026,513 |
|
Total
|
|
$ |
1,282,956 |
|
|
$ |
1,304,891 |
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Held
to maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities
|
|
|
|
|
|
|
Due
in one year or
less
|
|
$ |
– |
|
|
$ |
– |
|
Due
after one year through five years
|
|
|
– |
|
|
|
– |
|
Due
after five years through ten years
|
|
|
– |
|
|
|
– |
|
Due
after ten
years
|
|
|
478 |
|
|
|
487 |
|
|
|
|
478 |
|
|
|
487 |
|
Mortgage-backed
securities
|
|
|
157,287 |
|
|
|
159,451 |
|
Total
|
|
$ |
157,765 |
|
|
$ |
159,938 |
|
Investment
and mortgage-backed securities with book values of $952.6 million and $496.8
million were pledged as of December 31, 2008 and 2007, respectively, to
collateralize FHLB advances, repurchase agreements, public funds and trust
deposits or for other purposes as required by law.
Securities
with limited marketability, such as FHLB stock and other investments, are
carried at cost, which approximates its fair value and assessed for
other-than-temporary impairment. These securities have no maturity
date.
7.
|
LOANS
AND ALLOWANCE FOR PROBABLE LOAN
LOSSES
|
Loans in
the accompanying consolidated balance sheets are classified as
follows:
|
|
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
(in
thousands)
|
|
Real
Estate Loans:
|
|
|
|
|
|
Construction
|
|
$ |
120,153 |
|
|
$ |
107,397 |
|
1-4
family
residential
|
|
|
238,693 |
|
|
|
237,979 |
|
Other
|
|
|
184,629 |
|
|
|
200,148 |
|
Commercial
loans
|
|
|
165,558 |
|
|
|
154,171 |
|
Municipal
loans
|
|
|
134,986 |
|
|
|
112,523 |
|
Loans
to
individuals
|
|
|
178,530 |
|
|
|
149,012 |
|
Total
loans
|
|
|
1,022,549 |
|
|
|
961,230 |
|
Less: Allowance
for loan
losses
|
|
|
16,112 |
|
|
|
9,753 |
|
Net
loans
|
|
$ |
1,006,437 |
|
|
$ |
951,477 |
|
The
following is a summary of the Allowance for Loan Losses and Reserve for Unfunded
Loan Commitments for the years ended December 31, 2008, 2007 and
2006:
|
|
Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Allowance
For Loan Losses
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of
year
|
|
$
|
9,753
|
|
|
$
|
7,193
|
|
|
$
|
7,090
|
|
Provision
for loan
losses
|
|
|
13,675
|
|
|
|
2,351
|
|
|
|
1,080
|
|
Allowance
for loan losses
acquired
|
|
|
–
|
|
|
|
909
|
|
|
|
–
|
|
Loans
charged
off
|
|
|
(9,197
|
)
|
|
|
(2,747
|
)
|
|
|
(2,972
|
)
|
Recoveries
of loans charged
off
|
|
|
1,881
|
|
|
|
2,047
|
|
|
|
1,995
|
|
Balance
at end of
year
|
|
$
|
16,112
|
|
|
$
|
9,753
|
|
|
$
|
7,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
For Unfunded Loan Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of
year
|
|
$
|
50
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Provision
for losses on unfunded loan commitments
|
|
|
(43
|
)
|
|
|
50
|
|
|
|
–
|
|
Balance
at end of
year
|
|
$
|
7
|
|
|
$
|
50
|
|
|
$
|
–
|
|
Nonaccrual
loans at December 31, 2008 and 2007 were $14.3 million and $2.9 million,
respectively. Included in the nonaccrual loans at December 31, 2008
are SFG loans that total $3.6 million that were restructured and placed in
nonaccrual status. Loans with terms modified in troubled debt
restructuring at December 31, 2008 and 2007 were $148,000 and $225,000,
respectively.
For the
years ended December 31, 2008 and 2007, the average recorded investment in
impaired loans was approximately $6,458,000 and $1,749,000,
respectively.
The
amount of interest recognized on nonaccrual or restructured loans was $1.1
million, $102,000 and $113,000 for the years ended December 31, 2008, 2007 and
2006, respectively. If these loans had been accruing interest at
their original contracted rates, related income would have been $1.8 million,
$231,000 and $142,000 for the years ended December 31, 2008, 2007 and 2006,
respectively.
The
following is a summary of our recorded investment in loans (primarily nonaccrual
loans) for which impairment has been recognized in accordance with SFAS
114:
|
|
Total
|
|
|
Valuation
Allowance
|
|
|
Carrying
Value
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate
Loans
|
|
$
|
7,469
|
|
|
$
|
1,082
|
|
|
$
|
6,387
|
|
Loans
to
Individuals
|
|
|
6,003
|
|
|
|
2,259
|
|
|
|
3,744
|
|
Commercial
Loans
|
|
|
862
|
|
|
|
171
|
|
|
|
691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31,
2008
|
|
$
|
14,334
|
|
|
$
|
3,512
|
|
|
$
|
10,822
|
|
|
|
Total
|
|
|
Valuation
Allowance
|
|
|
Carrying
Value
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate
Loans
|
|
$
|
636
|
|
|
$
|
92
|
|
|
$
|
544
|
|
Loans
to
Individuals
|
|
|
2,230
|
|
|
|
396
|
|
|
|
1,834
|
|
Commercial
Loans
|
|
|
170
|
|
|
|
65
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31,
2007
|
|
$
|
3,036
|
|
|
$
|
553
|
|
|
$
|
2,483
|
|
The
balances of impaired loans included above with no valuation allowances were
approximately $6,000 and $14,000 at December 31, 2008 and 2007,
respectively.
8. PREMISES
AND EQUIPMENT
|
|
|
|
|
|
December
31,
|
|
December
31,
|
|
|
2008
|
|
2007
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
Premises
|
|
$ |
50,551 |
|
|
$ |
48,149 |
|
Furniture
and
equipment
|
|
|
21,213 |
|
|
|
18,837 |
|
|
|
|
71,764 |
|
|
|
66,986 |
|
Less:
accumulated
depreciation
|
|
|
29,042 |
|
|
|
26,737 |
|
Total
|
|
$ |
42,722 |
|
|
$ |
40,249 |
|
Depreciation
expense was $2.5 million, $2.3 million and $2.3 million for the years ended
December 31, 2008, 2007 and 2006, respectively.
9. GOODWILL
AND CORE DEPOSIT INTANGIBLE ASSETS
Goodwill. Goodwill
totaled $22.0 and $21.6 million at December 31, 2008 and 2007,
respectively. We recorded goodwill totaling $395,000 and $21.6
million in connection with the acquisition of FWBS as of December 31, 2008 and
2007, respectively. See “Note 2 – Mergers and Acquisition.”
We
measured our goodwill for impairment at December 31, 2008. As a
result of merging FWNB into Southside Bank in the third quarter of 2008, we have
identified Southside Bank as the sole operating segment and reporting unit for
our impairment assessment.
Step one
of the impairment test involves comparing the fair value of the reporting unit
which, in our case, is the entire entity, to the carrying value of the reporting
unit. If the fair value of the reporting unit is greater than the
carrying value of the reporting unit, no additional testing is required. If the
fair value of the reporting unit is less than the carrying value of the
reporting unit, step two of the impairment test must be
performed. At
December 31, 2008, the fair value of the reporting unit was greater than the
carrying value of the reporting unit. As a result, we did not record
any goodwill impairment for the year ended December 31, 2008.
During
the fourth quarter of 2007, we recorded core deposit intangibles totaling $2.0
million in connection with the acquisition of FWBS. Core deposit
intangibles are amortized on an accelerated basis over their estimated lives,
which range from four to 10 years. See “Note 2 – Mergers and
Acquisitions.”
Core Deposit
Intangibles. Core deposit intangible assets were as follows
(in thousands):
|
|
Gross
Intangible Assets
|
|
|
Accumulated
Amortization
|
|
|
Net
Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
Core
deposits
|
|
$
|
2,047
|
|
|
$
|
(568
|
)
|
|
$
|
1,479
|
|
|
|
$
|
2,047
|
|
|
$
|
(568
|
)
|
|
$
|
1,479
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
Core
deposits
|
|
$
|
2,047
|
|
|
$
|
(122
|
)
|
|
$
|
1,925
|
|
|
|
$
|
2,047
|
|
|
$
|
(122
|
)
|
|
$
|
1,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
year ended December 31, 2008 and 2007, amortization expense related to
intangible assets totaled $446,000 and $122,000, respectively. The
estimated aggregate future amortization expense for intangible assets remaining
as of December 31, 2008 is as follows (in thousands):
2009
|
$
|
383
|
2010
|
|
319
|
2011
|
|
255
|
2012
|
|
198
|
2013
|
|
146
|
Thereafter
|
|
178
|
|
$
|
1,479
|
10. OTHER
REAL ESTATE OWNED
For the
years ended December 31, 2008, 2007 and 2006, we did not have an allowance for
losses on OREO.
For the
years ended December 31, 2008 and 2007, the total of OREO was $318,000 and
$153,000, respectively. OREO is reflected in other assets in our
consolidated balance sheets.
For the
years ended December 31, 2008, 2007 and 2006, OREO properties expense exceeded
income by $257,000, $28,000 and $143,000, respectively.
11. INTEREST
BEARING DEPOSITS
|
|
December
31, 2008
|
|
|
December
31, 2007
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$ |
60,852 |
|
|
$ |
52,975 |
|
Money
market demand deposits
|
|
|
108,623 |
|
|
|
106,415 |
|
Platinum
money market deposits
|
|
|
163,055 |
|
|
|
163,310 |
|
NOW
demand deposits
|
|
|
280,854 |
|
|
|
228,496 |
|
Certificates
and other time deposits of $100,000 or more
|
|
|
288,047 |
|
|
|
257,095 |
|
Certificates
and other time deposits under $100,000
|
|
|
263,877 |
|
|
|
365,117 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,165,308 |
|
|
$ |
1,173,408 |
|
For the
years ended December 31, 2008, 2007 and 2006, interest expense on time deposits
of $100,000 or more was $10.0 million, $10.7 million and $7.8 million,
respectively.
At
December 31, 2008, the scheduled maturities of certificates and other time
deposits are as follows (in thousands):
2009
|
$
|
468,448
|
2010
|
|
44,476
|
2011
|
|
20,302
|
2012
|
|
14,547
|
2013
and thereafter
|
|
4,151
|
|
$
|
551,924
|
At
December 31, 2008, we had a total of $40.0 million in short-term brokered CDs
that represented 2.6% of our deposits. These brokered CDs mature
within the first six months of 2009 and are reflected in the CDs under $100,000
category. At December 31, 2007, we had $132.9 million in brokered
CDs. 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 current policy
allows for a maximum of $150 million in brokered CDs.
The
aggregate amount of demand deposit overdrafts that have been reclassified as
loans were $1.6 million and $1.9 million for December 31, 2008 and 2007,
respectively.
12. SHORT-TERM
BORROWINGS
Information
related to short-term borrowings is provided in the table below:
|
|
Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
Federal
funds purchased and repurchase agreements
|
|
|
|
|
|
|
Balance
at end of period
|
|
$ |
10,629 |
|
|
$ |
7,023 |
|
Average
amount outstanding during the period (1)
|
|
|
11,789 |
|
|
|
4,519 |
|
Maximum
amount outstanding during the period (3)
|
|
|
16,432 |
|
|
|
10,250 |
|
Weighted
average interest rate during the period (2)
|
|
|
3.7
|
% |
|
|
5.3
|
% |
Interest
rate at end of period
|
|
|
3.8
|
% |
|
|
4.7
|
% |
|
|
|
|
|
|
|
|
|
FHLB
advances
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
$ |
229,385 |
|
|
$ |
353,792 |
|
Average
amount outstanding during the period (1)
|
|
|
278,164 |
|
|
|
272,711 |
|
Maximum
amount outstanding during the period (3)
|
|
|
367,823 |
|
|
|
383,059 |
|
Weighted
average interest rate during the period (2)
|
|
|
3.1
|
% |
|
|
4.8
|
% |
Interest
rate at end of period
|
|
|
2.6
|
% |
|
|
4.1
|
% |
|
|
|
|
|
|
|
|
|
Other
obligations
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
$ |
1,857 |
|
|
$ |
2,500 |
|
Average
amount outstanding during the period (1)
|
|
|
942 |
|
|
|
772 |
|
Maximum
amount outstanding during the period (3)
|
|
|
2,500 |
|
|
|
2,500 |
|
Weighted
average interest rate during the period (2)
|
|
|
1.6
|
% |
|
|
5.0
|
% |
Interest
rate at end of period
|
|
|
– |
|
|
|
3.6
|
% |
|
(1)
|
The
average amount outstanding during the period was computed by dividing the
total daily outstanding principal balances by the number of days in the
period.
|
|
(2)
|
The
weighted average interest rate during the period was computed by dividing
the actual interest expense by the average balance outstanding during the
period.
|
|
(3)
|
The
maximum amount outstanding at any month-end during the
period.
|
Southside
Bank has four lines of credit for the purchase of federal
funds. 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. At December 31,
2008, the amount of additional funding Southside Bank could obtain from FHLB
using unpledged securities at FHLB was approximately $104 million, net of FHLB
stock purchases required. There were no federal funds purchased at
December 31, 2008 or 2007.
Securities
sold under agreements to repurchase are secured by short-term borrowings that
typically mature within one year. Securities sold under agreements to
repurchase are stated at the amount of cash received in connection with the
transaction. Securities sold under agreements to repurchase totaled
$10.6 million at December 31, 2008. There were $7.0 million sold
under agreements to repurchase at December 31, 2007.
13. LONG-TERM
OBLIGATIONS
|
|
Years
Ended December 31,
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
(dollars
in thousands)
|
|
|
FHLB
advances
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
$ |
655,489 |
|
|
|
$ |
86,247 |
|
|
Weighted
average interest rate during the period (1)
|
|
|
3.8 |
% |
|
|
|
4.6 |
% |
|
Interest
rate at end of period
|
|
|
3.6 |
% |
|
|
|
4.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt (2)
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
$ |
60,311 |
|
|
|
$ |
60,311 |
|
|
Weighted
average interest rate during the period (1)
|
|
|
6.7 |
% |
|
|
|
7.8 |
% |
|
Interest
rate at end of period
|
|
|
5.8 |
% |
|
|
|
7.2 |
% |
|
Maturities
of fixed rate long-term obligations based on scheduled repayments at December
31, 2008 are as follows (in thousands):
|
|
Under
1 Year
|
|
|
Due
1-5 Years
|
|
|
Due
6-10 Years
|
|
|
Over
10 Years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
advances
|
|
$ |
2,133 |
|
|
$ |
645,213 |
|
|
$ |
4,858 |
|
|
$ |
3,285 |
|
|
$ |
655,489 |
|
Long-term
debt
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
60,311 |
|
|
|
60,311 |
|
Total
long-term obligations
|
|
$ |
2,133 |
|
|
$ |
645,213 |
|
|
$ |
4,858 |
|
|
$ |
63,596 |
|
|
$ |
715,800 |
|
FHLB
advances represent borrowings with fixed interest rates ranging from 0.5% to
7.6% and with maturities of one to ten years. FHLB advances are
collateralized by FHLB stock, nonspecified real estate loans and mortgage-backed
securities.
|
|
Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Long-term
Debt
|
|
|
|
|
|
|
Southside
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 |
|
(1)
|
The
weighted average interest rate during the period was computed by dividing
the actual interest expense by the average balance outstanding during the
period.
|
(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 4.39875% through March 30, 2009 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 3.953% through February 22, 2009 and
adjusts quarterly at a rate equal to three-month LIBOR plus 180 basis
points.
|
The
long-term debt was $60.3 million for the years ended December 31, 2008 and
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 FWBS. In addition, as a result of the acquisition, we
assumed $3.6 million of junior subordinated debentures issued to Magnolia Trust
Company I.
14. EMPLOYEE
BENEFITS
Southside
Bank has a deferred compensation agreement with 18 of its executive officers,
which generally provides for payment of an aggregate amount of $8.4 million over
a maximum period of 15 years after retirement or death. Deferred
compensation expense was $1.2 million, $8,000 and $83,000 for the years ended
December 31, 2008, 2007 and 2006, respectively. For the years ended
December 31, 2008 and 2007, the deferred compensation plan liability totaled
$3.5 million and $2.3 million, respectively.
We
provide accident and health insurance for substantially all employees through a
self funded insurance program. Our healthcare plan was amended
December 2006 to eliminate retiree health insurance for all current employees
effective December 31, 2006. Effective July 31, 2007, the healthcare
plan no longer provides health insurance coverage for any current
retirees. The cost of health care benefits was $2.6 million, $3.0
million and $2.5 million for the years ended December 31, 2008, 2007 and 2006,
respectively. There were no retirees participating in the health
insurance plan as of December 31, 2008 and 2007.
We have
an Employee Stock Ownership Plan (the “ESOP”) which covers substantially all
employees. Contributions to the ESOP are at the sole discretion of
the board of directors. There was $250,000 contributed to the ESOP
for the year ended December 31, 2008. There were no contributions to the ESOP
for the years ended December 31, 2007 and 2006. At December 31, 2008
and 2007, 269,291 and 261,104 shares of common stock were owned by the ESOP,
respectively. The number of shares has been adjusted as a result of
stock splits and stock dividends. These shares are treated as
externally held shares for dividend and earnings per share
calculations.
We have
an officer’s long-term disability income policy which provides coverage in the
event they become disabled as defined under its terms. Individuals
are automatically covered under the policy if they (a) have been elected as an
officer, (b) have been an employee of Southside Bank for three years and (c)
receive earnings of $50,000 or more on an annual basis. The policy
provides, among other things, that should a covered individual become totally
disabled he would receive two-thirds of his current salary, not to exceed
$15,000 per month. The benefits paid out of the policy are limited by
the benefits paid to the individual under the terms of our other Company
sponsored benefit plans.
We
entered into split dollar agreements with eight of our executive
officers. The agreements provide we will be the beneficiary of bank
owned life insurance (“BOLI”) insuring the executives’ lives. The
agreements provide the executives the right to designate the beneficiaries of
the death benefits guaranteed in each agreement. The agreements
originally provided for death benefits of an initial aggregate amount of $4.5
million. The individual amounts are increased annually on the
anniversary date of the agreement by inflation adjustment factors ranging from
3% to 5%. As of December 31, 2008, the expected death benefits total
$5.2 million. The agreements also state that before and after the
executive’s retirement dates, we shall also pay an annual gross-up bonus to the
executive in an amount sufficient to enable the executive to pay federal income
tax on both the economic benefit and on the gross-up bonus. There was
no expense associated with the postretirement liability for the year ended
December 31, 2008. The expense required to record the postretirement
liability associated with the split dollar postretirement bonuses was $34,000
for the year ended December 31, 2007.
In
September 2006, the 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’ Account
for Postretirement Benefits Other Than Pensions.” 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. For the year ended December 31, 2008, the
split-dollar liability totaled $737,000.
We have a
defined benefit pension plan (“the Plan”) pursuant to which participants are
entitled to benefits based on final average monthly compensation and years of
credited service determined in accordance with plan provisions.
On
November 3, 2005, our board of directors approved amendments to the Plan which
affected future participation in the Plan and reduced the accrual of future
benefits.
Entrance
into the Plan by new employees was frozen effective December 31,
2005. Employees hired after December 31, 2005 are not eligible to
participate in the plan. All other employees are eligible to
participate under the plan on the first day of the month coincident with or next
following the first anniversary of hire. Employees are vested upon
the earlier of five years credited service or the employee attaining 60 years of
age. Benefits are payable monthly commencing on the later of age 65
or the participant’s date of retirement. Eligible participants may
retire at reduced benefit levels after reaching age 55. We contribute
amounts to the pension fund sufficient to satisfy funding requirements of the
Employee Retirement Income Security Act.
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 the defined benefit pension plan 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 plans at
December 31, 2008. 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 anticipated future
management 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
December 31, 2008, the weighted-average actuarial assumptions used to determine
the benefit obligation of the Plan were: a discount rate of 6.10%; 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.
Plan
assets included 158,915 shares of our stock at December 31, 2008 and
2007. Our stock included in Plan assets was purchased at fair market
value. The number of shares has been adjusted as a result of stock
splits and stock dividends. During 2008, our underfunded status
increased $5.4 million to an underfunded status of $5.9 million at December 31,
2008 from an underfunded status of $520,000 at December 31, 2007.
We have a
nonfunded supplemental retirement plan (the “Restoration Plan”) for our
employees whose benefits under the principal retirement plan are reduced because
of compensation deferral elections or limitations under federal tax
laws.
We use a
measurement date of December 31 for our plans.
|
|
2008
|
|
|
2007
|
|
|
|
Defined
Benefit
Pension
Plan
|
|
|
Restoration
Plan
|
|
|
Defined
Benefit
Pension
Plan
|
|
|
Restoration
Plan
|
|
|
|
(in
thousands)
|
|
Change
in Projected Benefit Obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at end of prior year
|
|
$ |
40,246 |
|
|
$ |
2,899 |
|
|
$ |
39,615 |
|
|
$ |
3,050 |
|
Service
cost
|
|
|
1,240 |
|
|
|
85 |
|
|
|
1,330 |
|
|
|
61 |
|
Interest
cost
|
|
|
2,424 |
|
|
|
228 |
|
|
|
2,313 |
|
|
|
168 |
|
Actuarial
loss (gain)
|
|
|
230 |
|
|
|
857 |
|
|
|
(1,892
|
) |
|
|
(300
|
) |
Benefits
paid
|
|
|
(1,255
|
) |
|
|
(80
|
) |
|
|
(1,028
|
) |
|
|
(80
|
) |
Expenses
paid
|
|
|
(104
|
) |
|
|
– |
|
|
|
(92
|
) |
|
|
– |
|
Benefit
obligation at end of year
|
|
|
42,781 |
|
|
|
3,989 |
|
|
|
40,246 |
|
|
|
2,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in Plan Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at end of prior year
|
|
|
39,726 |
|
|
|
– |
|
|
|
34,328 |
|
|
|
– |
|
Actual
return
|
|
|
(7,473
|
) |
|
|
– |
|
|
|
1,518 |
|
|
|
– |
|
Employer
contributions
|
|
|
6,000 |
|
|
|
80 |
|
|
|
5,000 |
|
|
|
80 |
|
Benefits
paid
|
|
|
(1,255
|
) |
|
|
(80
|
) |
|
|
(1,028
|
) |
|
|
(80
|
) |
Expenses
paid
|
|
|
(104
|
) |
|
|
– |
|
|
|
(92
|
) |
|
|
– |
|
Fair
value of plan assets at end of year
|
|
|
36,894 |
|
|
|
– |
|
|
|
39,726 |
|
|
|
– |
|
Funded
status at end of year
|
|
|
(5,887
|
) |
|
|
(3,989
|
) |
|
|
(520
|
) |
|
|
(2,899
|
) |
Accrued
benefit liability recognized
|
|
$ |
(5,887 |
) |
|
$ |
(3,989 |
) |
|
$ |
(520 |
) |
|
$ |
(2,899 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
benefit obligation at end of year
|
|
$ |
33,555 |
|
|
$ |
2,689 |
|
|
$ |
31,179 |
|
|
$ |
2,185 |
|
Amounts
related to our defined benefit pension and restoration plans recognized as a
component of other comprehensive income (loss) were as follows:
|
|
2008
|
|
|
|
Defined
Benefit
Pension
Plan
|
|
|
Restoration
Plan
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Recognition
of net
gain
|
|
$ |
417 |
|
|
$ |
152 |
|
Recognition
of prior service
cost
|
|
|
(42
|
) |
|
|
(2
|
) |
Net
loss occurring during the
year
|
|
|
(10,693
|
) |
|
|
(857
|
) |
Recognition
of transition
obligation
|
|
|
– |
|
|
|
– |
|
|
|
|
(10,318
|
) |
|
|
(707
|
) |
Deferred
tax
benefit
|
|
|
3,716 |
|
|
|
257 |
|
Other
comprehensive loss, net of
tax
|
|
$ |
(6,602 |
) |
|
$ |
(450 |
) |
Net
amounts recognized in net periodic benefit cost and other comprehensive income
(loss) as of December 31, 2008 were as follows:
|
|
2008
|
|
|
|
Defined
Benefit
Pension
Plan
|
|
|
Restoration
Plan
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
417 |
|
|
$ |
152 |
|
Prior
service
credit
|
|
|
(42
|
) |
|
|
(2
|
) |
|
|
|
375 |
|
|
|
150 |
|
Deferred
tax
benefit
|
|
|
(131
|
) |
|
|
(53
|
) |
Accumulated
other comprehensive loss, net of
tax
|
|
$ |
244 |
|
|
$ |
97 |
|
Amounts
recognized as a component of accumulated other comprehensive loss as of December
31, 2008 were as follows:
|
|
2008
|
|
|
|
Defined
Benefit
Pension
Plan
|
|
|
Restoration
Plan
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(21,329 |
) |
|
$ |
(1,683 |
) |
Prior
service
credit
|
|
|
548 |
|
|
|
10 |
|
|
|
|
(20,781
|
) |
|
|
(1,673
|
) |
Deferred
tax
benefit
|
|
|
7,273 |
|
|
|
586 |
|
Accumulated
other comprehensive loss, net of
tax
|
|
$ |
(13,508 |
) |
|
$ |
(1,087 |
) |
At
December 31, 2008 and 2007, the assumptions used to determine the benefit
obligation were as follows:
|
|
2008
|
|
|
2007
|
|
|
|
Defined
Benefit
Pension
Plan
|
|
|
Restoration
Plan
|
|
|
Defined
Benefit
Pension
Plan
|
|
|
Restoration
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.10
|
% |
|
|
6.10
|
% |
|
|
6.25
|
% |
|
|
6.25
|
% |
Compensation
increase rate
|
|
|
4.50
|
% |
|
|
4.50
|
% |
|
|
4.50
|
% |
|
|
4.50
|
% |
Net
periodic pension cost and postretirement benefit cost for the years ended
December 31, 2008, 2007 and 2006 included the following components:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Defined
Benefit Pension Plan
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
1,240
|
|
|
$
|
1,330
|
|
|
$
|
1,339
|
|
Interest
cost
|
|
|
2,424
|
|
|
|
2,313
|
|
|
|
2,190
|
|
Expected
return on assets
|
|
|
(2,990
|
)
|
|
|
(2,529
|
)
|
|
|
(2,324
|
)
|
Net
loss amortization
|
|
|
417
|
|
|
|
483
|
|
|
|
784
|
|
Prior
service credit amortization
|
|
|
(42
|
)
|
|
|
(42
|
)
|
|
|
(42
|
)
|
Net
periodic benefit cost
|
|
$
|
1,049
|
|
|
$
|
1,555
|
|
|
$
|
1,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restoration
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
85
|
|
|
$
|
61
|
|
|
$
|
68
|
|
Interest
cost
|
|
|
228
|
|
|
|
168
|
|
|
|
183
|
|
Transition
obligation recognition
|
|
|
–
|
|
|
|
3
|
|
|
|
3
|
|
Net
loss amortization
|
|
|
152
|
|
|
|
85
|
|
|
|
180
|
|
Prior
service credit amortization
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Net
periodic benefit cost
|
|
$
|
463
|
|
|
$
|
315
|
|
|
$
|
432
|
|
For the
years ended December 31, 2008, 2007, and 2006, the assumptions used to determine
net periodic pension cost and postretirement benefit cost were as
follows:
|
2008
|
|
2007
|
|
2006
|
Defined
Benefit Pension Plan
|
|
|
|
|
|
Discount
rate
|
6.25%
|
|
6.05%
|
|
|
5.625%
|
|
Expected
long-term rate of return on plan assets
|
7.50%
|
|
7.50%
|
|
|
7.875%
|
|
Compensation
increase rate
|
4.50%
|
|
4.50%
|
|
|
4.50%
|
|
|
|
|
|
|
|
|
|
Restoration
Plan
|
|
|
|
|
|
|
|
Discount
rate
|
6.25%
|
|
6.05%
|
|
|
5.625%
|
|
Compensation
increase rate
|
4.50%
|
|
4.50%
|
|
|
4.50%
|
|
The
amounts in accumulated other comprehensive loss that are expected to be
recognized as components of net periodic benefit cost during 2009 are as follows
(in thousands):
|
|
Defined
Benefit
|
|
|
Restoration
|
|
|
|
Pension
Plan
|
|
|
Plan
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
1,131 |
|
|
$ |
140 |
|
Prior
service credit
|
|
|
(42
|
) |
|
|
(2
|
) |
|
|
|
1,089 |
|
|
|
138 |
|
Deferred
tax
benefit
|
|
|
(381
|
) |
|
|
(48
|
) |
Other
comprehensive loss, net of tax
|
|
$ |
708 |
|
|
$ |
90 |
|
The asset
allocation for the defined benefit pension plan by asset category is as
follows:
|
Percentage
of Plan Assets
at
December 31,
|
|
|
2008
|
|
2007
|
|
Asset Category
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
51.1%
|
|
|
61.1%
|
|
Debt
securities
|
27.8%
|
|
|
26.8%
|
|
Cash
and cash equivalents
|
21.1%
|
|
|
12.1%
|
|
|
|
|
|
|
|
Total
|
100.0%
|
|
|
100.0%
|
|
We
attempt to invest Plan assets to employ investment strategies that achieve a
weighted average target asset allocation of 60% to 70% in equity securities, 30%
to 40% in fixed income and approximately 5% to 10% in cash. During
the fourth quarter of 2008, we made a contribution of $3.0 million in cash into
the Plan assets. In late December 2007, we made a contribution of
$2.0 million in cash into the Plan assets. This caused the asset
category percentages to fall outside the target asset allocations we attempt to
stay within as of December 31, 2008 and 2007.
As of
December 31, 2008, expected future benefit payments related to our defined
benefit pension plan and restoration plan were as follows (in
thousands):
|
|
Defined
Benefit Pension Plan
|
|
|
Restoration
Plan
|
|
2009
|
|
$ |
1,442 |
|
|
$ |
97 |
|
2010
|
|
|
1,565 |
|
|
|
108 |
|
2011
|
|
|
1,635 |
|
|
|
118 |
|
2012
|
|
|
1,880 |
|
|
|
232 |
|
2013
|
|
|
2,051 |
|
|
|
237 |
|
2014
through 2018
|
|
|
13,931 |
|
|
|
1,577 |
|
|
|
$ |
22,504 |
|
|
$ |
2,369 |
|
We expect
to contribute $6.0 million to our defined benefit pension plan and $80,000 to
our postretirement benefit plan in 2009.
401(k)
Plan
We have a
401(k) defined contribution plan (the “401(k) Plan”) covering substantially all
employees, who have completed one year of service and are age 21 or
older. A participant may elect to defer a percentage of their
compensation subject to certain limits based on federal tax laws. For
the years ended December 31, 2008, 2007 and 2006, expense attributable to the
401(k) Plan amounted to $117,000, $77,000 and $70,000,
respectively.
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 options as of December 31, 2008 is as
follows:
|
|
|
Weighted
|
|
|
Number
of
|
|
Average
Grant-
|
|
|
Options
|
|
Date
Fair Value
|
|
|
|
|
|
|
|
|
Nonvested
at beginning of the period
|
|
|
6,030 |
|
|
$ |
4.91 |
|
Vested
|
|
|
(6,030
|
) |
|
$ |
4.91 |
|
Nonvested
at end of period
|
|
|
– |
|
|
$ |
4.91 |
|
For the
year ended December 31, 2008 and 2007, we recorded approximately $7,000 and
$27,000, respectively, of stock-based compensation expense.
As of
December 31, 2008, there was no unrecognized compensation cost related to the
ISO Plan for nonvested options granted in March 2003. At December 31,
2007, there was $7,000 of total unrecognized cost.
The fair
value of each stock option granted is estimated on the date of grant using the
Black-Scholes method of option pricing with the following weighted-average
assumptions for grants in 2003: dividend yield of 1.93%; risk-free
interest rate of 4.93%; expected life of six years; and expected volatility of
28.90%.
Under the
ISO Plan, we were authorized to issue shares of common stock pursuant to
"Awards" granted in the form of incentive stock options (intended to qualify
under Section 422 of the Internal Revenue Code of 1986, as
amended). Before the ISO Plan expired, awards were granted to
selected employees and directors. No stock options have been
available for grant under the ISO Plan since its expiration in March
2003. Currently, we do not offer share-based payment programs to our
employees.
The ISO
Plan provided that the exercise price of any stock option not be less than the
fair market value of the common stock on the date of grant. The
outstanding stock options have contractual terms of 10 years. All
options vest on a graded schedule, 20% per year for five years, beginning on the
first anniversary date of the grant date.
A summary
of the status of our stock options as of December 31, 2008, and the changes
during the year ended 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
|
(182,934
|
)
|
$
|
5.68
|
|
|
|
|
|
Cancelled
|
–
|
|
$
|
–
|
|
|
|
|
|
Outstanding
at December 31,
2008
|
317,576
|
|
$
|
5.42
|
1.42
|
|
$
|
5,536
|
|
Exercisable
at December 31,
2008
|
317,576
|
|
$
|
5.42
|
1.42
|
|
$
|
5,536
|
|
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 years ended December 31, 2008, 2007 and 2006
were $2.9 million, $2.0 million and $2.5 million, respectively.
Cash
received from stock option exercises for the years ended December 31, 2008, 2007
and 2006 was $908,000, $587,000 and $828,000, respectively. The tax
benefit realized for the deductions related to the stock option exercises were
$639,000, $154,000 and $252,000 for the years ended December 31, 2008, 2007 and
2006, respectively.
15. FAIR
VALUE MEASUREMENT
Effective
January 1, 2008, we adopted the provisions of SFAS 157, "Fair Value
Measurements," for financial assets. In accordance with 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. The application of SFAS 157 in situations where the
market for a financial asset is not active was clarified by the issuance of FSP
No. SFAS 157-3, “Determining the Fair Value of a Financial Asset When the Market
for That Asset Is Not Active,” in October 2008. FSP No. SFAS 157-3
became effective for our interim financial statements as of September 30, 2008
and did not significantly impact the methods by which we determine the fair
value of our financial assets at December 31, 2008.
SFAS 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. SFAS 157 also requires an entity
to consider all aspects of nonperforming risk, including the entities own credit
standing when measuring fair value of a 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 primarily
consist of U. S. Treasuries, government sponsored enterprise debentures,
mortgage-backed securities, and municipal bonds and to a lesser
extent trust preferred securities and equity securities. We use
quoted market prices of identical assets on active exchanges, or Level 1
measurements where possible. Where such quoted market prices are not
available, we typically employ quoted market prices of similar instruments
(including matrix pricing) and/or discounted cash flows using observable inputs
to estimate a value of these securities, or Level 2
measurements. Discounted cash flow analyses are typically based on
market interest rates, prepayment speeds and/or option adjusted
spreads. Level 3 measurements include a range of fair value estimates
in the marketplace as a result of the illiquid market specific to the type of
security or discounted cash flow analyses based on assumptions that are not
readily observable in the market place. Such assumptions include
projections of future cash flows, including loss assumptions, and discount
rates.
Certain
financial assets are measured at fair value on a potentially recurring basis in
accordance with GAAP. Adjustments at fair value of these assets usually result
from the application of lower-of-cost-or-market accounting or write-downs of
individual assets.
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. At December 31,
2008, based on our estimates of fair value no valuation allowance was
recognized.
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 or appraisals. At December
31, 2008, the impact of loans with specific reserves based on the fair value of
the collateral were reflected in our allowance for loan losses.
Certain
non-financial assets and non-financial liabilities measured at fair value on a
recurring basis include reporting units measured at fair value in the first step
of a goodwill impairment test. Certain non-financial assets measured at fair
value on a non-recurring basis include non-financial assets and non-financial
liabilities measured at fair value in the second step of a goodwill impairment
test, as well as intangible assets and other non-financial long-lived assets
(such as real estate owned) are measured at fair value in the event of an
impairment. The framework prescribed by SFAS 157 will be applicable to
these fair value measurements beginning January 1, 2009.
The
following table summarizes financial assets and financial liabilities measured
at fair value on a recurring basis as of December 31, 2008, segregated by the
level of the valuation inputs within the fair value hierarchy utilized to
measure fair value (in thousands):
Securities
Available For Sale
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
|
Input
|
|
|
Input
|
|
|
Input
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
$ |
5,031 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
5,031 |
|
Government
Sponsored Enterprise Debentures
|
|
|
– |
|
|
|
60,551 |
|
|
|
– |
|
|
|
60,551 |
|
State
and Political Subdivisions
|
|
|
– |
|
|
|
211,594 |
|
|
|
– |
|
|
|
211,594 |
|
Other
Stocks and Bonds
|
|
|
556 |
|
|
|
– |
|
|
|
646 |
|
|
|
1,202 |
|
Mortgage-backed
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Agencies
|
|
|
– |
|
|
|
168,299 |
|
|
|
– |
|
|
|
168,299 |
|
Government
Sponsored Enterprise
|
|
|
– |
|
|
|
858,214 |
|
|
|
– |
|
|
|
858,214 |
|
Total
|
|
$ |
5,587 |
|
|
$ |
1,298,658 |
|
|
$ |
646 |
|
|
$ |
1,304,891 |
|
The
application of SFAS 157 in situations where the market for a financial
asset is not active was clarified by the issuance of FSP No.
SFAS 157-3, “Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active,” in October 2008. FSP
No. SFAS 157-3 became effective for our interim financial statements
as of September 30, 2008 and did not significantly impact the methods by
which we determine the fair value of our financial assets at December 31,
2008.
The
following table presents additional information about financial assets and
liabilities measured at fair value at December 31, 2008 on a recurring basis and
for which we have utilized Level 3 inputs to determine fair value (in
thousands):
|
|
|
|
|
|
Securities
Available
For
Sale
|
|
|
|
|
|
Beginning
Balance at January 1, 2008
|
|
$ |
– |
|
|
|
|
|
|
Total
gains or losses (realized/unrealized):
|
|
|
|
|
Included
in earnings (or changes in net assets)
|
|
|
– |
|
Included
in other comprehensive income (loss)
|
|
|
(5,354
|
) |
Purchases,
issuances and settlements
|
|
|
– |
|
Transfers
in and/or out of Level 3
|
|
|
6,000 |
|
Ending
Balance at December 31, 2008
|
|
$ |
646 |
|
|
|
|
|
|
The
amount of total gains or losses for the periods included in earnings (or
changes in net assets) attributable to the change in unrealized gains or
losses relating to assets still held at reporting date
|
|
|
– |
|
Statement
of Financial Accounting Standard No. 107, "Disclosures about Fair Value of
Financial Instruments" (“SFAS 107”), requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other estimation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Such techniques and
assumptions, as they apply to individual categories of our financial
instruments, are as follows:
|
Cash and cash
equivalents - The carrying amounts for cash and cash equivalents is
a reasonable estimate of those assets' fair
value.
|
Investment and mortgage-backed and
related securities - Fair values for these securities are based on quoted
market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices for similar securities
or estimates from independent pricing services.
|
FHLB stock and other
investments - The carrying amount of FHLB stock is a reasonable
estimate of those assets’ fair
value.
|
|
Loans receivable - For
adjustable rate loans that reprice frequently and with no significant
change in credit risk, the carrying amounts are a reasonable estimate of
those assets' fair value. The fair value of fixed rate loans is
estimated by discounting the future cash flows using the current rates at
which similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities. Nonperforming loans are
estimated using discounted cash flow analyses or underlying value of the
collateral where applicable.
|
|
Deposit liabilities -
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount on demand at the reporting date, that is,
the carrying value. Fair values
for
|
fixed
rate certificates of deposits are estimated using a discounted cash flow
calculation that applies interest rates currently being offered for deposits of
similar remaining maturities.
|
Federal funds purchased and
repurchase agreements - Federal funds purchased and repurchase
agreements generally have an original term to maturity of one day and thus
are considered short-term borrowings. Consequently, their
carrying value is a reasonable estimate of fair
value.
|
|
FHLB advances - The
fair value of these advances is estimated by discounting the future cash
flows using rates at which advances would be made to borrowers with
similar credit ratings and for the same remaining
maturities.
|
|
Long-term debt - The
carrying amount for floating long-term debt is a reasonable estimate of
the debts’ fair value due to the fact the debt floats based on LIBOR and
resets quarterly. The carrying amount for the fixed rate
long-term debt is estimated by discounting future cash flows using rates
at which fixed rate long-term debt would be made to borrowers with similar
credit ratings and for the remaining
maturities.
|
The
following table presents our assets, liabilities, and unrecognized financial
instruments at both their respective carrying amounts and fair
value:
|
|
At
December 31, 2008
|
|
|
At
December 31, 2007
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Amount
|
|
|
Fair
Value
|
|
|
Amount
|
|
|
Fair
Value
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
66,774 |
|
|
$ |
66,774 |
|
|
$ |
76,004 |
|
|
$ |
76,004 |
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale, at estimated fair value
|
|
|
278,378 |
|
|
|
278,378 |
|
|
|
109,928 |
|
|
|
109,928 |
|
Held
to maturity, at cost
|
|
|
478 |
|
|
|
487 |
|
|
|
475 |
|
|
|
477 |
|
Mortgage-backed
and related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale, at estimated fair value
|
|
|
1,026,513 |
|
|
|
1,026,513 |
|
|
|
727,553 |
|
|
|
727,553 |
|
Held
to maturity, at cost
|
|
|
157,287 |
|
|
|
159,451 |
|
|
|
189,965 |
|
|
|
189,913 |
|
Federal
Home Loan Bank stock and
other
investments, at cost
|
|
|
41,476 |
|
|
|
41,476 |
|
|
|
21,919 |
|
|
|
21,919 |
|
Loans,
net of allowance for loan losses
|
|
|
1,006,437 |
|
|
|
1,023,794 |
|
|
|
951,477 |
|
|
|
964,502 |
|
Loans
held for sale
|
|
|
511 |
|
|
|
511 |
|
|
|
3,361 |
|
|
|
3,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
deposits
|
|
$ |
1,556,131 |
|
|
$ |
1,564,369 |
|
|
$ |
1,530,491 |
|
|
$ |
1,538,489 |
|
Federal
funds purchased and repurchase agreements
|
|
|
10,629 |
|
|
|
10,629 |
|
|
|
7,023 |
|
|
|
7,023 |
|
FHLB
advances
|
|
|
884,874 |
|
|
|
916,344 |
|
|
|
440,039 |
|
|
|
442,223 |
|
Long-term
debt
|
|
|
60,311 |
|
|
|
36,118 |
|
|
|
60,311 |
|
|
|
60,680 |
|
As
discussed earlier, the fair value estimate of financial instruments for which
quoted market prices are unavailable is dependent upon the assumptions
used. Consequently, those estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instruments. Accordingly, the aggregate
fair value amounts presented in the above fair value table do not necessarily
represent our underlying value.
The
estimated fair value of our commitments to extend credit, credit card
arrangements and letters of credit, was not material at December 31, 2008 or
2007.
16. SHAREHOLDERS'
EQUITY
Cash
dividends declared and paid were $0.60, $0.50 and $0.47 per share for the years
ended December 31, 2008, 2007 and 2006, respectively. Future
dividends will depend on our earnings, financial condition and other factors
which the board of directors considers to be relevant. Our dividend
policy requires that any cash dividend payments made not exceed consolidated
earnings for that year.
We are
subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on our
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, we must meet specific capital
guidelines that involve quantitative measures of our assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Our capital amounts and classification are also subject to
qualitative judgments by the regulators regarding components, risk weightings,
and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require us to
maintain minimum amounts and ratios (set forth in the table below) of Total and
Tier 1 Capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier 1 Capital (as defined) to average assets (as
defined). At December 31, 2008, we exceeded all regulatory minimum
capital requirements.
As of
December 31, 2008, the most recent notification from the FDIC categorized us as
well capitalized under the regulatory framework for prompt corrective
action. 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 table. There are no conditions or events since that
notification that management believes have changed the Company’s
category.
|
|
Actual
|
|
|
For
Capital Adequacy Purposes
|
|
|
To
Be Well Capitalized Under Prompt Corrective Actions
Provisions
|
|
|
|
Amount
|
|
Ratio
|
|
|
Amount
|
|
Ratio
|
|
|
Amount
|
|
Ratio
|
|
As
of December 31, 2008:
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
212,082
|
|
17.66
|
%
|
|
$
|
96,097
|
|
8.00
|
%
|
|
|
N/A
|
|
N/A
|
|
Southside
Bank Only
|
|
$
|
208,394
|
|
17.35
|
%
|
|
$
|
96,067
|
|
8.00
|
%
|
|
$
|
120,084
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
192,615
|
|
16.04
|
%
|
|
$
|
48,049
|
|
4.00
|
%
|
|
|
N/A
|
|
N/A
|
|
Southside
Bank Only
|
|
$
|
193,370
|
|
16.10
|
%
|
|
$
|
48,033
|
|
4.00
|
%
|
|
$
|
72,050
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Capital (to Average Assets) (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
192,615
|
|
7.48
|
%
|
|
$
|
103,036
|
|
4.00
|
%
|
|
|
N/A
|
|
N/A
|
|
Southside
Bank Only
|
|
$
|
193,370
|
|
7.51
|
%
|
|
$
|
102,960
|
|
4.00
|
%
|
|
$
|
128,700
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
182,148
|
|
17.02
|
%
|
|
$
|
85,603
|
|
8.00
|
%
|
|
|
N/A
|
|
N/A
|
|
Southside
Bank Only
|
|
$
|
157,854
|
|
16.41
|
%
|
|
$
|
76,936
|
|
8.00
|
%
|
|
$
|
96,170
|
|
10.00
|
%
|
Fort
Worth National Bank Only
|
|
$
|
16,745
|
|
15.51
|
%
|
|
$
|
8,639
|
|
8.00
|
%
|
|
$
|
10,798
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
159,690
|
|
14.92
|
%
|
|
$
|
42,802
|
|
4.00
|
%
|
|
|
N/A
|
|
N/A
|
|
Southside
Bank Only
|
|
$
|
149,099
|
|
15.50
|
%
|
|
$
|
38,468
|
|
4.00
|
%
|
|
$
|
57,702
|
|
6.00
|
%
|
Fort
Worth National Bank Only
|
|
$
|
15,697
|
|
14.54
|
%
|
|
$
|
4,319
|
|
4.00
|
%
|
|
$
|
6,479
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Capital (to Average Assets) (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
159,690
|
|
7.73
|
%
|
|
$
|
82,625
|
|
4.00
|
%
|
|
|
N/A
|
|
N/A
|
|
Southside
Bank Only
|
|
$
|
149,099
|
|
7.67
|
%
|
|
$
|
77,797
|
|
4.00
|
%
|
|
$
|
97,246
|
|
5.00
|
%
|
Fort
Worth National Bank Only
|
|
$
|
15,697
|
|
13.13
|
%
|
|
$
|
4,783
|
|
4.00
|
%
|
|
$
|
5,979
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Refers
to quarterly average assets as calculated by bank regulatory
agencies.
Our
payment of dividends is limited under regulation. The amount that can
be paid in any calendar year without prior approval of our regulatory agencies
cannot exceed the lesser of net profits (as defined) for that year plus the net
profits for the preceding two calendar years, or retained earnings.
17. DIVIDEND
REINVESTMENT AND COMMON STOCK REPURCHASE PLAN
We have a
Dividend Reinvestment Plan funded by stock authorized but not yet
issued. Proceeds from the sale of the common stock will be used for
general corporate purposes and could be directed to our
subsidiaries. For the year ended December 31, 2008, 49,273 shares
were sold under this plan at an average price of $21.19 per share, reflective of
other trades at the time of each sale. For the year ended December
31, 2007, 42,752 shares were sold under this plan at an average price of $21.56
per share, reflective of other trades at the time of each sale.
We
instituted a Common Stock Repurchase Plan in late 1994. Under the repurchase
plan, our board of directors establishes, on a quarterly basis, total dollar
limitations and price per share for stock to be repurchased. Our
board reviews this plan in conjunction with our capital needs and Southside Bank
and may, at their discretion, modify or discontinue the plan. During
2008, 6,713 shares of common stock were purchased under this plan at a cost of
$132,000. During 2007, 6,120 shares of common stock were purchased
under this plan at a cost of $133,000.
18. INCOME
TAXES
The
provisions for income taxes included in the accompanying statements of income
consist of the following (in thousands):
|
|
Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Current
tax provision
|
|
$
|
15,601
|
|
|
$
|
4,068
|
|
|
$
|
8,582
|
|
Deferred
tax benefit
|
|
|
(4,351
|
)
|
|
|
(92
|
)
|
|
|
(4,482
|
)
|
Provision
for tax expense charged to operations
|
|
$
|
11,250
|
|
|
$
|
3,976
|
|
|
$
|
4,100
|
|
The
components of the net deferred tax asset as of December 31, 2008 and 2007 are
summarized below (in thousands):
|
|
Assets
|
|
|
Liabilities
|
|
Writedowns
on OREO
|
|
$ |
108 |
|
|
|
|
Allowance
for loan losses
|
|
|
4,817 |
|
|
|
|
Retirement
and other benefit plans
|
|
|
|
|
|
|
(3,003
|
) |
Unrealized
gains on securities available for sale
|
|
|
|
|
|
|
(7,253
|
) |
Premises
and equipment
|
|
|
|
|
|
|
(312
|
) |
FHLB
stock dividends
|
|
|
|
|
|
|
(324
|
) |
Unfunded
status of defined benefit plan
|
|
|
7,859 |
|
|
|
|
|
State
Business Tax Credit
|
|
|
744 |
|
|
|
|
|
Other
|
|
|
216 |
|
|
|
|
|
Gross
deferred tax assets (liabilities)
|
|
|
13,744 |
|
|
|
(10,892
|
) |
|
|
|
|
|
|
|
|
|
Net
deferred tax asset at December 31, 2008
|
|
$ |
2,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Writedowns
on OREO
|
|
$ |
55 |
|
|
|
|
|
Allowance
for loan losses
|
|
|
3,139 |
|
|
|
|
|
Retirement
and other benefit plans
|
|
|
|
|
|
|
(1,740
|
) |
Unrealized
gains on securities available for sale
|
|
|
|
|
|
|
(1,434
|
) |
Premises
and equipment
|
|
|
|
|
|
|
(270
|
) |
FHLB
stock dividends
|
|
|
|
|
|
|
(295
|
) |
Unfunded
status of defined benefit plan
|
|
|
3,886 |
|
|
|
|
|
State
Business Tax Credit
|
|
|
762 |
|
|
|
|
|
Other
|
|
|
217 |
|
|
|
|
|
Gross
deferred tax assets (liabilities)
|
|
|
8,059 |
|
|
|
(3,739
|
) |
|
|
|
|
|
|
|
|
|
Net
deferred tax asset at December 31, 2007
|
|
$ |
4,320 |
|
|
|
|
|
A
reconciliation of tax at statutory rates and total tax expense is as follows
(dollars in thousands):
|
|
Years
Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
Amount
|
|
Percent
of Pre-Tax Income
|
|
Amount
|
|
Percent
of Pre-Tax Income
|
|
Amount
|
|
Percent
of Pre-Tax Income
|
|
|
|
|
|
Statutory
Tax
Expense
|
|
$
|
14,681
|
|
35.0
|
%
|
$
|
7,024
|
|
34.0
|
%
|
$
|
6,495
|
|
34.0
|
%
|
Increase
(Decrease) in Taxes from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
Exempt
Interest
|
|
|
(3,589
|
)
|
(8.6
|
%)
|
|
(2,470
|
)
|
(12.0
|
%)
|
|
(2,415
|
)
|
(12.6
|
%)
|
Increase
in statutory
rate
|
|
|
(33
|
)
|
(0.0
|
%)
|
|
–
|
|
–
|
|
|
–
|
|
–
|
|
State
Business Tax
Credit
|
|
|
–
|
|
–
|
|
|
(779
|
)
|
(3.8
|
%)
|
|
–
|
|
–
|
|
State
Business
Tax
|
|
|
10
|
|
0.0
|
%
|
|
106
|
|
0.5
|
%
|
|
–
|
|
–
|
|
Other
Net
|
|
|
181
|
|
0.4
|
%
|
|
95
|
|
0.5
|
%
|
|
20
|
|
0.1
|
%
|
Provision
for Tax Expense Charged to Operations
|
|
$
|
11,250
|
|
26.8
|
%
|
$
|
3,976
|
|
19.2
|
%
|
$
|
4,100
|
|
21.5
|
%
|
19. 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 $137.0 million and $127.2
million at December 31, 2008 and 2007, respectively. Each commitment
has a maturity date and the commitment expires on that date with the exception
of credit card and ready reserve commitments, which have no stated maturity
date. Unused commitments for credit card and ready reserve at
December 31, 2008 and 2007 were $9.0 million and $8.8 million, respectively, and
are reflected in the due after one year category. We had outstanding
standby letters of credit of $4.7 million and $5.1 million at December 31, 2008
and 2007, respectively.
The
scheduled maturities of unused commitments as of December 31, 2008 and 2007 were
as follows (in thousands):
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Unused
commitments:
|
|
|
|
|
|
|
Due
in one year or less
|
|
$ |
77,789 |
|
|
$ |
96,264 |
|
Due
after one year
|
|
|
59,214 |
|
|
|
30,954 |
|
Total
|
|
$ |
137,003 |
|
|
$ |
127,218 |
|
We apply
the same credit policies in making commitments and standby letters of credit as
we do for on-balance-sheet instruments. We evaluate each customer's
credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary, upon extension of credit is based on management's
credit evaluation of the borrower. Collateral held varies but may
include cash or cash equivalents, negotiable instruments, real estate, accounts
receivable, inventory, property, plant, and equipment.
Lease Commitments. We lease
certain branch facilities and office equipment under operating
leases. Rent expense for branch facilities was $1.0 million, $773,000
and $697,000 for the years ended December 31, 2008, 2007 and 2006,
respectively. Rent expense for leased equipment was $198,000,
$181,000 and $217,000 for the years ended December 31, 2008, 2007 and 2006,
respectively.
Future
minimum rental commitments due under non-cancelable operating leases at December
31, 2008 were as follows (in thousands):
2009
|
$
|
1,161
|
2010
|
|
1,053
|
2011
|
|
796
|
2012
|
|
490
|
2013
|
|
262
|
Thereafter
|
|
–
|
|
$
|
3,762
|
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 no
unsettled trades to sell securities at December 31, 2008 and
2007. There were no unsettled trades to purchase securities at
December 31, 2008. There were $6.1 million unsettled trades to
purchase securities at December 31, 2007.
Litigation. We are involved
with various 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 the financial position and
results of operations and our liquidity.
20. 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 December 31, 2008, the
total of SFG’s automobile loan portfolio, as reported in our Loans to
Individuals, was approximately $80.1 million. Southside Bank is the
sole provider of financing for SFG. As of December 31, 2008,
Southside Bank had extended credit of $76.5 million to finance SFG’s
activities.
Southside
Bank has no other explicit arrangements or implicit variable interests with
SFG. In accordance with FIN 46 (R), this extension of credit has been
eliminated for fully consolidated purposes.
21. SIGNIFICANT
GROUP CONCENTRATIONS OF CREDIT RISK
Although
we have a diversified loan portfolio, a significant portion of our loans are
collateralized by real estate. Repayment of these loans is in part
dependent upon the economic conditions in the market area. Part of
the risk associated with real estate loans has been mitigated since 43.9% of
this group represents loans collateralized by residential dwellings that are
primarily owner occupied. Losses on this type of loan have
historically been less than those on speculative properties. Many of
the remaining real estate loans are collateralized primarily with owner occupied
commercial real estate. The oil and gas industry remains a
significant component of the East Texas economy and as such the health of the
oil and gas industry has an effect on our business.
A
significant portion of our loan portfolio is dependent on the medical
community. Medical loan types include commercial loans and commercial
real estate loans. Collateral for these loans varies depending on the
type of loan and financial strength of the borrower. The primary
source of repayment for loans in the medical community is cash flow from
continuing operations. The medical community represents a
concentration of risk in our Commercial loan and Commercial Real Estate loan
portfolio. See “Item 1. Business – Market
Area.” We believe that risk in the medical community is mitigated
because it is spread among multiple practice types and multiple
specialties. Should the government change the amount it pays the
medical community through the various government health insurance programs or if
new government regulation impacts the profitability of the medical community,
the medical community could be adversely impacted which in turn could result in
higher default rates by borrowers in the medical industry.
The
mortgage-backed securities we hold consist almost exclusively of government
pass-through securities which are either directly or indirectly backed by the
full faith and credit of the United States Government or guaranteed by GSEs,
FNMA or Freddie Mac. GSEs are not backed by the full faith and credit
of the United States government.
22. PARENT
COMPANY FINANCIAL INFORMATION
Condensed
financial information for Southside Bancshares, Inc. (parent company only) was
as follows
(in
thousands, except share amounts):
CONDENSED
BALANCE SHEETS
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
1,479 |
|
|
$ |
5,694 |
|
Investment
in bank subsidiaries at equity in underlying net assets
|
|
|
213,190 |
|
|
|
180,993 |
|
Investment
in nonbank subsidiaries at equity in underlying net assets
|
|
|
1,567 |
|
|
|
1,717 |
|
Other
assets
|
|
|
1,422 |
|
|
|
1,021 |
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
217,658 |
|
|
$ |
189,425 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$ |
56,702 |
|
|
$ |
56,702 |
|
Other
liabilities
|
|
|
339 |
|
|
|
395 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
57,041 |
|
|
|
57,097 |
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock ($1.25 par, 20,000,000 shares authorized: 15,756,096 and 14,865,134
shares issued)
|
|
|
19,695 |
|
|
|
18,581 |
|
Paid-in
capital
|
|
|
131,112 |
|
|
|
115,250 |
|
Retained
earnings
|
|
|
34,021 |
|
|
|
26,187 |
|
Treasury
stock (1,731,570 and 1,724,857 shares, at cost)
|
|
|
(23,115
|
) |
|
|
(22,983
|
) |
Accumulated
other comprehensive loss
|
|
|
(1,096
|
) |
|
|
(4,707
|
) |
|
|
|
|
|
|
|
|
|
TOTAL
SHAREHOLDERS' EQUITY
|
|
|
160,617 |
|
|
|
132,328 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$ |
217,658 |
|
|
$ |
189,425 |
|
CONDENSED
STATEMENTS OF INCOME
|
|
Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
INCOME
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
from subsidiary
|
|
$
|
6,000
|
|
|
$
|
9,800
|
|
|
$
|
7,600
|
|
Interest
income
|
|
|
116
|
|
|
|
82
|
|
|
|
50
|
|
TOTAL
INCOME
|
|
|
6,116
|
|
|
|
9,882
|
|
|
|
7,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
3,869
|
|
|
|
2,726
|
|
|
|
1,681
|
|
Other
|
|
|
1,556
|
|
|
|
923
|
|
|
|
907
|
|
TOTAL
EXPENSE
|
|
|
5,425
|
|
|
|
3,649
|
|
|
|
2,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income tax expense
|
|
|
691
|
|
|
|
6,233
|
|
|
|
5,062
|
|
Income
tax benefit
|
|
|
1,864
|
|
|
|
1,213
|
|
|
|
863
|
|
Income
before equity in undistributed earnings of subsidiaries
|
|
|
2,555
|
|
|
|
7,446
|
|
|
|
5,925
|
|
Equity
in undistributed earnings of subsidiaries
|
|
|
28,141
|
|
|
|
9,238
|
|
|
|
9,077
|
|
NET
INCOME
|
|
$
|
30,696
|
|
|
$
|
16,684
|
|
|
$
|
15,002
|
|
CONDENSED
STATEMENTS OF CASH FLOW
|
|
Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
30,696
|
|
|
$
|
16,684
|
|
|
$
|
15,002
|
|
Adjustments
to reconcile net income to net cash provided by
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in undistributed earnings of subsidiaries
|
|
|
(28,141
|
)
|
|
|
(9,238
|
)
|
|
|
(9,077
|
)
|
(Increase)
decrease in other assets
|
|
|
(401
|
)
|
|
|
361
|
|
|
|
1,792
|
|
(Decrease)
increase in other liabilities
|
|
|
(56
|
)
|
|
|
368
|
|
|
|
12
|
|
Net
cash provided by operating activities
|
|
|
2,098
|
|
|
|
8,175
|
|
|
|
7,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid in acquisition
|
|
|
–
|
|
|
|
(36,956
|
)
|
|
|
–
|
|
Investment
in subsidiaries
|
|
|
–
|
|
|
|
(1,083
|
)
|
|
|
–
|
|
Net
cash used in investing activities
|
|
|
–
|
|
|
|
(38,039
|
)
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of common stock
|
|
|
(132
|
)
|
|
|
(133
|
)
|
|
|
–
|
|
Proceeds
from issuance of long-term debt
|
|
|
–
|
|
|
|
36,083
|
|
|
|
–
|
|
Proceeds
from issuance of common stock
|
|
|
2,084
|
|
|
|
1,641
|
|
|
|
1,750
|
|
Dividends
paid
|
|
|
(8,265
|
)
|
|
|
(6,466
|
)
|
|
|
(5,702
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(6,313
|
)
|
|
|
31,125
|
|
|
|
(3,952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(4,215
|
)
|
|
|
1,261
|
|
|
|
3,777
|
|
Cash
and cash equivalents at beginning of year
|
|
|
5,694
|
|
|
|
4,433
|
|
|
|
656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$
|
1,479
|
|
|
$
|
5,694
|
|
|
$
|
4,433
|
|
23.
QUARTERLY FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except per
share data)
|
|
2008
|
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
38,245 |
|
|
$ |
34,260 |
|
|
$ |
31,575 |
|
|
$ |
32,096 |
|
Interest
expense
|
|
|
15,505 |
|
|
|
14,452 |
|
|
|
13,680 |
|
|
|
16,726 |
|
Net
interest income
|
|
|
22,740 |
|
|
|
19,808 |
|
|
|
17,895 |
|
|
|
15,370 |
|
Provision
for loan losses
|
|
|
5,339 |
|
|
|
3,150 |
|
|
|
2,947 |
|
|
|
2,239 |
|
Noninterest
income
|
|
|
12,694 |
|
|
|
7,619 |
|
|
|
11,287 |
|
|
|
8,702 |
|
Noninterest
expense
|
|
|
15,875 |
|
|
|
15,787 |
|
|
|
14,481 |
|
|
|
14,351 |
|
Income
before income tax expense
|
|
|
14,220 |
|
|
|
8,490 |
|
|
|
11,754 |
|
|
|
7,482 |
|
Provision
for income tax expense
|
|
|
3,851 |
|
|
|
2,240 |
|
|
|
3,223 |
|
|
|
1,936 |
|
Net
income
|
|
|
10,369 |
|
|
|
6,250 |
|
|
|
8,531 |
|
|
|
5,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
$ |
0.74 |
|
|
$ |
0.45 |
|
|
$ |
0.62 |
|
|
$ |
0.40 |
|
Diluted:
|
|
$ |
0.73 |
|
|
$ |
0.44 |
|
|
$ |
0.60 |
|
|
$ |
0.39 |
|
|
|
2007
|
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
30,689 |
|
|
$ |
25,475 |
|
|
$ |
24,380 |
|
|
$ |
25,197 |
|
Interest
expense
|
|
|
17,133 |
|
|
|
15,240 |
|
|
|
14,319 |
|
|
|
15,171 |
|
Net
interest income
|
|
|
13,556 |
|
|
|
10,235 |
|
|
|
10,061 |
|
|
|
10,026 |
|
Provision
for loan losses
|
|
|
1,397 |
|
|
|
620 |
|
|
|
217 |
|
|
|
117 |
|
Noninterest
income
|
|
|
7,215 |
|
|
|
6,403 |
|
|
|
6,662 |
|
|
|
6,138 |
|
Noninterest
expense
|
|
|
13,051 |
|
|
|
11,542 |
|
|
|
11,456 |
|
|
|
11,236 |
|
Income
before income tax expense
|
|
|
6,323 |
|
|
|
4,476 |
|
|
|
5,050 |
|
|
|
4,811 |
|
Provision
for income tax expense
|
|
|
1,489 |
|
|
|
976 |
|
|
|
463 |
|
|
|
1,048 |
|
Net
income
|
|
|
4,834 |
|
|
|
3,500 |
|
|
|
4,587 |
|
|
|
3,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
$ |
0.35 |
|
|
$ |
0.26 |
|
|
$ |
0.33 |
|
|
$ |
0.28 |
|
Diluted:
|
|
$ |
0.34 |
|
|
$ |
0.25 |
|
|
$ |
0.32 |
|
|
$ |
0.27 |
|
127