UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended September 30, 2009
OR
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from ____________ to ____________
Commission
file number
0-12247
SOUTHSIDE BANCSHARES, INC.
(Exact
name of registrant as specified in its charter)
|
|
|
TEXAS
|
75-1848732
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
|
|
1201 S. Beckham, Tyler,
Texas
|
75701
|
(Address
of principal executive offices)
|
(Zip
Code)
|
903-531-7111
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes o No o
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 o
|
Accelerated
filer x
|
Non-accelerated
filer o
|
Smaller
reporting company o
|
(Do
not check if a smaller reporting company)
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
number of shares of the issuer's common stock, par value $1.25, outstanding as
of October 23, 2009 was 14,935,039 shares.
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
(in
thousands, except share amounts)
|
|
September
30,
|
|
|
December
31,
|
|
ASSETS
|
|
2009
|
|
|
2008
|
|
Cash
and due from banks
|
|
$ |
39,389 |
|
|
$ |
64,067 |
|
Interest
earning deposits
|
|
|
4,464 |
|
|
|
557 |
|
Federal
funds sold
|
|
|
- |
|
|
|
2,150 |
|
Total
cash and cash equivalents
|
|
|
43,853 |
|
|
|
66,774 |
|
Investment
securities:
|
|
|
|
|
|
|
|
|
Available
for sale, at estimated fair value
|
|
|
264,712 |
|
|
|
278,378 |
|
Held
to maturity, at cost
|
|
|
1,493 |
|
|
|
478 |
|
Mortgage-backed
and related securities:
|
|
|
|
|
|
|
|
|
Available
for sale, at estimated fair value
|
|
|
1,209,571 |
|
|
|
1,026,513 |
|
Held
to maturity, at cost
|
|
|
236,072 |
|
|
|
157,287 |
|
Federal
Home Loan Bank stock, at cost
|
|
|
36,838 |
|
|
|
39,411 |
|
Other
investments, at cost
|
|
|
2,065 |
|
|
|
2,065 |
|
Loans
held for sale
|
|
|
4,317 |
|
|
|
511 |
|
Loans:
|
|
|
|
|
|
|
|
|
Loans
|
|
|
1,015,724 |
|
|
|
1,022,549 |
|
Less: allowance
for loan loss
|
|
|
(18,445
|
) |
|
|
(16,112
|
) |
Net
Loans
|
|
|
997,279 |
|
|
|
1,006,437 |
|
Premises
and equipment, net
|
|
|
46,481 |
|
|
|
42,722 |
|
Goodwill
|
|
|
22,034 |
|
|
|
22,034 |
|
Other
intangible assets, net
|
|
|
1,186 |
|
|
|
1,479 |
|
Interest
receivable
|
|
|
15,545 |
|
|
|
16,352 |
|
Deferred
tax asset
|
|
|
- |
|
|
|
2,852 |
|
Other
assets
|
|
|
60,117 |
|
|
|
36,945 |
|
TOTAL
ASSETS
|
|
$ |
2,941,563 |
|
|
$ |
2,700,238 |
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest
bearing
|
|
$ |
375,509 |
|
|
$ |
390,823 |
|
Interest
bearing
|
|
|
1,411,739 |
|
|
|
1,165,308 |
|
Total
Deposits
|
|
|
1,787,248 |
|
|
|
1,556,131 |
|
Short-term
obligations:
|
|
|
|
|
|
|
|
|
Federal
funds purchased and repurchase agreements
|
|
|
46,983 |
|
|
|
10,629 |
|
FHLB
advances
|
|
|
219,597 |
|
|
|
229,385 |
|
Other
obligations
|
|
|
2,433 |
|
|
|
1,857 |
|
Total
Short-term obligations
|
|
|
269,013 |
|
|
|
241,871 |
|
Long-term
obligations:
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
|
595,207 |
|
|
|
655,489 |
|
Long-term
debt
|
|
|
60,311 |
|
|
|
60,311 |
|
Total
Long-term obligations
|
|
|
655,518 |
|
|
|
715,800 |
|
Deferred
tax liability
|
|
|
2,611 |
|
|
|
- |
|
Other
liabilities
|
|
|
23,804 |
|
|
|
25,347 |
|
TOTAL
LIABILITIES
|
|
|
2,738,194 |
|
|
|
2,539,149 |
|
|
|
|
|
|
|
|
|
|
Off-Balance-Sheet
Arrangements, Commitments and Contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
Common
stock - $1.25 par, 40,000,000 shares authorized, 16,697,300
shares
|
|
|
20,872 |
|
|
|
19,695 |
|
issued
in 2009 and 15,756,096 shares issued in 2008
|
|
|
|
|
|
|
|
|
Paid-in
capital
|
|
|
145,726 |
|
|
|
131,112 |
|
Retained
earnings
|
|
|
48,517 |
|
|
|
34,021 |
|
Treasury
stock (1,762,261 and 1,731,570 shares at cost)
|
|
|
(23,545
|
) |
|
|
(23,115
|
) |
Accumulated
other comprehensive income (loss)
|
|
|
11,095 |
|
|
|
(1,096
|
) |
TOTAL
SHAREHOLDERS' EQUITY
|
|
|
202,665 |
|
|
|
160,617 |
|
Noncontrolling
interest
|
|
|
704 |
|
|
|
472 |
|
TOTAL
EQUITY
|
|
|
203,369 |
|
|
|
161,089 |
|
TOTAL
LIABILITIES AND EQUITY
|
|
$ |
2,941,563 |
|
|
$ |
2,700,238 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
(UNAUDITED)
(in
thousands, except per share data)
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
17,121 |
|
|
$ |
18,029 |
|
|
$ |
53,316 |
|
|
$ |
54,092 |
|
Investment
securities – taxable
|
|
|
402 |
|
|
|
307 |
|
|
|
1,010 |
|
|
|
1,377 |
|
Investment
securities – tax-exempt
|
|
|
2,266 |
|
|
|
851 |
|
|
|
5,139 |
|
|
|
2,829 |
|
Mortgage-backed
and related securities
|
|
|
15,509 |
|
|
|
14,883 |
|
|
|
47,988 |
|
|
|
38,876 |
|
Federal
Home Loan Bank stock and other investments
|
|
|
43 |
|
|
|
180 |
|
|
|
195 |
|
|
|
656 |
|
Other
interest earning assets
|
|
|
58 |
|
|
|
10 |
|
|
|
138 |
|
|
|
101 |
|
Total
interest income
|
|
|
35,399 |
|
|
|
34,260 |
|
|
|
107,786 |
|
|
|
97,931 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
5,474 |
|
|
|
7,257 |
|
|
|
17,532 |
|
|
|
25,880 |
|
Short-term
obligations
|
|
|
1,020 |
|
|
|
1,986 |
|
|
|
3,355 |
|
|
|
7,125 |
|
Long-term
obligations
|
|
|
6,242 |
|
|
|
5,209 |
|
|
|
19,544 |
|
|
|
11,853 |
|
Total
interest expense
|
|
|
12,736 |
|
|
|
14,452 |
|
|
|
40,431 |
|
|
|
44,858 |
|
Net
interest income
|
|
|
22,663 |
|
|
|
19,808 |
|
|
|
67,355 |
|
|
|
53,073 |
|
Provision
for loan losses
|
|
|
2,973 |
|
|
|
3,150 |
|
|
|
9,980 |
|
|
|
8,336 |
|
Net
interest income after provision for loan losses
|
|
|
19,690 |
|
|
|
16,658 |
|
|
|
57,375 |
|
|
|
44,737 |
|
Noninterest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit
services
|
|
|
4,543 |
|
|
|
4,739 |
|
|
|
12,995 |
|
|
|
13,823 |
|
Gain
on sale of securities available for sale
|
|
|
6,706 |
|
|
|
822 |
|
|
|
26,413 |
|
|
|
6,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary impairment losses
|
|
|
- |
|
|
|
- |
|
|
|
(5,627
|
) |
|
|
- |
|
Portion
of gain (loss) recognized in other comprehensive income (before
taxes)
|
|
|
(993
|
) |
|
|
- |
|
|
|
3,197 |
|
|
|
- |
|
Net
impairment losses recognized in earnings
|
|
|
(993
|
) |
|
|
- |
|
|
|
(2,430
|
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of loans
|
|
|
392 |
|
|
|
239 |
|
|
|
1,274 |
|
|
|
1,551 |
|
Trust
income
|
|
|
693 |
|
|
|
678 |
|
|
|
1,830 |
|
|
|
1,890 |
|
Bank
owned life insurance income
|
|
|
325 |
|
|
|
314 |
|
|
|
1,362 |
|
|
|
1,382 |
|
Other
|
|
|
847 |
|
|
|
827 |
|
|
|
2,376 |
|
|
|
2,388 |
|
Total
noninterest income
|
|
|
12,513 |
|
|
|
7,619 |
|
|
|
43,820 |
|
|
|
27,608 |
|
Noninterest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
10,219 |
|
|
|
10,002 |
|
|
|
31,163 |
|
|
|
27,521 |
|
Occupancy
expense
|
|
|
1,701 |
|
|
|
1,449 |
|
|
|
4,684 |
|
|
|
4,264 |
|
Equipment
expense
|
|
|
453 |
|
|
|
327 |
|
|
|
1,242 |
|
|
|
968 |
|
Advertising,
travel & entertainment
|
|
|
546 |
|
|
|
447 |
|
|
|
1,549 |
|
|
|
1,407 |
|
ATM
and debit card expense
|
|
|
328 |
|
|
|
313 |
|
|
|
988 |
|
|
|
905 |
|
Director
fees
|
|
|
168 |
|
|
|
134 |
|
|
|
480 |
|
|
|
425 |
|
Supplies
|
|
|
254 |
|
|
|
201 |
|
|
|
672 |
|
|
|
584 |
|
Professional
fees
|
|
|
572 |
|
|
|
452 |
|
|
|
1,657 |
|
|
|
1,239 |
|
Postage
|
|
|
247 |
|
|
|
199 |
|
|
|
627 |
|
|
|
565 |
|
Telephone
and communications
|
|
|
409 |
|
|
|
270 |
|
|
|
1,053 |
|
|
|
785 |
|
FDIC
Insurance
|
|
|
719 |
|
|
|
220 |
|
|
|
3,180 |
|
|
|
688 |
|
Other
|
|
|
2,135 |
|
|
|
1,698 |
|
|
|
5,261 |
|
|
|
4,997 |
|
Total
noninterest expense
|
|
|
17,751 |
|
|
|
15,712 |
|
|
|
52,556 |
|
|
|
44,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income tax expense
|
|
|
14,452 |
|
|
|
8,565 |
|
|
|
48,639 |
|
|
|
27,997 |
|
Provision
for income tax expense
|
|
|
3,620 |
|
|
|
2,240 |
|
|
|
13,021 |
|
|
|
7,399 |
|
Net
income
|
|
|
10,832 |
|
|
|
6,325 |
|
|
|
35,618 |
|
|
|
20,598 |
|
Less:
Net income attributable to the noncontrolling interest
|
|
|
(335
|
) |
|
|
(75
|
) |
|
|
(1,599
|
) |
|
|
(271
|
) |
Net
income attributable to Southside Bancshares, Inc.
|
|
$ |
10,497 |
|
|
$ |
6,250 |
|
|
$ |
34,019 |
|
|
$ |
20,327 |
|
Earnings
per common share – basic
|
|
$ |
0.70 |
|
|
$ |
0.43 |
|
|
$ |
2.29 |
|
|
$ |
1.40 |
|
Earnings
per common share – diluted
|
|
$ |
0.70 |
|
|
$ |
0.42 |
|
|
$ |
2.27 |
|
|
$ |
1.36 |
|
Dividends
paid per common share
|
|
$ |
0.14 |
|
|
$ |
0.16 |
|
|
$ |
0.41 |
|
|
$ |
0.41 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
(in
thousands, except share amounts)
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
Common
Stock
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
$ |
19,695 |
|
|
$ |
18,581 |
|
Issuance
of common stock (232,226 shares in 2009 and 177,933 shares in
2008)
|
|
|
291 |
|
|
|
223 |
|
Stock
dividend
|
|
|
886 |
|
|
|
824 |
|
Balance,
end of period
|
|
|
20,872 |
|
|
|
19,628 |
|
Paid-in
capital
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
|
131,112 |
|
|
|
115,250 |
|
Issuance
of common stock (232,226 shares in 2009 and 177,933 shares in
2008)
|
|
|
1,426 |
|
|
|
1,344 |
|
Stock
compensation expense
|
|
|
– |
|
|
|
7 |
|
Tax
benefit of incentive stock options
|
|
|
547 |
|
|
|
410 |
|
Stock
dividend
|
|
|
12,641 |
|
|
|
13,422 |
|
Balance,
end of period
|
|
|
145,726 |
|
|
|
130,433 |
|
Retained
earnings
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
|
34,021 |
|
|
|
26,187 |
|
Net
income attributable to Southside Bancshares, Inc.
|
|
|
34,019 |
|
|
|
20,327 |
|
Cumulative
effect of adoption of a new accounting principle on January 1,
2008
|
|
|
– |
|
|
|
(351
|
) |
Dividends
paid on common stock
|
|
|
(5,996
|
) |
|
|
(5,608
|
) |
Stock
dividend
|
|
|
(13,527
|
) |
|
|
(14,246
|
) |
Balance,
end of period
|
|
|
48,517 |
|
|
|
26,309 |
|
Treasury
Stock
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
|
(23,115
|
) |
|
|
(22,983
|
) |
Purchase
of common stock (30,691 shares in 2009 and 6,713 shares in
2008)
|
|
|
(430
|
) |
|
|
(132
|
) |
Balance,
end of period
|
|
|
(23,545
|
) |
|
|
(23,115
|
) |
Accumulated
other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
|
(1,096
|
) |
|
|
(4,707
|
) |
Net
unrealized gains (losses) on available-for sale securities, net of
tax
|
|
|
29,192 |
|
|
|
(2,218
|
) |
Reclassification
adjustment for gains on sales of available-for-sale securities included in
net income, net of tax
|
|
|
(17,168
|
) |
|
|
(4,273
|
) |
Non-credit
portion of other-than-temporary impairment losses on
available-for-sale
|
|
|
|
|
|
|
|
|
securities,
net of tax
|
|
|
(2,078
|
) |
|
|
– |
|
Other-than-temporary
impairment charges on available-for-sale securities included
in
|
|
|
|
|
|
|
|
|
net
income, net of tax
|
|
|
1,579 |
|
|
|
– |
|
Adjustment
to net periodic benefit cost, net of tax
|
|
|
666 |
|
|
|
370 |
|
Net
change in accumulated other comprehensive income (loss)
|
|
|
12,191 |
|
|
|
(6,121
|
) |
Balance,
end of period
|
|
|
11,095 |
|
|
|
(10,828
|
) |
Total
shareholders’ equity
|
|
|
202,665 |
|
|
|
142,427 |
|
Noncontrolling
interest
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
|
472 |
|
|
|
498 |
|
Net
income attributable to noncontrolling interest
shareholders
|
|
|
1,599 |
|
|
|
271 |
|
Capital
distribution to noncontrolling interest shareholders
|
|
|
(1,367
|
) |
|
|
(584
|
) |
Balance,
end of period
|
|
|
704 |
|
|
|
185 |
|
Total
equity
|
|
$ |
203,369 |
|
|
$ |
142,612 |
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
35,618 |
|
|
$ |
20,598 |
|
Net
change in accumulated other comprehensive income (loss)
|
|
|
12,191 |
|
|
|
(6,121
|
) |
Total
comprehensive income
|
|
$ |
47,809 |
|
|
$ |
14,477 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in
thousands)
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$ |
35,618 |
|
|
$ |
20,598 |
|
Adjustments
to reconcile net income to net cash provided by
operations:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,101 |
|
|
|
1,820 |
|
Amortization
of premium
|
|
|
10,491 |
|
|
|
5,424 |
|
Accretion
of discount and loan fees
|
|
|
(2,933
|
) |
|
|
(2,579
|
) |
Provision
for loan losses
|
|
|
9,980 |
|
|
|
8,336 |
|
Stock
compensation expense
|
|
|
– |
|
|
|
7 |
|
Decrease
(increase) in interest receivable
|
|
|
807 |
|
|
|
(1,241
|
) |
Increase
in other assets
|
|
|
(799
|
) |
|
|
(2,751
|
) |
Net
change in deferred taxes
|
|
|
(1,116
|
) |
|
|
(867
|
) |
Decrease
in interest payable
|
|
|
(1,669
|
) |
|
|
(362
|
) |
(Decrease)
increase in other liabilities
|
|
|
(431
|
) |
|
|
1,384 |
|
(Increase)
decrease in loans held for sale
|
|
|
(3,806
|
) |
|
|
1,347 |
|
Gain
on sale of securities available for sale
|
|
|
(26,413
|
) |
|
|
(6,574
|
) |
Net
other-than-temporary impairment losses
|
|
|
2,430 |
|
|
|
– |
|
Loss
on sale of assets
|
|
|
– |
|
|
|
81 |
|
Loss
on disposal of assets
|
|
|
43 |
|
|
|
– |
|
Impairment
on other real estate owned
|
|
|
530 |
|
|
|
– |
|
Gain
on sale of other real estate owned
|
|
|
(18
|
) |
|
|
– |
|
Net
cash provided by operating activities
|
|
|
24,815 |
|
|
|
24,623 |
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from sales of investment securities available for sale
|
|
|
204,813 |
|
|
|
80,139 |
|
Proceeds
from sales of mortgage-backed securities available for
sale
|
|
|
512,458 |
|
|
|
251,236 |
|
Proceeds
from maturities of investment securities available for
sale
|
|
|
55,913 |
|
|
|
65,055 |
|
Proceeds
from maturities of mortgage-backed securities available for
sale
|
|
|
205,156 |
|
|
|
93,864 |
|
Proceeds
from maturities of mortgage-backed securities held to
maturity
|
|
|
40,338 |
|
|
|
25,770 |
|
Proceeds
from redemption of FHLB stock
|
|
|
3,141 |
|
|
|
897 |
|
Purchases
of investment securities available for sale
|
|
|
(231,078
|
) |
|
|
(151,318
|
) |
Purchases
of investment securities held to maturity
|
|
|
(1,014
|
) |
|
|
– |
|
Purchases
of mortgage-backed securities available for sale
|
|
|
(887,176
|
) |
|
|
(668,188
|
) |
Purchases
of mortgage-backed securities held to maturity
|
|
|
(119,611
|
) |
|
|
(1,664
|
) |
Purchases
of FHLB stock and other investments
|
|
|
(568
|
) |
|
|
(15,362
|
) |
Net
increase in loans
|
|
|
(5,070
|
) |
|
|
(33,870
|
) |
Purchases
of premises and equipment
|
|
|
(5,903
|
) |
|
|
(2,851
|
) |
Proceeds
from sales of premises and equipment
|
|
|
– |
|
|
|
367 |
|
Proceeds
on bank owned life insurance
|
|
|
1,086 |
|
|
|
713 |
|
Proceeds
from sales of other real estate owned
|
|
|
864 |
|
|
|
305 |
|
Proceeds
from sales of repossessed assets
|
|
|
2,003 |
|
|
|
2,870 |
|
Net
cash used in investing activities
|
|
|
(224,648
|
) |
|
|
(352,037
|
) |
The
accompanying notes are an integral part of these consolidated financial
statements.
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED)
(in
thousands)
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
Net
increase in demand and savings accounts
|
|
|
53,373
|
|
|
|
70,022
|
|
Net
increase (decrease) in certificates of deposit
|
|
|
162,784
|
|
|
|
(122,249
|
)
|
Net
increase in federal funds purchased and repurchase
agreements
|
|
|
36,354
|
|
|
|
3,921
|
|
Proceeds
from FHLB advances
|
|
|
5,249,074
|
|
|
|
13,874,696
|
|
Repayment
of FHLB advances
|
|
|
(5,319,144
|
)
|
|
|
(13,513,344
|
)
|
Net
capital distributions from non-controlling interest in consolidated
entities
|
|
|
(1,367
|
)
|
|
|
(584
|
)
|
Tax
benefit of incentive stock options
|
|
|
547
|
|
|
|
410
|
|
Purchase
of common stock
|
|
|
(430
|
)
|
|
|
(132
|
)
|
Proceeds
from the issuance of common stock
|
|
|
1,717
|
|
|
|
1,567
|
|
Dividends
paid
|
|
|
(5,996
|
)
|
|
|
(5,608
|
)
|
Net
cash provided by financing activities
|
|
|
176,912
|
|
|
|
308,699
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(22,921
|
)
|
|
|
(18,715
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
66,774
|
|
|
|
76,004
|
|
Cash
and cash equivalents at end of period
|
|
$
|
43,853
|
|
|
$
|
57,289
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES FOR CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
42,100
|
|
|
$
|
45,220
|
|
Income
taxes paid
|
|
|
12,500
|
|
|
|
8,125
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Acquisition
of other repossessed assets and real estate through
foreclosure
|
|
$
|
7,214
|
|
|
$
|
4,867
|
|
5%
stock dividend
|
|
|
13,527
|
|
|
|
14,246
|
|
Adjustment
to pension liability
|
|
|
(1,024
|
)
|
|
|
(393
|
)
|
Unsettled
trades to purchase securities
|
|
|
(2,158
|
)
|
|
|
(8,441
|
)
|
Unsettled
trades to sell securities
|
|
|
6,168
|
|
|
|
29,612
|
|
Unsettled
issuances of brokered CDs
|
|
|
14,875
|
|
|
|
–
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO
FINANCIAL STATEMENTS
1. Basis of
Presentation
In this
report, the words “the Company,” “we,” “us,” and “our” refer to the combined
entities of Southside Bancshares, Inc. and its subsidiaries. The
words “Southside” and “Southside Bancshares” refer to Southside Bancshares,
Inc. The words “Southside Bank” and “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). “FWBS” refers
to Fort Worth Bancshares, Inc., a bank holding company acquired by Southside of
which FWNB was a wholly-owned subsidiary. “SFG” refers to Southside
Financial Group, LLC, of which Southside owns a 50% interest and consolidates
for financial reporting.
The
consolidated balance sheet as of September 30, 2009, and the related
consolidated statements of income, equity and cash flows and notes to the
financial statements for the three and nine month periods ended September 30,
2009 and 2008 are unaudited; in the opinion of management, all adjustments
necessary for a fair presentation of such financial statements have been
included. Such adjustments consisted only of normal recurring
items. All significant intercompany accounts and transactions are
eliminated in consolidation. The preparation of these consolidated
financial statements in conformity with U.S. generally accepted accounting
principles (“GAAP”) requires the use of management’s estimates. These estimates
are subjective in nature and involve matters of judgment. Actual
amounts could differ from these estimates. We have evaluated
subsequent events for potential recognition and or disclosure through November
6, 2009, the date the consolidated financial statements included in this
Quarterly Report on Form 10-Q were issued.
The
Financial Accounting Standards Board’s (“FASB”) Accounting Standards
Codification (“ASC”) became effective on July 1, 2009. At that date, the
ASC became FASB’s officially recognized source of authoritative U.S. GAAP
applicable to all public and non-public non-governmental entities, superseding
existing FASB, American Institute of Certified Public Accountants (“AICPA”),
Emerging Issues Task Force (“EITF”) and related literature. Rules and
interpretive releases of the SEC under the authority of federal securities laws
are also sources of authoritative GAAP for SEC registrants. All other accounting
literature is considered non-authoritative. The switch to the ASC affects the
way companies refer to U.S. GAAP in financial statements and accounting
policies. Citing particular content in the ASC involves specifying the unique
numeric path to the content through the Topic, Subtopic, Section and Paragraph
structure.
Interim
results are not necessarily indicative of results for a full
year. These financial statements should be read in conjunction with
the financial statements and notes thereto in our Annual Report on Form 10-K for
the year ended December 31, 2008. All share data has been adjusted to
give retroactive recognition to stock splits and stock dividends. For
a description of our significant accounting and reporting policies, refer to
Note 1 of the Notes to Financial Statements in our Annual Report on Form 10-K
for the year ended December 31, 2008.
2. Earnings Per
Share
Earnings
per share attributable to Southside Bancshares, Inc. on a basic and diluted
basis has been adjusted to give retroactive recognition to stock splits and
stock dividends and is calculated as follows (in thousands, except per share
amounts):
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Basic
and Diluted Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income - Southside Bancshares, Inc.
|
|
$ |
10,497 |
|
|
$ |
6,250 |
|
|
$ |
34,019 |
|
|
$ |
20,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average
shares outstanding
|
|
|
14,911 |
|
|
|
14,623 |
|
|
|
14,843 |
|
|
|
14,552 |
|
Add: Stock
options
|
|
|
107 |
|
|
|
299 |
|
|
|
152 |
|
|
|
345 |
|
Diluted
weighted-average shares outstanding
|
|
|
15,018 |
|
|
|
14,922 |
|
|
|
14,995 |
|
|
|
14,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income - Southside Bancshares, Inc.
|
|
$ |
0.70 |
|
|
$ |
0.43 |
|
|
$ |
2.29 |
|
|
$ |
1.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income - Southside Bancshares, Inc.
|
|
$ |
0.70 |
|
|
$ |
0.42 |
|
|
$ |
2.27 |
|
|
$ |
1.36 |
|
For the
three and nine month periods ended September 30, 2009 and 2008, there were no
antidilutive options.
3. Comprehensive
Income(Loss)
The
components of other comprehensive income (loss) are as follows (in
thousands):
|
|
Nine
Months Ended September 30, 2009
|
|
|
|
Before-Tax
|
|
|
Tax
(Expense)
|
|
|
Net-of-Tax
|
|
|
|
Amount
|
|
|
Benefit
|
|
|
Amount
|
|
Unrealized
gains on securities:
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gains arising during period
|
|
$ |
44,911 |
|
|
$ |
(15,719 |
) |
|
$ |
29,192 |
|
Non
credit portion of other-than-temporary
impairment
losses on the AFS securities
|
|
|
(3,197
|
) |
|
|
1,119 |
|
|
|
(2,078
|
) |
Less: reclassification
adjustment for gains
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income
|
|
|
26,413 |
|
|
|
(9,245
|
) |
|
|
17,168 |
|
Less: other-than-temporary
impairment charges
on
AFS securities included in net income
|
|
|
(2,430
|
) |
|
|
851 |
|
|
|
(1,579
|
) |
Net
unrealized gains on securities
|
|
|
17,731 |
|
|
|
(6,206
|
) |
|
|
11,525 |
|
Change
in pension plans
|
|
|
1,024 |
|
|
|
(358
|
) |
|
|
666 |
|
Other
comprehensive income
|
|
$ |
18,755 |
|
|
$ |
(6,564 |
) |
|
$ |
12,191 |
|
|
Three
Months Ended September 30, 2009
|
|
|
Before-Tax
|
|
Tax
(Expense)
|
|
Net-of-Tax
|
|
|
Amount
|
|
Benefit
|
|
Amount
|
|
Unrealized
gains on securities:
|
|
|
|
|
|
|
Unrealized
holding gains arising during period
|
|
$ |
23,044 |
|
|
$ |
(8,066 |
) |
|
$ |
14,978 |
|
Less: reclassification
adjustment for gains
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income
|
|
|
6,706 |
|
|
|
(2,348
|
) |
|
|
4,358 |
|
Less:
other-than-temporary impairment charges
on
AFS securities included in net income
|
|
|
(993
|
) |
|
|
348 |
|
|
|
(645
|
) |
Net
unrealized gains on securities
|
|
|
17,331 |
|
|
|
(6,066
|
) |
|
|
11,265 |
|
Change
in pension plans
|
|
|
342 |
|
|
|
(120
|
) |
|
|
222 |
|
Other
comprehensive income
|
|
$ |
17,673 |
|
|
$ |
(6,186 |
) |
|
$ |
11,487 |
|
|
Nine
Months Ended September 30, 2008
|
|
|
Before-Tax
|
|
Tax
(Expense)
|
|
Net-of-Tax
|
|
|
Amount
|
|
Benefit
|
|
Amount
|
|
Unrealized
losses on securities:
|
|
|
|
|
|
|
Unrealized
holding losses arising during period
|
|
$ |
(3,346 |
) |
|
$ |
1,128 |
|
|
$ |
(2,218 |
) |
Less: reclassification
adjustment for gains
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income
|
|
|
6,574 |
|
|
|
(2,301
|
) |
|
|
4,273 |
|
Net
unrealized losses on securities
|
|
|
(9,920
|
) |
|
|
3,429 |
|
|
|
(6,491
|
) |
Change
in pension plans
|
|
|
393 |
|
|
|
(23
|
) |
|
|
370 |
|
Other
comprehensive loss
|
|
$ |
(9,527 |
) |
|
$ |
3,406 |
|
|
$ |
(6,121 |
) |
|
Three
Months Ended September 30, 2008
|
|
|
Before-Tax
|
|
Tax
(Expense)
|
|
Net-of-Tax
|
|
|
Amount
|
|
Benefit
|
|
Amount
|
|
Unrealized
losses on securities:
|
|
|
|
|
|
|
Unrealized
holding losses arising during period
|
|
$ |
(4,683 |
) |
|
$ |
1,639 |
|
|
$ |
(3,044 |
) |
Less: reclassification
adjustment for gains
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income
|
|
|
822 |
|
|
|
(288
|
) |
|
|
534 |
|
Net
unrealized losses on securities
|
|
|
(5,505
|
) |
|
|
1,927 |
|
|
|
(3,578
|
) |
Change
in pension plans
|
|
|
131 |
|
|
|
(46
|
) |
|
|
85 |
|
Other
comprehensive loss
|
|
$ |
(5,374 |
) |
|
$ |
1,881 |
|
|
$ |
(3,493 |
) |
4.
Securities
The
amortized cost and estimated market value of investment and mortgage-backed
securities as of September 30, 2009 and December 31, 2008, are reflected in the
tables below (in thousands):
|
|
September
30, 2009
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
Gross Unrealized Losses
|
|
Estimated
|
|
AVAILABLE FOR
SALE:
|
|
|
Cost
|
|
|
Gains
|
|
OTTI
|
|
Other
|
|
Market
Value
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
$
|
4,896
|
|
$
|
–
|
|
$
|
–
|
|
$
|
–
|
|
$
|
4,896
|
|
Government-Sponsored
Enterprise Debentures
|
|
|
40,446
|
|
|
–
|
|
|
–
|
|
|
1,074
|
|
|
39,372
|
|
State
and Political Subdivisions
|
|
|
208,547
|
|
|
11,315
|
|
|
–
|
|
|
195
|
|
|
219,667
|
|
Other
Stocks and Bonds
|
|
|
4,103
|
|
|
3
|
|
|
3,197
|
|
|
132
|
|
|
777
|
|
Mortgage-backed
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Agencies
|
|
|
104,025
|
|
|
4,585
|
|
|
–
|
|
|
74
|
|
|
108,536
|
|
Government-Sponsored
Enterprises
|
|
|
1,072,894
|
|
|
29,813
|
|
|
–
|
|
|
1,672
|
|
|
1,101,035
|
|
Total
|
|
$
|
1,434,911
|
|
$
|
45,716
|
|
$
|
3,197
|
|
$
|
3,147
|
|
$
|
1,474,283
|
|
|
|
September
30, 2009
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
Gross Unrealized Losses
|
|
Estimated
|
|
HELD TO
MATURITY:
|
|
|
Cost
|
|
|
Gains
|
|
OTTI
|
|
Other
|
|
Market
Value
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and Political Subdivisions
|
|
$
|
1,013
|
|
$
|
104
|
|
$
|
–
|
|
$
|
–
|
|
$
|
1,117
|
|
Other
Stocks and Bonds
|
|
|
480
|
|
|
15
|
|
|
–
|
|
|
–
|
|
|
495
|
|
Mortgage-backed
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Agencies
|
|
|
18,267
|
|
|
578
|
|
|
–
|
|
|
41
|
|
|
18,804
|
|
Government-Sponsored
Enterprises
|
|
|
217,805
|
|
|
6,872
|
|
|
–
|
|
|
7
|
|
|
224,670
|
|
Total
|
|
$
|
237,565
|
|
$
|
7,569
|
|
$
|
–
|
|
$
|
48
|
|
$
|
245,086
|
|
|
|
December
31, 2008
|
|
AVAILABLE
FOR SALE:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Estimated
Market 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 |
|
|
|
December
31, 2008
|
|
HELD
TO MATURITY:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Estimated
Market 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 |
|
The
following table represents the unrealized loss on securities for the nine months
ended September 30, 2009 and year ended December 31, 2008 (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 September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-Sponsored
Enterprise Debentures
|
|
$ |
39,372 |
|
|
$ |
1,074 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
39,372 |
|
|
$ |
1,074 |
|
State
and Political Subdivisions
|
|
|
1,606 |
|
|
|
62 |
|
|
|
3,722 |
|
|
|
133 |
|
|
|
5,328 |
|
|
|
195 |
|
Other
Stocks and Bonds
|
|
|
– |
|
|
|
– |
|
|
|
583 |
|
|
|
3,329 |
|
|
|
583 |
|
|
|
3,329 |
|
Mortgage-Backed
Securities
|
|
|
236,662 |
|
|
|
1,721 |
|
|
|
2,652 |
|
|
|
25 |
|
|
|
239,314 |
|
|
|
1,746 |
|
Total
|
|
$ |
277,640 |
|
|
$ |
2,857 |
|
|
$ |
6,957 |
|
|
$ |
3,487 |
|
|
$ |
284,597 |
|
|
$ |
6,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-Backed
Securities
|
|
$ |
2,042 |
|
|
$ |
48 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
2,042 |
|
|
$ |
48 |
|
Total
|
|
$ |
2,042 |
|
|
$ |
48 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
2,042 |
|
|
$ |
48 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 a combination of illiquidity and credit impairment. At
September 30, 2009 we have, in Available for Sale (“AFS”) Other Stocks and
Bonds, $3.6 million amortized 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 September 30,
2009 for the TRUPs is approximately $286,000 and reflects the market
illiquidity. With the exception of the TRUPs, to the best of
management’s knowledge and based on our consideration of the qualitative factors
associated with each security, there were no securities in our investment and
mortgage-backed securities portfolio at September 30, 2009 with an
other-than-temporary impairment.
Given the
facts and circumstances associated with the TRUPs we performed detailed cash
flow modeling for each TRUP using an industry-accepted cash flow model. Prior to
loading the required assumptions into the model we reviewed the financial
condition of each of the underlying issuing banks within the TRUP collateral
pool that had not deferred or defaulted as of September 30,
2009. Management’s best estimate of a 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 to arrive at our best estimate of cash
flows. Based on that detailed analysis, we have concluded that the
other-than-temporary impairment, which captures the credit component in
compliance with FASB ASC Topic 320, “Investments – Debt and Equity Securities,”
was estimated at $2.4 million at September 30, 2009 and the non credit charge to
other comprehensive income was estimated at $3.2
million. Therefore,
the carrying amount of the TRUPs was written down with $2.4 million recognized
in earnings as of September 30, 2009. The cash flow model assumptions
represent management’s best estimate and consider a variety of qualitative
factors, which include, among others, the credit rating downgrades, the severity
and duration of the mark-to-market loss, and the structural nuances of each
TRUP. Management believes that the detailed review of the collateral
and cash flow modeling support the conclusion that the TRUPs had an
other-than-temporary impairment at September 30, 2009. We will
continue to update our assumptions and the resulting analysis each reporting
period to reflect changing market conditions. Additionally, we do not
currently intend to sell the TRUPs and it is not more likely than not that we
will be required to sell the TRUPs before the anticipated recovery of their
amortized cost basis.
The table
below provides more detail on the TRUPs (dollars in thousands).
TRUP
|
|
|
Par
|
|
|
Credit
Loss
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Tranche
|
|
|
Credit
Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
$
|
2,000
|
|
$
|
770
|
|
$
|
1,230
|
|
$
|
214
|
|
|
C1
|
|
|
Ca
|
2
|
|
|
2,000
|
|
|
390
|
|
|
1,610
|
|
|
36
|
|
|
B1
|
|
|
Ca
|
3
|
|
|
2,000
|
|
|
1,270
|
|
|
730
|
|
|
36
|
|
|
B2
|
|
|
Ca
|
|
|
$
|
6,000
|
|
$
|
2,430
|
|
$
|
3,570
|
|
$
|
286
|
|
|
|
|
|
|
The
following table presents the impairment activity related to credit loss, which
is recognized in earnings, and the impairment activity related to all other
factors, which are recognized in other comprehensive income.
|
Nine
Months Ended September 30, 2009
|
|
|
Impairment
Related to Credit Loss
|
|
Impairment
Related to All Other Factors
|
|
Total
Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of the period
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
Charges
on securities for which other-than-temporary impairment charges were not
previously recognized
|
|
|
2,430 |
|
|
|
3,197 |
|
|
|
5,627 |
|
Additional
charges on securities for which other-than-temporary impairment charges
were previously recognized
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Balance,
end of the period
|
|
$ |
2,430 |
|
|
$ |
3,197 |
|
|
$ |
5,627 |
|
|
Three
Months Ended September 30,2009
|
|
|
Impairment
Related to Credit Loss
|
|
Impairment
Related to All Other Factors
|
|
Total
Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of the period
|
|
$ |
1,437 |
|
|
$ |
4,190 |
|
|
$ |
5,627 |
|
Charges
on securities for which other-than-temporary impairment charges were not
previously recognized
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Additional
charges on securities for which other-than-temporary impairment charges
were previously recognized
|
|
|
993 |
|
|
|
(993
|
) |
|
|
– |
|
Balance,
end of the period
|
|
$ |
2,430 |
|
|
$ |
3,197 |
|
|
$ |
5,627 |
|
There
were no securities transferred from AFS to Held to Maturity (“HTM”) during the
nine months ended September 30, 2009 and 2008. There were no sales
from the HTM portfolio during the nine months ended September 30, 2009 or
2008. There were $237.6 million of securities classified as HTM for
the nine months ended September 30, 2009 compared to $157.8 million of
securities classified as HTM for the year ended December 31, 2008.
Of the
$26.4 million in net securities gains from the AFS portfolio for the nine months
ended September 30, 2009, there were $26.5 million in realized gains and
$100,000 in realized losses. Of the $6.6 million in net securities
gains from the AFS portfolio for the nine months ended September 30, 2008, there
were $6.7 million in realized gains and $153,000 in realized
losses.
The
amortized cost and fair value of securities at September 30, 2009 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.
|
|
September
30, 2009
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Available
for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities
|
|
|
|
|
|
|
Due
in one year or less
|
|
$ |
8,975 |
|
|
$ |
9,035 |
|
Due
after one year through five years
|
|
|
8,356 |
|
|
|
8,651 |
|
Due
after five years through ten years
|
|
|
25,395 |
|
|
|
26,805 |
|
Due
after ten years
|
|
|
215,266 |
|
|
|
220,221 |
|
|
|
|
257,992 |
|
|
|
264,712 |
|
Mortgage-backed
securities
|
|
|
1,176,919 |
|
|
|
1,209,571 |
|
Total
|
|
$ |
1,434,911 |
|
|
$ |
1,474,283 |
|
|
|
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
|
|
|
480 |
|
|
|
495 |
|
Due
after ten years
|
|
|
1,013 |
|
|
|
1,117 |
|
|
|
|
1,493 |
|
|
|
1,612 |
|
Mortgage-backed
securities
|
|
|
236,072 |
|
|
|
243,474 |
|
Total
|
|
$ |
237,565 |
|
|
$ |
245,086 |
|
Investment
and mortgage-backed securities with book values of $990.1 million at September
30, 2009 and $952.6 million at December 31, 2008 were pledged to collateralize
Federal Home Loan Bank (“FHLB”) advances, repurchase agreements, public funds
and trust deposits or for other purposes as required by law.
5. Loans and Allowance for
Probable Loan Losses
The
following table sets forth loan totals by category for the periods presented (in
thousands):
|
At
|
|
|
At
|
|
|
September
30,
|
|
|
December
31,
|
|
|
2009
|
|
|
2008
|
|
Real
Estate Loans:
|
|
|
|
|
|
Construction
|
|
$ |
87,976 |
|
|
$ |
120,153 |
|
1-4
Family Residential
|
|
|
233,172 |
|
|
|
238,693 |
|
Other
|
|
|
208,187 |
|
|
|
184,629 |
|
Commercial
Loans
|
|
|
162,378 |
|
|
|
165,558 |
|
Municipal
Loans
|
|
|
144,450 |
|
|
|
134,986 |
|
Loans
to Individuals
|
|
|
179,561 |
|
|
|
178,530 |
|
Total
Loans
|
|
$ |
1,015,724 |
|
|
$ |
1,022,549 |
|
The
summaries of the Allowance for Loan Losses and Reserve for Unfunded Loan
Commitments are as follows (in thousands):
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Allowance
for Loan Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$ |
18,804 |
|
|
$ |
11,527 |
|
|
$ |
16,112 |
|
|
$ |
9,753 |
|
Provision
for loan losses
|
|
|
2,973 |
|
|
|
3,150 |
|
|
|
9,980 |
|
|
|
8,336 |
|
Loans
charged off
|
|
|
(3,860
|
) |
|
|
(2,258
|
) |
|
|
(9,029
|
) |
|
|
(6,658
|
) |
Recoveries
of loans charged off
|
|
|
528 |
|
|
|
509 |
|
|
|
1,382 |
|
|
|
1,497 |
|
Balance
at end of period
|
|
$ |
18,445 |
|
|
$ |
12,928 |
|
|
$ |
18,445 |
|
|
$ |
12,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
for Unfunded Loan Commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$ |
9 |
|
|
$ |
6 |
|
|
$ |
7 |
|
|
$ |
50 |
|
Provision
for losses on unfunded loan
commitments
|
|
|
(4
|
) |
|
|
– |
|
|
|
(2
|
) |
|
|
(44
|
) |
Balance
at end of period
|
|
$ |
5 |
|
|
$ |
6 |
|
|
$ |
5 |
|
|
$ |
6 |
|
6. Goodwill and Core Deposit
Intangible Assets
Goodwill. Goodwill
totaled $22.0 million at both September 30, 2009 and December 31,
2008.
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. As of
September 30, 2009, there were no trigger events to warrant an updated
impairment analysis.
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 ten years.
Core Deposit
Intangibles. Core deposit intangible assets were as follows
(in thousands):
|
|
Gross
Intangible Assets
|
|
|
Accumulated
Amortization
|
|
|
Net
Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2009
|
|
|
|
|
|
|
|
|
|
|
Core
deposits
|
|
$
|
2,047
|
|
|
$
|
(861
|
)
|
|
$
|
1,186
|
|
|
|
$
|
2,047
|
|
|
$
|
(861
|
)
|
|
$
|
1,186
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
Core
deposits
|
|
$
|
2,047
|
|
|
$
|
(568
|
)
|
|
$
|
1,479
|
|
|
|
$
|
2,047
|
|
|
$
|
(568
|
)
|
|
$
|
1,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
three and nine months ended September 30, 2009, amortization expense related to
intangible assets totaled $94,000 and $293,000, respectively. The
estimated aggregate future amortization expense for intangible assets remaining
as of September 30, 2009 is as follows (in thousands):
Remainder
of 2009
|
$
|
90
|
2010
|
|
319
|
2011
|
|
255
|
2012
|
|
198
|
2013
|
|
146
|
Thereafter
|
|
178
|
|
$
|
1,186
|
7.
Long-term
Obligations
Long-term
obligations are summarized as follows (in thousands):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
Federal
Home Loan Bank Advances (1)
|
|
|
|
|
|
|
Varying
maturities to 2028
|
|
$ |
595,207 |
|
|
$ |
655,489 |
|
|
|
|
|
|
|
|
|
|
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
|
|
$ |
655,518 |
|
|
$ |
715,800 |
|
(1) At
September 30, 2009, the weighted average cost of these advances was
3.60%.
|
(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 3.2225% through December 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 2.20688% through November 22, 2009 and
thereafter, adjusts quarterly at a rate equal to three-month LIBOR plus
180 basis points.
|
8. Employee Benefit
Plans
The
components of net periodic benefit cost are as follows (in
thousands):
|
|
Nine
Months Ended September 30,
|
|
|
|
Defined
Benefit
|
|
|
|
|
|
|
|
|
|
Pension
Plan
|
|
|
Restoration
Plan
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Service
cost
|
|
$
|
958
|
|
|
$
|
930
|
|
|
$
|
81
|
|
|
$
|
64
|
|
Interest
cost
|
|
|
1,927
|
|
|
|
1,818
|
|
|
|
203
|
|
|
|
171
|
|
Expected
return on assets
|
|
|
(2,159
|
)
|
|
|
(2,243
|
)
|
|
|
–
|
|
|
|
–
|
|
Net
loss recognition
|
|
|
900
|
|
|
|
313
|
|
|
|
157
|
|
|
|
114
|
|
Prior
service credit amortization
|
|
|
(31
|
)
|
|
|
(31
|
)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
Net
periodic benefit cost
|
|
$
|
1,595
|
|
|
$
|
787
|
|
|
$
|
439
|
|
|
$
|
348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30,
|
|
|
|
Defined
Benefit
|
|
|
|
|
|
|
|
|
|
Pension
Plan
|
|
|
Restoration
Plan
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Service
cost
|
|
$
|
320
|
|
|
$
|
310
|
|
|
$
|
27
|
|
|
$
|
21
|
|
Interest
cost
|
|
|
642
|
|
|
|
606
|
|
|
|
67
|
|
|
|
57
|
|
Expected
return on assets
|
|
|
(720
|
)
|
|
|
(748
|
)
|
|
|
–
|
|
|
|
–
|
|
Net
loss recognition
|
|
|
300
|
|
|
|
105
|
|
|
|
53
|
|
|
|
38
|
|
Prior
service credit amortization
|
|
|
(10
|
)
|
|
|
(10
|
)
|
|
|
(1
|
)
|
|
|
–
|
|
Net
periodic benefit cost
|
|
$
|
532
|
|
|
$
|
263
|
|
|
$
|
146
|
|
|
$
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer
Contributions. We previously disclosed in our financial
statements for the year ended December 31, 2008, that we expected to contribute
$6.0 million to our defined benefit pension plan and $80,000 to our post
retirement benefit plan in 2009. As of September 30, 2009, we had
contributed $6.0 million to our defined benefit plan and $60,000 to our post
retirement benefit plan.
9. Incentive Stock
Options
In April
1993, we adopted the Southside Bancshares, Inc. 1993 Incentive Stock Option Plan
("the ISO Plan"), a stock-based incentive compensation plan. The ISO
Plan expired March 31, 2003.
As of
September 30, 2009 and 2008, there were no nonvested shares. For the
nine months ended September 30, 2009, there was no stock-based compensation
expense. For the nine
months ended September 30, 2008, we recorded approximately $7,000 of stock-based
compensation expense. As of September 30, 2009 and 2008, there was no
unrecognized compensation cost related to the ISO Plan for nonvested options
granted in March 2003.
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.
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 ten 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 outstanding stock options as of September 30, 2009 and the
changes during the nine months ended September 30, 2009 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, 2008
|
333,473
|
|
$
|
5.16
|
–
|
|
|
–
|
|
Exercised
|
(208,500
|
)
|
$
|
5.06
|
–
|
|
|
–
|
|
Cancelled
|
–
|
|
$
|
–
|
–
|
|
|
–
|
|
Outstanding
at September 30, 2009
|
124,973
|
|
$
|
5.31
|
1.13
|
|
$
|
2,166
|
|
Exercisable
at September 30, 2009
|
124,973
|
|
$
|
5.31
|
1.13
|
|
$
|
2,166
|
|
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 nine months ended September 30, 2009 and 2008
were $2.6 million and $2.3 million, respectively.
Cash
received from stock option exercises for the nine months ended September 30,
2009 and 2008 was $626,000 and $706,000, respectively. The tax benefit
realized for the deductions related to the stock option exercises were $547,000
and $410,000 for the nine months ended September 30, 2009 and 2008,
respectively.
On April
16, 2009, our shareholders approved the Southside Bancshares, Inc. 2009
Incentive Plan (the “2009 Incentive Plan”), a stock-based incentive compensation
plan. A total of 1,000,000 shares of our common stock are reserved
and available for issuance pursuant to awards granted under the 2009 Incentive
Plan. As of September 30, 2009, no awards had been granted under this
plan.
10. Fair
Value Measurement
Fair
value is 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.
Valuation
techniques including the market approach, the income approach and/or the cost
approach are utilized to determine fair value. Inputs to valuation
techniques refer to the assumptions that market participants would use in
pricing the asset or liability. An entity must consider all aspects
of nonperforming risk, including the entity’s 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. A fair value hierarchy for valuation inputs 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, municipal bonds, and, to a lesser extent, TRUPs 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 in accordance with GAAP. Adjustments
to the fair value of these assets usually result from the application of fair
value 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, which are based on sales
contracts and commitments and are considered Level 2 inputs. At
September 30, 2009, 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 September
30, 2009, the impact of loans with specific reserves based on the fair value of
the collateral was 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) that are measured at fair value in the event of an
impairment. The framework became applicable to these fair value measurements
beginning January 1, 2009.
The
following tables summarize financial assets and financial liabilities measured
at fair value on a recurring basis as of September 30, 2009 and December 31,
2008, segregated by the level of the valuation inputs within the fair value
hierarchy utilized to measure fair value (in thousands):
|
|
As
of September 30, 2009
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Securities
Available For Sale
|
|
Input
|
|
|
Input
|
|
|
Input
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
$ |
4,896 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
4,896 |
|
Government-Sponsored
Enterprise Debentures
|
|
|
– |
|
|
|
39,372 |
|
|
|
– |
|
|
|
39,372 |
|
State
and Political Subdivisions
|
|
|
– |
|
|
|
219,667 |
|
|
|
– |
|
|
|
219,667 |
|
Other
Stocks and Bonds
|
|
|
491 |
|
|
|
– |
|
|
|
286 |
|
|
|
777 |
|
Mortgage-backed
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Agencies
|
|
|
– |
|
|
|
108,536 |
|
|
|
– |
|
|
|
108,536 |
|
Government-Sponsored
Enterprise
|
|
|
– |
|
|
|
1,101,035 |
|
|
|
– |
|
|
|
1,101,035 |
|
Total
|
|
$ |
5,387 |
|
|
$ |
1,468,610 |
|
|
$ |
286 |
|
|
$ |
1,474,283 |
|
|
|
As
of December 31, 2008
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Securities
Available For Sale
|
|
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
following tables present additional information about financial assets and
liabilities measured at fair value on a recurring basis and for which we have
utilized Level 3 inputs to determine fair value (in thousands):
|
|
Nine
Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Other
Stocks and Bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at Beginning of Period
|
|
$ |
646 |
|
|
$ |
5,541 |
|
|
|
|
|
|
|
|
|
|
Total
gains or losses (realized/unrealized):
|
|
|
|
|
|
|
|
|
Included
in earnings (or changes in net assets)
|
|
|
(2,430
|
) |
|
|
– |
|
Included
in other comprehensive income (loss)
|
|
|
2,070 |
|
|
|
(3,504
|
) |
Purchases,
issuances and settlements
|
|
|
– |
|
|
|
– |
|
Transfers
in and/or out of Level 3
|
|
|
– |
|
|
|
– |
|
Balance
at End of Period
|
|
$ |
286 |
|
|
$ |
2,037 |
|
|
|
|
|
|
|
|
|
|
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
|
|
$ |
(2,430 |
) |
|
$ |
– |
|
|
|
Three
Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Other
Stocks and Bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at Beginning of Period
|
|
$ |
669 |
|
|
$ |
5,333 |
|
|
|
|
|
|
|
|
|
|
Total
gains or losses (realized/unrealized):
|
|
|
|
|
|
|
|
|
Included
in earnings (or changes in net assets)
|
|
|
(993
|
) |
|
|
– |
|
Included
in other comprehensive income (loss)
|
|
|
610 |
|
|
|
(3,296
|
) |
Purchases,
issuances and settlements
|
|
|
– |
|
|
|
– |
|
Transfers
in and/or out of Level 3
|
|
|
– |
|
|
|
– |
|
Balance
at End of Period
|
|
$ |
286 |
|
|
$ |
2,037 |
|
|
|
|
|
|
|
|
|
|
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
|
|
$ |
(993 |
) |
|
$ |
– |
|
Disclosure
of fair value information about financial instruments, whether or not recognized
in the balance sheet is required, 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 the 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 the long-term debt is estimated by
discounting future cash flows using rates at which 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
September 30, 2009
|
|
|
At
December 31, 2008
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Amount
|
|
|
Fair
Value
|
|
|
Amount
|
|
|
Fair
Value
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
43,853 |
|
|
$ |
43,853 |
|
|
$ |
66,774 |
|
|
$ |
66,774 |
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale, at estimated fair value
|
|
|
264,712 |
|
|
|
264,712 |
|
|
|
278,378 |
|
|
|
278,378 |
|
Held
to maturity, at cost
|
|
|
1,493 |
|
|
|
1,612 |
|
|
|
478 |
|
|
|
487 |
|
Mortgage-backed
and related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale, at estimated fair value
|
|
|
1,209,571 |
|
|
|
1,209,571 |
|
|
|
1,026,513 |
|
|
|
1,026,513 |
|
Held
to maturity, at cost
|
|
|
236,072 |
|
|
|
243,474 |
|
|
|
157,287 |
|
|
|
159,451 |
|
FHLB
stock and
other
investments, at cost
|
|
|
38,903 |
|
|
|
38,903 |
|
|
|
41,476 |
|
|
|
41,476 |
|
Loans,
net of allowance for loan losses
|
|
|
997,279 |
|
|
|
1,011,061 |
|
|
|
1,006,437 |
|
|
|
1,023,794 |
|
Loans
held for sale
|
|
|
4,317 |
|
|
|
4,317 |
|
|
|
511 |
|
|
|
511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
deposits
|
|
$ |
1,787,248 |
|
|
$ |
1,795,059 |
|
|
$ |
1,556,131 |
|
|
$ |
1,564,369 |
|
Federal
funds purchased and repurchase agreements
|
|
|
46,983 |
|
|
|
46,983 |
|
|
|
10,629 |
|
|
|
10,629 |
|
FHLB
advances
|
|
|
814,804 |
|
|
|
835,624 |
|
|
|
884,874 |
|
|
|
916,344 |
|
Long-term
debt
|
|
|
60,311 |
|
|
|
40,506 |
|
|
|
60,311 |
|
|
|
36,118 |
|
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 their underlying value.
The
estimated fair value of our commitments to extend credit, credit card
arrangements and letters of credit, was not material at September 30, 2009 or
December 31, 2008.
11. Accounting
Pronouncements
As
discussed in Note 1 - Significant Accounting Policies, on July 1, 2009, the
Accounting Standards Codification became FASB’s officially recognized source of
authoritative U.S. generally accepted accounting principles applicable to all
public and non-public non-governmental entities, superseding existing FASB,
AICPA, EITF and related literature. Rules and interpretive releases of the SEC
under the authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. All other accounting literature is considered
non-authoritative. The switch to the ASC affects the way companies refer to U.S.
GAAP in financial statements and accounting policies. Citing particular content
in the ASC involves specifying the unique numeric path to the content through
the Topic, Subtopic, Section and Paragraph structure.
FASB ASC Topic 320, “Investments -
Debt and Equity Securities.” New authoritative accounting guidance under
ASC Topic 320, “Investments - Debt and Equity Securities,” (i) changes
existing guidance for determining whether an impairment is other than temporary
to debt securities and (ii) replaces the existing requirement that the
entity’s management assert it has both the intent and ability to hold an
impaired security until recovery with a requirement that management assert:
(a) it does not have the intent to sell the security; and (b) it is
more likely than not it will not have to sell the security before recovery of
its cost basis. Under ASC Topic 320, declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses
to the extent the impairment is related to credit losses. The amount of the
impairment related to other factors is recognized in other comprehensive income.
We adopted the provisions of the new authoritative accounting guidance under ASC
Topic 320 during the first quarter of 2009. The adoption of guidance under ASC
Topic 320 was applied and considered during management’s other-than-temporary
impairment analysis and conclusion.
FASB ASC Topic 325, “Investments -
Other.” ASC Topic 325 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 ASC Topic 325, effective December 31, 2008, was applied and
considered during management's other-than-temporary impairment analysis and
conclusion.
FASB ASC Topic 715,
“Compensation - Retirement Benefits.” New authoritative accounting
guidance under ASC Topic 715, “Compensation - Retirement Benefits,” provides
guidance related to an employer’s disclosures about plan assets of defined
benefit pension or other post-retirement benefit plans. Under ASC Topic 715,
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 ASC Topic
715 will be included in our financial statements beginning with the financial
statements for the year ended December 31, 2009.
FASB ASC Topic 805, “Business
Combinations.” On January 1, 2009, new authoritative accounting
guidance under ASC Topic 805, “Business Combinations,” became applicable to our
accounting for business combinations closing on or after January 1, 2009.
ASC Topic 805 applies to all transactions and other events in which one entity
obtains control over one or more other businesses. ASC Topic 805 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 previous accounting guidance whereby the cost of an acquisition
was allocated to the individual assets acquired and liabilities assumed based on
their estimated fair value. ASC Topic 805 requires acquirers to expense
acquisition-related costs as incurred rather than allocating such costs to the
assets acquired and liabilities assumed, as was previously the case under prior
accounting guidance. Assets acquired and liabilities assumed in a business
combination that arise from contingencies are to be recognized at fair value if
fair value can be reasonably estimated. If fair value of such an asset or
liability cannot be reasonably estimated, the asset or liability would generally
be recognized in accordance with ASC Topic 450, “Contingencies.” Under ASC Topic
805, the requirements of ASC Topic 420, “Exit or Disposal Cost Obligations,”
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 ASC Topic 450, “Contingencies.”
FASB ASC Topic 810,
“Consolidation.” New authoritative accounting guidance under ASC Topic
810, “Consolidation,” amended prior guidance to establish accounting and
reporting standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. Under ASC Topic 810, a non-controlling interest
in a subsidiary, which is sometimes referred to as minority interest, is an
ownership interest in the consolidated entity that should be reported as a
component of equity in the consolidated financial statements. Among other
requirements, ASC Topic 810 requires consolidated net income to be reported at
amounts that include the amounts attributable to both the parent and the
non-controlling interest. It also requires disclosure, on the face of the
consolidated income statement, of the amounts of consolidated net income
attributable to the parent and to the non-controlling interest. The new
authoritative accounting guidance under ASC Topic 810 became effective for us on
January 1, 2009 and did not have a material impact on our consolidated
financial statements.
Further new
authoritative accounting guidance amends prior guidance under ASC Topic 810 to
change how a company determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should be
consolidated. The determination of whether a company is required to consolidate
an entity is based on, among other things, an entity’s purpose and design and a
company’s ability to direct the activities of the entity that most significantly
impact the entity’s economic performance. The new authoritative accounting
guidance requires additional disclosures about the reporting entity’s
involvement with variable-interest entities and any significant changes in risk
exposure due to that involvement as well as its affect on the entity’s financial
statements. The new authoritative accounting guidance will be effective
January 1, 2010 and is not expected to have a material impact on our
consolidated financial statements.
FASB ASC Topic 820, “Fair Value
Measurements and Disclosures.” New authoritative accounting guidance
under ASC Topic 820, "Fair Value Measurements and Disclosures," affirms that the
objective of fair value when the market for an asset is not active is the price
that would be received to sell the asset in an orderly transaction, and
clarifies and includes additional factors for determining whether there has been
a significant decrease in market activity for an asset when the market for that
asset is not active. ASC Topic 820 requires an entity to base its conclusion
about whether a transaction was not orderly on the weight of the evidence. The
new accounting guidance amended prior guidance to expand certain disclosure
requirements. We adopted the new authoritative accounting guidance under ASC
Topic 820 during the first quarter of 2009. Adoption of the new guidance did not
have a material impact on our consolidated financial statements.
Further
new authoritative accounting guidance (Accounting Standards Update
No. 2009-5) under ASC Topic 820 provides guidance for measuring the fair
value of a liability in circumstances in which a quoted price in an active
market for the identical liability is not available. In such instances, a
reporting entity is required to measure fair value utilizing a valuation
technique that uses (i) the quoted price of the identical liability when
traded as an asset, (ii) quoted prices for similar liabilities or similar
liabilities when traded as assets, or (iii) another valuation technique
that is consistent with the existing principles of ASC Topic 820, such as an
income approach or market approach. The new authoritative accounting guidance
also clarifies that when estimating the fair value of a liability, a reporting
entity is not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents the transfer of the
liability. The forgoing new authoritative accounting guidance under ASC Topic
820 will be effective for our consolidated financial statements beginning
October 1, 2009 and is not expected to have a material impact on our
consolidated financial statements.
FASB ASC Topic 825 “Financial
Instruments.” New authoritative accounting guidance under ASC Topic 825,
"Financial Instruments," requires an entity to provide disclosures about the
fair value of financial instruments in interim financial information and amends
prior guidance to require those disclosures in summarized financial information
at interim reporting periods. The new interim disclosures required under Topic
825 are included in “Note 10 - Fair Value Measurement.”
FASB ASC Topic 855, “Subsequent
Events.” New authoritative accounting guidance under ASC Topic 855,
“Subsequent Events,” establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or available to be issued. ASC Topic 855 defines
(i) the period after the balance sheet date during which a reporting
entity’s management should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, (ii) the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and
(iii) the disclosures an entity should make about events or transactions
that occurred after the balance sheet date. The new authoritative accounting
guidance under ASC Topic 855 became effective for our consolidated financial
statements for periods ending after June 15, 2009 and did not have a
material impact on our consolidated financial statements.
New
authoritative accounting guidance amends prior accounting guidance under ASC
Topic 860, “Transfers and Servicing,” to enhance reporting about transfers of
financial assets, including securitizations, and where companies have continuing
exposure to the risks related to transferred financial assets. The new
authoritative accounting guidance eliminates the concept of a “qualifying
special-purpose entity” and changes the requirements for derecognizing financial
assets. The new authoritative accounting guidance also requires additional
disclosures about all continuing involvements with transferred financial assets
including information about gains and losses resulting from transfers during the
period. The new authoritative accounting guidance will be effective
January 1, 2010 and is not expected to have a material impact on our
consolidated financial statements.
12. Off-Balance-Sheet
Arrangements, Commitments and Contingencies
Financial Instruments with
Off-Balance-Sheet-Risk. In the normal course of business, we are a party
to certain financial instruments, with off-balance-sheet risk, to meet the
financing needs of our customers. These off-balance-sheet instruments
include commitments to extend credit and standby letters of
credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount reflected in the financial
statements. The contract or notional amounts of these instruments
reflect the extent of involvement and exposure to credit loss that 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 issued primarily 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 $122.6 million and $130.0
million at September 30, 2009 and 2008, 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
September 30, 2009 and 2008 were $10.3 million and $8.8 million, respectively,
and are reflected in the due after one year category. We had
outstanding standby letters of credit of $5.2 million and $4.5 million at
September 30, 2009 and 2008, respectively.
The
scheduled maturities of unused commitments as of September 30, 2009 and 2008
were as follows (in thousands):
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
Unused
commitments:
|
|
|
|
|
|
|
Due
in one year or less
|
|
$
|
69,631
|
|
|
$
|
73,890
|
|
Due
after one year
|
|
|
52,961
|
|
|
|
56,155
|
|
Total
|
|
$
|
122,592
|
|
|
$
|
130,045
|
|
We apply
the same credit policies in making commitments and standby letters of credit as
we do for on-balance-sheet instruments. We evaluate each customer's
credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary, upon extension of credit is based on management's
credit evaluation of the borrower. Collateral held varies but may
include cash or cash equivalents, negotiable instruments, real estate, accounts
receivable, inventory, and/or property, plant and equipment.
Lease Commitments. We lease
certain branch facilities and office equipment under operating
leases. It is expected that certain leases will be renewed, or
equipment replaced with new leased equipment, as these leases
expire.
Securities. In the normal
course of business we buy and sell securities. There were $2.2
million of unsettled trades to purchase and $6.2 million of unsettled trades to
sell securities at September 30, 2009. At December 31, 2008, there
were no unsettled trades to purchase and no unsettled trades to sell
securities.
Deposits. There were $14.9
million of unsettled issuances of brokered CDs at September 30,
2009. At December 31, 2008, there were no unsettled issuances of
brokered CDs.
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 our financial position,
results of operations or liquidity.
13. Variable Interest
Entities
Companies
are required 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. Venue has 50% ownership rights and 51% voting rights in SFG
based on its 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.
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 September 30, 2009, the
total of SFG’s automobile loan portfolios was approximately $74.2
million. Southside Bank is the sole provider of financing for
SFG. As of September 30, 2009, Southside Bank had extended credit of
$70.0 million to finance SFG’s activities.
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following is a discussion of the consolidated financial condition, changes in
financial condition, and results of our operations, and should be read and
reviewed in conjunction with the financial statements, and the notes thereto, in
this presentation and in our Annual Report on Form 10-K for the year ended
December 31, 2008.
We
reported an increase in net income for the three and nine months ended September
30, 2009 compared to the same periods in 2008. Net income for the
three and nine months ended September 30, 2009 was $10.5 million and $34.0
million, respectively, compared to $6.3 million and $20.3 million, respectively,
for the same periods in 2008.
All share
data has been adjusted to give retroactive recognition to stock splits and stock
dividends.
Forward Looking
Statements
Certain
statements of other than historical fact that are contained in this document and
in written material, press releases and oral statements issued by or on behalf
of Southside Bancshares, Inc., a bank holding company, may be considered to be
“forward-looking statements” within the meaning of and subject to the
protections of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are not guarantees of future
performance, nor should they be relied upon as representing management’s views
as of any subsequent date. These statements may include words such as
"expect," "estimate," "project," "anticipate," "appear," "believe," "could,"
"should," "may," "intend," "probability," "risk," "target," "objective,"
"plans," "potential," and similar expressions. Forward-looking
statements are statements with respect to our beliefs, plans, expectations,
objectives, goals, anticipations, assumptions, estimates, intentions and future
performance, and are subject to significant known and unknown risks and
uncertainties, which could cause our actual results to differ materially from
the results discussed in the forward-looking statements. For example,
discussions of the effect of our expansion, trends in asset quality and earnings
from growth, and certain market risk disclosures are based upon information
presently available to management and are dependent on choices about key model
characteristics and assumptions and are subject to various
limitations. By their nature, certain of the market risk disclosures
are only estimates and could be materially different from what actually occurs
in the future. As a result, actual income gains and losses could
materially differ from those that have been estimated. Other factors
that could cause actual results to differ materially from forward-looking
statements include, but are not limited to, the following:
·
|
general
economic conditions, either globally, nationally, in the State of Texas,
or in the specific markets in which we operate, including, without
limitation, the deterioration of
the
|
subprime,
mortgage, credit and liquidity markets, which could cause further 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 Federal Deposit Insurance Corporation (“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 non-performing
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 our 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 U.S. generally accepted
accounting principles (“GAAP”) and general practices within the financial
services industry. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those
estimates. We consider our critical accounting policies to include
the following:
Allowance for Losses on
Loans. The allowance for losses on loans represents our best
estimate of probable losses inherent in the existing loan
portfolio. The allowance for losses on loans is increased by the
provision for losses on loans charged to expense and reduced by loans
charged-off, net of recoveries. The provision for losses on loans is
determined based on our assessment of several factors: reviews and
evaluations of specific loans, changes in the nature and volume of the loan
portfolio, 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 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
September 30, 2009, our review of the loan portfolio indicated that a loan loss
allowance of $18.4 million was adequate to cover probable losses in the
portfolio.
Refer to
“Part II - Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations - Loan Loss Experience and Allowance for Loan Losses”
and “Note 1 – Summary of Significant Accounting and Reporting Policies” of the
Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for
the year ended December 31, 2008 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 FASB ASC Topic 820, “Fair Value Measurements and
Disclosures,” as presented in “Note 10 – Fair Value Measurement” in the
accompanying Notes to Financial Statements included in this
report. The estimation of fair value is significant to a number of
our assets and liabilities. GAAP requires disclosure of the fair
value of financial instruments as a part of the notes to the consolidated
financial statements. Fair values are volatile and may be influenced
by a number of factors, including market interest rates, prepayment speeds,
discount rates and the shape of yield curves. Fair values for most
investment and mortgage-backed securities are based on quoted market prices,
where available. If quoted market prices are not available, fair
values are based on the quoted prices of similar instruments 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 September 30, 2009, the valuation inputs
for our available for sale (“AFS”) 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. 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 at
September 30, 2009 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 is caused by the
significant illiquidity in this market which contrasts sharply with our
assessment of the fundamental performance of these
securities. Therefore, we believe the estimate of fair value will no
longer be clearly based on observable market data and will be 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 determined that the
TRUPs security valuation is based on Level 3 inputs.
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
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 intent not to sell and that it
is not more likely than not that we would be required to sell the security
before the anticipated recovery of its amortized cost basis; 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 a combination of illiquidity and credit impairment. At
September 30, 2009 we have, in AFS Other Stocks and Bonds, $3.6 million
amortized 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 September 30, 2009 for the TRUPs is approximately $286,000 and
reflects the market illiquidity. With the exception of the TRUPs, to
the best of management’s knowledge and based on our consideration of the
qualitative factors associated with each security, there were no securities in
our investment and mortgage-backed securities portfolio at September 30, 2009
with an other-than-temporary impairment. Given the facts and
circumstances associated with the TRUPs, 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 the
underlying issuing banks within the TRUP collateral pool that had not deferred
or defaulted as of September 30, 2009. Management’s best estimate of
a 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 to arrive at our best estimate
of cash flows. Based on that detailed analysis, we have concluded
that the other-than-temporary impairment which captures the credit component in
compliance with the FASB ASC Topic 320, “Investments – Debt and Equity
Securities,” was estimated at $2.4 million at September 30, 2009 and the non
credit charge to other comprehensive income was estimated at $3.2
million. Therefore, the carrying amount of the TRUPs was written down
with $2.4 million recognized in earnings as of September 30,
2009. The cash flow model assumptions represent management’s best
estimate and consider a variety of qualitative factors, which include, among
others, the credit rating downgrades, severity and duration of the
mark-to-market loss, and structural nuances of each TRUP. Management
believes the detailed review of the collateral and cash flow modeling support
the conclusion that the TRUPs had an other-than-temporary impairment at
September 30, 2009. We will continue to update our assumptions and
the resulting analysis each reporting period to reflect changing market
conditions. Additionally, we do not currently intend to sell the
TRUPs and it is not more likely than not that we will be required to sell the
TRUPs before the anticipated recovery of their amortized cost
basis.
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 below carrying
value.
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. As of September 30, 2009, there were no
trigger events to warrant an updated impairment analysis.
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” of the Notes to
Consolidated Financial Statements in our Annual Report on Form 10-K for the year
ended December 31, 2008. 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
September 30, 2009, 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.
Off-Balance-Sheet
Arrangements, Commitments and Contingencies
Details
of our off-balance-sheet arrangements, commitments and contingencies as of
September 30, 2009 and 2008, are included in “Note 12 – Off-Balance-Sheet
Arrangements, Commitments and Contingencies” in the accompanying Notes to
Financial Statements included in this report.
Balance Sheet and 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 certificates of deposit (“CDs”). These funds are
invested primarily in U. S. Agency mortgage-backed securities, and to a lesser
extent, long-term municipal securities. Although U. S. Agency
mortgage-backed securities often carry lower yields than traditional mortgage
loans and other types of loans we make, these securities generally (i) increase
the overall quality of our assets because of either the implicit or explicit
guarantees of the U.S. Government, (ii) are more liquid than individual loans
and (iii) 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
our 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 3. Quantitative and Qualitative Disclosures
about Market Risk” in this report.
Determining
the appropriate size of the balance sheet is one of the critical decisions any
bank makes. Our balance sheet is not merely the result of a series of
micro-decisions, but rather the size is controlled based on the economics of
assets compared to the economics of funding. 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
September 30, 2009, assets had grown from $1.8 billion at June 30, 2007 to $2.9
billion. Asset growth during this period included $152.3 million due
to the acquisition of FWBS in October of 2007, $141.4 million in loan growth
(including Southside Financial Group “SFG”) and an $809.8 million increase in
the securities portfolio. Funding for these earning assets was
accomplished through an increase in deposits (net of brokered CDs) of $477.5
million, $100.9 million of which were due to the acquisition of FWBS, an
increase in wholesale funding of $459.0 million and an increase in capital of
$125.7 million (including through the issuance of 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
September 30, 2009, as mortgage spreads tightened in the face of decreasing U.S.
Treasury interest rates, we repositioned a portion of the mortgage-backed
securities portfolio by selling selected securities whose market value did not
compensate the bank for the potential funding risk. The net result of
the repositioning of a portion of the mortgage-backed securities portfolio was
an increase in the average coupon at September 30, 2009 of approximately 0.15%,
or 15 basis points, when compared to June 30, 2009. The resulting
gains on the sale of securities may not be repeated in future
quarters. During the quarter ended September 30, 2009, we
purchased premium mortgage-backed securities which more than offset the amount
sold or maturing. The net result was an increase of $200.5 million in
our investment and U.S. Agency mortgage-backed securities to $1.71 billion at
September 30, 2009, from $1.51 billion at June 30, 2009. At September
30, 2009, securities as a percentage of assets increased to 59.5%, when compared
to 56.6% at June 30, 2009. 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. FHLB funding and brokered CDs represent wholesale
funding sources we are currently utilizing. Our FHLB borrowings at
September 30, 2009 increased 18.0%, or $124.5 million, to $814.8 million from
$690.4 million at June 30, 2009 primarily as a result of an increase in
securities. As of September 30, 2009 we had $96.8 million in brokered
CDs of which approximately $76.9 million are long-term. All of the long-term
brokered CDs have short-term calls that we control. We utilize
long-term callable brokered CDs because the brokered CDs better match 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. During the nine months of 2009, a decrease in FHLB
borrowings, coupled with the overall growth in deposits, net of brokered CDs,
resulted in a decrease in our total wholesale funding as a percentage of
deposits, not including brokered CDs, to 53.9% at September 30, 2009, from 61.0%
at December 31, 2008.
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 nine months ended September 30, 2009 was $67.4 million,
an increase of $14.3 million, or 26.9%, compared to the same period in
2008. The overall increase in net interest income was primarily the
result of increases in interest income from tax exempt investment securities and
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 nine months ended September 30, 2009, total interest income increased $9.9
million, or 10.1%, to $107.8 million compared to $97.9 million for the same
period in 2008. The increase in total interest income was the result
of an increase in average interest earning assets of $450.6 million, or 21.1%,
from $2.1 billion to $2.6 billion, which more than offset the decrease in the
average yield on average interest earning assets from 6.33% for the nine months
ended September 30, 2008 to 5.85% for the nine months ended September 30,
2009. Total interest expense decreased $4.4 million, or 9.9%, to
$40.4 million during the nine months ended September 30, 2009 as compared to
$44.9 million during the same period in 2008. The decrease was
attributable to a decrease in the average yield on interest bearing liabilities
for the nine months ended September 30, 2009, to 2.50% from 3.41% for the same
period in 2008, which was partially offset by an increase in average interest
bearing liabilities of $406.1 million, or 23.1%, from $1.8 billion to $2.2
billion.
Net
interest income increased during the three months ended September 30, 2009 when
compared to the same period in 2008 as a result of increases in our average
interest earning assets and net interest margin on average earning
assets. Our average interest earning assets increased $396.5 million,
or 17.6%. The decrease in the average yield on interest earning
assets and interest bearing liabilities is a result of an overall decrease in
interest rates compared to the same period in 2008. For the three
months ended September 30, 2009, our net interest spread increased to 3.35% from
3.13%, and our net interest margin increased to 3.73% from 3.68% when compared
to the same period in 2008.
During
the nine months ended September 30, 2009, average loans increased $40.7 million,
or 4.2%, from $980.1 million to $1.0 billion, compared to the same period in
2008. Municipal loans originated represent the largest part of this
increase. The average yield on loans decreased from 7.61% for the
nine months ended September 30, 2008 to 7.27% for the nine months ended
September 30, 2009 due to the decrease in interest rates. The
decrease in interest income on loans of $776,000, or 1.4%, to $53.3 million for
the nine months ended September 30, 2009, when compared to $54.1 million for the
same period in 2008 was a result of the decrease in the average yield on loans
which more than offset the increase in the average balance. The decrease in the
average yield on loans was due to the decrease in interest rates. For
the three months ended September 30, 2009, average loans increased $35.3
million, or 3.6%, to $1.0 billion, compared to $986.0 million for the same
period in 2008. The average yield on loans decreased from 7.52% for
the three months ended September 30, 2008 to 6.95% for the three months ended
September 30, 2009. Due to the competitive loan pricing environment,
we anticipate that we may be required to continue to offer lower interest rate
loans that compete with those offered by other financial institutions in order
to retain quality loan relationships. Offering lower interest rate
loans could impact the overall loan yield and, therefore,
profitability.
Average
investment and mortgage-backed securities increased $372.2 million, or 33.4%,
from $1.1 billion to $1.5 billion, for the nine months ended September 30, 2009
when compared to the same period in 2008. This increase was the
result of securities purchased due to buying opportunities available throughout
the year ended 2008 and during the nine months ended September 30,
2009. The overall yield on average investment and mortgage-backed
securities decreased to 5.13% during the nine months ended September 30, 2009,
from 5.32% during the same period in 2008 due to the overall decrease in
interest rates and tightening spreads. Interest income on investment
and mortgage-backed securities increased $11.1 million during the nine months
ended September 30, 2009, or 25.7%, compared to the same period in 2008 due to
the increase in the average balance which more than offset the decrease in
average yield. For the three months ended September 30, 2009, average
investment and mortgage-backed securities increased $328.5 million, or 26.6%, to
$1.6 billion, when compared to $1.2 billion for the same period in
2008. The overall yield on average investment and mortgage-backed
securities decreased to 4.99% during the three months ended September 30, 2009,
from 5.31% during the same period in 2008. Interest income from
investment and mortgage-backed securities increased $2.1 million, or 13.3%, to
$18.2 million for the three months ended September 30, 2009, compared to $16.0
million for the same period in 2008. The decrease in the average
yield primarily reflects increased prepayments due to lower interest rates
creating refinancing alternatives, tighter spreads on mortgage-backed securities
and overall lower interest rates. A return to lower long-term
interest rate levels combined with lower volatility and credit spreads similar
to those 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 40.3%, to $40.8
million, for the nine months ended September 30, 2009, when compared to $29.1
million for the same period in 2008. Interest income from our FHLB
stock and other investments decreased $461,000, or 70.3%, during the nine months
ended September 30, 2009, when compared to the same period in 2008, due to the
decrease in average yield from 3.01% for the nine months ended September 30,
2008 compared to 0.64% for the same period in 2009, which more than offset the
increase in the average balance. For the three months ended September
30, 2009, average FHLB stock and other investments increased $5.7 million, or
17.0%, to $39.5 million, when compared to $33.8 million 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. For the
three months ended September 30, 2009, interest income from FHLB
stock and other investments decreased $137,000, or 76.1%, to $43,000, when
compared to $180,000 for the same period in 2008 as a result of the decrease in
the average yield from 2.12% in 2008 to 0.43% in 2009, which more than offset
the increase in the average balance.
Average
federal funds sold and other interest earning assets increased $24.6 million, or
487.0%, to $29.6 million, for the nine months ended September 30, 2009, when
compared to $5.0 million for 2008. Interest income from federal funds
sold and other interest earning assets increased $37,000, or 36.6%, for the nine
months ended September 30, 2009, when compared to the same period in 2008, as a
result of the increase in the average balance while partially offset by a
decrease in the average yield from 2.67% in 2008 to 0.62% in
2009. Average federal funds sold and other interest earning assets
increased $24.5 million, or 1174.0%, to $26.6 million, for the three months
ended September 30, 2009, when compared to $2.1 million for the same period in
2008. Interest income from federal funds sold and other interest
earning assets increased $48,000, or 480.0%, for the three months ended
September 30, 2009, when compared to the same period in 2008, as a result of the
increase in the average balance while partially offset by a decrease in the
average yield from 1.90% in 2008 to 0.86% in 2009.
During
the nine months ended September 30, 2009, 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 period as
securities averaged 57.6% during the nine months ended September 30, 2009
compared to 52.3% during the same period in 2008, a direct result of securities
purchases. Average loans were 39.5% of average total interest earning
assets and other interest earning asset categories averaged 2.9% for the nine
months ended September 30, 2009. During 2008, the comparable mix was
46.0% in loans and 1.7% in the other interest earning asset
categories.
Total
interest expense decreased $4.4 million, or 9.9%, to $40.4 million during the
nine months ended September 30, 2009 as compared to $44.9 million during the
same period in 2008. The decrease was primarily attributable to
decreased funding costs as the average yield on interest bearing liabilities
decreased from 3.41% for 2008 to 2.50% for the nine months ended September 30,
2009, which more than offset an increase in average interest bearing
liabilities. The increase in average interest bearing liabilities of
$406.1 million, or 23.1% primarily included an increase in deposits and FHLB
advances. For the three months ended September 30, 2009, total
interest expense decreased $1.7 million, or 11.9%, to $12.7 million, compared to
$14.5 million for the same period in 2008 as a result of a decrease in the
average yield on interest bearing liabilities which more than offset the
increase in average interest bearing liabilities. Average interest
bearing liabilities increased $361.4 million, or 19.5%, while the average yield
decreased from 3.10% for the three months ended September 30, 2008 as compared
to 2.28% for the three months ended September 30, 2009.
Average
interest bearing deposits increased $205.6 million, or 18.9%, from $1.1 billion
to $1.3 billion, while the average rate paid decreased from 3.18% for the nine
months ended September 30, 2008 to 1.81% for the nine months ended September 30,
2009. For the three months ended September 30, 2009, average interest
bearing deposits increased $290.9 million, or 27.2%, to $1.4 billion, when
compared to $1.1 billion for the same period in 2008 while the average rate paid
decreased from 2.70% for the three month period ended September 30, 2008 to
1.60% for the three month period ended September 30, 2009. Average
time deposits increased $131.2 million, or 24.4%, from $537.8 million to $669.1
million while the average rate paid decreased to 2.52% for the nine months ended
September 30, 2009 as compared to 4.27% for the same period in
2008. Average interest bearing demand deposits increased $66.1
million, or 13.4%, while the average rate paid decreased to 1.10% for the nine
months ended September 30, 2009 as compared to 2.21% for the same period in
2008. Average savings deposits increased $8.2 million, or 14.5%,
while the average rate paid decreased to 0.72% for the nine months ended
September 30, 2009 as compared to 1.28% for the same period in
2008. Interest expense for interest bearing deposits for the nine
months ended September 30, 2009, decreased $8.3 million, or 32.3%, when compared
to the same period in 2008 due to the decrease in the average yield which more
than offset the increase in the average balance. Average noninterest
bearing demand deposits increased $10.6 million, or 2.9%, during the nine months
ended September 30, 2009. The latter three categories of deposits,
which are considered the lowest cost deposits, comprised 60.0% of total average
deposits during the nine months ended September 30, 2009 compared to 63.0%
during the same period in 2008. The increase in our average total
deposits is the result of overall bank growth, increases in public fund
deposits, increases in callable brokered CDs and branch expansion.
During
the nine months ended September 30, 2009, we issued $20.0 million of what are
now short-term brokered CDs and $77.5 million of long-term brokered
CDs. At September 30, 2009 and December 31, 2008, all of our brokered
CDs had maturities of less than 125 months. At September 30, 2009, we
had $96.8 million in brokered CDs that represented 5.4% of deposits compared to
$40.0 million, or 2.6% of deposits, at December 31, 2008. 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,
federal funds purchased and repurchase agreements, were $182.3 million, a
decrease of $116.8 million, or 39.1%, for the nine months ended September 30,
2009 when compared to the same period in 2008. Interest expense
associated with short-term interest bearing liabilities decreased $3.8 million,
or 52.9%, and the average rate paid decreased to 2.46% for the nine months ended
September 30, 2009, when compared to 3.18% for the same period in
2008. For the three months ended September 30, 2009, average
short-term interest bearing liabilities decreased $85.3 million, or 30.5%, when
compared to the same period in 2008. Interest expense associated with
short-term interest bearing liabilities decreased $966,000, or 48.6%, and the
average rate paid decreased to 2.08% for the three month period ended September
30, 2009 when compared to 2.83% for the same period in 2008. The
decrease in the interest expense was due to a decrease in the average rate paid
and the average balance of short-term interest bearing liabilities.
Average
long-term interest bearing liabilities consisting of FHLB advances increased
$317.2 million, or 102.8%, during the nine months ended September 30, 2009 to
$626.0 million as compared to $308.7 million for the nine months ended September
30, 2008. The increase in the average long-term FHLB advances
occurred primarily as a result of lower long-term rates during 2008 and the nine
months ended September 30, 2009, our decision to call outstanding long-term
brokered CDs and replace them with long-term FHLB borrowings during 2008 and
increased purchases of securities. Interest expense associated with
long-term FHLB advances increased $8.1 million, or 92.1%, while the average rate
paid decreased to 3.62% for the nine months ended September 30, 2009 when
compared to 3.82% for the same period in 2008. For the three months
ended September 30, 2009, long-term interest bearing liabilities increased
$155.9 million, or 35.0%, when compared to the same period in
2008. Interest expense associated with long-term FHLB advances
increased $1.2 million, or 27.7%, while the average rate paid decreased to 3.56%
for the three months ended September 30, 2009 when compared to 3.78% for the
same period in 2008. 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 for the nine months ended September 30, 2009 and
2008. 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 decreased $138,000, or 14.1%, to $840,000 and $439,000, or 14.5% to $2.6
million for the three and nine months ended September 30, 2009, respectively,
when compared to $978,000 and $3.0 million for the same periods in 2008,
respectively, as a result of the decrease in the average yield during the three
and nine months ended September 30, 2009 when compared to the same periods in
2008. 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.
The
analysis below shows average interest earning assets and interest bearing
liabilities together with the average yield on the interest earning assets and
the average cost of the interest bearing liabilities.
|
|
AVERAGE
BALANCES AND YIELDS
|
|
|
|
(dollars
in thousands)
|
|
|
|
(unaudited)
|
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2009
|
|
|
September
30, 2008
|
|
|
|
AVG
BALANCE
|
|
|
INTEREST
|
|
|
AVG
YIELD
|
|
|
AVG
BALANCE
|
|
|
INTEREST
|
|
|
AVG
YIELD
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
(1) (2)
|
|
$ |
1,020,782 |
|
|
$ |
55,505 |
|
|
|
7.27
|
% |
|
$ |
980,076 |
|
|
$ |
55,818 |
|
|
|
7.61
|
% |
Loans
Held For Sale
|
|
|
4,202 |
|
|
|
116 |
|
|
|
3.69
|
% |
|
|
2,734 |
|
|
|
99 |
|
|
|
4.84
|
% |
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities (Taxable)(4)
|
|
|
52,308 |
|
|
|
1,010 |
|
|
|
2.58
|
% |
|
|
47,105 |
|
|
|
1,377 |
|
|
|
3.90
|
% |
Investment
Securities (Tax-Exempt)(3)(4)
|
|
|
156,416 |
|
|
|
8,091 |
|
|
|
6.92
|
% |
|
|
83,357 |
|
|
|
4,124 |
|
|
|
6.61
|
% |
Mortgage-backed
and Related Securities (4)
|
|
|
1,277,781 |
|
|
|
47,988 |
|
|
|
5.02
|
% |
|
|
983,882 |
|
|
|
38,876 |
|
|
|
5.28
|
% |
Total
Securities
|
|
|
1,486,505 |
|
|
|
57,089 |
|
|
|
5.13
|
% |
|
|
1,114,344 |
|
|
|
44,377 |
|
|
|
5.32
|
% |
FHLB
stock and other investments, at cost
|
|
|
40,841 |
|
|
|
195 |
|
|
|
0.64
|
% |
|
|
29,108 |
|
|
|
656 |
|
|
|
3.01
|
% |
Interest
Earning Deposits
|
|
|
24,371 |
|
|
|
121 |
|
|
|
0.66
|
% |
|
|
928 |
|
|
|
22 |
|
|
|
3.17
|
% |
Federal
Funds Sold
|
|
|
5,248 |
|
|
|
17 |
|
|
|
0.43
|
% |
|
|
4,118 |
|
|
|
79 |
|
|
|
2.56
|
% |
Total
Interest Earning Assets
|
|
|
2,581,949 |
|
|
|
113,043 |
|
|
|
5.85
|
% |
|
|
2,131,308 |
|
|
|
101,051 |
|
|
|
6.33
|
% |
NONINTEREST
EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Due From Banks
|
|
|
44,031 |
|
|
|
|
|
|
|
|
|
|
|
45,590 |
|
|
|
|
|
|
|
|
|
Bank
Premises and Equipment
|
|
|
44,792 |
|
|
|
|
|
|
|
|
|
|
|
40,135 |
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
110,506 |
|
|
|
|
|
|
|
|
|
|
|
86,988 |
|
|
|
|
|
|
|
|
|
Less: Allowance
for Loan Loss
|
|
|
(17,423
|
) |
|
|
|
|
|
|
|
|
|
|
(10,667
|
) |
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
2,763,855 |
|
|
|
|
|
|
|
|
|
|
$ |
2,293,354 |
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
Deposits
|
|
$ |
65,110 |
|
|
|
352 |
|
|
|
0.72
|
% |
|
$ |
56,863 |
|
|
|
545 |
|
|
|
1.28
|
% |
Time
Deposits
|
|
|
669,069 |
|
|
|
12,597 |
|
|
|
2.52
|
% |
|
|
537,829 |
|
|
|
17,203 |
|
|
|
4.27
|
% |
Interest
Bearing Demand Deposits
|
|
|
558,196 |
|
|
|
4,583 |
|
|
|
1.10
|
% |
|
|
492,051 |
|
|
|
8,132 |
|
|
|
2.21
|
% |
Total
Interest Bearing Deposits
|
|
|
1,292,375 |
|
|
|
17,532 |
|
|
|
1.81
|
% |
|
|
1,086,743 |
|
|
|
25,880 |
|
|
|
3.18
|
% |
Short-term
Interest Bearing Liabilities
|
|
|
182,310 |
|
|
|
3,355 |
|
|
|
2.46
|
% |
|
|
299,125 |
|
|
|
7,125 |
|
|
|
3.18
|
% |
Long-term
Interest Bearing Liabilities – FHLB Dallas
|
|
|
625,964 |
|
|
|
16,958 |
|
|
|
3.62
|
% |
|
|
308,725 |
|
|
|
8,828 |
|
|
|
3.82
|
% |
Long-term
Debt (5)
|
|
|
60,311 |
|
|
|
2,586 |
|
|
|
5.73
|
% |
|
|
60,311 |
|
|
|
3,025 |
|
|
|
6.70
|
% |
Total
Interest Bearing Liabilities
|
|
|
2,160,960 |
|
|
|
40,431 |
|
|
|
2.50
|
% |
|
|
1,754,904 |
|
|
|
44,858 |
|
|
|
3.41
|
% |
NONINTEREST
BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
Deposits
|
|
|
378,368 |
|
|
|
|
|
|
|
|
|
|
|
367,786 |
|
|
|
|
|
|
|
|
|
Other
Liabilities
|
|
|
42,906 |
|
|
|
|
|
|
|
|
|
|
|
28,623 |
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
2,582,234 |
|
|
|
|
|
|
|
|
|
|
|
2,151,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY (6)
|
|
|
181,621 |
|
|
|
|
|
|
|
|
|
|
|
142,041 |
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$ |
2,763,855 |
|
|
|
|
|
|
|
|
|
|
$ |
2,293,354 |
|
|
|
|
|
|
|
|
|
NET
INTEREST INCOME
|
|
|
|
|
|
$ |
72,612 |
|
|
|
|
|
|
|
|
|
|
$ |
56,193 |
|
|
|
|
|
NET
INTEREST MARGIN ON AVERAGE EARNING ASSETS
|
|
|
|
|
|
|
|
|
|
|
3.76
|
% |
|
|
|
|
|
|
|
|
|
|
3.52
|
% |
NET
INTEREST SPREAD
|
|
|
|
|
|
|
|
|
|
|
3.35
|
% |
|
|
|
|
|
|
|
|
|
|
2.92
|
% |
(1) Interest
on loans includes fees on loans that are not material in amount.
(2) Interest
income includes taxable-equivalent adjustments of $2,305 and $1,825 for the nine
months ended September 30, 2009 and 2008, respectively.
(3) Interest
income includes taxable-equivalent adjustments of $2,952 and $1,295 for the nine
months ended September 30, 2009 and 2008, respectively.
(4) For
the purpose of calculating the average yield, the average balance of securities
is presented at historical cost.
(5) Represents
junior subordinated debentures issued by us to Southside Statutory Trust III,
IV, and V in connection with the issuance by Southside Statutory Trust III of
$20 million of trust preferred securities, Southside Statutory Trust IV of $22.5
million of trust preferred securities, Southside Statutory Trust V of $12.5
million of trust preferred securities and junior subordinated debentures issued
by FWBS to Magnolia Trust Company I in connection with the issuance by Magnolia
Trust Company I of $3.5 million of trust preferred securities.
(6) Includes
average equity of noncontrolling interest of $793 and $525 for the nine months
ended September 30, 2009 and 2008, respectively.
Note: As
of September 30, 2009 and 2008, loans totaling $16,690 and $6,192, respectively,
were on nonaccrual status. The policy is to reverse previously
accrued but unpaid interest on nonaccrual loans; thereafter, interest income is
recorded to the extent received when appropriate.
|
|
AVERAGE
BALANCES AND YIELDS
|
|
|
|
(dollars
in thousands)
|
|
|
|
(unaudited)
|
|
|
|
Three
Months Ended
|
|
|
|
September
30, 2009
|
|
|
September
30, 2008
|
|
|
|
AVG
BALANCE
|
|
|
INTEREST
|
|
|
AVG
YIELD
|
|
|
AVG
BALANCE
|
|
|
INTEREST
|
|
|
AVG
YIELD
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
(1) (2)
|
|
$ |
1,021,251 |
|
|
$ |
17,887 |
|
|
|
6.95
|
% |
|
$ |
985,953 |
|
|
$ |
18,630 |
|
|
|
7.52
|
% |
Loans
Held For Sale
|
|
|
4,473 |
|
|
|
50 |
|
|
|
4.43
|
% |
|
|
2,099 |
|
|
|
29 |
|
|
|
5.50
|
% |
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities (Taxable)(4)
|
|
|
46,463 |
|
|
|
402 |
|
|
|
3.43
|
% |
|
|
37,826 |
|
|
|
307 |
|
|
|
3.23
|
% |
Investment
Securities (Tax-Exempt)(3)(4)
|
|
|
211,915 |
|
|
|
3,728 |
|
|
|
6.98
|
% |
|
|
76,646 |
|
|
|
1,291 |
|
|
|
6.70
|
% |
Mortgage-backed
and Related Securities (4)
|
|
|
1,303,851 |
|
|
|
15,509 |
|
|
|
4.72
|
% |
|
|
1,119,217 |
|
|
|
14,883 |
|
|
|
5.29
|
% |
Total
Securities
|
|
|
1,562,229 |
|
|
|
19,639 |
|
|
|
4.99
|
% |
|
|
1,233,689 |
|
|
|
16,481 |
|
|
|
5.31
|
% |
FHLB
stock and other investments, at cost
|
|
|
39,544 |
|
|
|
43 |
|
|
|
0.43
|
% |
|
|
33,810 |
|
|
|
180 |
|
|
|
2.12
|
% |
Interest
Earning Deposits
|
|
|
26,614 |
|
|
|
58 |
|
|
|
0.86
|
% |
|
|
530 |
|
|
|
2 |
|
|
|
1.50
|
% |
Federal
Funds Sold
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
1,559 |
|
|
|
8 |
|
|
|
2.04
|
% |
Total
Interest Earning Assets
|
|
|
2,654,111 |
|
|
|
37,677 |
|
|
|
5.63
|
% |
|
|
2,257,640 |
|
|
|
35,330 |
|
|
|
6.23
|
% |
NONINTEREST
EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Due From Banks
|
|
|
42,076 |
|
|
|
|
|
|
|
|
|
|
|
45,061 |
|
|
|
|
|
|
|
|
|
Bank
Premises and Equipment
|
|
|
46,341 |
|
|
|
|
|
|
|
|
|
|
|
40,473 |
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
114,102 |
|
|
|
|
|
|
|
|
|
|
|
86,542 |
|
|
|
|
|
|
|
|
|
Less: Allowance
for Loan Loss
|
|
|
(18,291
|
) |
|
|
|
|
|
|
|
|
|
|
(11,614
|
) |
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
2,838,339 |
|
|
|
|
|
|
|
|
|
|
$ |
2,418,102 |
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
Deposits
|
|
$ |
66,903 |
|
|
|
99 |
|
|
|
0.59
|
% |
|
$ |
58,646 |
|
|
|
188 |
|
|
|
1.28
|
% |
Time
Deposits
|
|
|
711,740 |
|
|
|
3,999 |
|
|
|
2.23
|
% |
|
|
497,663 |
|
|
|
4,502 |
|
|
|
3.60
|
% |
Interest
Bearing Demand Deposits
|
|
|
580,202 |
|
|
|
1,376 |
|
|
|
0.94
|
% |
|
|
511,599 |
|
|
|
2,567 |
|
|
|
2.00
|
% |
Total
Interest Bearing Deposits
|
|
|
1,358,845 |
|
|
|
5,474 |
|
|
|
1.60
|
% |
|
|
1,067,908 |
|
|
|
7,257 |
|
|
|
2.70
|
% |
Short-term
Interest Bearing Liabilities
|
|
|
194,157 |
|
|
|
1,020 |
|
|
|
2.08
|
% |
|
|
279,502 |
|
|
|
1,986 |
|
|
|
2.83
|
% |
Long-term
Interest Bearing Liabilities – FHLB Dallas
|
|
|
601,446 |
|
|
|
5,402 |
|
|
|
3.56
|
% |
|
|
445,590 |
|
|
|
4,231 |
|
|
|
3.78
|
% |
Long-term
Debt (5)
|
|
|
60,311 |
|
|
|
840 |
|
|
|
5.53
|
% |
|
|
60,311 |
|
|
|
978 |
|
|
|
6.45
|
% |
Total
Interest Bearing Liabilities
|
|
|
2,214,759 |
|
|
|
12,736 |
|
|
|
2.28
|
% |
|
|
1,853,311 |
|
|
|
14,452 |
|
|
|
3.10
|
% |
NONINTEREST
BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
Deposits
|
|
|
376,307 |
|
|
|
|
|
|
|
|
|
|
|
382,940 |
|
|
|
|
|
|
|
|
|
Other
Liabilities
|
|
|
55,472 |
|
|
|
|
|
|
|
|
|
|
|
39,105 |
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
2,646,538 |
|
|
|
|
|
|
|
|
|
|
|
2,275,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY (6)
|
|
|
191,801 |
|
|
|
|
|
|
|
|
|
|
|
142,746 |
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$ |
2,838,339 |
|
|
|
|
|
|
|
|
|
|
$ |
2,418,102 |
|
|
|
|
|
|
|
|
|
NET
INTEREST INCOME
|
|
|
|
|
|
$ |
24,941 |
|
|
|
|
|
|
|
|
|
|
$ |
20,878 |
|
|
|
|
|
NET
INTEREST MARGIN ON AVERAGE EARNING ASSETS
|
|
|
|
|
|
|
|
|
|
|
3.73
|
% |
|
|
|
|
|
|
|
|
|
|
3.68
|
% |
NET
INTEREST SPREAD
|
|
|
|
|
|
|
|
|
|
|
3.35
|
% |
|
|
|
|
|
|
|
|
|
|
3.13
|
% |
(1) Interest
on loans includes fees on loans that are not material in amount.
(2) Interest
income includes taxable-equivalent adjustments of $816 and $630 for the three
months ended September 30, 2009 and 2008, respectively.
(3) Interest
income includes taxable-equivalent adjustments of $1,462 and $440 for the three
months ended September 30, 2009 and 2008, respectively.
(4) For
the purpose of calculating the average yield, the average balance of securities
is presented at historical cost.
(5) Represents
junior subordinated debentures issued by us to Southside Statutory Trust III,
IV, and V in connection with the issuance by Southside Statutory Trust III of
$20 million of trust preferred securities, Southside Statutory Trust IV of $22.5
million of trust preferred securities, Southside Statutory Trust V of $12.5
million of trust preferred securities and junior subordinated debentures issued
by FWBS to Magnolia Trust Company I in connection with the issuance by Magnolia
Trust Company I of $3.5 million of trust preferred securities.
(6) Includes
average equity of noncontrolling interest of $833 and $425 for the three months
ended September 30, 2009 and 2008, respectively.
Note: As
of September 30, 2009 and 2008, loans totaling $16,690 and $6,192, 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.
Noninterest
Income
Noninterest
income consists of revenue generated from a broad range of financial services
and activities including deposit related fees such as ATM, overdraft, and check
processing fees. In addition, we earn income from the sale of loans
and securities, trust services, bank owned life insurance (“BOLI”), brokerage
services, and other fee generating programs that we either provide or in which
we participate.
Noninterest
income was $43.8 million for the nine months ended September 30, 2009 compared
to $27.6 million for the same period in 2008, an increase of $16.2 million, or
58.7%. For the three months ended September 30, 2009, noninterest
income was $12.5 million, compared to $7.6 million for the same period in 2008,
an increase of $4.9 million, or 64.2%. During the nine months ended
September 30, 2009, we had gains on sale of AFS securities, net of impairment
charges of $24.0 million compared to gains of $6.6 million for the same period
in 2008. Gains on AFS securities, net of impairment charges for the
three months ended September 30, 2009 were $5.7 million compared to $822,000 for
the same period in 2008. The market value of the AFS securities
portfolio at September 30, 2009 was $1.5 billion with a net unrealized gain on
that date of $39.4 million. The net unrealized gain is comprised of
$45.7 million in unrealized gains and $6.3 million in unrealized
losses. The market value of the HTM securities portfolio at September
30, 2009 was $245.1 million with a net unrealized gain on that date of $7.5
million. The net unrealized gain is comprised of $7.6 million in
unrealized gains and $48,000 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 the
nine months of 2009, volatility associated with the direction of interest rates
and credit spreads for both agency mortgage-backed securities provided
opportunities to restructure portions of both the mortgage-backed securities
portfolio as well as portions of the municipal portfolio. During the
nine months ended September 30, 2009, we repositioned a portion of the
mortgage-backed securities portfolio by selling selected securities whose market
value did not compensate the bank for the potential funding risk and in doing
so, increased the average coupon of this portfolio. We believe the
higher coupon has less funding risk should interest rates
increase. In addition, municipal securities purchased during a period
of tremendous volatility in 2008 at what management believed were attractive
prices, were sold, as market prices and spreads returned to levels which
appeared consistent with a more liquid market. The level of security
gains during the nine months ended September 30, 2009, are unlikely to be
repeated in future quarters.
Deposit
services income decreased $196,000, or 4.1%, and $828,000, or 6.0%, for the
three and nine months ended September 30, 2009, respectively, when compared to
the same period in 2008, primarily as a result of decreases in overdraft and NSF
fee income.
Gain on
sale of loans increased $153,000, or 64.0%, for the three months ended September
30, 2009, and decreased $277,000, or 17.9%, for the nine months ended September
30, 2009, when compared to the same periods in 2008. This is a result
of a decrease in the amount of loans sold during the nine months ended September
30, 2009 when compared to the same period in 2008 which included the sale of
selected loans from automobile loans purchased by SFG at gains of $334,000
during 2008 and $6.2 million of student loans sold during the second
quarter of 2008.
Noninterest
Expense
We incur
numerous types of noninterest expenses associated with the operation of our
various business activities, the largest of which are salaries and employee
benefits. In addition, we incur numerous other expenses, the largest
of which are detailed in the consolidated statements of income.
Noninterest
expense was $17.8 million and $52.6 million for the three and nine months ended
September 30, 2009, respectively, compared to $15.7 million and $44.3 million
for the same periods in 2008, respectively, representing increases of $2.0
million, or 13.0%, and $8.2 million, or 18.5%, respectively.
Salaries
and employee benefits expense increased $217,000, or 2.2%, and $3.6 million, or
13.2%, during the three and nine months ended September 30, 2009, respectively,
when compared to the same periods in 2008. The increase for
the three and nine months ended September 30, 2009, was primarily the result of
increases in personnel associated with our overall growth and expansion,
including SFG, an increase in health insurance expense and normal salary
increases for existing personnel. Direct salary expense and payroll
taxes increased $758,000, or 9.7%, and $3.2 million, or 14.2%, during the three
and nine months ended September 30, 2009, respectively, when compared to the
same periods in 2008.
Retirement
expense, included in salary and benefits, decreased $885,000, or 53.5%, and
$359,000, or 13.5%, for the three and nine months ended September 30, 2009,
respectively, when compared to the same periods in 2008. The
decreases were related to a $1.2 million retirement agreement for the Chairman
and Chief Executive Officer made during the three and nine months ended
September 30, 2008 which was partially offset by an increase in the defined
benefit plan during 2009 related primarily to the changes in the actuarial
assumptions used to determine net periodic pension costs for 2009 when compared
to 2008. Specifically, the assumed long-term rate of return was 7.50%
and the assumed discount rate decreased to 6.10%. 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 further, the cost and funding required for the
retirement plan could increase.
Health
and life insurance expense, included in salary and benefits, increased $345,000,
or 61.8%, and $770,000, or 37.6%,
for the three and nine months ended September 30, 2009, respectively, when
compared to the same periods in 2008 due to increased health claims expense and
plan administrative cost for the comparative period of time. 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 continue to increase during the remainder of 2009.
Occupancy
expense increased $252,000, or 17.4%, and $420,000, or 9.8%, for the three and
nine months ended September 30, 2009, respectively, when compared to the same
periods in 2008 as a result of the opening of one branch during the third
quarter of 2008 and another branch early third quarter 2009.
Equipment
expense increased $126,000, or 38.5%, and $274,000, or 28.3%, for the three and
nine months ended September 30, 2009, respectively, when compared to the same
periods in 2008 as a result of increases on equipment service contracts and bank
growth.
Advertising,
travel and entertainment increased $99,000, or 22.1%, and $142,000, or 10.1%,
for the three and nine months ended September 30, 2009, respectively, when
compared to the same periods in 2008 as a result of bank growth.
Director
fees increased $34,000, or 25.4%, and $55,000, or 12.9%, for the three and nine
months ended September 30, 2009, respectively, compared to the same periods in
2008 due to additional meetings and additional number of directors attending
committee meetings during the comparable periods.
Supplies
increased $53,000, or 26.4%, and $88,000, or 15.1%, for the three and nine
months ended September 30, 2009, respectively, compared to the same periods in
2008 due to bank growth.
Professional
fees increased $120,000, or 26.5%, and $418,000, or 33.7%, for the three and
nine months ended September 30, 2009, respectively, compared to the same periods
in 2008 primarily as a result of increases in legal fees.
Postage
increased $48,000, or 24.1%, and $62,000, or 11.0%, for the three and nine
months ended September 30, 2009, respectively, compared to the same periods in
2008 due to bank growth.
Telephone
and communications increased $139,000, or 51.5%, and $268,000, or 34.1%, for the
three and nine months ended September 30, 2009, respectively, compared to the
same periods in 2008 due to bank growth.
FDIC
insurance increased $499,000, or 226.8%, and $2.5 million, or 362.2% for the
three and nine months ended September 30, 2009, respectively, compared to the
same periods in 2008. The increases were due to the FDIC finalizing a
rule in December 2008 that raised the then-current assessment rates uniformly by
7 basis points for the 2009 assessment as well as a special second quarter
assessment of approximately $1.3 million. The new rule resulted in
annualized assessment rates for Risk Category 1 institutions ranging from 12 to
14 basis points. The increases were also partly related to the additional
10 basis point assessment paid during 2009 on covered transaction accounts
exceeding $250,000 under the Temporary Liquidity Guaranty Program.
Other
expenses increased $437,000, or 25.7%, and $264,000, or 5.3%, for the three and
nine months ended September 30, 2009, respectively, compared to the same periods
in 2008 primarily due to an increase in losses on other real estate
owned.
Income
Taxes
Pre-tax
income for the three and nine months ended September 30, 2009 was $14.5 million
and $48.6 million, respectively, compared to $8.6 million and $28.0 million,
respectively, for the same periods in 2008.
Income
tax expense was $3.6 million and $13.0 million, respectively, for the three and
nine months ended September 30, 2009, compared to $2.2 million and $7.4 million,
respectively, for the three and nine months ended September 30,
2008. The effective tax rate as a percentage of pre-tax income was
25.0%, and 26.8%, respectively, for the three and nine months ended September
30, 2009, compared to 26.2%, and 26.4%, respectively, for the three and nine
months ended September 30, 2008. The increase in the effective tax
rate and income tax expense for the nine months ended September 30, 2009 was due
to a decrease in tax-exempt income as a percentage of taxable income as compared
to the same period in 2008.
Net
deferred tax liabilities totaled $2.6 million at September 30,
2009. Net deferred tax assets totaled $2.9 million at December 31,
2008. The net change in deferred taxes were primarily related to the
increase in fair value of our securities portfolio.
Capital
Resources
Our total
shareholders' equity at September 30, 2009, was $202.7 million, representing an
increase of $42.0 million from December 31, 2008, which represented 6.9% of
total assets at September 30, 2009 compared to 5.9% of total assets at December
31, 2008.
Increases
to our shareholders’ equity consisted of net income of $34.0 million, the
issuance of $1.7 million in common stock (232,226 shares) through our incentive
stock option and dividend reinvestment plans, with an increase in accumulated
other comprehensive income of $12.2 million, which was partially offset by $6.0
million in dividends paid.
On April
9, 2009, our board of directors declared a 5% stock dividend to common stock
shareholders of record as of April 28, 2009, and payable on May 14,
2009.
Under the
Federal Reserve Board's risk-based capital guidelines for bank holding
companies, the minimum ratio of total capital to risk-adjusted assets (including
certain off-balance sheet items, such as standby letters of credit) is currently
8%. The minimum Tier 1 capital to risk-adjusted assets is
4%. Our $20 million, $22.5 million, $12.5 million and $3.5 million of
trust preferred securities issued by our subsidiaries, Southside Statutory Trust
III, IV, V and Magnolia Trust Company I, respectively, are considered Tier 1
capital by the Federal Reserve Board. Due to uncertainty in the
credit markets with respect to issuing trust preferred securities, it is
uncertain if the Company could currently issue additional trust preferred
securities and, if so, at what price. The Company cannot predict if
or when general market conditions might change. The Federal Reserve
Board also requires bank holding companies to comply with the minimum leverage
ratio guidelines. The leverage ratio is the ratio of bank holding
company's Tier 1 capital to its total consolidated quarterly average assets,
less goodwill and certain other intangible assets. The guidelines
require a minimum leverage ratio of 4% for bank holding companies that meet
certain specified criteria. Failure to meet minimum capital
regulations can initiate certain mandatory and possibly additional discretionary
actions by regulators, which could have a material adverse effect on our
financial condition and results of operations. Management believes
that, as of September 30, 2009, we met all capital adequacy requirements to
which we were subject.
The
Federal Deposit Insurance Act requires bank regulatory agencies to take "prompt
corrective action" with respect to FDIC-insured depository institutions that do
not meet minimum capital requirements. A depository institution's
treatment for purposes of the prompt corrective action provisions will depend on
how its capital levels compare to various capital measures and certain other
factors, as established by regulation. Prompt corrective action and
other discretionary actions could have a material effect on our financial
condition and results of operation.
It is
management's intention to maintain our capital at a level acceptable to all
regulatory authorities and future dividend payments will be determined
accordingly. Regulatory authorities require that any dividend
payments made by either us or the Bank, not exceed earnings for that
year. Shareholders should not anticipate a continuation of the cash
dividend simply because of the existence of a dividend reinvestment
program. The payment of dividends is at the discretion of our board
of directors and will depend upon future earnings, our financial condition, and
other related factors.
To be
categorized as well capitalized, we must maintain minimum Total risk-based, Tier
1 risk-based, and Tier 1 leverage ratios as set forth in the following
table:
|
|
Actual
|
|
|
For
Capital
Adequacy
Purposes
|
|
|
To
Be Well Capitalized Under Prompt Corrective Actions
Provisions
|
|
|
|
Amount
|
|
Ratio
|
|
|
Amount
|
|
Ratio
|
|
|
Amount
|
|
Ratio
|
|
As
of September 30, 2009:
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
243,545
|
|
19.01
|
%
|
|
$
|
102,473
|
|
8.00
|
%
|
|
|
N/A
|
|
N/A
|
|
Bank
Only
|
|
$
|
235,730
|
|
18.40
|
%
|
|
$
|
102,471
|
|
8.00
|
%
|
|
$
|
128,089
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
227,440
|
|
17.76
|
%
|
|
$
|
51,237
|
|
4.00
|
%
|
|
|
N/A
|
|
N/A
|
|
Bank
Only
|
|
$
|
219,625
|
|
17.15
|
%
|
|
$
|
51,236
|
|
4.00
|
%
|
|
$
|
76,854
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Capital (to Average Assets) (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
227,440
|
|
8.15
|
%
|
|
$
|
111,586
|
|
4.00
|
%
|
|
|
N/A
|
|
N/A
|
|
Bank
Only
|
|
$
|
219,625
|
|
7.88
|
%
|
|
$
|
111,510
|
|
4.00
|
%
|
|
$
|
139,387
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
212,082
|
|
17.66
|
%
|
|
$
|
96,097
|
|
8.00
|
%
|
|
|
N/A
|
|
N/A
|
|
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
|
|
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
|
|
Bank
Only
|
|
$
|
193,370
|
|
7.51
|
%
|
|
$
|
102,960
|
|
4.00
|
%
|
|
$
|
128,700
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Refers to quarterly average assets as calculated by bank regulatory
agencies.
Liquidity and Interest Rate
Sensitivity
Liquidity
management involves our ability to convert assets to cash with a minimum of loss
to enable us to meet our obligations to our customers at any
time. This means addressing (1) the immediate cash withdrawal
requirements of depositors and other funds providers; (2) the funding
requirements of all lines and letters of credit; and (3) the short-term credit
needs of customers. Liquidity is provided by short-term investments
that can be readily liquidated with a minimum risk of loss. Cash,
interest earning deposits, federal funds sold and short-term investments with
maturities or repricing characteristics of one year or less continue to be a
substantial percentage of total assets. At September 30, 2009, these
investments were 19.49% of total assets as compared to 19.52% at September 30,
2008. 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 was $30.0 million of federal funds
purchased at September 30, 2009. At September 30, 2009, the amount of
additional funding Southside Bank could obtain from FHLB using unpledged
securities at FHLB was approximately $271.4 million, net of FHLB stock purchases
required.
Interest
rate sensitivity management seeks to avoid fluctuating net interest margins and
to enhance consistent growth of net interest income through periods of changing
interest rates. The ALCO closely monitors various liquidity ratios,
interest rate spreads and margins. The ALCO performs interest rate
simulation tests that apply various interest rate scenarios including immediate
shocks and market value of portfolio equity (“MVPE”) with interest rates
immediately shocked plus and minus 200 basis points to assist in determining our
overall interest rate risk and adequacy of the liquidity position. In
addition, the ALCO utilizes a simulation model to determine the impact on net
interest income of several different interest rate scenarios. By
utilizing this technology, we can determine changes that need to be made to the
asset and liability mixes to minimize the change in net interest income under
these various interest rate scenarios.
Composition of
Loans
One of
our main objectives is to seek attractive lending opportunities in Texas,
primarily in the counties in which we operate. Substantially all of
our loan originations are made to borrowers who live in and conduct business in
the counties in Texas in which we operate, with the exception of municipal loans
which are made almost entirely in Texas, 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
September 30, 2009, the SFG loans totaled approximately $74.2
million. We look forward to the possibility that our loan growth will
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 September 30, 2009 increased $28.3
million, or 2.9%, and the average loan balance was up $40.7 million, or 4.2%,
when compared to the same period in 2008.
Our
market areas have not, to date, experienced the level of downturn in the economy
and real estate prices that other areas of the country have
experienced. However, we have noticed some weakening conditions and
have strengthened our underwriting standards, especially related to all aspects
of real estate lending. Our real estate loan portfolio does not have
Alt-A or subprime mortgage exposure.
The
following table sets forth loan totals by category for the periods
presented:
|
At
|
|
|
At
|
|
At
|
|
|
September
30,
|
|
|
December
31,
|
|
September
30,
|
|
|
2009
|
|
|
2008
|
|
2008
|
|
|
(in
thousands)
|
|
Real
Estate Loans:
|
|
|
|
|
|
|
|
Construction
|
|
$ |
87,976 |
|
|
$ |
120,153 |
|
|
$ |
99,235 |
|
1-4
Family Residential
|
|
|
233,172 |
|
|
|
238,693 |
|
|
|
244,988 |
|
Other
|
|
|
208,187 |
|
|
|
184,629 |
|
|
|
185,248 |
|
Commercial
Loans
|
|
|
162,378 |
|
|
|
165,558 |
|
|
|
165,929 |
|
Municipal
Loans
|
|
|
144,450 |
|
|
|
134,986 |
|
|
|
118,568 |
|
Loans
to Individuals
|
|
|
179,561 |
|
|
|
178,530 |
|
|
|
173,407 |
|
Total
Loans
|
|
$ |
1,015,724 |
|
|
$ |
1,022,549 |
|
|
$ |
987,375 |
|
Real
estate loans – Other, which are comprised primarily of commercial real estate
loans increased $23.6 million, or 12.8% to $208.2 million for the nine month
period ended September 30, 2009 from $184.6 million at December 31, 2008, and
$22.9 million, or 12.4%, from $185.2 million at September 30,
2008. The increase for the nine month period is primarily due to
construction loans transferred into permanent loans.
Municipal
loans increased $9.5 million, or 7.0%, to $144.5 million for the nine month
period ended September 30, 2009 from $135.0 million at December 31, 2008, and
$25.9 million, or 21.8%, from $118.6 million at September 30,
2008. Loans to individuals, which includes SFG loans, increased $1.0
million, or 0.6%, to $179.6 million for the nine month period ended September
30, 2009 from $178.5 million at December 31, 2008, and $6.2 million, or 3.5%,
from $173.4 million at September 30, 2008.
Construction
loans decreased $32.2 million, or 26.8%, to $88.0 million for the nine month
period ended September 30, 2009 from $120.2 million at December 31, 2008, and
$11.3 million, or 11.3%, from $99.2 million at September 30, 2008, primarily as
a result of construction loans transferred to permanent loans and loans
transferred into the other real estate category. Our 1-4 family
residential mortgage loans decreased $5.5 million, or 2.3%, to $233.2 million
for the nine month period ended September 30, 2009 from $238.7 million at
December 31, 2008, and $11.8 million, or 4.8%, from $245.0 million at September
30, 2008 due to the economic conditions surrounding residential real estate
during this period. Commercial loans decreased $3.2 million, or 1.9%,
to $162.4 million for the nine month period ended September 30, 2009 from $165.6
million at December 31, 2008, and $3.6 million, or 2.1%, from $165.9 million at
September 30, 2008.
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
September 30, 2009, our review of the loan portfolio indicated that a loan loss
allowance of $18.4 million was adequate to cover probable losses in the
portfolio.
For the
three and nine months ended September 30, 2009, loan charge-offs were $3.9
million and $9.0 million and recoveries were $528,000 and $1.4 million,
resulting in net charge-offs of $3.3 million and $7.6 million,
respectively. For the three and nine months ended September 30, 2008,
loan charge-offs were $2.3 million and $6.7 million, and recoveries were
$509,000 and $1.5 million, resulting in net charge-offs of $1.7 million and $5.2
million, respectively. The increase in net charge-offs was related to
the weakening economic conditions. The necessary provision expense
was estimated at $3.0 million and $10.0 million, for the three and nine months
ended September 30, 2009, compared to $3.2 million and $8.3 million for the
comparable periods in 2008, respectively. The increase in provision expense for
the three and nine months ended September 30, 2009 compared to the same periods
in 2008 was primarily a result of the increase in nonperforming loans and the
loan portfolio, including the investment in the automobile loan portfolios of
SFG. Please see “Note 13 – Variable Interest Entities” in our
financial statements included in this report. The SFG loans are high
yield loans which have a higher than average risk profile.
This has
resulted in increased charge-offs and increased provision
expense. These factors are considered prior to SFG purchases of pools
of automobile loans when determining the appropriate purchase
price. These pools are typically purchased at a
discount.
Nonperforming
Assets
Nonperforming
assets consist of delinquent loans 90 days or more past due, nonaccrual loans,
other real estate owned (“OREO”), repossessed assets and restructured
loans. Nonaccrual loans are those loans which are 90 days or more
delinquent and collection in full of both the principal and interest is in
doubt. Additionally, some loans that are not delinquent may be placed
on nonaccrual status due to doubts about full collection of principal or
interest. When a loan is categorized as nonaccrual, the accrual of
interest is discontinued and the accrued balance is reversed for financial
statement purposes. Restructured loans represent loans that have been
renegotiated to provide a reduction or deferral of interest or principal because
of deterioration in the financial position of the
borrowers. Categorization of a loan as nonperforming is not in itself
a reliable indicator of potential loan loss. Other factors, such as
the value of collateral securing the loan and the financial condition of the
borrower must be considered in judgments as to potential loan
loss. OREO represents real estate taken in full or partial
satisfaction of debts previously contracted. The dollar amount of
OREO is based on a current 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.
The
following table sets forth nonperforming assets for the periods
presented:
|
|
At
September
30,
2009
|
|
At
December
31,
2008
|
|
At
September
30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
loans
|
|
$
|
16,690
|
|
$
|
14,289
|
|
$
|
6,192
|
|
Loans
90 days past due
|
|
|
1,065
|
|
|
593
|
|
|
1,320
|
|
Restructured
loans
|
|
|
2,273
|
|
|
148
|
|
|
158
|
|
Other
real estate owned
|
|
|
2,331
|
|
|
318
|
|
|
549
|
|
Repossessed
assets
|
|
|
848
|
|
|
433
|
|
|
342
|
|
Total
Nonperforming Assets
|
|
$
|
23,207
|
|
$
|
15,781
|
|
$
|
8,561
|
|
|
|
At
September
30,
2009
|
|
At
December
31,
2008
|
|
At
September
30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
Asset
Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccruing
loans to total loans
|
|
|
1.64
|
%
|
1.40
|
%
|
0.63
|
%
|
Allowance
for loan losses to nonaccruing loans
|
|
|
110.52
|
|
112.76
|
|
208.79
|
|
Allowance
for loan losses to nonperforming assets
|
|
|
79.48
|
|
102.10
|
|
151.01
|
|
Allowance
for loan losses to total loans
|
|
|
1.82
|
|
1.58
|
|
1.31
|
|
Nonperforming
assets to total assets
|
|
|
0.79
|
|
0.58
|
|
0.34
|
|
Net
charge-offs to average loans
|
|
|
1.00
|
|
0.74
|
|
0.70
|
|
Total
nonperforming assets at September 30, 2009 were $23.2 million, an increase of
$7.4 million, or 47.1%, from $15.8 million at December 31, 2008 and an increase
of $14.6 million, or 171.1%, from $8.6 million at September 30,
2008. In general, the increasing trend in nonperforming assets is
reflective of current weak economic conditions.
From
December 31, 2008 to September 30, 2009, nonaccrual loans increased $2.4
million, or 16.8%, to $16.7 million and from September 30, 2008, increased $10.5
million, or 169.5%. Of the total nonaccrual loans at September 30,
2009, 5.2% are residential real estate loans, 8.4% are commercial real estate
loans, 12.3% are commercial loans, 41.2% are loans to individuals, primarily SFG
automobile loans, and 32.9% are construction loans. Loans 90 days or
more past due increased $472,000, or 79.6%, to $1.1 million at September 30,
2009 from $593,000 at December 31, 2008 and decreased $255,000, or 19.3%, from
$1.3 million at September 30, 2008. Restructured loans increased $2.1
million, or 1435.8%, to $2.3 million at September 30, 2009 from $148,000 at
December 31, 2008 and $2.1 million, or 1338.6%, from $158,000 at September 30,
2008. The increase in restructured loans was attributable to SFG
automobile loan pools. OREO increased $2.0 million, or 633.0%, to
$2.3 million at September 30, 2009 from $318,000 at December 31, 2008 and
increased $1.8 million, or 324.6%, from $549,000 at September 30, 2008.
Most of
the OREO at September 30, 2009, consisted of construction loans. We
are actively marketing all properties and none are being held for investment
purposes. Repossessed assets increased $415,000, or 95.8%, to
$848,000 at September 30, 2009 from $433,000 at December 31, 2008 and $506,000,
or 148.0%, from $342,000 at September 30, 2008. The increase in
repossessed assets at September 30, 2009 was attributable to SFG automobile loan
pools.
Expansion
During
July 2009, we opened a full service branch in Gresham, Texas, just south of
Tyler, replacing a loan production office we have operated for several years in
close proximity. We are in the process of building a full service
branch on the west side of Tyler on Highway 64, which we anticipate will open
during the first half of 2010. In addition, we are building a new
facility adjacent to our headquarters in Tyler which will house our Trust
department. It is anticipated to be completed during the first half
of 2010. We continue to explore opportunities to expand either into
additional grocery store or traditional branch locations.
Accounting
Pronouncements
See “Note
11 - Accounting Pronouncements” in our financial statements included in this
report.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The
disclosures set forth in this item are qualified by the section captioned
“Forward-Looking Statements” included in “Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations” of this report and
other cautionary statements set forth elsewhere in this report.
Refer to
the discussion of market risks included in “Item 7A. Quantitative and
Qualitative Disclosures About Market Risks” in our Annual Report on Form 10-K
for the year ended December 31, 2008. There have been no significant
changes in the types of market risks we face since December 31,
2008.
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 with 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 the net income simulation model as the primary
quantitative tool in measuring the amount of interest rate risk associated with
changing market rates. This 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 September 30, 2009, the model simulations projected
that 100 and 200 basis point increases in interest rates would result in
negative variances on net interest income of 1.64% and 3.90%, 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 negative variance in net
interest income of 4.66% and 14.29%, respectively, relative to the base case
over the next 12 months. As of September 30, 2008, the model
simulations projected that 100 and 200 basis point increases in interest rates
would result in negative variances in net interest income of 0.13% and 0.42%,
respectively, relative to the base case over 12 months, while a decrease in
interest rates of 100 basis points would result in a positive variance in net
interest income of 0.45% and a decrease of 200 basis points would result in a
negative variance in net income of 4.37% 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 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, as described above, 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 4. CONTROLS AND
PROCEDURES
Our
management, including our Chief Executive Officer (“CEO”) and our Chief
Financial Officer (“CFO”), undertook an evaluation of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered
by this report, and the CEO and CFO concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this report, in
recording, processing, summarizing and reporting in a timely manner the
information that the Company is required to disclose in its reports under
the Exchange Act and in accumulating and communicating to the
Company’s management, including the Company’s CEO and CFO, such information as
appropriate to allow timely decisions regarding required
disclosure.
No
changes were made to our internal control over financial reporting (as defined
in Rule 13a-15(f) under the Exchange Act) during our last fiscal quarter that
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
We are
party to legal proceedings arising in the normal conduct of
business. Management believes that at September 30, 2009 such
litigation is not material to our financial position or results of
operations.
Additional
information regarding risk factors appears in “Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Forward Looking Statements” of this Form 10-Q and in Part I — “Item 1A. Risk
Factors” in our Annual Report on Form 10-K for the year ended December 31,
2008. There have been no material changes from the risk factors
previously disclosed in our Annual Report on Form 10-K.
ITEM
2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
Not
Applicable.
ITEM
3. DEFAULTS UPON SENIOR
SECURITIES
Not
Applicable.
ITEM
4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
Not
Applicable.
Not
Applicable.
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Exhibit
No.
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3
(a)
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–
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Amended
and Restated Articles of Incorporation (filed as Exhibit 3(a) to the
Registrant's Form 8-K, filed dated April 20, 2009, and incorporated herein
by reference).
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3
(b)
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–
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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).
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3(b)(i)
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–
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Amendment
No. 1 to the Amended and Restated Bylaws of Southside Bancshares, Inc
effective August 27, 2009 (filed as Exhibit 3.1 to the Registrant’s Form
8-K/A, filed September 10, 2009, and incorporated herein by
reference).
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*31.1
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–
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Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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*31.2
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–
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Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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*32
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–
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Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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*Filed
herewith.
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Pursuant
to the requirements 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.
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SOUTHSIDE
BANCSHARES, INC.
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BY:
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/s/
B. G. HARTLEY
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B.
G. Hartley, Chairman of the Board
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and
Chief Executive Officer
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(Principal
Executive Officer)
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DATE:
November 6, 2009
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BY:
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/s/
LEE R. GIBSON
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Lee
R. Gibson, CPA, Executive Vice President
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and
Chief Financial Officer (Principal Financial
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and
Accounting Officer)
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DATE:
November 6, 2009
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Exhibit
Number Description
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31.1
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Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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31.2
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Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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*32
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Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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*The
certifications attached as Exhibit 32 accompany this quarterly report on
Form 10-Q and are “furnished” to the Commission pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by us for
purposes of Section 18 of the Securities Exchange Act of 1934, as
amended.
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