UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
(Mark
One)
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X
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ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2007
or
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the Transition Period From _____ to _____
Commission
file number 0-12247
Southside
Bancshares, Inc.
(Exact name of
registrant as specified in its charter)
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Texas
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75-1848732
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(State of
incorporation)
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(I.R.S.
Employer Identification No.)
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1201
S. Beckham Avenue, Tyler, Texas
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75701
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(Address of
Principal Executive Offices)
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(Zip
Code)
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Registrant's
telephone number, including area code: (903) 531-7111
Securities
registered pursuant to Section 12(b) of the Act:
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Name of each
exchange
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Title of each
class
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on which
registered
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COMMON
STOCK, $1.25 PAR VALUE
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NASDAQ
Global Select Market
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Securities
registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
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YES
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NO
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ü
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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YES
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NO
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ü
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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.
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YES
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ü
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NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated
filer
[ ] Accelerated
filer [ü] Non-accelerated
filer [ ]
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
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YES
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NO
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ü
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The aggregate market value of the
common stock held by non-affiliates of the registrant as of June 29, 2007 was
$240,147,310.
As of February 15,
2008, 13,142,462 shares of common stock of Southside Bancshares, Inc. were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain portions of
the Registrant's Proxy Statement to be filed for the Annual Meeting of
Shareholders to be held April 17, 2008 are incorporated by reference into Part
III of this Annual Report on Form 10-K. Other than those portions of
the proxy statement specifically incorporated by reference pursuant to Items
10-14 of Part III hereof, no other portions of the proxy statement shall be
deemed so incorporated.
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TABLE OF CONTENTS
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Subsidiaries
of the Registrant
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Consent of
Independent Registered Public Accounting Firm
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Certification
Pursuant to Section 302
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Certification
Pursuant to Section 302
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Certification
Pursuant to Section 906
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IMPORTANT INFORMATION ABOUT
THIS REPORT
In this report, the
words “the Company,” “we,” “us,” and “our” refer to the combined entities of
Southside Bancshares, Inc. and its subsidiaries. The words
“Southside” and “Southside Bancshares” refer to Southside Bancshares,
Inc. The words “Southside Bank” and “Fort Worth National Bank” refer
to those entities, respectively, and the words “the Banks” refers to those
entities collectively. The word “SFG” refers to Southside Financial
Group, LLC., of which Southside owns a 50% interest.
FORWARD-LOOKING
INFORMATION
The disclosures set forth in this item are
qualified by the section captioned “Forward-Looking Information” in “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of this Annual Report on Form 10-K and other cautionary statements
set forth elsewhere in this report.
GENERAL
Southside Bancshares, Inc., incorporated in
Texas in 1982, is a bank holding company for Southside Bank, a Texas state bank
headquartered in Tyler, Texas and Southside Bancshares, Inc. acquired Fort Worth
Bancshares, Inc., the bank holding company for Fort Worth National Bank,
headquartered in Fort Worth, Texas. Tyler has a metropolitan area
population of approximately 195,000 and is located approximately 90 miles east
of Dallas, Texas and 90 miles west of Shreveport, Louisiana. Fort
Worth is the fifth largest city in Texas with a population of approximately
620,000.
At December 31, 2007, our total assets were
$2.20 billion, total loans were $961.2 million, deposits were $1.53 billion, and
shareholders’ equity was $132.3 million. Our net income was $16.7
million and $15.0 million and fully diluted earnings per common share were $1.24
and $1.12 for the years ended December 31, 2007 and 2006,
respectively. We have paid a cash dividend every year since
1970.
We are a community-focused financial
institution that offers a full range of financial services to individuals,
businesses, municipal entities, and non-profit organizations in the communities
we serve. These services include consumer and commercial loans,
deposit accounts, trust services, safe deposit services and brokerage
services.
Our consumer loan services include 1-4 family
residential mortgage loans, home equity loans, home improvement loans,
automobile loans and other installment loans. Commercial loan
services include short-term working capital loans for inventory and accounts
receivable, short and medium-term loans for equipment or other business capital
expansion, commercial real estate loans and municipal loans. We also
offer construction loans for 1-4 family residential and commercial real
estate. During the third quarter we acquired a 50% ownership interest
and 51% voting interest in SFG, a start-up company that purchases existing high
yield automobile loan portfolios from lenders throughout the United
States.
We offer a variety of deposit
accounts with a wide range of interest rates and terms, including savings, money
market, interest and noninterest bearing checking accounts and certificates of
deposit (“CDs”). Our trust services include investment, management,
administration and advisory services, primarily for individuals and, to a lesser
extent, partnerships and corporations. At December 31, 2007, our
trust department managed approximately $718 million of trust
assets.
1
We and our subsidiaries are subject to
comprehensive regulation, examination and supervision by the Board of Governors
of the Federal Reserve System (the “Federal Reserve”), the Texas Department of
Banking (the “TDB”), the Federal Deposit Insurance Corporation (the “FDIC”) and
the Office of the Comptroller of the Currency (the “OCC”), and are subject to
numerous laws and regulations relating to internal controls, the extension of
credit, making of loans to individuals, deposits, and all other facets of our
operations.
Our administrative offices are located at
1201 S. Beckham Avenue, Tyler, Texas 75701, and our telephone number is
903-531-7111. Our website can be found at www.southside.com. Our
public filings with the Securities and Exchange Commission (the “SEC”) may be
obtained free of charge at either our website or the SEC’s website, www.sec.gov, as soon as reasonably
practicable after filing with the SEC.
RECENT
DEVELOPMENTS
On October 10, 2007, Southside completed the
acquisition of Fort Worth Bancshares, Inc. and its wholly-owned subsidiaries,
Fort Worth Bancorporation, Inc., Fort Worth National Bank and Magnolia Trust
Company I. Southside purchased all of the outstanding capital stock
of Fort Worth Bancshares, Inc. for approximately $37 million. Fort
Worth National Bank operates two banking offices in Fort Worth, one banking
office in Arlington and a loan production office in Austin. At the
time of purchase, Fort Worth National Bank had approximately $124 million in
total assets, $105 million in loans and $103 million in
deposits. Southside retained many of the key employees of Fort Worth
National Bank, and continues to operate Fort Worth National Bank as a separate
depository institution under its existing charter.
On August 8, 2007, Southside acquired a 50%
ownership interest, through a subsidiary of Southside Bank, in Southside
Financial Group, LLC. SFG is engaged in the business of purchasing
high-yield portfolios of automobile loans on a basis from lenders across the
United States. SFG has retained a management team with extensive
experience in the automobile loan industry. Southside Bank’s initial
capital contribution to SFG was $500,000.
MARKET
AREA
We consider our primary market area to be all
of Smith, Gregg, Tarrant, Travis, Cherokee, Anderson, Kaufman, Henderson and
Wood Counties in Texas, and to a lesser extent, portions of adjoining
counties. During 2007, we acquired Fort Worth National Bank, which
operates with two branches in Fort Worth, one branch in Arlington and a loan
production office in Austin. In addition, we opened a full service
grocery store branch in Hawkins in Wood County, as well as our sixth full
service grocery store branch in our largest market area, the city of Tyler, in
Smith County. Our expectation is that our presence in all of the
market areas we serve will continue to grow in the future. In
addition, we continue to explore new markets in which we believe we can expand
successfully.
The principal economic activities in our market
areas include retail, distribution, manufacturing, medical services, education
and oil and gas industries. Additionally, the industry base includes
conventions and tourism, as well as retirement relocation. These
economic activities support a growing regional system of medical service, retail
and education centers. Tyler, Longview, Fort Worth, Austin and
Arlington are home to several nationally recognized health care systems that
represent all major specialties.
We serve our markets through 44 branch
locations, 18 of which are located in grocery stores. The branches
are located in and around Tyler, Longview, Lindale, Gresham, Jacksonville,
Bullard, Chandler, Hawkins, Seven Points, Palestine, Forney, Gun Barrel City,
Athens, Whitehouse, Fort Worth and Arlington. Our television and
radio advertising has extended into most of our East Texas market areas for
several years, providing us name recognition throughout Smith, Gregg and
Cherokee counties along with portions of Anderson and Henderson
counties. We anticipate that continued advertising combined with
strategically placed branches should expand our name recognition in this part of
the state. Fort Worth National Bank is a well recognized name in the
Fort Worth and Arlington markets.
2
We also maintain eight motor bank
facilities. Our customers may also access various banking services
through our 45 automatic teller machines (“ATMs”) and ATMs owned by others,
through debit cards, and through our automated telephone, internet and
electronic banking products. These products allow our customers to
apply for loans from their computers, access account information and conduct
various other transactions from their telephones and computers.
THE BANKING
INDUSTRY IN TEXAS
The banking industry is affected by general
economic conditions such as interest rates, inflation, recession, unemployment
and other factors beyond our control. During the last ten to fifteen
years the Texas economy has continued to diversify, decreasing the overall
impact of fluctuations in oil and gas prices; however, the oil and gas industry
is still a significant component of the Texas economy. During
2007, we believe our market areas have been realatively resilient and
we have not experinced the effects of the housing led slowdown that
impacted other regions of the United States. We cannot predict
whether current economic conditions will improve, remain the same or
decline.
COMPETITION
The activities we are engaged in are highly
competitive. Financial institutions such as savings and loan
associations, credit unions, consumer finance companies, insurance companies,
brokerage companies and other financial institutions with varying degrees of
regulatory restrictions compete vigorously for a share of the financial services
market. During 2007, the number of financial institutions in our
market areas increased, a trend that we expect will
continue. Brokerage and insurance companies continue to become more
competitive in the financial services arena and pose an ever increasing
challenge to banks. Legislative changes also greatly affect the level
of competition we face. Federal legislation allows credit unions to
use their expanded membership capabilities, combined with tax-free status, to
compete more fiercely for traditional bank business. The tax-free
status granted to credit unions provides them a significant competitive
advantage. Many of the largest banks operating in Texas, including
some of the largest banks in the country, have offices in our market
areas. Many of these institutions have capital resources, broader
geographic markets, and legal lending limits substantially in excess of those
available to us. We face competition from institutions that offer
products and services we do not or cannot currently offer. Some
institutions we compete with offer interest rate levels on loan and deposit
products that we are unwilling to offer due to interest rate risk and overall
profitability concerns. We expect the level of competition to
increase.
EMPLOYEES
At February 15, 2008, we employed approximately
530 full time equivalent persons. None of the employees are
represented by any unions or similar groups, and we have not experienced any
type of strike or labor dispute. We consider the relationship with
our employees to be good.
EXECUTIVE OFFICERS
OF THE REGISTRANT
Our executive officers as of December 31,
2007, were as follows:
B. G. Hartley (Age
78), Chairman of the Board and Chief Executive Officer of Southside Bancshares,
Inc. since 1983. He also serves as Chairman of the Board and Chief
Executive Officer of Southside Bank, having served in these capacities since
Southside Bank's inception in 1960.
Sam Dawson (Age
60), President, Secretary and Director of Southside Bancshares, Inc. since
1998. He also has served as President, Chief Operations Officer and
Director of Southside Bank since 1996. He became an officer of
Southside Bancshares, Inc. in 1982 and of Southside Bank in 1975.
Robbie N. Edmonson
(Age 75), Vice Chairman of the Board of Southside Bancshares, Inc. and Southside
Bank since 1998. He joined Southside Bank as a vice president in
1968.
3
Jeryl Story (Age
56), Executive Vice President of Southside Bancshares, Inc. since 2000, and
Senior Executive Vice President - Loan Administration, Senior Lending Officer
and Director of Southside Bank since 1996. He joined Southside Bank
in 1979 as an officer in Loan Documentation.
Lee R. Gibson (Age
51), Executive Vice President and Chief Financial Officer of Southside
Bancshares, Inc. and of Southside Bank since 2000. He is also a
Director of Southside Bank. He became an officer of Southside
Bancshares, Inc. in 1985 and of Southside Bank in 1984.
All the individuals named above serve in their
capacity as officers of Southside Bancshares, Inc. and Southside Bank and are
appointed annually by the board of directors of each entity.
SUPERVISION AND
REGULATION
General
Banking is a complex, highly regulated
industry. Consequently, our growth and earnings performance can be
affected not only by decisions of management and national and local economic
conditions, but also by the statutes administered by, and the regulations and
policies of, various governmental authorities. For bank holding
companies, Texas state-chartered banks, and national banks, these authorities
include, but are not limited to, the Federal Reserve, the Federal Deposit
Insurance Corporation (“FDIC”), the Texas Department of Banking (“TDB”), the
Office of the Comptroller of the Currency (“OCC”), United States Department of
Treasury (the “Treasury Department”), the Internal Revenue Service and state
taxing authorities.
The primary goals of the bank regulatory system
are to maintain a safe and sound banking system and to facilitate the conduct of
sound monetary policy. In furtherance of these goals, Congress has
created several largely autonomous regulatory agencies and enacted numerous laws
that govern banks, bank holding companies and the banking
industry. The system of supervision and regulation applicable to us
establishes a comprehensive framework for our operations and is intended
primarily for the protection of the FDIC’s Deposit Insurance Fund, our
depositors and the public, rather than our shareholders and
creditors. The following summarizes certain of the more important
relevant laws, rules and regulations governing banks and bank holding companies,
but does not purport to be a complete summary of all applicable laws, rules and
regulations governing banks and bank holding companies. The
descriptions are qualified in their entirety by reference to the specific
statutes and regulations discussed.
Holding Company
Regulation
The Bank
Holding Company Act. As bank holding companies under the Bank
Holding Company Act of 1956 (“BHCA”), as amended, Southside Bancshares, Inc. and
its wholly-owned subsidiary, Southside Delaware Financial Corporation, Fort
Worth Bancshares, Inc. and Fort Worth Bancorporation, Inc. (collectively, the
“Holding Companies”) are registered with and subject to regulation by the
Federal Reserve. The Holding Companies are required to file annual
and other reports with, and furnish information to, the Federal Reserve, which
makes periodic inspections of the Holding Companies.
The Bank Holding Company Act provides that a
bank holding company must obtain the prior approval of the Federal Reserve (i)
for the acquisition of more than five percent of the voting stock in any bank or
bank holding company, (ii) for the acquisition of substantially all the assets
of any bank or bank holding company or (iii) in order to merge or consolidate
with another bank holding company. The BHCA also provides that, with
certain exceptions, a bank holding company may not engage in any activities
other than those of banking or managing or controlling banks and other
authorized subsidiaries that are engaged in businesses that are closely related
to banking or that own or control more than five percent of the voting shares of
any company that is not a bank or otherwise engaged in businesses that are
closely related to banking. The Federal Reserve has deemed limited
activities (such as leasing, consumer and commercial finance, certain financial
consulting activities and certain securities brokerage activities) to be closely
related to banking and therefore permissible for a bank holding
company.
4
The Bank Holding Company Act restricts the
extension of credit to any bank holding company or non-banking subsidiary by a
subsidiary bank. A bank holding company and its subsidiaries are also
prohibited from engaging in certain tying arrangements in connection with any
extension of credit, lease or sale of property or furnishing of
services. Bank anti-tying regulations are discussed in greater detail
below.
Traditionally, the activities of bank holding
companies had been limited to the business of banking and activities closely
related or incidental to banking. The Gramm-Leach-Bliley Act
(“GLBA”), which became effective on March 11, 2000, amended the Bank Holding
Company Act and removed certain legal barriers separating the conduct of various
types of financial services businesses. In addition, GLBA
substantially revamped the regulatory scheme within which financial institutions
operate.
Under GLBA, bank holding companies meeting
certain eligibility requirements may elect to become a “financial holding
company.” A financial holding company may engage in activities that
are “financial in nature,” as well as additional activities that the Federal
Reserve or Treasury Department determine are financial in nature or incidental
or complimentary to financial activities. Under GLBA, “financial
activities” specifically include insurance brokerage and underwriting,
securities underwriting and dealing, merchant banking, investment advisory and
lending activities.
A bank holding company may become a financial
holding company under GLBA if each of its subsidiary banks is “well capitalized”
under the FDIC Improvement Act prompt corrective action provisions, is “well
managed” and has at least a “satisfactory” rating under the Community
Reinvestment Act. In addition, the bank holding company must file a
declaration with the Federal Reserve that the bank holding company elects to
become a financial holding company. A bank holding company that falls
out of compliance with these requirements may be required to cease engaging in
certain of its activities.
Under GLBA, the Federal Reserve serves as the
primary regulator of financial holding companies, with supervisory authority
over the parent company and limited authority over its
subsidiaries. Expanded financial activities of financial holding
companies generally will be regulated according to the type of such financial
activity: banking activities by banking regulators, securities activities by
securities regulators and insurance activities by insurance
regulators. As noted, none of the Holding Companies have elected to
become a financial holding company and to conduct the broader activities
permitted under GLBA. However, there can be no assurance that they
will not make such an election in the future.
In addition, GLBA also imposes additional
restrictions and heightened obligations, including disclosure requirements,
regarding private information collected by financial
institutions. The Holding Companies and their subsidiaries (including
the Banks) are subject to these obligations.
Interstate
Banking. Federal banking law generally provides that a bank
holding company may acquire or establish banks in any state of the United
States, subject to certain age and deposit concentration limits. In
approving acquisitions by bank holding companies of banks and companies engaged
in banking-related activities under sections 3 and 4 of the BHCA, the Federal
Reserve considers a number of factors, including expected benefits to the public
such as greater convenience, increased competition, or gains in efficiency, as
weighed against the risks of possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest, or unsound banking practices. The Federal Reserve is also empowered to
differentiate between new activities and activities commenced through the
acquisition of a going concern. In addition, Texas banking laws
permit a bank holding company that owns stock of a bank located outside the
State of Texas to acquire a bank or bank holding company located in
Texas. This type of acquisition may occur only if the Texas bank to
be directly or indirectly controlled by the out-of-state bank holding company
has existed and continuously operated as a bank for a period of at least five
years. In any event, a bank holding company may not own or control
banks in Texas the deposits of which would exceed 20% of the total deposits of
all federally-insured deposits in Texas. Texas banking laws also
would not prevent us from making bank acquisitions or establishing banks outside
of the state of Texas. We have no present plans to acquire or
establish banks outside the State of Texas but have not eliminated the
possibility of doing so.
5
Capital
Adequacy. Each of the federal banking agencies, including the
Federal Reserve, the OCC, and the FDIC, has issued substantially similar
risk-based and leverage capital guidelines applicable to banking organizations
they supervise, including bank holding companies and banks. Under the risk-based
capital requirements, the Holding Companies and the Banks are each generally
required to maintain a minimum ratio of total capital to risk-weighted assets
(including certain off-balance sheet activities, such as standby letters of
credit) of 8%. At least half of the total capital must be composed of common
shareholders’ equity excluding unrealized gains or losses on debt securities
available for sale, unrealized gains on equity securities available for sale and
unrealized gains or losses on cash flow hedges, net of deferred income taxes;
plus certain mandatorily redeemable capital securities; less nonqualifying
intangible assets net of applicable deferred income taxes and certain
nonfinancial equity investments. This is called “Tier 1 capital.” The remainder
may consist of qualifying subordinated debt, certain hybrid capital instruments,
qualifying preferred stock and a limited amount of the allowance for credit
losses. This is called “Tier 2 capital.” Tier 1 capital and Tier 2 capital
combined are referred to as total regulatory capital. The Federal
Reserves also expects bank holding companies to maintain a minimum ratio of Tier
1 capital to risk-weighted assets of 4%.
The Federal Reserve requires bank holding
companies that engage in trading activities to adjust their risk-based capital
ratios to take into consideration market risks that may result from movements in
market prices of covered trading positions in trading accounts, or from foreign
exchange or commodity positions, whether or not in trading accounts, including
changes in interest rates, equity prices, foreign exchange rates or commodity
prices. Any capital required to be maintained under these provisions may consist
of a new “Tier 3 capital” consisting of forms of short-term subordinated
debt.
Each of the federal bank regulatory agencies,
including the Federal Reserve, also has established minimum leverage capital
requirements for banking organizations. These requirements provide that banking
organizations that meet certain criteria, including excellent asset quality,
high liquidity, low interest rate exposure and good earnings, and that have
received the highest regulatory rating must maintain a ratio of Tier 1 capital
to total adjusted average assets of at least 3%. Institutions not meeting these
criteria, as well as institutions with supervisory, financial or operational
weaknesses, are expected to maintain a minimum Tier 1 capital to total adjusted
average assets ratio equal to 100 to 200 basis points above that stated minimum.
Holding companies experiencing internal growth or making acquisitions are
expected to maintain strong capital positions substantially above the minimum
supervisory levels without significant reliance on intangible assets. The
Federal Reserve also continues to consider a “tangible Tier 1 capital leverage
ratio” (deducting all intangibles) and other indicators of capital strength in
evaluating proposals for expansion or new activity.
In addition, the Federal Reserve, the OCC and
the FDIC have adopted risk-based capital standards that explicitly identify
concentrations of credit risk and the risk arising from non-traditional
activities, as well as an institution’s ability to manage these risks, as
important factors to be taken into account by each agency in assessing an
institution’s overall capital adequacy. The capital guidelines provide that an
institution’s exposure to a decline in the economic value of its capital due to
changes in interest rates be considered by the agency as a factor in evaluating
a banking organization’s capital adequacy. The agencies also require banks and
bank holding companies to adjust their regulatory capital to take into
consideration the risk associated with certain recourse obligations, direct
credit subsidies, residual interest and other positions in securitized
transactions that expose banking organizations to credit risk.
6
The ratios of Tier 1 capital, total capital to
risk-adjusted assets, and leverage capital of the Company and the Banks as of
December 31, 2007, are shown in the following table.
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Capital
Adequacy Ratios
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||||||||||||||||||||
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Regulatory
Minimums
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Regulatory
Minimums
to be
Well-Capitalized
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Southside
Bancshares, Inc.
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Southside
Bank
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Fort Worth
National Bank
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Risk-based
capital ratios:
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Tier 1
Capital (1)
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4.0 | % | 6.0 | % | 14.92 | % | 15.50 | % | 14.54 | % | ||||||||||
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Total
risk-based capital (2)
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8.0 | 10.0 | 17.02 | 16.41 | 15.51 | |||||||||||||||
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Tier 1
leverage ratio (3)
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4.0 | 5.0 | 7.73 | 7.67 | 13.13 | |||||||||||||||
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(1)
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Common
shareholders’ equity excluding unrealized gains or losses on debt
securities available for sale, unrealized gains on equity securities
available for sale and unrealized gains or losses on cash flow hedges, net
of deferred income taxes; plus certain mandatorily redeemable capital
securities, less nonqualifying intangible assets net of applicable
deferred income taxes, and certain nonfinancial equity investments;
computed as a ratio of risk-weighted assets, as defined in the risk-based
capital guidelines.
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(2)
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The sum of
Tier 1 capital, a qualifying portion of the allowance for credit losses,
qualifying subordinated debt and qualifying unrealized gains on available
for sale equity securities; computed as a ratio of risk-weighted assets,
as defined in the risk-based capital
guidelines.
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(3)
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Tier 1
capital computed as a percentage of fourth quarter average assets less
nonqualifying intangibles and certain nonfinancial equity
investments.
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The federal banking agencies, including the OCC
and the FDIC, are required to take “prompt corrective action” in respect of
depository institutions that do not meet minimum capital requirements. The law
establishes five capital categories for insured depository institutions for this
purpose: “well-capitalized,” “adequately capitalized,” “undercapitalized,”
“significantly undercapitalized” and “critically
undercapitalized.” To be considered “well-capitalized” under these
standards, an institution must maintain a total risk-based capital ratio of 10%
or greater; a Tier 1 risk-based capital ratio of 6% or greater; a leverage
capital ratio of 5% or greater; and must not be subject to any order or written
directive to meet and maintain a specific capital level for any capital
measure. The Banks meet the criteria for “well-capitalized.” Federal
law also requires the bank regulatory agencies to implement systems for “prompt
corrective action” for institutions that fail to meet minimum capital
requirements within the five capital categories, with progressively more severe
restrictions on operations, management and capital distributions according to
the category in which an institution is placed. Failure to meet capital
requirements may also cause an institution to be directed to raise additional
capital. Federal law also mandates that the agencies adopt safety and soundness
standards relating generally to operations and management, asset quality and
executive compensation, and authorizes administrative action against an
institution that fails to meet such standards.
In addition to the “prompt corrective action”
directives, failure to meet capital guidelines may subject a banking
organization to a variety of other enforcement remedies, including additional
substantial restrictions on its operations and activities, termination of
deposit insurance by the FDIC and, under certain conditions, the appointment of
a conservator or receiver.
7
The regulations also establish procedures for
“downgrading” an institution to a lower capital category based on supervisory
factors other than capital. Specifically, a federal banking agency may, after
notice and an opportunity for a hearing, reclassify a well-capitalized
institution as adequately capitalized and may require an adequately capitalized
institution or an undercapitalized institution to comply with supervisory
actions as if it were in the next lower category if the institution is operating
in an unsafe or unsound condition or engaging in an unsafe or unsound
practice. The FDIC may not, however, reclassify a significantly
undercapitalized institution as critically undercapitalized.
Federal Reserve policy requires a bank holding
company to act as a source of financial strength and to take measures to
preserve and protect bank subsidiaries in situations where additional
investments in a troubled bank may not otherwise be warranted. In addition,
where a bank holding company has more than one bank or thrift subsidiary, each
of the bank holding company’s subsidiary depository institutions are responsible
for any losses to the FDIC as a result of an affiliated depository institution’s
failure or anticipated failure. As a result, a bank holding company
may be required to contribute additional capital to its subsidiaries in the form
of capital notes or other instruments which qualify as capital under regulatory
rules. Any such loans from the holding company to its subsidiary
banks likely will be unsecured and subordinated to the bank’s depositors and
perhaps to other creditors of the bank.
Dividends. As
a bank holding company that does not, as an entity, currently engage in separate
business activities of a material nature, the Holding Companies’ ability to pay
cash dividends depends upon the cash dividends received from the
Banks. We must pay essentially all of our operating expenses from
funds we receive from the Banks. Therefore, shareholders may receive
dividends from us only to the extent that funds are available after payment of
our operating expenses. In general, the Federal Reserve discourages
bank holding companies from paying dividends except out of operating earnings,
and the prospective rate of earnings retention appears consistent with the bank
holding company’s capital needs, asset quality and overall financial
condition. We are also subject to certain restrictions on the payment
of dividends as a result of the requirement that we maintain an adequate level
of capital as described above and serve as a source of strength for our
subsidiaries.
Change
in Bank Control Act. Under the Change in Bank Control Act
(“CBCA”), persons who intend to acquire control of a bank holding company,
either directly or indirectly, must give 60 days prior notice to the Federal
Reserve. “Control” would exist when an acquiring party directly or
indirectly has control of at least 25% of our voting securities or the power to
direct management or policies. Under Federal Reserve regulations, a
rebuttable presumption of control would arise with respect to an acquisition
where, after the transaction, the acquiring party has ownership control or the
power to vote at least 10% (but less than 25%) of our voting
securities.
The Attorney General of the United States may,
within 15 days after approval by the Federal Reserve Board of an acquisition
under section 3 of the BHCA, bring an action challenging such acquisition under
the federal antitrust laws, in which case the effectiveness of such approval is
stayed pending a final ruling by the courts. Failure of the Attorney General to
challenge a section 3 acquisition and the absence of a specific right of action
to challenge section 4 or CBCA acquisitions do not, however, exempt the holding
company from complying with both state and federal antitrust laws after the
acquisition is consummated.
The Federal Reserve has broad authority to
prohibit activities of bank holding companies and their non-bank subsidiaries
which represent unsafe and unsound banking practices or which constitute knowing
or reckless violations of laws or regulations, if those activities caused a
substantial loss to a depository institution. These penalties can be as high as
one million dollars for each day the activity continues.
8
Bank
Regulation
Southside Bank is chartered under the laws of
the State of Texas, is an “insured institution” and is a member of the FDIC’s
Deposit Insurance Fund. It is not a member of the Federal Reserve
System. As such, it is subject to various requirements and
restrictions under the laws of the United States and the State of Texas, and to
regulation, supervision and regular examination by the TDB and the
FDIC. The TDB and the FDIC have the power to enforce compliance with
applicable banking statutes and regulations. These requirements and
restrictions include requirements to maintain reserves against deposits,
restrictions on the nature and amount of loans that may be made and the interest
that may be charged thereon and restrictions relating to investments and other
activities of Southside Bank. Fort Worth National Bank is a national
bank, and as such is subject to supervision, regulation and examination by the
OCC. The FDIC also has back-up enforcement authority over Fort Worth
National Bank. Ongoing supervision is provided through regular
examinations and other means that allow the regulators to gauge management’s
ability to identify, assess and control risk in all areas of operations in a
safe and sound manner and to ensure compliance with laws and
regulations. As a result, the scope of routine examinations of the
Banks is rather extensive. To facilitate supervision, the Banks are required to
file periodic reports with the regulatory agencies, and much of this information
is made available to the public by the agencies.
Deposit
Insurance. The Banks’ deposits are generally insured up to
$100,000 per depositor and up to $250,000 for certain retirement accounts by the
FDIC’s Deposit Insurance Fund. As insurer, the FDIC imposes deposit
premiums and is authorized to conduct examinations and to require
reporting. The FDIC assesses insurance premiums on a bank’s deposits
at a variable rate depending on the probability that the deposit insurance fund
will incur a loss with respect to the bank. The FDIC determines the
deposit insurance assessment rates on the basis of the bank’s capital
classification and supervisory evaluations. For 2007, the minimum
assessment rate is 5 basis points for the institutions the FDIC perceives to
pose the least threat to the Deposit Insurance Fund, and 47 basis points for the
highest risk institutions. Our deposits insurance
assessments may increase or decrease depending upon the risk assessment
classification to which we are assigned by the FDIC. Any increase in
insurance assessments could have an adverse effect on our earnings.
In addition to its role as insurer, the FDIC is
the primary federal regulator of state-chartered banks, including Southside
Bank, that are not members of a Federal Reserve Bank. The FDIC issues
regulations, conducts examinations, requires the filing of reports and generally
supervises and regulates the operations of state-chartered nonmember banks. FDIC
approval is required prior to any merger or consolidation involving state,
nonmember banks, or the establishment or relocation of an office facility
thereof. FDIC supervision and regulation of Southside Bank is intended primarily
for the protection of depositors and the FDIC insurance funds. With
respect to Fort Worth National Bank, OCC approval is required prior to any
merger or consolidation involving national banks, or the establishment or
relocation of an office facility thereof. OCC and FDIC
supervision and regulation of Fort Worth National Bank is intended primarily for
the protection of depositors and the FDIC insurance funds.
Under the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (“FIRREA”), a depository institution
insured by the FDIC can be held liable for any loss incurred by, or reasonably
expected to be incurred by, the FDIC after August 9, 1989 in connection with (i)
the default of a commonly controlled FDIC insured depository institution or (ii)
any assistance provided by the FDIC to a commonly controlled FDIC insured
depository institution in danger of default. FIRREA provides that certain types
of persons affiliated with financial institutions can be fined by the federal
regulatory agency having jurisdiction over a depository institution with federal
deposit insurance (such as the Banks) up to $1 million per day for each
violation of certain regulations related (primarily) to lending to and
transactions with executive officers, directors, and principal shareholders,
including the interests of these individuals. Other violations may result in
civil money penalties of $5,000 to $25,000 per day or in criminal fines and
penalties. In addition, the FDIC has been granted enhanced authority to withdraw
or to suspend deposit insurance in certain cases.
9
Activities
and Investments of Insured State-Chartered and National
Banks. The activities and investments of national banks are
limited to those set forth in the National Bank Act and in statutory
interpretations of the OCC. The FDIC generally limits the activities
and equity investments of state nonmember banks to those that are permissible
for national banks. Under regulations dealing with equity investments, an
insured state bank generally may not directly or indirectly acquire or retain
any equity investment of a type, or in an amount, that is not permissible for a
national bank. However, a state nonmember bank may seek FDIC approval
to engage in activities that are not permissible for a national
bank.
An insured state bank or a national bank is not
prohibited from, among other things, (i) acquiring or retaining a majority
interest in a subsidiary that engages in activities permissible for the parent
bank, (ii) investing as a limited partner in a partnership the sole purpose of
which is direct or indirect investment in the acquisition, rehabilitation or new
construction of a qualified housing project, provided that such limited
partnership investment may not exceed 2% of the bank’s total assets, (iii)
acquiring up to 10% of the voting stock of a company that solely provides or
reinsures directors’, trustees’ and officers’ liability insurance coverage or
bankers’ blanket bond group insurance coverage for insured depository
institutions, and (iv) acquiring or retaining the voting shares of a depository
institution if certain requirements are met.
FDIC regulations implementing the Federal
Deposit Insurance Act (“FDIA”) provide that an insured state-chartered bank may
not, directly, or indirectly through a subsidiary, engage as “principal” in any
activity that is not permissible for a national bank unless the FDIC has
determined that such activities would pose no risk to the insurance fund of
which it is a member and the bank is in compliance with applicable regulatory
capital requirements. Any insured state-chartered bank or savings bank directly
or indirectly engaged in any activity that is not permitted for a national bank
must cease the impermissible activity.
Loans-to-One-Borrower. The
maximum aggregate amount of loans that Southside Bank will be permitted to make
under Texas law to any one borrower, including related entities, is 25% of
Tier 1 capital. The limit for Fort Worth National Bank under the
National Bank Act is 15% of Total capital, plus an additional 10% for loans
secured by readily marketable securities.
Regulation
of Lending Activities. Our loans are subject to numerous
federal and state laws and regulations, including the Truth in Lending Act, the
Federal Consumer Credit Protection Act, the Texas Finance Code, the Texas
Deceptive Trade Practices Act, the Equal Credit Opportunity Act, the Real Estate
Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit
Reporting Act, and the Flood Disaster Protection Act. Remedies to the
borrower or consumer and penalties to us are provided if we fail to comply with
these laws and regulations. The scope and requirements of these laws
and regulations have expanded significantly in recent years. The Fair
and Accurate Credit Transactions Act of 2003 (“FACTA”) substantially amended the
Fair Credit Reporting Act to impose new duties on institutions such as the Banks
that furnish or receive information from credit reporting
agencies. The new duties relate primarily to situations in which a
consumer could become the victim of an identity theft. The FDIC and
other federal agencies are still in the process of developing regulations
implementing the FACTA provisions.
Brokered
Deposits. The Banks also may be restricted in their ability to
accept brokered deposits, depending on their capital
classification. “Well capitalized” banks are permitted to accept
brokered deposits, but all banks that are not well capitalized are not permitted
to accept such deposits. The FDIC may, on a case-by-case basis,
permit banks that are adequately capitalized to accept brokered deposits if the
FDIC determines that acceptance of such deposits would not constitute an unsafe
or unsound banking practice with respect to the bank.
Anti-Tying
Regulations. Under the Bank Holding Company Act and Federal
Reserve regulations, a bank is prohibited from engaging in certain tying or
reciprocity arrangements with its customers. In general, a bank may
not extend credit, lease, sell property, or furnish any services or fix or vary
the consideration for these products or services on the condition that either:
the customer obtain or provide some additional credit, property, or services
from or to the bank, the bank holding company or subsidiaries thereof, or that
the customer may not obtain some other credit, property, or services from a
competitor, except to the extent reasonable conditions are imposed to assure the
soundness of the credit extended. Certain arrangements
10
are permissible: a
bank may offer combined-balance products and may otherwise offer more favorable
terms if a customer obtains two or more traditional bank products; and certain
foreign transactions are exempt from the general rule. A bank holding
company or any bank affiliate also is subject to anti-tying requirements in
connection with electronic benefit transfer services.
Dividends. All
dividends paid by Southside Bank are paid to the Company, as sole indirect
shareholder of Southside Bank, through Southside Delaware. All
dividends paid by Fort Worth National Bank are paid to the Company, as sole
indirect shareholder of Fort Worth National Bank, through Fort Worth
Bancorporation, Inc. and Fort Worth Bancshares, Inc. Our general
dividend policy is to pay dividends at levels consistent with maintaining
liquidity and preserving applicable capital ratios and servicing
obligations. The dividend policies of the Banks are subject to the
discretion of their respective boards of directors and will depend upon such
factors as future earnings, financial conditions, cash needs, capital adequacy,
compliance with applicable statutory and regulatory requirements and general
business conditions.
The ability of Southside Bank, as a Texas
banking association, to pay dividends is restricted under applicable law and
regulations. We generally may not pay a dividend reducing our capital
and surplus without the prior approval of the Texas Banking
Commissioner. All dividends must be paid out of net profits then on
hand, after deducting expenses, including losses and provisions for loan
losses. The FDIC has the right to prohibit the payment of dividends
by us where the payment is deemed to be an unsafe and unsound banking
practice. We are also prohibited from paying dividends that will
reduce our capital below the “well-capitalized” level as defined by the FDIC,
and as a general matter, prefer to maintain a strong capital position which
necessarily limits the amount of dividends we are prepared to declare and
pay.
The ability of Fort Worth National Bank to pay
dividends is subject to similar restrictions. Fort Worth National
Bank may not, without prior OCC approval, pay a dividend that would exceed the
sum of net income in calendar year to date plus retained net earnings of the
immediately previous two years. As a policy matter, the OCC prefers
that national banks pay dividends solely out of net profits then on
hand.
The exact amount of future dividends on the
Banks will be a function of the profitability of the Banks in general (which
cannot be accurately estimated or assured), applicable tax rates in effect from
year to year and the discretion of their respective boards of
directors.
In addition, FDIC regulations generally
prohibits FDIC-insured depository institutions, such the Banks, from making any
capital distribution (including payment of dividends) or paying any management
fee to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to
restrictions on borrowing from the Federal Reserve. In addition,
undercapitalized depository institutions are subject to growth limitations and
are required to submit capital restoration plans. A depository institution’s
holding company must guarantee the capital plan, up to an amount equal to the
lesser of 5% of the depository institution’s assets at the time it becomes
undercapitalized or the amount of the capital deficiency when the institution
fails to comply with the plan. The federal banking agencies may not accept a
capital plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the depository
institution’s capital. If a depository institution fails to submit an acceptable
plan, it is treated as if it is significantly undercapitalized.
Significantly undercapitalized depository
institutions may be subject to a number of requirements and restrictions,
including orders to sell sufficient voting stock to become adequately
capitalized, requirements to reduce total assets and cessation of receipt of
deposits from correspondent banks. Critically undercapitalized depository
institutions are subject to appointment of a receiver or
conservator.
Various other legislation, including proposals
to revise the bank regulatory system and to limit or expand the investments that
a depository institution may make with insured funds, is from time to time
introduced in Congress. The TDB, the OCC, and the FDIC will examine the Banks
periodically for compliance with various regulatory requirements. Such
examinations, however, are for the protection of the DIF and for depositors and
not for the protection of investors and shareholders.
11
Transactions
with Affiliates. The Holding Companies are legal entities separate and
distinct from the Banks and their other subsidiaries. Various legal limitations
restrict the Banks from lending or otherwise advancing funds to the Holding
Companies or their non-bank subsidiaries. The Holding Companies and
the Banks are subject to Sections 23A and 23B of the Federal Reserve Act and
Federal Reserve Regulation W. Generally, Sections 23A and 23B (i)
limit the extent to which a bank or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus; (ii) limit such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus; and (ii)
require that all such transactions be on terms that are consistent with safe and
sound banking practices. The term "covered transaction" includes the
making of loans to an affiliate, the purchase of or investment in securities
issued by an affiliate, the purchase of assets from an affiliate, the issuance
of a guarantee for the benefit of an affiliate, and similar
transactions. Most loans by a bank to any of its affiliates must be
secured by collateral in amounts ranging from 100 to 130 percent of the loan
amount, depending on the nature of the collateral. In addition, any
covered transaction by a bank with an affiliate and any sale of assets or
provision of services to an affiliate must be on terms that are substantially
the same, or at least as favorable, to the bank as those prevailing at the time
for comparable transactions with nonaffiliated companies. The Banks
are also restricted in the loans that it may make to its executive officers and
directors, the executive officers and directors of the Company, any owner of 10%
or more of its stock or the stock of the Company, and certain entities
affiliated with any such person. Section 23B also prohibits a bank
from purchasing low-quality assets from the bank’s affiliates, and requires that
all of a bank’s extensions of credit to an affiliate be appropriately secured by
acceptable collateral, generally United States government or agency
securities.
Under Sections 23A and 23B of the Federal
Reserve Act, an affiliate of a bank is any company or entity that controls, is
controlled by or is under common control with the bank. A subsidiary
of a bank that is not also a depository institution is not treated as an
affiliate of a bank for purposes of Sections 23A and 23B unless it engages in
activities not permissible for a national bank to engage in
directly.
Insider Loans. Under
Regulation O of the Federal Reserve, the Bank’s are restricted in the loans that
they may make to their executive officers and directors, the executive officers
and directors of Southside Bancshares, Inc., any owner of 10% or more of its
stock or the stock of Southside Bancshares, Inc., and certain entities
affiliated with any such person.
Standards
for Safety and Soundness. The FDIA requires the
federal banking regulatory agencies to prescribe, by regulation or guideline,
operational and managerial standards for all insured depository institutions
relating to: (i) internal controls, information systems and internal audit
systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate
risk exposure; and (v) asset growth. The agencies also must prescribe
standards for asset quality, earnings, and stock valuation, as well as standards
for compensation, fees and benefits. The federal banking agencies
have adopted regulations and Interagency Guidelines Prescribing Standards for
Safety and Soundness (“Guidelines”) to implement these required standards. The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. Under the regulations, if the FDIC or the OCC,
as applicable, determines that the Banks fail to meet any standards prescribed
by the Guidelines, the agency may require the Bank in question to submit to the
agency an acceptable plan to achieve compliance with the standard, as required
by the FDIC or the OCC. The final regulations establish deadlines for the
submission and review of such safety and soundness compliance
plans.
Community
Reinvestment Act. Under the Community Reinvestment Act, we
have a continuing and affirmative obligation consistent with safe and sound
banking practices to help meet the needs of our entire community, including low-
and moderate-income neighborhoods. The Community Reinvestment Act
does not establish specific lending requirements or programs for financial
institutions nor does it limit our discretion to develop the types of products
and services that we believe are best suited to our particular
community. Current CRA regulations rate institutions based on their
actual performance in meeting community credit needs. CRA performance is
evaluated by the FDIC and the OCC, the Banks’ primary federal regulators, using
a lending test, an investment test, and a service test. The regulators also will
consider: (i) demographic data about the community; (ii) the institution’s
capacity and constraints; (iii) the
12
institution’s
product offerings and business strategy; and (iv) data on the prior performance
of the institution and similarly-situated lenders. On a periodic
basis, the FDIC or the OCC, as applicable, is charged with preparing a written
evaluation of our record of meeting the credit needs of the entire community and
assigning a rating. Our regulatory agencies will take that record
into account in their evaluation of any application made by us for, among other
things, approval of the acquisition or establishment of a branch or other
deposit facility, an office relocation, a merger or the acquisition of shares of
capital stock of another financial institution. An “unsatisfactory”
Community Reinvestment Act rating may be used as the basis to deny an
application. In addition, as discussed above, a bank holding company
may not become a financial holding company unless each of its subsidiary banks
has a Community Reinvestment Act rating of at least satisfactory. We
were last examined for compliance with the Community Reinvestment Act on March
12, 2007 and received a rating of “outstanding.”
Consumer
Regulation. Activities
of the Banks are subject to a variety of statutes and regulations designed to
protect consumers, including the Fair Credit Reporting Act (FCRA), Equal Credit
Opportunity Act (ECOA), and Truth-in-Lending Act (TILA). These laws
and regulations include provisions that:
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·
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limit the
interest and other charges collected or contracted for by the
Banks;
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govern the
Banks’ disclosures of credit terms to consumer
borrowers;
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require the
Banks to provide information to enable the public and public officials to
determine whether they are fulfilling its obligation to help meet the
housing needs of the community it
serves;
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prohibit the
Banks from discriminating on the basis of race, creed or other prohibited
factors when they make decisions to extend
credit;
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require that
the Banks safeguard the personal nonpublic information of their customers,
provide annual notices to consumers regarding the usage and sharing of
such information, and limit disclosure of such information to third
parties except under specific circumstances;
and
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·
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govern the
manner in which the Banks may collect consumer
debts.
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The deposit
operations of the Banks are also subject to laws and regulations
that:
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·
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require the
Banks to adequately disclose the interest rates and other terms of
consumer deposit accounts;
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·
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impose a duty
on the Banks to maintain the confidentiality of consumer financial records
and prescribe procedures for complying with administrative subpoenas of
financial records; and
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govern
automatic deposits to and withdrawals from deposit accounts with the Banks
and the rights and liabilities of customers who use automated teller
machines and other electronic banking
services.
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USA PATRIOT Act/Anti-Money
Laundering. Following the events of September 11, 2001,
President Bush, on October 26, 2001, signed into law the United and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001. Also known as the “USA PATRIOT Act,”
the law enhances the powers of the federal government and law enforcement
organizations to combat terrorism, organized crime and money
laundering. The USA PATRIOT Act significantly amends and expands the
application of the Bank Secrecy Act, including enhanced measures regarding
customer identity, new suspicious activity reporting rules and enhanced
anti-money laundering programs. Under the Act, each financial
institution is required to establish and maintain anti-money laundering
compliance and due diligence programs, which include, at a minimum, the
development of internal policies, procedures, and controls; the designation of a
compliance officer; an ongoing employee training program; and an independent
audit function to test programs. In addition, the Act requires the
bank regulatory agencies to
13
consider the record
of a bank or bank holding company in combating money laundering activities in
their evaluation of bank and bank holding company merger or acquisition
transactions.
Furthermore, financial institutions
must maintain anti-money laundering programs that include established internal
policies, procedures, and controls; a designated compliance officer; an ongoing
employee training program; and testing of the program by an independent audit
function. The Company and the Banks are also prohibited
from entering into specified financial transactions and account relationships
and must meet enhanced standards for due diligence and “knowing your customer”
in their dealings with foreign financial institutions and foreign customers.
Financial institutions must take reasonable steps to conduct enhanced scrutiny
of account relationships to guard against money laundering and to report any
suspicious transactions, and recent laws provide law enforcement authorities
with increased access to financial information maintained by
banks. Anti-money laundering obligations have been substantially
strengthened as a result of the USA Patriot Act, which was renewed in
2006. Bank regulators routinely examine institutions for compliance
with these obligations and are required to consider compliance in connection
with the regulatory review of applications. The regulatory
authorities have been active in imposing “cease and desist” orders and money
penalty sanctions against institutions found to be violating these
obligations.
Privacy
and Data Security. The GLB Act
imposed new requirements on financial institutions with respect to consumer
privacy. The GLB Act generally prohibits disclosure of consumer information to
non-affiliated third parties unless the consumer has been given the opportunity
to object and has not objected to such disclosure. Financial institutions are
further required to disclose their privacy policies to consumers annually.
Financial institutions, however, will be required to comply with state law if it
is more protective of consumer privacy than the GLB Act. The GLB Act
also directed federal regulators, including the FDIC, to prescribe standards for
the security of consumer information. The Banks are subject to such
standards, as well as standards for notifying consumers in the event of a
security breach. Under federal law, the Company must disclose its
privacy policy to consumers, permit consumers to “opt out” of having non-public
customer information disclosed to third parties, and allow customers to opt out
of receiving marketing solicitations based on information about the customer
received from another subsidiary. States may adopt more extensive
privacy protections. The Banks and the Company are similarly required
to have an information security program to safeguard the confidentiality and
security of customer information and to ensure proper disposal. Customers must
be notified when unauthorized disclosure involves sensitive customer information
that may be misused.
Branch
Banking. Pursuant to the Texas Finance Code, all banks located
in Texas are authorized to branch statewide. Accordingly, a bank
located anywhere in Texas has the ability, subject to regulatory approval, to
establish branch facilities near any of our facilities and within our market
area. If other banks were to establish branch facilities near our
facilities, it is uncertain whether these branch facilities would have a
material adverse effect on our business.
In 1994, Congress adopted the Reigle-Neal
Interstate Banking and Branching Efficiency Act of 1994. That statute
provides for nationwide interstate banking and branching, subject to certain
aging and deposit concentration limits that may be imposed under applicable
state laws. Texas law permits interstate branching in two manners,
with certain exceptions. First, a financial institution with its main
office outside of Texas may establish a branch in the State of Texas by
acquiring a financial institution located in Texas that is at least five years
old, so long as the resulting institution and its affiliates would not hold more
than 20% of the total deposits in the state after the acquisition. In
addition, a financial institution with its main office outside of Texas
generally may establish a branch in the State of Texas on a de novo basis if the
financial institution’s main office is located in a state that would permit
Texas institutions to establish a branch on a de novo basis in that
state. These limitations apply to both of the Banks.
The FDIC has adopted regulations under the
Reigle-Neal Act to prohibit an out-of-state bank from using the interstate
branching authority primarily for the purpose of deposit
production. These regulations include guidelines to insure that
interstate branches operated by an out-of-state bank in a host state are
reasonably helping to meet the credit needs of the communities served by the
out-of-state bank.
14
Enforcement
Authority. The federal banking laws also contain civil and
criminal penalties available for use by the appropriate regulatory agency
against certain “institution-affiliated parties” primarily including management,
employees and agents of a financial institution, as well as independent
contractors such as attorneys and accountants and others who participate in the
conduct of the financial institution’s affairs and who caused or are likely to
cause more than minimum financial loss to or a significant adverse affect on the
institution, who knowingly or recklessly violate a law or regulation, breach a
fiduciary duty or engage in unsafe or unsound practices. These
practices can include the failure of an institution to timely file required
reports or the submission of inaccurate reports. These laws
authorize the appropriate banking agency to issue cease
and desist orders that may, among other things, require affirmative action to
correct any harm resulting from a violation or practice, including restitution,
reimbursement, indemnification or guarantees against loss. A
financial institution may also be ordered to restrict its growth, dispose of
certain assets or take other action as determined by the ordering agency to be
appropriate. The FDIC and the OCC, respectively, are the appropriate
regulatory agencies for Southside Bank and Fort Worth National Bank; the Federal
Reserve is the appropriate regulatory agency for the Holding
Companies.
Governmental
Monetary Policies. The commercial banking business is affected
not only by general economic conditions but also by the monetary policies of the
Federal Reserve. Changes in the discount rate on member bank
borrowings, control of borrowings, open market operations, the imposition of and
changes in reserve requirements against member banks, deposits and assets of
foreign branches, the imposition of and changes in reserve requirements against
certain borrowings by banks and their affiliates and the placing of limits on
interest rates which member banks may pay on time and savings deposits are some
of the instruments of monetary policy available to the Federal
Reserve. Those monetary policies influence to a significant extent
the overall growth of all bank loans, investments and deposits and the interest
rates charged on loans or paid on time and savings deposits. The
nature of future monetary policies and the effect of such policies on our future
business and earnings, therefore, cannot be predicted accurately.
Annual
Audits. Every bank with total assets in excess of $500
million, such as us, must have an annual independent audit made of the bank’s
financial statements by a certified public accountant to verify that the
financial statements of the bank are presented in accordance with United States
generally accepted accounting principles (“GAAP”) and comply with such other
disclosure requirements as prescribed by the FDIC.
All of the above laws and regulations add to
the cost of our operations and thus have a negative impact on
profitability. It should be noted that there has been a tremendous
expansion experienced in recent years by financial service providers that are
not subject to the same rules and regulations as are applicable to the Holding
Companies. Management cannot predict what other legislation might be
enacted or what other regulations might be adopted and the effects thereof on
us.
Usury Laws. Texas
usury laws limit the rate of interest that may be charged by state
banks. Certain federal laws provide a limited preemption of Texas
usury laws. The maximum rate of interest that we may charge on direct
business loans under Texas law varies between 18% per annum and (i) 28% per
annum for business and agricultural loans above $250,000 or (ii) 24% per annum
for other direct loans. Texas floating usury ceilings are tied to the
26-week United States Treasury Bill Auction rate. Other ceilings
apply to open-end credit card loans and dealer paper we purchase. A
federal statute removes interest ceilings under usury laws for our loans that
are secured by first liens on residential real property. These
restrictions generally apply to both of the Banks.
Economic
Environment. The monetary policies of
regulatory authorities, including the Federal Reserve, have a significant effect
on the operating results of bank holding companies and their
subsidiaries. The Federal Reserve regulates the national supply of
bank credit. Among the means available to the Federal Reserve are
open market operations in United States Government Securities, changes in the
discount rate on member bank borrowings, changes in reserve requirements against
member and nonmember bank deposits, and loans and limitations on interest rates
which member banks may pay on time or demand deposits. These methods
are used in varying combinations to influence overall growth and distribution of
bank loans, investments and deposits. Their use may affect interest
rates charged on loans or paid for deposits.
Also see discussion of "Banking Industry in
Texas" above.
15
ITEM 1A. RISK
FACTORS
An investment in our common stock is subject to
risks inherent to our business. The material risks and uncertainties that
management believes affect us are described below. Before making an investment
decision, you should carefully consider the risks and uncertainties described
below together with all of the other information included or incorporated by
reference in this report. The risks and uncertainties described below are not
the only ones facing us. Additional risks and uncertainties that
management is not aware of or focused on or that management currently deems
immaterial may also impair our business operations. This report is qualified in
its entirety by these risk factors.
If any of the following risks actually occur,
our financial condition and results of operations could be materially and
adversely affected. If this were to happen, the value of our common
stock could decline significantly, and you could lose all or part of your
investment.
RISKS RELATED TO
OUR BUSINESS
We
are subject to interest rate risk.
Our earnings and cash flows are largely
dependent upon our net interest income. Net interest income is the difference
between interest income earned on interest-earning assets such as loans and
securities and interest expense paid on interest-bearing liabilities such as
deposits and borrowed funds. Interest rates are highly sensitive to many factors
that are beyond our control, including general economic conditions and policies
of various governmental and regulatory agencies and, in particular, the Board of
Governors of the Federal Reserve System. Changes in monetary policy, changes in
interest rates, changes in the yield curve, changes in market risk spreads, and
a prolonged inverted yield curve could influence not only the interest we
receive on loans and securities and the amount of interest we pay on deposits
and borrowings, but such changes could also affect:
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our ability
to originate loans and obtain
deposits;
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net interest
rate spreads and net interest rate
margins;
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our ability
to enter into instruments to hedge against interest rate
risk;
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the fair
value of our financial assets and liabilities;
and
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the average
duration of our loan and mortgage-backed securities
portfolio.
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If the interest rates paid on deposits and
other borrowings increase at a faster rate than the interest rates received on
loans and other investments, our net interest income, and therefore earnings,
could be adversely affected. Earnings could also be adversely
affected if the interest rates received on loans and other investments fall more
quickly than the interest rates paid on deposits and other
borrowings.
Although management believes we have
implemented effective asset and liability management strategies to reduce the
potential effects of changes in interest rates on our results of operations, any
substantial, unexpected, prolonged change in market interest rates could have a
material adverse effect on our financial condition and results of operations.
See the section captioned “Net Interest Income” in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” for
further discussion related to our management of interest rate risk.
16
We
are subject to credit quality risks and our credit policies may not be
sufficient to avoid losses.
We are subject to the risk of losses resulting
from the failure of borrowers, guarantors and related parties to pay interest
and principal amounts on their loans. Although we maintain credit
policies and credit underwriting, monitoring and collection procedures that
management believes are sufficient to manage these risks, these policies and
procedures may not prevent losses, particularly during periods in which the
local, regional or national economy suffers a general decline. If
borrowers fail to repay their loans, our financial condition and results of
operations would be adversely affected.
Our
interest rate risk, liquidity, market value of securities and profitability are
subject to risks associated with the successful implementation of our leverage
strategy.
We implemented a leverage strategy in 1998 for
the purpose of enhancing overall profitability by maximizing the use of our
capital. The effectiveness of our leverage strategy, and therefore
our profitability, may be adversely affected by a number of factors, including
reduced net interest margin and spread, adverse market value changes to the
investment and mortgage-backed and related securities, incorrect modeling
results due to the unpredictable nature of mortgage-backed securities
prepayments, the length of interest rate cycles, and the slope of the interest
rate yield curve. In addition, we may not be able to obtain wholesale
funding to profitably and properly fund the leverage program. If our
leverage strategy is flawed or poorly implemented, we may incur significant
losses. See the section captioned “Leverage Strategy” in “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
We
have a high concentration of loans secured by real estate and a continued
downturn in the real estate market, for any reason, could result in losses and
materially and adversely affect our business, financial condition, results of
operations and future prospects.
A significant portion of our loan portfolio is
dependent on real estate. In addition to the financial strength and
cash flow characteristics of the borrower in each case, often loans are secured
with real estate collateral. At December 31, 2007, approximately
56.8% of our loans have real estate as a primary or secondary component of
collateral. The real estate in each case provides an alternate source
of repayment in the event of default by the borrower and may deteriorate in
value during the time the credit is extended. Beginning in the third
quarter of 2007, there were well-publicized developments in the credit markets,
beginning with a decline in the sub-prime mortgage lending market, which later
extended to the markets for collateralized mortgage obligations, mortgage-backed
securities and the lending markets generally. This decline has
resulted in restrictions in the resale markets for non-conforming loans and has
had an adverse effect on retail mortgage lending operations in many
markets. We believe our markets have been relatively resilient and we
have not
experienced effects associated with these market trends; however, a continued
decline in the credit markets generally could adversely effect our financial
condition and results of operations if we are unable to extend credit or sell
loans in the secondary market. An adverse change in the economy
affecting values of real estate generally or in our primary markets specifically
could significantly impair the value of collateral and our ability to sell the
collateral upon foreclosure. Furthermore, it is likely that, in a
declining real estate market, we would be required to further increase our
allowance for loan losses. If we are required to liquidate the
collateral securing a loan to satisfy the debt during a period of reduced real
estate values or to increase our allowance for loan losses, our profitability
and financial condition could be adversely impacted.
We
have a high concentration of loans directly related to the medical community in
our market area, primarily in Smith and Gregg counties. A negative
change adversely impacting the medical community, for any reason, could result
in losses and materially and adversely affect our business, financial condition,
results of operations and future prospects.
A significant portion of our loan portfolio is
dependent on the medical community. The primary source of repayment
for loans in the medical community is cash flow from continuing
operations. However, changes in the amount the government pays the
medical community through the various government health insurance programs could
adversely impact the medical community, which in turn could result in higher
default rates by borrowers in the medical industry. Increased
regulation of the medical community
17
could also
negatively impact profitability and cash flow in the medical
community. It is likely that, should there be any significant adverse
impact to the medical community, our profitability and financial condition would
also be adversely impacted.
Our allowance for probable loan losses
may be insufficient.
We maintain an allowance for probable loan
losses, which is a reserve established through a provision for probable loan
losses charged to expense. This allowance represents management’s
best estimate of probable losses that have been incurred within the existing
portfolio of loans. The allowance, in the judgment of management, is necessary
to reserve for estimated loan losses and risks inherent in the loan portfolio.
The level of the allowance reflects management’s continuing evaluation of
industry concentrations; specific credit risks; loan loss experience; current
loan portfolio quality; present economic, political and regulatory conditions;
and unidentified losses inherent in the current loan portfolio. The
determination of the appropriate level of the allowance for probable loan losses
inherently involves a high degree of subjectivity and requires us to make
significant estimates and assumptions regarding current credit risks and future
trends, all of which may undergo material changes. Changes in
economic conditions affecting borrowers, new information regarding existing
loans, identification of additional problem loans and other factors, both within
and outside our control, may require an increase in the allowance for probable
loan losses. In addition, bank regulatory agencies periodically
review our allowance for loan losses and may require an increase in the
provision for probable loan losses or the recognition of further loan
charge-offs, based on judgments different than those of
management. In addition, if charge-offs in future periods exceed the
allowance for probable loan losses, we will need additional provisions to
increase the allowance for probable loan losses. Any increases in the
allowance for probable loan losses will result in a decrease in net income and,
possibly, capital, and may have a material adverse effect on our financial
condition and results of operations. See the section captioned “Loan Loss
Experience and Allowance for Loan Losses” in
“Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations” for further discussion related to our
process for determining the appropriate level of the allowance for probable loan
losses.
We
are subject to environmental liability risk associated with lending
activities.
A significant portion of our loan portfolio is
secured by real property. During the ordinary course of business, we
may foreclose on and take title to properties securing certain loans. There is a
risk that hazardous or toxic substances could be found on these
properties. If hazardous or toxic substances are found, we may be
liable for remediation costs, as well as for personal injury and property
damage. Environmental laws may require us to incur substantial expenses and may
materially reduce the affected property’s value or limit our ability to use or
sell the affected property. In addition, future laws or more
stringent interpretations or enforcement policies with respect to existing laws
may increase our exposure to environmental liability. Although we
have policies and procedures to perform an environmental review before
initiating any foreclosure action on nonresidential real property, these reviews
may not be sufficient to detect all potential environmental
hazards. The remediation costs and any other financial liabilities
associated with an environmental hazard could have a material adverse effect on
our financial condition and results of operations.
Our
profitability depends significantly on economic conditions in the State of
Texas.
Our success depends primarily on the general
economic conditions of the State of Texas and the specific local markets in
which we operate. Unlike larger national or other regional banks that
are more geographically diversified, we provide banking and financial
services to customers primarily in the Texas areas of Tyler, Longview, Lindale,
Whitehouse, Chandler, Gresham, Athens, Palestine, Jacksonville, Bullard, Forney,
Seven Points, Gun Barrel City, Fort Worth, Austin and Arlington. The
local economic conditions in these areas have a significant impact on the demand
for our products and services, as well as the ability of our customers to repay
loans, the value of the collateral securing loans and the stability of our
deposit funding sources. A significant decline in general economic
conditions, caused by inflation, recession, acts of terrorism, outbreak of
hostilities or other international or domestic occurrences, unemployment,
changes in securities markets or other factors could impact these local economic
conditions and, in turn, have a material adverse effect on our financial
condition and results of operations.
18
We
operate in a highly competitive industry and market area.
We face substantial competition in all areas of
our operations from a variety of different competitors, many of which are larger
and may have more financial resources. Such competitors primarily
include national, regional, and community banks within the various markets we
operate. Additionally, various out-of-state banks have entered or
have announced plans to enter the market areas in which we currently
operate. We also face competition from many other types of financial
institutions, including, without limitation, savings and loans, credit unions,
finance companies, brokerage firms, insurance companies, factoring companies and
other financial intermediaries. The financial services industry could become
even more competitive as a result of legislative, regulatory and technological
changes, continued consolidation and recent trends in the credit and mortgage
lending markets. Banks, securities firms and insurance companies can
merge under the umbrella of a financial holding company, which can offer
virtually any type of financial service, including banking, securities
underwriting, insurance (both agency and underwriting) and merchant
banking. Also, technology has lowered barriers to entry and made it
possible for non-banks to offer products and services traditionally provided by
banks, such as automatic transfer and automatic payment systems. Many
of our competitors have fewer regulatory constraints and may have lower cost
structures. Additionally, due to their size, many competitors may be
able to achieve economies of scale and, as a result, may offer a broader range
of products and services as well as better pricing for those products and
services than we can.
Our ability to
compete successfully depends on a number of factors, including, among other
things:
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The ability
to develop, maintain and build upon long-term customer relationships based
on top quality service, high ethical standards and safe, sound
assets.
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The ability
to expand our market position.
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The scope,
relevance and pricing of products and services offered to meet customer
needs and demands.
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The rate at
which we introduce new products and services relative to our
competitors.
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Customer
satisfaction with our level of
service.
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Industry and general economic
trends.
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Failure to perform in any of these areas could
significantly weaken our competitive position, which could adversely affect our
growth and profitability, which, in turn, could have a material adverse effect
on our financial condition and results of operations.
We
are subject to extensive government regulation and supervision.
Southside Bancshares, Inc., primarily through
Southside Bank, Fort Worth National Bank and certain non-bank subsidiaries, is
subject to extensive federal and state regulation and
supervision. Banking regulations are primarily intended to protect
depositors’ funds, federal deposit insurance funds and the banking system as a
whole, not shareholders. These regulations affect our lending
practices, capital structure, investment practices and dividend policy and
growth, among other things. Congress and federal and state regulatory
agencies continually review banking laws, regulations and policies for possible
changes. Changes to statutes, regulations or regulatory policies, including
changes in interpretation or implementation of statutes, regulations or
policies, could affect us in substantial and unpredictable ways. Such
changes could subject us to additional costs, limit the types of financial
services and products we may offer and/or increase the ability of non-banks to
offer competing financial services and products, among other
things. Failure to comply with laws, regulations or policies could
result in sanctions by regulatory agencies, civil money penalties and/or
reputation damage, which could have a material adverse effect on our business,
financial condition and results of operations. While our
19
policies and
procedures are designed to prevent any such violations, there can be no
assurance that such violations will not occur. See the section
captioned “Supervision and Regulation” in “Item 1. Business” and
“Note 15 –
Shareholders’ Equity” in the notes to consolidated financial statements included
in “Item 8. Financial Statements and Supplementary Data,” which are located
elsewhere in this report.
Our
controls and procedures may fail or be circumvented.
Management regularly reviews and updates our
internal controls, disclosure controls and procedures, and corporate governance
policies and procedures. Any system of controls, however well
designed and operated, is based in part on certain assumptions and can provide
only reasonable, not absolute, assurances that the objectives of the system are
met. Any failure or circumvention of our controls and procedures or
failure to comply with regulations related to controls and procedures could have
a material adverse effect on our business, results of operations and financial
condition.
New
lines of business or new products and services may subject us to additional
risks.
From time to time, we may implement new
delivery systems, such as internet banking, or offer new products and services
within existing lines of business. In August, 2007, through a subsidiary of
Southside Bank, we entered into a joint venture engaged in the purchase and sale
of portfolios of automobile loans nationwide. Although we have
retained a management team with expertise in this industry, we cannot provide
any assurance as to our ability to profitably operate this line of
business. There are substantial risks and uncertainties associated
with these efforts, particularly in instances where the markets are not fully
developed. In developing and marketing new delivery systems and/or
new products and services, we may invest significant time and resources. Initial
timetables for the introduction and development of new lines of business and/or
new products or services may not be achieved and price and profitability targets
may not prove feasible. External factors, such as compliance with regulations,
competitive alternatives, and shifting market preferences, may also impact the
successful implementation of a new line of business or a new product or
service. Furthermore, any new line of business and/or new product or
service could have a significant impact on the effectiveness of our system of
internal controls. Failure to successfully manage these risks in the
development and implementation of new lines of business or new products or
services could have a material adverse effect on our business, results of
operations and financial condition.
We
rely on dividends from our subsidiaries for most of our revenue.
Southside Bancshares, Inc. is a separate and
distinct legal entity from our subsidiaries. We receive substantially
all of our revenue from dividends from our subsidiaries. These
dividends are the principal source of funds to pay dividends on our common stock
and interest and principal on our debt. Various federal and/or state
laws and regulations limit the amount of dividends that Southside Bank, Fort
Worth National Bank, and certain non-bank subsidiaries may pay to Southside
Bancshares, Inc. Also, Southside Bancshares, Inc.’s right to
participate in a distribution of assets upon a subsidiary’s liquidation or
reorganization is subject to the prior claims of the subsidiary’s
creditors. In the event Southside Bank or Fort Worth National Bank is
unable to pay dividends to Southside Bancshares, Inc., Southside Bancshares,
Inc. may not be able to service debt, pay obligations or pay dividends on common
stock. The inability to receive dividends from Southside Bank or Fort
Worth National Bank could have a material adverse effect on Southside
Bancshares, Inc.’s business, financial condition and results of
operations. See the section captioned “Supervision and Regulation” in
“Item 1. Business” and “Note 15 – Shareholders’ Equity” in the notes
to consolidated financial statements included in “Item 8. Financial
Statements and Supplementary Data,” which are located elsewhere in this
report.
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We
may not be able to access capital on favorable terms, including cost of
funds.
The availability and cost of funds may increase
as a result of general economic condition, increased interest rates and
competitive pressures. If we are unable to obtain funds on terms that
are favorable to us, we could be restricted in our ability to extend credit, and
may not be able to obtain sufficient funds to support growth through branching
or acquisition initiatives.
The
holders of our junior subordinated debentures have rights that are senior to
those of our shareholders.
On September 4, 2003, we issued $20.6 million
of floating rate junior subordinated debentures in connection with a $20.0
million trust preferred securities issuance by our subsidiary, Southside
Statutory Trust III. This junior subordinated debenture matures in
September 2033. On August 8 and 10, 2007, we issued $23.2 million and
$12.9 million, respectively, of five year fixed rate converting to floating rate
thereafter, junior subordinated debentures in connection with $22.5 million and
$12.5 million, respectively, trust preferred securities issuances by our
subsidiaries Southside Statutory Trust IV and V, respectively. Trust
IV matures September 2037 and Trust V matures December 2037. As part
of the acquisition of Fort Worth Bancshares, Inc. on October 10, 2007, we
assumed a $3.6 million floating rate junior subordinated debenture issued to
Magnolia Trust Company I in connection with $3.5 million of trust preferred
securities issued in 2005 that matures in 2035.
We conditionally guarantee payments of the
principal and interest on the trust preferred securities. Our junior
subordinated debentures are senior to our shares of common stock. As
a result, we must make payments on the junior subordinated debentures (and the
related trust preferred securities) before any dividends can be paid on our
common stock and, in the event of bankruptcy, dissolution or liquidation, the
holders of the debentures must be satisfied before any distributions can be made
to the holders of common stock. We have the right to defer
distributions on our junior subordinated debentures (and the related trust
preferred securities) for up to five years, during which time no dividends may
be paid to holders of common stock.
Acquisitions
and potential acquisitions may disrupt our business and dilute shareholder
value.
During 2007, we completed the acquisition of
Fort Worth Bancshares, Inc. This was our first
acquisition. Aside from this acquisition, we occasionally investigate
potential merger or acquisition partners that appear to be culturally similar,
have experienced management and possess either significant or attractive market
presence or have potential for improved profitability through financial
management, economies of scale or expanded services. Acquiring other banks,
businesses or branches involves various risks commonly associated with
acquisitions, including, among other things:
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potential
exposure to unknown or contingent liabilities of the target
company;
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exposure to
potential asset quality issues of the target
company;
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difficulty
and expense of integrating the operations and personnel of the target
company;
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potential
disruption to our business;
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potential
diversion of our management’s time and
attention;
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the possible
loss of key employees and customers of the target
company;
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difficulty in
estimating the value of the target company;
and
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potential
changes in banking or tax laws or regulations that may affect the target
company.
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We occasionally evaluate merger and acquisition
opportunities and conduct due diligence activities related to possible
transactions with other financial institutions and financial services companies.
As a result, merger or acquisition discussions and, in some cases, negotiations
may take place and future mergers or acquisitions involving cash, debt or equity
securities may occur at any time. Acquisitions typically involve the
payment of a premium over book and market values, and, therefore, some dilution
of our tangible book value and net income per common share may occur in
connection with any future transaction. Furthermore, failure to realize the
expected revenue increases, cost savings, increases in geographic or product
presence, and/or other projected benefits and synergies from an acquisition
could have a material adverse effect on our financial condition and results of
operations. Failure to integrate Fort Worth National Bank’s
operations, personnel, policies and procedures into Southside’s could have a
material and adverse effect on our financial condition and results of
operations.
We
may not be able to attract and retain skilled people.
Our success depends, in large part, on our
ability to attract and retain key people. Competition for the best
people in most activities we engage in can be intense, and we may not be able to
hire people or to retain them. The unexpected loss of services of one
or more of our key personnel could have a material adverse impact on our
business because of their skills, knowledge of our market, relationships in the
communities we serve, years of industry experience and the difficulty of
promptly finding qualified replacement personnel. Although we have
employment agreements with certain of our executive officers, there is no
guarantee that these officers will remain employed with the
company.
Our information
systems may experience an interruption or breach in security.
We rely heavily on communications and
information systems to conduct our business. Any failure,
interruption or breach in security of these systems could result in failures or
disruptions in our customer relationship management, general ledger, deposit,
loan and other systems. While we have policies and procedures
designed to prevent or limit the effect of the failure, interruption or security
breach of our information systems, there can be no assurance that we can prevent
any such failures, interruptions or security breaches or, if they do occur, that
they will be adequately addressed. The occurrence of any failures,
interruptions or security breaches of our information systems could damage our
reputation, result in a loss of customer business, subject us to additional
regulatory scrutiny, or expose us to civil litigation and possible financial
liability, any of which could have a material adverse effect on our financial
condition and results of operations.
We
continually encounter technological change.
The financial services industry is continually
undergoing rapid technological change with frequent introductions of new
technology-driven products and services. The effective use of technology
increases efficiency and enables financial institutions to better serve
customers and to reduce costs. Our future success depends, in part, upon our
ability to address the needs of our customers by using technology to provide
products and services that will satisfy customer demands, as well as to create
additional efficiencies in our operations. Many of our competitors have
substantially greater resources to invest in technological improvements. We may
not be able to effectively implement new technology-driven products and services
or be successful in marketing these products and services to our customers and
even if we implement such products and services, we may incur substantial costs
in doing so. Failure to successfully keep pace with technological
change affecting the financial services industry could have a material adverse
impact on our business, financial condition and results of
operations.
We
are subject to claims and litigation pertaining to fiduciary
responsibility.
From time to time, customers make claims and
take legal action pertaining to our performance of our fiduciary
responsibilities. Whether customer claims and legal action related to our
performance of our fiduciary responsibilities are founded or unfounded,
defending claims is costly and diverts management’s attention, and if such
claims and legal actions are not resolved in a manner favorable to us, they may
result in significant financial liability and/or adversely affect our market
perception and products and
22
services as well as
impact customer demand for those products and services. Any financial liability
or reputation damage could have a material adverse effect on our business,
financial condition and results of operations.
Severe
weather, natural disasters, acts of war or terrorism and other external events
could significantly impact our business.
Severe weather, natural disasters, acts of war
or terrorism and other adverse external events could have a significant impact
on our ability to conduct business. Such events could affect the stability of
our deposit base, impair the ability of borrowers to repay outstanding loans,
impair the value of collateral securing loans, cause significant property
damage, result in loss of revenue and/or cause us to incur additional expenses.
For example, during 2005, hurricanes Katrina and Rita caused extensive flooding
and destruction along the coastal areas of the Gulf of Mexico. While
the impact of these hurricanes did not significantly affect us, other severe
weather or natural disasters, acts of war or terrorism or other adverse external
events may occur in the future. Although management has established disaster
recovery policies and procedures, there can be no assurance of the effectiveness
of such policies and procedures, and the occurrence of any such event could have
a material adverse effect on our business, financial condition and results of
operations.
RISKS ASSOCIATED
WITH OUR COMMON STOCK
Our
stock price can be volatile.
Stock price volatility may make it more
difficult for you to resell your common stock when you want and at prices you
find attractive. Our stock price can fluctuate significantly in response to a
variety of factors including, among other things:
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actual or
anticipated variations in quarterly results of
operations;
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recommendations
by securities analysts;
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operating and
stock price performance of other companies that investors deem comparable
to us;
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news reports
relating to trends, concerns and other issues in the financial services
industry;
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perceptions
in the marketplace regarding us and/or our
competitors;
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new
technology used, or services offered, by
competitors;
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significant
acquisitions or business combinations, strategic partnerships, joint
ventures or capital commitments by or involving us or our
competitors;
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failure to
integrate acquisitions or realize anticipated benefits from
acquisitions;
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changes in
government regulations; and
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geopolitical
conditions such as acts or threats of terrorism or military
conflicts.
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General market fluctuations, industry factors
and general economic and political conditions and events, such as economic
slowdowns or recessions, interest rate changes or credit loss trends, could also
cause our stock price to decrease regardless of operating results.
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The
trading volume in our common stock is less than that of other larger financial
services companies.
Although our common stock is listed for trading
on the NASDAQ Global Select Market, the trading volume is low, and you are not
assured liquidity with respect to transactions in our common stock. A public
trading market having the desired characteristics of depth, liquidity and
orderliness depends on the presence in the marketplace of willing buyers and
sellers of our common stock at any given time. This presence depends on the
individual decisions of investors and general economic and market conditions
over which we have no control. Given the lower trading volume of our common
stock, significant sales of our common stock, or the expectation of these sales,
could cause our stock price to fall.
An
investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and,
therefore, is not insured against loss by the FDIC, any other deposit insurance
fund or by any other public or private entity. Investment in our common stock is
inherently risky for the reasons described in this “Risk Factors” section and
elsewhere in this report and is subject to the same market forces that affect
the price of common stock in any company. As a result, if you acquire our common
stock, you may lose some or all of your investment.
Provisions
of our amended and restated articles of incorporation and amended and restated
bylaws, as well as state and federal banking regulations, could delay or prevent
a takeover of us by a third party.
Our amended and restated articles of
incorporation and amended and restated bylaws could delay, defer or prevent a
third party from acquiring us, despite the possible benefit to our shareholders,
or otherwise adversely affect the price of our common stock. These
provisions include, among others, requiring advance notice for raising business
matters or nominating directors at shareholders’ meetings and staggered board
elections.
Any individual, acting alone or with other
individuals, who is seeking to acquire, directly or indirectly, 10.0% or more of
our outstanding common stock must comply with the Change in Bank Control Act,
which requires prior notice to the Federal Reserve for any
acquisition. Additionally, any entity that wants to acquire 5.0% or
more of our outstanding common stock, or otherwise control us, may need to
obtain the prior approval of the Federal Reserve under the Bank Holding Company
Act of 1956, as amended. As a result, prospective investors in our
common stock need to be aware of and comply with those requirements, to the
extent applicable.
RISKS ASSOCIATED
WITH THE BANKING INDUSTRY
The
earnings of financial services companies are significantly affected by general
business and economic conditions.
Our operations and profitability are impacted
by general business and economic conditions in the United States and abroad.
These conditions include short-term and long-term interest rates, inflation,
money supply, political issues, legislative and regulatory changes, fluctuations
in both debt and equity capital markets, broad trends in industry and finance,
and the strength of the U.S. economy and the local economies in which we
operate, all of which are beyond our control. A deterioration in economic
conditions could result in an increase in loan delinquencies and non-performing
assets, decreases in loan collateral values and a decrease in demand for our
products and services, among other things, any of which could have a material
adverse impact on our financial condition and results of
operations.
Financial
services companies depend on the accuracy and completeness of information about
customers and counterparties.
In deciding whether to extend credit or enter
into other transactions, we may rely on information furnished by or on behalf of
customers and counterparties, including financial statements, credit reports and
other financial information. We may also rely on representations of those
customers, counterparties or other third parties, such as independent auditors,
as to the accuracy and completeness of that
24
information.
Reliance on inaccurate or misleading financial statements, credit reports or
other financial information could have a material adverse impact on our
business, financial condition and results of operations.
Consumers
may decide not to use banks to complete their financial
transactions.
Technology and other changes are allowing
parties to complete financial transactions that historically have involved banks
through alternative methods. For example, consumers can now maintain funds that
would have historically been held as bank deposits in brokerage accounts or
mutual funds. Consumers can also complete transactions such as paying bills
and/or transferring funds directly without the assistance of banks. The process
of eliminating banks as intermediaries could result in the loss of fee income,
as well as the loss of customer deposits and the related income generated from
those deposits. The loss of these revenue streams and the lower cost deposits as
a source of funds could have a material adverse effect on our financial
condition and results of operations.
ITEM 1B. UNRESOLVED STAFF
COMMENTS
None
|
ITEM 2. PROPERTIES
|
Southside Bank owns and operates the following
properties:
|
|
·
|
Southside
Bank main branch at 1201 South Beckham Avenue, Tyler,
Texas. The executive offices of Southside Bancshares, Inc. are
located at this location;
|
|
|
·
|
Southside
Bank Annex at 1211 South Beckham Avenue, Tyler, Texas. The
Southside Bank Annex is directly adjacent to the main bank
building. Human Resources, the Trust Department and other
support areas are located in this
building;
|
|
|
·
|
Operations
Annex at 1221 South Beckham Avenue, Tyler, Texas. Various back
office, lending and training facilities and other support areas are
located in this building;
|
|
|
·
|
Southside
main branch motor bank facility at 1010 East First Street, Tyler,
Texas;
|
|
|
·
|
South
Broadway branch at 6201 South Broadway, Tyler,
Texas;
|
|
|
·
|
South
Broadway branch motor bank facility at 6019 South Broadway, Tyler,
Texas;
|
|
|
·
|
Downtown
branch at 113 West Ferguson Street, Tyler,
Texas;
|
|
|
·
|
Gentry
Parkway branch and motor bank facility at 2121 West Gentry Parkway, Tyler,
Texas;
|
|
|
·
|
Longview main
branch and motor bank facility at 2001 Judson Road, Longview,
Texas;
|
|
|
·
|
Lindale main
branch and motor bank facility at 2510 South Main Street, Lindale,
Texas;
|
|
|
·
|
Whitehouse
main branch and motor bank facility at 901 Highway 110 North, Whitehouse,
Texas;
|
|
|
·
|
Jacksonville
main branch and motor bank facility at 1015 South Jackson Street,
Jacksonville, Texas;
|
|
|
·
|
Gun Barrel
City main branch at 901 West Main, Gun Barrel City, Texas;
and
|
|
|
·
|
42 ATM’s
located throughout Smith, Gregg, Cherokee, Anderson and Henderson
Counties.
|
25
Southside Bank
currently operates full service banks in leased space in 18 grocery stores and
two lending centers in leased office space in the following
locations:
|
|
·
|
one in
Bullard, Texas;
|
|
|
·
|
one in
Lindale, Texas;
|
|
|
·
|
one in Flint,
Texas;
|
|
|
·
|
one in
Whitehouse, Texas;
|
|
|
·
|
one in
Chandler, Texas;
|
|
|
·
|
one in Seven
Points, Texas;
|
|
|
·
|
one in
Palestine, Texas;
|
|
|
·
|
one in
Athens, Texas;
|
|
|
·
|
one in
Hawkins, Texas;
|
|
|
·
|
three in
Longview, Texas;
|
|
|
·
|
six in Tyler,
Texas;
|
|
|
·
|
Gresham loan
production office at 16637 FM 2493, Tyler, Texas;
and
|
|
|
·
|
Forney loan
production office at 413 North McGraw, Forney,
Texas.
|
Fort Worth National
Bank owns and operates the following properties:
|
|
·
|
Arlington
branch at 2831 W. Park Row, Arlington,
Texas;
|
|
|
·
|
Fort Worth
branch at 9516 Clifford Street, Fort Worth, Texas;
and
|
|
|
·
|
3 ATM’s
located in Fort Worth and Arlington,
Texas.
|
Fort Worth National
Bank currently operates its main branch and one lending center in leased office
space in the following locations:
|
|
·
|
Main branch
at 701 W. Magnolia, Fort Worth, Texas;
and
|
|
|
·
|
Austin loan
production office at 8200 N. Mopac, Ste. 130, Austin,
Texas.
|
SFG currently
operates its business in leased office space in the following
location:
|
|
·
|
1600 E.
Pioneer Parkway, Ste. 300, Arlington,
Texas.
|
All of the properties detailed above are
suitable and adequate to provide the banking services intended based on the type
of property described. In addition, the properties for the most part
are fully utilized but designed with productivity in mind and can handle the
additional business volume we anticipate they will generate. As
additional potential needs are identified, individual property enhancements or
the need to add properties will be evaluated.
26
|
ITEM 3. LEGAL
PROCEEDINGS
|
We are party to legal proceedings arising in
the normal conduct of business. Management believes that such
litigation is not material to our financial position or results of
operations.
|
ITEM 4. SUBMISSION OF MATTERS
TO A VOTE OF SECURITY
HOLDERS
|
During the three months ended December 31,
2007, there were no meetings, annual or special, of our
shareholders. No matters were submitted to a vote of the
shareholders, nor were proxies solicited by management or any other
person.
PART II
|
ITEM 5. MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS
|
|
AND ISSUER
PURCHASES OF EQUITY
SECURITIES
|
MARKET
INFORMATION
Our common stock trades on the NASDAQ Global
Select Market (formerly the NASDAQ National Market) under the symbol
"SBSI." The high/low prices shown below represent the daily weighted
average prices on the NASDAQ Global Select Market for the period from January 1,
2006 to December 31, 2007. During the second quarter of 2007 and the
first quarter of 2006, we declared and paid a 5% stock
dividend. Stock prices listed below have been adjusted to give
retroactive recognition to stock splits and stock dividends.
|
Year
Ended
|
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
||||||||||||
|
December 31,
2007
|
$ | 24.64-21.04 | $ | 22.51-21.11 | $ | 23.93-19.24 | $ | 23.74-18.72 | ||||||||
|
December 31,
2006
|
$ | 19.77-18.22 | $ | 21.49-18.12 | $ | 25.55-21.59 | $ | 26.18-23.44 | ||||||||
See "Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations - Capital
Resources" for a discussion of our common stock repurchase program.
SHAREHOLDERS
There were approximately 1,100 holders of
record of our common stock, the only class of equity securities currently issued
and outstanding, as of February 15, 2008.
DIVIDENDS
Cash dividends declared and paid were $0.50 and
$0.47 per share for the years ended December 31, 2007 and 2006,
respectively. Stock dividends of 5% were also declared and paid
during each of the years ended December 31, 2007, 2006 and 2005. We
have paid a cash dividend at least once every year since 1970. Future
dividends will depend on our earnings, financial condition and other factors
that our board of directors considers to be relevant. In addition, we
must make payments on our junior subordinated debentures before any dividends
can be paid on the common stock. For additional discussion relating
to restrictions that limit our ability to pay dividends refer to “Supervision
and Regulation” in “Item 1. Business” and in “Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations –Capital
Resources.” The cash dividends were paid quarterly each year as
listed below.
Quarterly Cash Dividends
Paid
|
Year
Ended
|
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
||||||||||||
|
December 31,
2007
|
$ | 0.11 | $ | 0.12 | $ | 0.12 | $ | 0.15 | ||||||||
|
December 31,
2006
|
$ | 0.11 | $ | 0.11 | $ | 0.11 | $ | 0.14 | ||||||||
27
STOCK-BASED
COMPENSATION PLANS
Information regarding
stock-based compensation awards outstanding and available for future grants as
of December 31, 2007, is presented in “Item 12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters” of
this Annual Report on Form 10-K. Additional information regarding
stock-based compensation plans is presented in “Note 14 — Employee
Benefit Plans" in the notes to consolidated financial statements located
elsewhere in this report.
UNREGISTERED SALES
OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER SECURITY
REPURCHASES
During 2007, we did not approve any additional
funding for our stock repurchase plan. No common stock was purchased
during the fourth quarter ended December 31, 2007.
FINANCIAL
PERFORMANCE
The following performance graph does not
constitute soliciting material and should not be deemed filed or incorporated by
reference into any other Company under the Securities Act of 1933 or the
Securities Exchange Act of 1934, except to the extent the filing Company
specifically incorporates the performance graph by reference
therein.
Southside
Bancshares, Inc.
28
|
Period
Ending
|
||||||||||||||||||||||||
|
Index
|
12/31/02
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
||||||||||||||||||
|
Southside
Bancshares, Inc.
|
100.00 | 133.89 | 177.37 | 168.33 | 229.87 | 196.58 | ||||||||||||||||||
|
Russell
2000
|
100.00 | 147.25 | 174.24 | 182.18 | 215.64 | 212.26 | ||||||||||||||||||
|
Southside
Bancshares Peer Group*
|
100.00 | 137.24 | 160.09 | 168.91 | 187.11 | 156.29 | ||||||||||||||||||
|
*Southside
Bancshares’ Peer Group includes the following Texas banks: Cullen/Frost
Bankers, Inc., First Financial
|
||
|
Bankshares,
Inc., International Bancshares Corporation, MetroCorp Bancshares, Inc.,
Prosperity Bancshares, Inc.,
|
||
|
Sterling
Bancshares, Inc., Texas Capital Bancshares, Inc. and Franklin Bank
Corp.
|
||
|
Source
: SNL Financial LC, Charlottesville, VA
|
|
ITEM 6. SELECTED FINANCIAL
DATA
|
The following table sets forth selected
financial data regarding our results of operations and financial position for,
and as of the end of, each of the fiscal years in the five-year period ended
December 31, 2007. This information should be read in conjunction
with "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" and “Item 8. Financial Statements and
Supplementary Data,” as set forth in this report.
|
As of and For
the Years Ended December 31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||||||
|
Balance Sheet
Data:
|
||||||||||||||||||||
|
Investment
Securities
|
$ | 110,403 | $ | 100,303 | $ | 121,240 | $ | 133,535 | $ | 144,876 | ||||||||||
|
Mortgage-backed
and Related Securities
|
$ | 917,518 | $ | 869,326 | $ | 821,756 | $ | 720,533 | $ | 590,963 | ||||||||||
|
Loans, Net of
Allowance for Loan Losses
|
$ | 951,477 | $ | 751,954 | $ | 673,274 | $ | 617,077 | $ | 582,721 | ||||||||||
|
Total
Assets
|
$ | 2,196,322 | $ | 1,890,976 | $ | 1,783,462 | $ | 1,619,643 | $ | 1,454,952 | ||||||||||
|
Deposits
|
$ | 1,530,491 | $ | 1,282,475 | $ | 1,110,813 | $ | 940,986 | $ | 872,529 | ||||||||||
|
Long-term
Obligations
|
$ | 146,558 | $ | 149,998 | $ | 229,032 | $ | 351,287 | $ | 272,694 | ||||||||||
|
Income
Statement Data:
|
||||||||||||||||||||
|
Interest
& Deposit Service Income
|
$ | 123,021 | $ | 112,434 | $ | 94,275 | $ | 80,793 | $ | 73,958 | ||||||||||
|
Net
Income
|
$ | 16,684 | $ | 15,002 | $ | 14,592 | $ | 16,099 | $ | 13,564 | ||||||||||
|
Per Share
Data:
|
||||||||||||||||||||
|
Net Income
Per Common Share:
|
||||||||||||||||||||
|
Basic
|
$ | 1.28 | $ | 1.16 | $ | 1.15 | $ | 1.27 | $ | 1.24 | ||||||||||
|
Diluted
|
$ | 1.24 | $ | 1.12 | $ | 1.10 | $ | 1.20 | $ | 1.05 | ||||||||||
|
Cash
Dividends Paid Per Common Share
|
$ | 0.50 | $ | 0.47 | $ | 0.46 | $ | 0.42 | $ | 0.36 | ||||||||||
29
|
ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
|
|
RESULTS
OF
OPERATIONS
|
The following discussion and analysis provides
a comparison of our results of operations for the years ended December 31, 2007,
2006, and 2005 and financial condition as of December 31, 2007 and
2006. This discussion should be read in conjunction with the
financial statements and related notes included elsewhere in this
report. All share data has been adjusted to give retroactive
recognition to stock splits and stock dividends.
CAUTIONARY NOTICE
REGARDING FORWARD-LOOKING STATEMENTS
Certain statements of other than historical
fact that are contained in this document and in written material, press releases
and oral statements issued by or on behalf of Southside Bancshares, Inc., a bank
holding company, may be considered to be “forward-looking statements” within the
meaning of and subject to the protections of the Private Securities Litigation
Reform Act of 1995. These forward-looking statements are not
guarantees of future performance, nor should they be relied upon as representing
management’s views as of any subsequent date. These statements may
include words such as "expect," "estimate," "project," "anticipate," "appear,"
"believe," "could," "should," "may," "intend," "probability," "risk," "target,"
"objective," "plans," "potential," and similar
expressions. Forward-looking statements are statements with respect
to our beliefs, plans, expectations, objectives, goals, anticipations,
assumptions, estimates, intentions and future performance, and are subject to
significant known and unknown risks and uncertainties, which could cause our
actual results to differ materially from the results discussed in the
forward-looking statements. For example, discussions of the effect of
our expansion, trends in asset quality and earnings from growth, and certain
market risk disclosures are based upon information presently available to
management and are dependent on choices about key model characteristics and
assumptions and are subject to various limitations. See “Item 1.
Business” and “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” By their nature, certain of the
market risk disclosures are only estimates and could be materially different
from what actually occurs in the future. As a result, actual income
gains and losses could materially differ from those that have been
estimated. Other factors that could cause actual results to differ
materially from forward-looking statements include, but are not limited to, the
following:
|
·
|
general
economic conditions, either globally, nationally, in the State of Texas,
or in the specific markets in which we
operate;
|
|
·
|
legislation,
regulatory changes or changes in monetary or fiscal policy that adversely
affect the businesses in which we are
engaged;
|
|
·
|
adverse
changes in the status or financial condition of the government sponsored
enterprises (the “GSEs”) impacting the GSEs’ guarantees or ability to pay
or issue debt;
|
|
·
|
economic or
other disruptions caused by acts of terrorism in the United States, Europe
or other areas;
|
|
·
|
changes in
the interest rate yield curve such as flat, inverted or steep yield
curves, or changes in the interest rate environment that impact interest
margins and may impact prepayments on the mortgage-backed securities
portfolio;
|
|
·
|
unexpected
outcomes of existing or new litigation involving
us;
|
|
·
|
changes
impacting the leverage strategy;
|
|
·
|
significant
increases in competition in the banking and financial services
industry;
|
|
·
|
changes in
consumer spending, borrowing and saving
habits;
|
|
·
|
technological
changes;
|
30
|
·
|
our ability
to increase market share and control
expenses;
|
|
·
|
the effect of
changes in federal or state tax
laws;
|
|
·
|
the effect of
compliance with legislation or regulatory
changes;
|
|
·
|
the effect of
changes in accounting policies and
practices;
|
|
·
|
the costs and
effects of unanticipated
litigation;
|
|
·
|
risks of
mergers and acquisitions including the related time and cost of
implementing transactions and the potential failure to achieve expected
gains, revenue growth or expense savings;
and
|
|
·
|
failure of
assumptions underlying allowance for loan losses and other
estimates.
|
Additional
information concerning us and our business, including additional factors that
could materially affect our financial results, is included in our filings with
the SEC. All written or oral forward-looking statements made by us or
attributable to us are expressly qualified by this cautionary
notice. We disclaim any obligation to update any factors or to
announce publicly the result of revisions to any of the forward-looking
statements included herein to reflect future events or
developments.
CRITICAL ACCOUNTING
ESTIMATES
Our accounting and reporting estimates conform
with accounting principles generally accepted in the United States and general
practices within the financial services industry. The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates. We consider our critical accounting policies to
include the following:
Allowance for Losses on
Loans. The allowance for losses on loans represents our best
estimate of probable losses inherent in the existing loan
portfolio. The allowance for losses on loans is increased by the
provision for losses on loans charged to expense and reduced by loans
charged-off, net of recoveries. The provision for losses on loans is
determined based on our assessment of several factors: reviews and
evaluations of specific loans, changes in the nature and volume of the loan
portfolio, and current economic conditions and the related impact on specific
borrowers and industry groups, historical loan loss experience, the level of
classified and nonperforming loans and the results of regulatory
examinations.
The loan loss allowance is based on the most
current review of the loan portfolio. The servicing officer has the
primary responsibility for updating significant changes in a customer's
financial position. Each officer prepares status updates on any
credit deemed to be experiencing repayment difficulties which, in the officer's
opinion, would place the collection of principal or interest in
doubt. Our internal loan review department is responsible for an
ongoing review of our loan portfolio with specific goals set for the loans to be
reviewed on an annual basis.
At each review, a subjective analysis
methodology is used to grade the respective loan. Categories of
grading vary in severity from loans that do not appear to have a significant
probability of loss at the time of review to loans that indicate a probability
that the entire balance of the loan will be uncollectible. If full
collection of the loan balance appears unlikely at the time of review, estimates
or appraisals of the collateral securing the debt are used to allocate the
necessary allowances. The internal loan review department maintains a
list of all loans or loan relationships that are graded as having more than the
normal degree of risk associated with them. In addition, a list of
loans or loan relationships of $50,000 or more is updated on a periodic basis in
order to properly allocate necessary allowance and keep management informed on
the status of attempts to correct the deficiencies noted with respect to the
loan.
31
Loans are considered impaired if, based on
current information and events, it is probable that we will be unable to collect
the scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. The measurement of impaired
loans is generally based on the present value of expected future cash flows
discounted at the historical effective interest rate stipulated in the loan
agreement, except that all collateral-dependent loans are measured for
impairment based on the fair value of the collateral. In measuring
the fair value of the collateral, we use assumptions such as discount rates, and
methodologies, such as comparison to the recent selling price of similar assets,
consistent with those that would be utilized by unrelated third parties
performing a valuation.
Changes in the financial condition of
individual borrowers, economic conditions, historical loss experience and the
conditions of the various markets in which collateral may be sold all may affect
the required level of the allowance for losses on loans and the associated
provision for loan losses.
As of December 31, 2007, our review of the loan
portfolio indicated that a loan loss allowance of $9.8 million was adequate to
cover probable losses in the portfolio.
Refer to “Loan Loss Experience and Allowance
for Loan Losses” and “Note 1 – Summary of Significant Accounting and Reporting
Policies” to our consolidated financial statements for a detailed description of
our estimation process and methodology related to the allowance for loan
losses.
Estimation of Fair Value. The
estimation of fair value is significant to a number of our assets and
liabilities. GAAP requires disclosure of the fair value of financial
instruments as a part of the notes to the consolidated financial
statements. Fair values are volatile and may be influenced by a
number of factors, including market interest rates, prepayment speeds, discount
rates and the shape of yield curves.
Fair values for most investment and
mortgage-backed securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are
based on the quoted prices of similar instruments. The fair value of
fixed rate loans is estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities. Nonperforming
loans are estimated using discounted cash flow analyses or underlying value of
the collateral where applicable. Fair values for fixed rate CDs are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered for deposits of similar remaining maturities. The fair
value of Federal Home Loan Bank (“FHLB”) advances is estimated by discounting
the future cash flows using rates at which advances would be made to borrowers
with similar credit ratings and for the same remaining
maturities. The fair values of other real estate owned (“OREO”) are
typically determined based on appraisals by third parties, less estimated costs
to sell and recorded at the lower of cost or fair value. The fair
value of the fixed rate long-term debt is estimated by discounting future cash
flows using rates at which fixed rate long-term debt would be made to borrowers
with similar credit ratings and for remaining maturities.
Impairment of Investment Securities
and Mortgage-backed Securities. Investment and mortgage-backed
securities classified as available for sale (“AFS”) are carried at fair value
and the impact of changes in fair value are recorded on our consolidated balance
sheet as an unrealized gain or loss in “Accumulated other comprehensive income
(loss),” a separate component of shareholders’ equity. Securities
classified as AFS or held to maturity (“HTM”) are subject to our review to
identify when a decline in value is other-than-temporary. Factors
considered in determining whether a decline in value is other-than-temporary
include: whether the decline is substantial; the duration of the decline; the
reasons for the decline in value; whether the decline is related to a credit
event or to a change in interest rate; our ability and intent to hold the
investment for a period of time that will allow for a recovery of value; and the
financial condition and near-term prospects of the issuer. When it is
determined that a decline in value is other-than-temporary, the carrying value
of the security is reduced to its estimated fair value, with a corresponding
charge to earnings.
32
Defined Benefit Pension Plan.
The plan obligations and related assets of the defined benefit pension plan (the
“Plan”) are presented in “Note 14 – Employee Benefits” to our consolidated
financial statements. Plan assets, which consist primarily of
marketable equity and debt instruments, are valued using market
quotations. Plan obligations and the annual pension expense are
determined by independent actuaries and through the use of a number of
assumptions. Key assumptions in measuring the plan obligations
include the discount rate, the rate of salary increases and the estimated future
return on plan assets. In determining the discount rate, we utilized
a cash flow matching analysis to determine a range of appropriate discount rates
for our defined benefit pension and restoration plans. In developing
the cash flow matching analysis, we constructed a portfolio of high quality
non-callable bonds (rated AA- or better) to match as close as possible the
timing of future benefit payments of the plans at December 31,
2007. Based on this cash flow matching analysis, we were able to
determine an appropriate discount rate.
Salary increase assumptions are based upon
historical experience and our anticipated future actions. The
expected long-term rate of return assumption reflects the average return
expected based on the investment strategies and asset allocation on the assets
invested to provide for the Plan’s liabilities. We considered broad
equity and bond indices, long-term return projections, and actual long-term
historical Plan performance when evaluating the expected long-term rate of
return assumption. At December 31, 2007, the weighted-average
actuarial assumptions of the Plan were: a discount rate of 6.25%; a long-term
rate of return on plan assets of 7.50%; and assumed salary increases of
4.50%. Material changes in pension benefit costs may occur in the
future due to changes in these assumptions. Future annual amounts
could be impacted by changes in the number of plan participants, changes in the
level of benefits provided, changes in the discount rates, changes in the
expected long-term rate of return, changes in the level of contributions to the
Plan and other factors.
|
OVERVIEW
|
OPERATING RESULTS
During the year ended December 31, 2007, our
net income increased $1.7 million, or 11.2%, to $16.7 million, from $15.0
million for the same period in 2006. The increase in net income was
primarily attributable to the increase in net interest income and noninterest
income partially offset by an increase in the provision for loan losses and
noninterest expense. This increase in noninterest income was offset
by noninterest expense due primarily to increases in salaries and employee
benefits due to the acquisition of Fort Worth National Bank during the fourth
quarter of 2007 and an interest in SFG in the third quarter of
2007. Earnings per fully diluted share increased $0.12, or 10.7% to
$1.24, for the year ended December 31, 2007, from $1.12 for the same period in
2006.
During the year ended December 31, 2006, our
net income increased $410,000, or 2.8%, to $15.0 million, from $14.6 million for
the same period in 2005. The increase in net income was primarily
attributable to the increase in noninterest income and decrease in the provision
for loan losses. This increase in noninterest income was offset by
noninterest expense due primarily to increases in salaries and employee benefits
due to normal payroll increases and staff increases due to branch expansion and
the new regional lending initiative. Earnings per fully diluted share
were $1.12 and $1.10, respectively, for the years ended December 31, 2006 and
2005.
FINANCIAL CONDITION
Our total assets
increased $305.3 million, or 16.1%, to $2.20 billion at December 31, 2007 from
$1.89 billion at December 31, 2006. The increase was partially
attributable to our acquisition of Fort Worth Bancshares, Inc. during October
2007. Fort Worth Bancshares, Inc.’s total consolidated assets as of
December 31, 2007 were $158.8 million. The acquisition of Fort Worth
Bancshares, Inc. and our interest in SFG contributed to our increase in loans of
$202.1 million, or 26.6%, as compared to December 31, 2006. Fort
Worth National Bank loans acquired represented $105.6 million of the increase
in loans. SFG loans represented approximately $56 million of the
increase in loans. At December 31, 2007, loans were
$961.2
33
million
compared to $759.1 million at December 31, 2006. Our securities
portfolio also contributed to the increase by $53.7 million, or 5.4%, to $1.0
billion as compared to $996.1 million at December 31, 2006. Our
organic increase in loans and securities was funded by increases in
deposits.
Our nonperforming assets at December 31, 2007
increased to $3.9 million, and represented 0.18% of total assets, compared to
$2.1 million, or 0.11%, of total assets at December 31,
2006. Nonaccruing loans increased to $2.9 million and the ratio of
nonaccruing loans to total loans increased to 0.30% at December 31, 2007 as
compared to $1.3 million and 0.18% at December 31, 2006. Not
including the $2.0 million increase in nonperforming assets attributable to the
SFG automobile loans, nonperforming assets for Southside would have decreased by
$148,000. Approximately $265,000 of the nonaccrual loans at December
31, 2007, is one loan that has an average SBA guarantee of 75%. OREO
decreased to $153,000 at December 31, 2007 from $351,000 at December 31,
2006. Loans 90 days past due at December 31, 2007 increased to
$400,000 compared to $128,000 at December 31, 2006. Repossessed
assets increased to $255,000 at December 31, 2007 from $78,000 at December 31,
2006. Restructured loans at December 31, 2007 increased slightly to
$225,000 compared to $220,000 at December 31, 2006.
Our deposits increased $248.0 million to $1.53
billion at December 31, 2007 from $1.28 billion at December 31,
2006. Fort Worth National Bank deposits acquired in the fourth
quarter of 2007 represent $109.1 million of the increase. The
remaining $138.9 million increase was primarily due to branch expansion and
increased market penetration. Due to the increase in deposits during
2007, FHLB advances decreased $11.6 million to $440.0 million at December 31,
2007, from $451.6 million at December 31, 2006. Short-term FHLB
advances increased $31.6 million to $353.8 million at December 31, 2007 from
$322.2 million at December 31, 2006. Long-term FHLB advances
decreased $43.1 million to $86.2 million at December 31, 2007 from $129.4
million at December 31, 2006. Other borrowings at December 31, 2007
and 2006 totaled $69.8 million and $27.9 million, respectively, and at December
31, 2007 consisted of $9.5 million of short-term borrowings and $60.3 million of
long-term debt.
The increase in long-term debt resulted from
approximately $36.1 million of subordinated debentures issued to finance the
acquisition of Fort Worth Bancshares, Inc. and approximately $3.6 million in
subordinated debentures previously issued by Fort Worth Bancshares, Inc. and
assumed in connection with the acquisition.
Assets under management in our trust department
exceeded $700 million for the first time during 2007 and were approximately $718
million at December 31, 2007.
Shareholders' equity at December 31, 2007
totaled $132.3 million compared to $110.6 million at December 31,
2006. The increase primarily reflects the net income of $16.7 million
recorded for the year ended December 31, 2007, and the common stock issued of
$1.6 million as a result of our incentive stock option and dividend reinvestment
plans, a decrease in the accumulated other comprehensive loss of $9.8 million,
all of which were partially offset by the payment of cash dividends to our
shareholders of $6.5 million. The decrease in accumulated other
comprehensive loss is composed of an increase of $1.1 million, net of tax,
related to the change in the unfunded status of our defined benefit plan and an
$8.7 million, net of tax, unrealized gain on securities, net of reclassification
adjustment. See “Note 4 – Comprehensive Income (Loss)” to our
consolidated financial statements.
During 2007 the economy in our market area
appeared to reflect only slight effects of the housing led economic slowdown
impacting other regions of the United States. We cannot predict
whether current economic conditions will improve, remain the same or
decline.
Key financial indicators management follows
include, but are not limited to, numerous interest rate sensitivity and interest
rate risk indicators, credit risk, operations risk, liquidity risk, capital
risk, regulatory risk, competition risk, yield curve risk, and economic
risk.
34
LEVERAGE STRATEGY
We utilize wholesale funding and securities to
enhance our profitability and balance sheet composition by determining
acceptable levels of credit, interest rate and liquidity risk consistent with
prudent capital management. The leverage strategy consists of
borrowing a combination of long and short-term funds from the FHLB and issuing
brokered CDs. These funds are invested primarily in agency mortgage-backed
securities, and to a lesser extent, long-term municipal
securities. Although agency mortgage-backed securities often carry
lower yields than traditional mortgage loans and other types of loans we make,
these securities generally increase the overall quality of our assets because of
underlying insurance or guarantees, are more liquid than individual loans and
may be used to collateralize our borrowings or other
obligations. While the strategy of investing a substantial portion of
our assets in agency mortgage-backed and municipal securities has resulted in
lower interest rate spreads and margins, we believe that the lower operating
expenses and reduced credit risk combined with the managed interest rate risk of
this strategy have enhanced our overall profitability over the last several
years. At this time, we utilize the leverage strategy with the goal
of enhancing overall profitability by maximizing the use of our
capital.
Risks associated with the asset structure we
maintain include a lower net interest rate spread and margin when compared to
our peers, changes in the slope of the yield curve, which can reduce our net
interest rate spread and margin, increased interest rate risk, the length of
interest rate cycles, and the unpredictable nature of mortgage-backed securities
prepayments. See “Item 1A. Risk Factors – Risks Related to
Our Business.” During the first half of 2007, the interest rate yield
curve was relatively flat to only slightly positively sloped. During
the second half of 2007, the Federal Reserve decreased the overnight fed funds
rate by 100 basis points while at the same time short-term U. S. Treasury
interest rates decreased more than long-term U. S. Treasury interest
rates. These changes during 2007 resulted in a positively sloped U.
S. Treasury yield curve at December 31, 2007. Our asset structure,
net interest spread and net interest margin require an increase in the need to
monitor our interest rate risk. An additional risk is the change in
market value of the AFS securities portfolio as a result of changes in interest
rates. Significant increases in interest rates, especially long-term
interest rates, could adversely impact the market value of the AFS securities
portfolio, which could also significantly impact our equity
capital. Due to the unpredictable nature of mortgage-backed
securities prepayments, the length of interest rate cycles, and the slope of the
interest rate yield curve, net interest income could fluctuate more than
simulated under the scenarios modeled by our Asset/Liability Committee (“ALCO”)
and described under “Item 7A. Quantitative and Qualitative
Disclosures about Market Risk” in this report.
The management of the securities portfolio as a
percentage of earning assets is guided by changes in our overall loan and
deposit levels combined with changes in our wholesale funding
levels. If adequate quality loan growth is not available to achieve
our goal of enhancing profitability by maximizing the use of capital, as
described above, then we could purchase additional securities, if appropriate,
which could cause securities as a percentage of earning assets to
increase. Should we determine that increasing the securities
portfolio or replacing the current securities maturities and principal payments
is not an efficient use of capital, we could decrease the level of securities
through proceeds from maturities, principal payments on mortgage-backed
securities or sales. During the year ended December 31, 2007, credit
and volatility spreads increased which, combined with the steeper yield curve,
led to buying opportunities in agency mortgage-backed securities and to a lesser
extent municipal securities. While loan growth during the year was
adequate, a majority of this growth did not occur until the last half of the
year. At December 31, 2007, the securities portfolio as a percentage
of total assets decreased to 47.8% from 52.7% at December 31, 2006 primarily as
a result of the Fort Worth National Bank acquisition. The current
interest rate yield curve and spreads remain investment friendly and changes to
the securities portfolio as a percentage of earning assets will be guided by
changes in our loan and deposit levels during the first quarter of 2008 as well
as the availability of attractive investment opportunities. During
the year ended December 31, 2007, we increased our investment and
mortgage-backed securities approximately $45.7 million as investment and
mortgage-backed securities excluding the net unrealized gain on AFS securities
increased from $976.3 million at December 31, 2006 to $1.0 billion at December
31, 2007. Our leverage strategy is dynamic and requires ongoing
management and will be reevaluated as market conditions warrant. As
interest rates, yield curves, mortgage-backed securities prepayments, funding
costs, security spreads and loan and deposit portfolios change, our
determination of the proper
35
types and
maturities of securities to own, proper amount of securities to own and funding
needs and funding sources will continue to be reevaluated.
With respect to liabilities, we will continue
to utilize a combination of FHLB advances and deposits to achieve our strategy
of minimizing cost while achieving overall interest rate risk objectives as well
as the liability management objectives of the ALCO. The FHLB funding
and the brokered CDs represent wholesale funding sources we currently
utilize. Our FHLB borrowings at December 31, 2007 decreased 2.6%, or
$11.6 million, to $440.0 million from $451.6 million at December 31, 2006
primarily as a result of an increase in deposits. At December 31,
2007, our callable brokered CDs totaled $123.4 million. During the
year ended December 31, 2007, we did not issue any brokered CDs; however, our
brokered CDs increased $9.5 million through the acquisition of Fort Worth
National Bank. The callable brokered CDs have maturities from
approximately one to four years and have calls that we control, all of which are
currently six months or less. The $9.5 million of brokered CDs
related to Fort Worth National Bank are not callable and have maturities of
approximately one year. As we integrate our funds management
processes the banks will likely issue similar structures of brokered CDs when
needed. We utilized long-term brokered CDs because the brokered CDs
better matched overall ALCO objectives by protecting Southside Bank with fixed
rates should interest rates increase, while providing Southside Bank options to
call the funding should interest rates decrease. Our wholesale
funding policy currently allows maximum brokered CDs of $150 million; however,
this amount could be increased to match changes in ALCO
objectives. The potential higher interest expense and lack of
customer loyalty are risks associated with the use of brokered
CDs. Due to the significant decrease in interest rates, including
brokered CD rates during the first quarter of 2008, we called approximately
$91.3 million of our brokered CDs. Based on current pricing, we
anticipate replacing this long-term funding with long-term FHLB
borrowings. For the year ended December 31, 2007, the large increase
in non-brokered deposits, partially associated with the Fort Worth National Bank
acquisition, and the decrease in FHLB borrowings resulted in a decrease in our
total wholesale funding as a percentage of deposits, not including brokered CDs,
from 49.6% at December 31, 2006, to 41.0% at December 31, 2007.
RESULTS OF
OPERATIONS
Our results of operations are dependent
primarily on net interest income, which is the difference between the interest
income earned on assets (loans and investments) and interest expense due on our
funding sources (deposits and borrowings) during a particular
period. Results of operations are also affected by our noninterest
income, provision for loan losses, noninterest expenses and income tax
expense. General economic and competitive conditions, particularly
changes in interest rates, changes in interest rate yield curves, prepayment
rates of mortgage-backed securities and loans, repricing of loan relationships,
government policies and actions of regulatory authorities, also significantly
affect our results of operations. Future changes in applicable law,
regulations or government policies may also have a material impact on
us.
COMPARISON OF OPERATING
RESULTS FOR THE YEARS ENDED DECEMBER 31, 2007 COMPARED TO DECEMBER 31,
2006
NET INTEREST INCOME
Net interest income is one of the principal
sources of a financial institution's earnings stream and represents the
difference or spread between interest and fee income generated from interest
earning assets and the interest expense paid on deposits and borrowed
funds. Fluctuations in interest rates or interest rate yield curves,
as well as repricing characteristics and volume and changes in the mix of
interest earning assets and interest bearing liabilities, materially impact net
interest income.
Net interest income for the year ended December
31, 2007 was $43.9 million, an increase of $2.2 million, or 5.3%, compared to
the same period in 2006. The overall increase in net interest income
was primarily the result of increases in interest income from loans and a
decrease in interest expense on short-term and long-term obligations that was
partially offset by an increase in interest expense on deposits and a decrease
in interest income from mortgage-backed and related securities and FHLB stock
and other investments. During the year ended December 31, 2007, total
interest income increased $8.8
36
million, or 9.1%,
from $97.0 million to $105.7 million. The increase in total interest
income was the result of an increase in average interest earning assets of $40.2
million, or 2.3%, from $1.75 billion to $1.79 billion, and the increase in
average yield on average interest earning assets from 5.74% for the year ended
December 31, 2006 to 6.10% for the year ended December 31,
2007. Total interest expense increased $6.6 million, or 11.9%, to
$61.9 million during the year ended December 31, 2007 as compared to $55.3
million during the same period in 2006. The increase was attributable
to an increase in the average yield on interest bearing liabilities for the year
ended December 31, 2007, to 4.30% from 3.89% for the same period in 2006 and an
increase in average interest bearing liabilities of $20.5 million, or 1.4%, from
$1.42 billion to $1.44 billion.
Net interest income increased during 2007 as a
result of increases in our average interest earning assets during 2007 when
compared to 2006, and the increase in our net interest margin during the year
ended December 31, 2007 to 2.64%, when compared to 2.57% for the same period in
2006. The net interest spread decreased to 1.80% as compared to 1.85%
for the same period in 2006. The increase in our net interest margin
reflects the volume changes combined with the rate changes. The
decrease in our net interest spread reflects an increase in the average
short-term borrowing and long-term FHLB advances rates that exceeded the
increase in the yields on the average earning assets. Future changes
in the interest rates or yield curve could influence our net interest margin and
net interest spread during future quarters. Future changes in
interest rates could also impact prepayment speeds on our mortgage-backed
securities, which could influence our net interest margin and net interest
spread during future quarters.
During the year ended December 31, 2007,
average loans increased $87.7 million, or 12.1% from $722.3 million to $809.9
million, compared to the same period in 2006. The average yield on
loans increased from 6.70% at December 31, 2006 to 7.16% at December 31,
2007. The increase in the yield on loans was due to the increase in
credit spreads, the repricing characteristics of Southside Bank’s loan
portfolio, the higher yielding automobile portfolios purchased during the second
half of 2007 and the higher yielding Fort Worth National Bank loan portfolio
acquired October 10, 2007. Due to the competitive loan pricing
environment, we anticipate that we may be required to 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. The increase in interest income on loans of $9.5
million, or 20.4%, resulted from the increase in average loans and the average
yield on loans.
Average investment and mortgage-backed
securities decreased $40.6 million, or 4.1%, from $989.1 million to $948.5
million, for the year ended December 31, 2007 when compared to the same period
in 2006. This decrease was attributable to the deleveraging strategy
in place from June 2006 to June 2007. Southside began to releverage
the balance sheet during the second half of 2007.
The overall yield on average investment and
mortgage-backed securities increased to 5.21% during the year ended December 31,
2007 from 5.06% during the same period in 2006. Interest income on
investment and mortgage-backed securities decreased $579,000 in 2007, or 1.2%,
compared to 2006 due to the decrease in the average balances while partially
offset by the increase in overall yield. The increase in the average
yield primarily reflects higher credit and swap spreads and decreased prepayment
rates on mortgage-backed securities, which led to decreased amortization
expense, combined with the reinvestment of proceeds from lower-yielding matured
securities into higher yielding securities due to the overall higher credit and
swap spreads. An overall housing slowdown nationwide during 2007 when
compared to 2006 contributed to a decrease in residential mortgage refinancing
nationwide and in our market area. A return to a lower long-term
interest rate level similar to that experienced during 2003 could impact our net
interest margin in the future due to increased prepayments and
repricings.
37
Average FHLB stock and other investments
decreased $7.8 million, or 27.9%, to $20.2 million, for the year ended December
31, 2007, when compared to $28.0 million for 2006, primarily due to the average
decrease in FHLB advances during 2007 when compared to 2006. Interest
income from our FHLB stock and other investments decreased $216,000, or 15.3%,
during 2007, when compared to 2006, due to the decrease in average balance which
was offset by the increase in average yield from 5.04% for the year ended
December 31, 2006 compared to 5.91% for the same period in
2007. Average federal funds sold and other interest earning assets
increased $1.9 million, or 101.2%, to $3.7 million, for the year ended December
31, 2007, when compared to $1.8 million for 2006. Interest income
from federal funds sold and other interest earning assets increased $93,000, or
101.1%, for the year ended December 31, 2007, when compared to 2006, as a result
of the increase in the average balance while the average yield remained at 5.00%
for both 2006 and 2007.
During the year ended December 31, 2007,
average loans increased while average securities decreased. As a
result, the mix of our average interest earning assets reflected an increase in
average total loans as a percentage of total average interest earning assets
compared to the prior year as loans averaged 45.6% during 2007 compared to 41.6%
during 2006, a direct result of loan growth, including the acquisition of Fort
Worth National Bank and the investment in SFG. Average securities
were 54.2% of average total interest earning assets and other interest earning
asset categories averaged 0.2% for December 31, 2007. During 2006,
the comparable mix was 58.3% in securities and 0.1% in the other interest
earning asset categories.
Total interest expense increased $6.6 million,
or 11.9%, to $61.9 million during the year ended December 31, 2007 as compared
to $55.3 million during the same period in 2006. The increase was
primarily attributable to increased funding costs associated with an increase in
average interest bearing liabilities, including an increase in deposits and FHLB
advances of $20.5 million, or 1.4%, and an increase in the average yield on
interest bearing liabilities from 3.89% for 2006 to 4.30% for the year ended
December 31, 2007.
Average interest bearing deposits increased
$163.7 million, or 18.9%, from $867.3 million to $1.03 billion, and the average
rate paid increased from 3.54% for the year ended December 31, 2006 compared to
4.02% for the year ended December 31, 2007. Average time deposits
increased $97.4 million, or 20.9%, from $467.2 million to $564.6 million, and
the average rate paid increased 51 basis points. Of the average
increase in time deposits, $42.1 million was attributable to the issuance of
callable brokered CDs during 2006. Average interest bearing demand
deposits increased $64.9 million, or 18.6%, and the average rate paid increased
44 basis points. Average savings deposits increased $1.3 million, or
2.6%, and the average rate paid increased three basis
points. Interest expense for interest bearing deposits for the year
ended December 31, 2007, increased $10.8 million, or 35.1%, when compared to the
same period in 2006 due to the increase in the average balance and
yield. Average noninterest bearing demand deposits increased $14.5
million, or 4.6%, during 2007. The latter three categories, which are
considered the lowest cost deposits, comprised 58.5% of total average deposits
during the year ended December 31, 2007 compared to 60.5% during
2006. The increase in our average total deposits is the result of
overall bank growth and branch expansion and the acquisition of Fort Worth
National Bank.
During the year ended December 31, 2007, we did
not issue brokered CDs; however, our brokered CDs increased $9.5 million through
the acquisition of Fort Worth National Bank. At December 31, 2007,
$123.4 million of these brokered CDs had maturities from approximately one to
four years and had calls that we control, all of which are currently six months
or less. The $9.5 million acquired through the Fort Worth National
Bank transaction do not have calls and have a maturity of approximately one
year. At December 31, 2007, we had $132.9 million in brokered CDs
that represented 8.7% of deposits compared to $123.5 million, or 9.6% of
deposits, at December 31, 2006. During 2006, we utilized long-term
brokered CDs to a greater extent than long-term FHLB funding as the brokered CDs
better matched overall ALCO objectives due to the calls we
controlled. Our current policy allows for a maximum of $150 million
in brokered CDs. The potential higher interest cost and lack of
customer loyalty are risks associated with the use of brokered CDs.
38
The following table sets forth our deposit
averages by category for the years ended December 31, 2007, 2006 and
2005:
|
COMPOSITION
OF DEPOSITS
|
||||||||||||||||
|
Years Ended
December 31,
|
||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||
|
(dollars in
thousands)
|
||||||||||||||||
|
AVG
BALANCE
|
AVG
YIELD
|
AVG
BALANCE
|
AVG
YIELD
|
AVG
BALANCE
|
AVG
YIELD
|
|||||||||||
|
Noninterest
Bearing Demand Deposits
|
$
|
328,711
|
N/A
|
$
|
314,241
|
N/A
|
$
|
280,036
|
N/A
|
|||||||
|
Interest
Bearing Demand Deposits
|
414,293
|
3.17
|
%
|
349,375
|
2.73
|
%
|
313,815
|
1.74
|
%
|
|||||||
|
Savings
Deposits
|
52,106
|
1.30
|
%
|
50,764
|
1.27
|
%
|
50,502
|
1.04
|
%
|
|||||||
|
Time
Deposits
|
564,613
|
4.90
|
%
|
467,174
|
4.39
|
%
|
354,360
|
3.17
|
%
|
|||||||
|
Total
Deposits
|
$
|
1,359,723
|
3.05
|
%
|
$
|
1,181,554
|
2.60
|
%
|
$
|
998,713
|
1.72
|
%
|
||||
Average short-term interest bearing
liabilities, consisting primarily of FHLB advances and federal funds purchased
and repurchase agreements, were $278.0 million, a decrease of $98.7 million, or
26.2%, for the year ended December 31, 2007 when compared to the same period in
2006. Interest expense associated with short-term interest bearing
liabilities decreased $3.3 million, or 19.8%, while the average rate paid
increased 38 basis points to 4.77% for the year ended December 31, 2007, when
compared to 4.39% for the same period in 2006. The decrease in the
interest expense was due to a decrease in the average balance which was more
than offset the increase in the average yield for short-term interest bearing
liabilities.
Average long-term interest bearing liabilities
consisting of FHLB advances decreased $59.7 million, or 38.5%, during the year
ended December 31, 2007 to $95.3 million as compared to $155.0 million at
December 31, 2006. Interest expense associated with long-term FHLB
advances decreased $2.0 million, or 31.7%, while the average rate paid increased
45 basis points to 4.57% for the year ended December 31, 2007 when compared to
4.12% for the same period in 2006. The decrease in interest expense
was due to a decrease in the average balance of long-term interest bearing
liabilities that more than offset the increase in the average rate
paid. FHLB advances are collateralized by FHLB stock, securities and
nonspecific real estate loans.
Average long-term debt, consisting of our
junior subordinated debentures issued in 2003 and August 2007 and junior
subordinated debenture acquired in the purchase of Fort Worth Bancshares, Inc.,
was $35.8 million and $20.6 million for the years ended December 31, 2007 and
2006, respectively. During the third quarter ended September 30,
2007, we issued $36.1 million of junior subordinated debentures in connection
with the issuance of trust preferred securities by our subsidiaries Southside
Statutory Trusts IV and V. The $36.1 million in debentures were
issued to fund the purchase of Fort Worth Bancshares, Inc., which occurred on
October 10, 2007. Interest expense increased $1.1 million, or 65.7%,
to $2.8 million for the year ended December 31, 2007 when compared to $1.7
million for the same period in 2006 primarily as a result of the increase in the
average balance during 2007 when compared to 2006. The interest rate
on the $20.6 million of long-term debentures issued to Southside Statutory Trust
III adjusts quarterly at a rate equal to three-month LIBOR plus 294 basis
points. The $23.2 million of long-term debentures issued to Southside
Trust IV and the $12.9 million of long-term debentures issued to
Southside Trust V have fixed rates of 6.518% and 7.48%, respectively, for a
period of five years. The interest rate on the $3.6 million of
long-term debentures issued to Magnolia Trust Company I, assumed in the purchase
of Fort Worth Bancshares, Inc., adjusts quarterly at a rate equal to three-month
LIBOR plus 180 basis points.
39
AVERAGE BALANCES AND YIELDS
The following table presents average
balance sheet amounts and average yields for the years ended December 31, 2007,
2006 and 2005. The information should be reviewed in conjunction with
the consolidated financial statements for the same years then
ended. Two major components affecting our earnings are the interest
earning assets and interest bearing liabilities. A summary of average
interest earning assets and interest bearing liabilities is set forth below,
together with the average yield on the interest earning assets and the average
cost of the interest bearing liabilities.
|
AVERAGE
BALANCES AND YIELDS
|
||||||||||||||||||||||||||||||||||||
|
(dollars in
thousands)
|
||||||||||||||||||||||||||||||||||||
|
Years
Ended
|
||||||||||||||||||||||||||||||||||||
|
December 31,
2007
|
December 31,
2006
|
December 31,
2005
|
||||||||||||||||||||||||||||||||||
|
AVG.
BALANCE
|
INTEREST
|
AVG.
YIELD
|
AVG.
BALANCE
|
INTEREST
|
AVG.
YIELD
|
AVG.
BALANCE
|
INTEREST
|
AVG.
YIELD
|
||||||||||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||||||||||||||
|
INTEREST
EARNING ASSETS:
|
||||||||||||||||||||||||||||||||||||
|
Loans(1)
(2)
|
$ | 809,906 | $ | 58,002 | 7.16 | % | $ | 722,252 | $ | 48,397 | 6.70 | % | $ | 657,938 | $ | 40,927 | 6.22 | % | ||||||||||||||||||
|
Loans Held
For Sale
|
3,657 | 191 | 5.22 | % | 4,651 | 246 | 5.29 | % | 4,469 | 212 | 4.74 | % | ||||||||||||||||||||||||
|
Securities:
|
||||||||||||||||||||||||||||||||||||
|
Inv.
Sec. (Taxable)(4)
|
52,171 | 2,580 | 4.95 | % | 54,171 | 2,498 | 4.61 | % | 51,431 | 1,978 | 3.85 | % | ||||||||||||||||||||||||
|
Inv.
Sec. (Tax-Exempt)(3)(4)
|
43,486 | 3,065 | 7.05 | % | 43,931 | 3,134 | 7.13 | % | 66,023 | 4,696 | 7.11 | % | ||||||||||||||||||||||||
|
Mortgage-backed and
related
Sec.(4)
|
852,880 | 43,767 | 5.13 | % | 891,015 | 44,401 | 4.98 | % | 773,973 | 34,584 | 4.47 | % | ||||||||||||||||||||||||
|
Total
Securities
|
948,537 | 49,412 | 5.21 | % | 989,117 | 50,033 | 5.06 | % | 891,427 | 41,258 | 4.63 | % | ||||||||||||||||||||||||
|
FHLB stock
and other investments, at cost
|
20,179 | 1,193 | 5.91 | % | 27,969 | 1,409 | 5.04 | % | 28,099 | 1,032 | 3.67 | % | ||||||||||||||||||||||||
|
Interest
Earning Deposits
|
769 | 41 | 5.33 | % | 692 | 35 | 5.06 | % | 644 | 24 | 3.73 | % | ||||||||||||||||||||||||
|
Federal Funds
Sold
|
2,933 | 144 | 4.91 | % | 1,148 | 57 | 4.97 | % | 995 | 30 | 3.02 | % | ||||||||||||||||||||||||
|
Total
Interest Earning Assets
|
1,785,981 | 108,983 | 6.10 | % | 1,745,829 | 100,177 | 5.74 | % | 1,583,572 | 83,483 | 5.27 | % | ||||||||||||||||||||||||
|
NONINTEREST
EARNING ASSETS:
|
||||||||||||||||||||||||||||||||||||
|
Cash and Due
From Banks
|
42,724 | 42,906 | 42,280 | |||||||||||||||||||||||||||||||||
|
Bank Premises
and Equipment
|
35,746 | 33,298 | 31,504 | |||||||||||||||||||||||||||||||||
|
Other
Assets
|
51,968 | 42,716 | 45,625 | |||||||||||||||||||||||||||||||||
|
Less: Allowance
for Loan
Loss
|
(7,697 | ) | (7,231 | ) | (6,945 | ) | ||||||||||||||||||||||||||||||
|
Total
Assets
|
$ | 1,908,722 | $ | 1,857,518 | $ | 1,696,036 | ||||||||||||||||||||||||||||||
|
(1)
|
Interest on
loans includes fees on loans that are not material in
amount.
|
|
(2)
|
Interest
income includes taxable-equivalent adjustments of $2,289, $2,230 and
$2,287 for the years ended December 31, 2007, 2006 and 2005,
respectively.
|
|
(3)
|
Interest
income includes taxable-equivalent adjustments of $953, $995 and $1,515
for the years ended December 31, 2007, 2006 and 2005,
respectively.
|
|
(4)
|
For the
purpose of calculating the average yield, the average balance of
securities is presented at historical
cost.
|
|
Note:
|
As of
December 31, 2007, 2006 and 2005, loans totaling $2,913, $1,333 and
$1,731, 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.
|
40
|
AVERAGE
BALANCES AND YIELDS
|
||||||||||||||||||||||||||||||||||||
|
(dollars in
thousands)
|
||||||||||||||||||||||||||||||||||||
|
Years
Ended
|
||||||||||||||||||||||||||||||||||||
|
December 31,
2007
|
December 31,
2006
|
December 31,
2005
|
||||||||||||||||||||||||||||||||||
|
AVG.
BALANCE
|
INTEREST
|
AVG.
YIELD
|
AVG.
BALANCE
|
INTEREST
|
AVG.
YIELD
|
AVG.
BALANCE
|
INTEREST
|
AVG.
YIELD
|
||||||||||||||||||||||||||||
|
LIABILITIES
AND
SHAREHOLDERS'
EQUITY
|
||||||||||||||||||||||||||||||||||||
|
INTEREST
BEARING
LIABILITIES:
|
||||||||||||||||||||||||||||||||||||
|
Savings
Deposits
|
$ | 52,106 | $ | 676 | 1.30 | % | $ | 50,764 | $ | 645 | 1.27 | % | $ | 50,502 | $ | 524 | 1.04 | % | ||||||||||||||||||
|
Time
Deposits
|
564,613 | 27,666 | 4.90 | % | 467,174 | 20,516 | 4.39 | % | 354,360 | 11,221 | 3.17 | % | ||||||||||||||||||||||||
|
Interest
Bearing Demand Deposits
|
414,293 | 13,116 | 3.17 | % | 349,375 | 9,529 | 2.73 | % | 313,815 | 5,476 | 1.74 | % | ||||||||||||||||||||||||
|
Total
Interest
Bearing Deposits
|
1,031,012 | 41,458 | 4.02 | % | 867,313 | 30,690 | 3.54 | % | 718,677 | 17,221 | 2.40 | % | ||||||||||||||||||||||||
|
Short-term
Interest Bearing
Liabilities
|
278,002 | 13,263 | 4.77 | % | 376,696 | 16,534 | 4.39 | % | 282,283 | 9,892 | 3.50 | % | ||||||||||||||||||||||||
|
Long-term
Interest Bearing Liabilities - FHLB
|
95,268 | 4,357 | 4.57 | % | 154,983 | 6,379 | 4.12 | % | 274,673 | 10,004 | 3.64 | % | ||||||||||||||||||||||||
|
Long-term
Debt (5)
|
35,802 | 2,785 | 7.78 | % | 20,619 | 1,681 | 8.04 | % | 20,619 | 1,305 | 6.24 | % | ||||||||||||||||||||||||
|
Total
Interest Bearing Liabilities
|
1,440,084 | 61,863 | 4.30 | % | 1,419,611 | 55,284 | 3.89 | % | 1,296,252 | 38,422 | 2.96 | % | ||||||||||||||||||||||||
|
NONINTEREST
BEARING LIABILITIES:
|
||||||||||||||||||||||||||||||||||||
|
Demand
Deposits
|
328,711 | 314,241 | 280,036 | |||||||||||||||||||||||||||||||||
|
Other
Liabilities
|
20,997 | 12,403 | 14,649 | |||||||||||||||||||||||||||||||||
|
Total
Liabilities
|
1,789,792 | 1,746,255 | 1,590,937 | |||||||||||||||||||||||||||||||||
|
Minority
Interest in SFG
|
151 | – | – | |||||||||||||||||||||||||||||||||
|
SHAREHOLDERS'
EQUITY
|
118,779 | 111,263 | 105,099 | |||||||||||||||||||||||||||||||||
|
TOTAL
LIABILITIES AND
SHAREHOLDERS'
EQUITY
|
$ | 1,908,722 | $ | 1,857,518 | $ | 1,696,036 | ||||||||||||||||||||||||||||||
|
NET INTEREST
INCOME
|
$ | 47,120 | $ | 44,893 | $ | 45,061 | ||||||||||||||||||||||||||||||
|
NET YIELD ON
AVERAGE
EARNING
ASSETS
|
2.64 | % | 2.57 | % | 2.85 | % | ||||||||||||||||||||||||||||||
|
NET INTEREST
SPREAD
|
1.80 | % | 1.85 | % | 2.31 | % | ||||||||||||||||||||||||||||||
|
(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 on August 8, 2007
and Southside Statutory Trust V of $12.5 million of Trust Preferred
Securities on August 10, 2007 and junior subordinated debentures issued by
Fort Worth Bancshares, Inc. to Magnolia Trust Company I in connection with
the issuance by Magnolia Trust Company I of $3.5 million of trust
preferred securities, which we assumed on October 10,
2007.
|
41
ANALYSIS OF CHANGES IN INTEREST INCOME AND
INTEREST EXPENSE
The following tables set forth the dollar
amount of increase (decrease) in interest income and interest expense resulting
from changes in the volume of interest earning assets and interest bearing
liabilities and from changes in yields (in thousands):
|
Years Ended
December 31,
|
||||||||||||
|
2007 Compared
to 2006
|
||||||||||||
|
Average
|
Average
|
Increase
|
||||||||||
|
Volume
|
Yield
|
(Decrease)
|
||||||||||
|
INTEREST
INCOME:
|
||||||||||||
|
Loans
(1)
|
$
|
6,131
|
$
|
3,474
|
$
|
9,605
|
||||||
|
Loans Held
For
Sale
|
(52
|
)
|
(3
|
)
|
(55
|
)
|
||||||
|
Investment
Securities (Taxable)
|
(85
|
)
|
167
|
82
|
||||||||
|
Investment
Securities (Tax Exempt) (1)
|
(32
|
)
|
(37
|
)
|
(69
|
)
|
||||||
|
Mortgage-backed
Securities
|
(1,934
|
)
|
1,300
|
(634
|
)
|
|||||||
|
FHLB stock
and other investments
|
(434
|
)
|
218
|
(216
|
)
|
|||||||
|
Interest
Earning
Deposits
|
4
|
2
|
6
|
|||||||||
|
Federal Funds
Sold
|
88
|
(1
|
)
|
87
|
||||||||
|
Total
Interest
Income
|
3,686
|
5,120
|
8,806
|
|||||||||
|
INTEREST
EXPENSE:
|
||||||||||||
|
Savings
Deposits
|
17
|
14
|
31
|
|||||||||
|
Time
Deposits
|
4,598
|
2,552
|
7,150
|
|||||||||
|
Interest
Bearing Demand Deposits
|
1,923
|
1,664
|
3,587
|
|||||||||
|
Short-term
Interest Bearing Liabilities
|
(4,615
|
)
|
1,344
|
(3,271
|
)
|
|||||||
|
Long-term
FHLB
Advances
|
(2,670
|
)
|
648
|
(2,022
|
)
|
|||||||
|
Long-term
Debt
|
1,184
|
(80
|
)
|
1,104
|
||||||||
|
Total
Interest
Expense
|
437
|
6,142
|
6,579
|
|||||||||
|
Net Interest
Income
|
$
|
3,249
|
$
|
(1,022
|
)
|
$
|
2,227
|
|||||
|
Years Ended
December 31,
|
||||||||||||
|
2006 Compared
to 2005
|
||||||||||||
|
Average
|
Average
|
Increase
|
||||||||||
|
Volume
|
Yield
|
(Decrease)
|
||||||||||
|
INTEREST
INCOME:
|
||||||||||||
|
Loans
(1)
|
$
|
4,173
|
$
|
3,297
|
$
|
7,470
|
||||||
|
Loans Held
For
Sale
|
9
|
25
|
34
|
|||||||||
|
Investment
Securities (Taxable)
|
110
|
410
|
520
|
|||||||||
|
Investment
Securities (Tax Exempt) (1)
|
(1,576
|
)
|
14
|
(1,562
|
)
|
|||||||
|
Mortgage-backed
Securities
|
5,572
|
4,245
|
9,817
|
|||||||||
|
FHLB stock
and other investments
|
(5
|
)
|
382
|
377
|
||||||||
|
Interest
Earning
Deposits
|
2
|
9
|
11
|
|||||||||
|
Federal Funds
Sold
|
5
|
22
|
27
|
|||||||||
|
Total
Interest
Income
|
8,290
|
8,404
|
16,694
|
|||||||||
|
INTEREST
EXPENSE:
|
||||||||||||
|
Savings
Deposits
|
3
|
118
|
121
|
|||||||||
|
Time
Deposits
|
4,196
|
5,099
|
9,295
|
|||||||||
|
Interest
Bearing Demand Deposits
|
679
|
3,374
|
4,053
|
|||||||||
|
Short-term
Interest Bearing Liabilities
|
3,785
|
2,857
|
6,642
|
|||||||||
|
Long-term
FHLB
Advances
|
(4,796
|
)
|
1,171
|
(3,625
|
)
|
|||||||
|
Long-term
Debt
|
–
|
376
|
376
|
|||||||||
|
Total
Interest
Expense
|
3,867
|
12,995
|
16,862
|
|||||||||
|
Net Interest
Income
|
$
|
4,423
|
$
|
(4,591
|
)
|
$
|
(168
|
)
|
||||
|
(1)
|
Interest
yields on loans and securities that are nontaxable for federal income tax
purposes are presented on a taxable equivalent
basis.
|
NOTE: Volume/Yield
variances (change in volume times change in yield) have been allocated to
amounts attributable to changes in volumes and to changes in yields in
proportion to the amounts directly attributable to those changes.
42
PROVISION FOR LOAN LOSSES
The provision for loan losses for the year
ended December 31, 2007 was $2.4 million compared to $1.1 million for December
31, 2006. Approximately $933,000 of this increase is related to the
loans that were purchased by SFG during 2007. Approximately $152,000
of this increase is provision expense of Fort Worth National
Bank. For the year ended December 31, 2007, net charge-offs of loans
decreased $277,000, or 28.4%, to $700,000 when compared to $977,000 for the same
period in 2006.
The decrease in net charge-offs for 2007 was
due to a combination of an increase in total recoveries of $52,000 and a
decrease in total charge-offs of $225,000. Net charge-offs for
commercial loans decreased $161,000 from 2006 primarily as a result of an
overall decrease in charge-offs and increase in recoveries. Net
charge-offs for loans to individuals decreased $46,000 during 2007 due to an
overall increase in recoveries and decrease in charge-offs when compared to
2006.
As of December 31, 2007, our review of the loan
portfolio indicated that a loan loss allowance of $9.8 million was adequate to
cover probable losses in the portfolio.
NONINTEREST INCOME
Noninterest income consists of revenues
generated from a broad range of financial services and activities including fee
based services. The following schedule lists the accounts from which
noninterest income was derived, gives totals for these accounts for the year
ended December 31, 2007 and the comparable year ended December 31, 2006 and
indicates the percentage changes:
|
Years
Ended
|
||||||||||||
| December 31, |
Percent
|
|||||||||||
|
2007
|
2006
|
Change
|
||||||||||
|
(dollars in
thousands)
|
||||||||||||
|
Deposit
services
|
$ | 17,280 | $ | 15,482 | 11.6 | % | ||||||
|
Gain on
securities available for
sale
|
897 | 743 | 20.7 | % | ||||||||
|
Gain on sale
of
loans
|
1,922 | 1,817 | 5.8 | % | ||||||||
|
Trust
income
|
2,106 | 1,711 | 23.1 | % | ||||||||
|
Bank owned
life insurance
income
|
1,142 | 1,067 | 7.0 | % | ||||||||
|
Other
|
3,071 | 2,661 | 15.4 | % | ||||||||
|
Total
noninterest
income
|
$ | 26,418 | $ | 23,481 | 12.5 | % | ||||||
Total noninterest income for the year ended
December 31, 2007 increased 12.5%, or $2.9 million, compared to
2006. During the year ended December 31, 2007, we had a gain on AFS
securities of $897,000 compared to $743,000 for the same period in
2006. The market value of the AFS securities portfolio at December
31, 2007 was $837.5 million with a net unrealized gain on that date of $5.9
million. The net unrealized gain is comprised of $8.7 million in
unrealized gains and $2.8 million in unrealized losses. We sold
securities out of our AFS portfolio to accomplish ALCO and investment portfolio
objectives aimed at repositioning a portion of the securities portfolio in an
attempt to maximize the total return of the securities portfolio and reduce
alternative minimum tax. During 2007, we primarily sold selected
mortgage-backed securities where the risk reward profile had
changed. We recorded an impairment charge of $58,000 on $4.8 million
of whole loan collateralized mortgage obligations ("CMOs") at December 31,
2007. After the sale of these CMOs during January 2008, all of our
remaining mortgage-backed securities are agency mortgage-backed securities
("MBSs").
Deposit services income increased $1.8 million,
or 11.6%, for the year ended December 31, 2007, when compared to the same period
in 2006, primarily as a result of increases in overdraft income, an increase in
the number of deposit accounts and an increase in debit card
income.
43
Trust income increased $395,000, or 23.1%, for
the year ended December 31, 2007, when compared to the same period in 2006 due
to growth experienced in our trust department.
Gain on sale of loans increased $105,000, or
5.8%, for the year ended December 31, 2007, when compared to the same period in
2006. The increase was primarily due to an increase in premiums on
student loans and the sale of non-accrual loans from a pool of automobile loans
purchased by SFG which was partially offset by a decrease in the mortgage loans
sold during 2007 when compared to 2006.
Bank owned life insurance (“BOLI”) income
increased $75,000, or 7.0%, for the year ended December 31, 2007, when compared
to the same period in 2006 primarily as a result of an increase in the average
balance of cash surrender value associated with our BOLI.
Other noninterest income increased $410,000, or
15.4%, for the year ended December 31, 2007, when compared to the same period in
2006. The increase was primarily a result of increases in brokerage
services income, credit card fee income, and merchant banking income which was
offset by decreases in other recoveries including a recovery of $150,000
received during the second quarter of 2006 that was related to a loss on a check
during 2005.
NONINTEREST EXPENSE
The following schedule lists the accounts which
comprise noninterest expense, gives totals for these accounts for the years
ended December 31, 2007 and 2006 and indicates the percentage
changes:
|
Years
Ended
|
||||||||||||
| December 31, |
Percent
|
|||||||||||
|
2007
|
2006
|
Change
|
||||||||||
|
(dollars in
thousands)
|
||||||||||||
|
Salaries and
employee benefits
|
$ | 29,361 | $ | 28,275 | 3.8 | % | ||||||
|
Occupancy
expense
|
4,881 | 4,777 | 2.2 | % | ||||||||
|
Equipment
expense
|
1,017 | 899 | 13.1 | % | ||||||||
|
Advertising,
travel and entertainment
|
1,812 | 1,742 | 4.0 | % | ||||||||
|
ATM and debit
card expense
|
1,006 | 955 | 5.3 | % | ||||||||
|
Director
fees
|
605 | 587 | 3.1 | % | ||||||||
|
Supplies
|
692 | 637 | 8.6 | % | ||||||||
|
Professional
fees
|
1,268 | 1,386 | (8.5 | %) | ||||||||
|
Postage
|
662 | 618 | 7.1 | % | ||||||||
|
Telephone and
communications
|
800 | 723 | 10.7 | % | ||||||||
|
Other
|
5,181 | 4,368 | 18.6 | % | ||||||||
|
Total
noninterest expense
|
$ | 47,285 | $ | 44,967 | 5.2 | % | ||||||
Noninterest expense for the year ended December
31, 2007 increased $2.3 million, or 5.2%, when compared to the year ended
December 31, 2006. Salaries and employee benefits expense increased
$1.1 million, or 3.8%, during the year ended December 31, 2007, when compared to
the same period in 2006. Direct salary expense and payroll taxes
increased $1.2 million, or 5.1%, for the year ended December 31, 2007, when
compared to the same period in 2006. These increases were the result
of the addition of SFG and acquisition of Fort Worth National Bank.
Retirement expense, included in salary and
benefits, decreased $533,000, or 21.7%, for the year ended December 31, 2007,
when compared to the same period in 2006, primarily as a result of the
amendments to the Plan in the fourth quarter of 2005 that became effective in
2006. Our actuarial assumptions used to determine net periodic
pension costs for 2007 included an assumed long-term rate of return of 7.50% and
an assumed discount rate of 6.05%. This compares to an assumed
long-term rate of
44
return of 7.875%
and an assumed discount rate of 5.625% for 2006. We will continue to
evaluate the assumed long-term rate of return and the discount rate to determine
if either should be changed in the future. If either of these
assumptions were decreased, the cost and funding required for the retirement
plan could increase.
Health and life insurance expense, included in
salary and benefits, increased $436,000, or 16.6%, for the year ended December
31, 2007, when compared to the same period in 2006 due to increased health
claims expense during 2007. We have a self-insured health plan which
is supplemented with stop loss insurance policies. Health insurance
costs are rising nationwide and these costs may increase during
2008.
Equipment expense increased $118,000, or 13.1%,
for the year ended December 31, 2007, compared to the same period in 2006 due
primarily to various increases on equipment service contracts.
Telephone and communications expense increased
$77,000, or 10.7%, for the year ended December 31, 2007, compared to the same
period in 2006 primarily due to the opening of two de novo branch locations in
2007 and the capture of a full year of expenses of three locations added in
2006. The addition of Fort Worth National Bank and SFG also
contributed to the increase over last year.
Other expense increased $813,000, or 18.6%, for
the year ended December 31, 2007, compared to the same period in
2006. The increase occurred primarily due to increases in computer
fees, bank analysis and exam fees, brokerage service expense, student loan
origination and lender fee expense, FDIC insurance and the amortization expense
related to the core deposit intangible that resulted from the acquisition during
2007.
INCOME
TAXES
Pre-tax income for the year ended December 31,
2007 was $20.7 million compared to $19.1 million and $17.9 million for the years
ended December 31, 2006 and 2005, respectively.
Income tax expense was $4.0 million for the
year ended December 31, 2007 and represented a $124,000, or 3.0%, decrease from
the year ended December 31, 2006. The effective tax rate as a
percentage of pre-tax income was 19.2% in 2007, 21.5% in 2006 and 18.4% in
2005. The decrease in the effective tax rate and income tax expense
for 2007 was due to a one-time state tax credit resulting from a change in Texas
tax law related to the new margin tax during the quarter ended June 30,
2007. The state tax credit was $779,000, which was partially offset
by an increase in our estimated margin tax of $70,000, net of federal income
tax. Excluding the effect of the state tax credit and estimated
margin tax, the effective rate for the year ended December 31, 2007 would have
been 22.6%.
The remaining alternative minimum tax position
reversed during 2007. We will continue to review the appropriate
level of tax free income so as to minimize any alternative minimum tax position
in the future.
45
COMPARISON OF OPERATING RESULTS FOR THE YEARS
ENDED DECEMBER 31, 2006 COMPARED TO DECEMBER 31, 2005
NET INTEREST INCOME
Net interest income for the year ended December
31, 2006 was $41.7 million, an increase of $409,000, or 1.0%, compared to the
same period in 2005. The overall increase in net interest income was
primarily the result of increases in interest income from loans, mortgage-backed
and related securities and taxable investment securities and a decrease in
interest expense on long-term obligations which was partially offset by an
increase in interest expense on deposits and short-term
obligations. During the year ended December 31, 2006, total interest
income increased $17.3 million, or 21.7%, from $79.7 million to $97.0
million. The increase in total interest income was the result of an
increase in average interest earning assets of $162.3 million, or 10.2%, from
$1.58 billion to $1.75 billion, and the increase in average yield on average
interest earning assets from 5.27% for the year ended December 31, 2005 to 5.74%
for the year ended December 31, 2006. Total interest expense
increased $16.9 million, or 43.9%, to $55.3 million during the year ended
December 31, 2006 as compared to $38.4 million during the same period in
2005. The increase was attributable to an increase in the average
yield on interest bearing liabilities for the year ended December 31, 2006, to
3.89% from 2.96% for the same period in 2005 and an increase in average interest
bearing liabilities of $123.4 million, or 9.5% from $1.30 billion to $1.42
billion.
Net interest income increased as a result of
increases in our average interest earning assets during 2006 when compared to
2005, which more than offset the decrease in our net interest margin and spread
during the year ended December 31, 2006 to 2.57% and 1.85%, respectively, when
compared to 2.85% and 2.31%, respectively, for the same period in
2005. The decreases in our net interest margin and spread were due
primarily to the changing interest rate environment that began in
mid-2004. Since mid-2004, short-term interest rates have increased
significantly while long-term interest rates have increased
less. This has caused our yield on our interest bearing liabilities
to increase faster than the yield on our earning assets. During 2006,
our net interest income trend continued to gradually decline due to the net
interest spread and margin decreases which more than offset the increase in
average interest earning assets by the end of 2006, and resulted in a slight
decrease in net interest income during the fourth quarter ended December 31,
2006, of $81,000, or 0.8%, when compared to the same period in
2005. Future changes in the interest rate environment or yield curve
could also influence our net interest margin and spread during future
quarters.
During the year ended December 31, 2006,
average loans, funded by the growth in average deposits, increased $64.3
million, or 9.8%, from $657.9 million to $722.3 million, compared to the same
period in 2005. The average yield on loans increased from 6.22% at
December 31, 2005 to 6.70% at December 31, 2006. The increase in the
yield on loans was due to the overall increase in interest rates. The
rate at which loan yields increased were partially impacted by repricing
characteristics of the loans, interest rates at the time the loans repriced, and
the competitive loan pricing environment. The increase in interest
income on loans of $7.6 million, or 19.5%, was the result of an increase in
average loans and the average yield on loans.
Average investment and mortgage-backed
securities increased $97.7 million, or 11.0%, from $891.4 million to $989.1
million, for the year ended December 31, 2006 when compared to the same period
in 2005. This increase was funded by the increase in average deposits
which included brokered CDs we issued. The overall yield on average
investment and mortgage-backed securities increased to 5.06% during the year
ended December 31, 2006 from 4.63% during the same period in
2005. Interest income on investment and mortgage-backed securities
increased $9.3 million in 2006, or 23.4%, compared to 2005 due to the increase
in the overall yield and average balances. The increase in the
average yield primarily reflects decreased prepayment rates on mortgage-backed
securities, which led to decreased amortization expense, combined with the
reinvestment of proceeds from lower-yielding matured securities into higher
yielding securities due to the overall higher interest rate
environment. The higher overall interest rate environment during 2006
when compared to 2005 contributed to a decrease in residential mortgage
refinancing nationwide and in our market area. The decrease in
prepayments on mortgage loans combined
46
with a previous
restructuring of the securities portfolio reduced overall amortization expense
which contributed to the increase in interest income.
Average FHLB stock and other investments
decreased $130,000, or 0.5%, to $28.0 million, for the year ended December 31,
2006, when compared to $28.1 million for 2005. Interest income from
our FHLB stock and other investments increased $377,000, or 36.5%, from $1.0
million to $1.4 million, during 2006, when compared to 2005, due to the increase
in average yield from 3.67% for the year ended December 31, 2005 compared to
5.04% for the same period in 2006. Average federal funds sold and
other interest earning assets increased $201,000, or 12.3%, to $1.8 million, for
the year ended December 31, 2006, when compared to $1.6 million for
2005. Interest income from federal funds sold and other interest
earning assets increased $38,000, or 70.4%, for the year ended December 31,
2006, when compared to 2005, as a result of the increase in the average balance
and the average yield from 3.29% in 2005 to 5.00% in 2006, which was due to the
higher average short-term interest rates.
During the year ended December 31, 2006,
average securities increased more than average loans. As a result,
the mix of our average interest earning assets reflected a slight decrease in
average total loans as a percentage of total average interest earning assets
compared to the prior year as loans averaged 41.6% during 2006 compared to 41.8%
during 2005, a direct result of securities growth exceeding loan
growth. Average securities were 58.3% of average total interest
earning assets and other interest earning asset categories averaged 0.1% for
December 31, 2006. During 2005, the comparable mix was 58.1% in
securities and 0.1% in the other interest earning asset categories.
Total interest expense increased $16.9 million,
or 43.9%, to $55.3 million during the year ended December 31, 2006 as compared
to $38.4 million during the same period in 2005. The increase was
primarily attributable to increased funding costs associated with an increase in
average interest bearing liabilities, including deposits, brokered CDs and FHLB
advances of $123.4 million, or 9.5%, from $1.30 billion to $1.42 billion, and an
increase in the average yield on interest bearing liabilities from 2.96% for
2005 to 3.89% for the year ended December 31, 2006.
Average interest bearing deposits increased
$148.6 million, or 20.7%, and the average rate paid increased from 2.40% for the
year ended December 31, 2005 compared to 3.54% for the year ended December 31,
2006. Average time deposits increased $112.8 million, or 31.8%, and
the average rate paid increased 122 basis points from 3.17% to
4.39%. The largest increase in average time deposits resulted from
the issuance of callable brokered CDs. Average interest bearing
demand deposits increased $35.6 million, or 11.3%, from $313.8 million to $349.4
million, and the average rate paid increased 99 basis points. Average
savings deposits increased $262,000, or 0.5%, and the average rate paid
increased 23 basis points. Interest expense for interest bearing
deposits for the year ended December 31, 2006 increased $13.5 million, or 78.2%,
from $17.2 million to $30.7 million, when compared to the same period in 2005
due to the increase in the average balance and yield. Average
noninterest bearing demand deposits increased $34.2 million, or 12.2%, from
$280.0 million to $314.2 million, during 2006. The latter three
categories, which are considered the lowest cost deposits, comprised 60.5% of
total average deposits during the year ended December 31, 2006 compared to 64.5%
during 2005. The increase in our average total deposits is the result
of issuing callable brokered CDs, overall bank growth and branch
expansion.
During the year ended December 31, 2006, we
issued approximately $104 million of callable brokered CDs, net of discount,
where we control numerous options to call the CDs before the final maturity
date. At December 31, 2006, these brokered CDs had maturities from
1.7 to five years and had calls that we controlled, all of which were six
months or less. At December 31, 2006, we had $123.5 million in
brokered CDs that represented 9.6% of deposits compared to $19.8 million, or
1.8% of deposits, at December 31, 2005. During 2006, we utilized
long-term brokered CDs to a greater extent than long-term FHLB funding as the
brokered CDs better matched overall ALCO objectives due to the calls we
controlled. Our current policy allows for a maximum of $150 million
in brokered CDs. The potential higher interest cost and lack of
customer loyalty are risks associated with the use of brokered CDs.
47
Average short-term interest bearing
liabilities, consisting primarily of FHLB advances and federal funds purchased,
were $376.7 million, an increase of $94.4 million, or 33.4%, for the year ended
December 31, 2006 when compared to $282.3 million for the same period in
2005. Interest expense associated with short-term interest bearing
liabilities increased $6.6 million, or 67.1%, and the average rate paid
increased 89 basis points to 4.39% for the year ended December 31, 2006, when
compared to 3.50% for the same period in 2005. The increase in the
interest expense was due to an increase in the average balance and the average
yield for short-term interest bearing liabilities.
Average long-term interest bearing liabilities
consisting of FHLB advances decreased $119.7 million, or 43.6%, during the year
ended December 31, 2006 to $155.0 million as compared to $274.7 million at
December 31, 2005. Interest expense associated with long-term FHLB
advances decreased $3.6 million, or 36.2%, while the average rate paid increased
48 basis points to 4.12% for the year ended December 31, 2006 when compared to
3.64% for the same period in 2005. The decrease in interest expense
was due to the fact the decrease in the average balance of long-term interest
bearing liabilities more than offset the increase in the average rate
paid. FHLB advances are collateralized by FHLB stock, securities and
nonspecific real estate loans.
Average long-term debt, consisting entirely of
our junior subordinated debentures issued in 2003 in connection with the
issuance of trust preferred securities by our subsidiary Southside Statutory
Trust III, was $20,619,000 for the years ended December 31, 2005 and
2006. Interest expense increased $376,000, or 28.8%, to $1.7 million
for the year ended December 31, 2006 when compared to $1.3 million for the same
period in 2005 as a result of the increase in three-month LIBOR due to higher
short-term interest rates during 2006 when compared to 2005. The
long-term debt adjusts quarterly at a rate equal to three-month LIBOR plus 294
basis points.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the year
ended December 31, 2006 was $1.1 million compared to $1.5 million for December
31, 2005. For the year ended December 31, 2006, net charge-offs of
loans decreased $338,000, or 25.7%, to $977,000 when compared to $1.3 million
for the same period in 2005.
The decrease in net charge-offs for 2006 was
due to a combination of an increase in total recoveries of $314,000 and a slight
decrease in total charge-offs of $24,000. Net charge-offs for
commercial loans decreased $226,000 from 2005 primarily as a result of an
overall decrease in charge-offs. Net charge-offs for loans to
individuals decreased $113,000 during 2006 due to an overall increase in
recoveries which more than offset the increase in charge-offs when compared to
2005.
As of December 31, 2006, our review of the loan
portfolio indicated that a loan loss allowance of $7.2 million was adequate to
cover probable losses in the portfolio.
48
NONINTEREST INCOME
Noninterest income consists of revenues
generated from a broad range of financial services and activities including fee
based services. The following schedule lists the accounts from which
noninterest income was derived, gives totals for these accounts for the year
ended December 31, 2006 and the comparable year ended December 31, 2005 and
indicates the percentage changes:
|
Years
Ended
|
||||||||||||
|
December
31,
|
Percent
|
|||||||||||
|
2006
|
2005
|
Change
|
||||||||||
|
(dollars in
thousands)
|
||||||||||||
|
Deposit
services
|
$ | 15,482 | $ | 14,594 | 6.1 | % | ||||||
|
Gain on
securities available for sale
|
743 | 228 | 225.9 | % | ||||||||
|
Gain on sale
of loans
|
1,817 | 1,807 | 0.6 | % | ||||||||
|
Trust
income
|
1,711 | 1,422 | 20.3 | % | ||||||||
|
Bank owned
life insurance income
|
1,067 | 951 | 12.2 | % | ||||||||
|
Other
|
2,661 | 2,246 | 18.5 | % | ||||||||
|
Total
noninterest income
|
$ | 23,481 | $ | 21,248 | 10.5 | % | ||||||
Total noninterest income for the year ended
December 31, 2006 increased 10.5%, or $2.2 million, compared to
2005. During the year ended December 31, 2006, we had a gain on the
sale of AFS securities of $743,000 compared to $228,000 for the same period in
2005. The market value of the AFS securities portfolio at December
31, 2006 was $742.1 million with a net unrealized loss on that date of $6.7
million. The net unrealized loss is comprised of $9.9 million in
unrealized losses and $3.2 million in unrealized gains. We sold
securities out of our AFS portfolio to accomplish ALCO and investment portfolio
objectives aimed at repositioning a portion of the securities portfolio in an
attempt to maximize the total return of the securities portfolio and reduce
alternative minimum tax. During 2006, we primarily sold tax-free
municipal securities to reduce alternative minimum tax and selected
mortgage-backed securities where the risk reward profile had
changed.
Deposit services income increased $888,000, or
6.1%, for the year ended December 31, 2006, when compared to the same period in
2005, primarily as a result of increases in overdraft income and an increase in
debit card income, which were offset by decreases in deposit account service
charges due to increases in earnings credit rates.
Trust income increased $289,000, or 20.3%, for
the year ended December 31, 2006, when compared to the same period in 2005 due
to growth experienced in our trust department.
Gain on sale of loans increased $10,000, or
0.6%, for the year ended December 31, 2006, when compared to the same period in
2005. The slight increase was primarily due to an increase in
residential mortgage loans sold during 2006 when compared to
2005. The increase was offset by a gain of $248,000 from the sale of
$6.2 million in student loans during 2005.
BOLI income increased $116,000, or 12.2%, for
the year ended December 31, 2006, when compared to the same period in 2005
primarily as a result of an increase in the average balance of cash surrender
value associated with our BOLI.
Other noninterest income increased $415,000, or
18.5%, for the year ended December 31, 2006, when compared to the same period in
2005. The increase was primarily a result of increases in brokerage
services income, credit card fee income, merchant banking and
Travelers Express income, and a recovery of $150,000 received during the second
quarter of 2006 that was related to a loss on a check during
2005. The increases were partially offset by a special distribution
of $286,000 received during 2005 as a result of the merger of the Pulse EFT
Association with Discover Financial Services.
49
NONINTEREST EXPENSE
The following schedule lists the accounts which
comprise noninterest expense, gives totals for these accounts for the years
ended December 31, 2006 and 2005 and indicates the percentage
changes:
|
Years
Ended
|
||||||||||||
|
December
31,
|
Percent
|
|||||||||||
|
2006
|
2005
|
Change
|
||||||||||
|
(dollars in
thousands)
|
||||||||||||
|
Salaries and
employee benefits
|
$ | 28,275 | $ | 27,479 | 2.9 | % | ||||||
|
Occupancy
expense
|
4,777 | 4,257 | 12.2 | % | ||||||||
|
Equipment
expense
|
899 | 847 | 6.1 | % | ||||||||
|
Advertising,
travel and entertainment
|
1,742 | 1,967 | (11.4 | %) | ||||||||
|
ATM and debit
card expense
|
955 | 648 | 47.4 | % | ||||||||
|
Director
fees
|
587 | 677 | (13.3 | %) | ||||||||
|
Supplies
|
637 | 628 | 1.4 | % | ||||||||
|
Professional
fees
|
1,386 | 1,339 | 3.5 | % | ||||||||
|
Postage
|
618 | 572 | 8.0 | % | ||||||||
|
Telephone and
communications
|
723 | 593 | 21.9 | % | ||||||||
|
Other
|
4,368 | 4,152 | 5.2 | % | ||||||||
|
Total
noninterest expense
|
$ | 44,967 | $ | 43,159 | 4.2 | % | ||||||
Noninterest expense for the year ended December
31, 2006 increased $1.8 million, or 4.2%, when compared to the year ended
December 31, 2005. Salaries and employee benefits expense increased
$796,000, or 2.9%, during the year ended December 31, 2006, when compared to the
same period in 2005. Direct salary expense and payroll taxes
increased $1.6 million, or 7.4%, for the year ended December 31, 2006, when
compared to the same period in 2005. These increases were the result
of normal salary increases and higher staffing levels associated with both the
opening of four de novo branch locations since September 30, 2005, and our
regional lending initiative.
During the third quarter of 2006, department
managers completed an evaluation of work flow in their respective departments,
with the primary objective of identifying any opportunities to increase
productivity primarily through the use of technology investments with less
personnel expense. In certain departments the evaluations identified
the ability to utilize part-time employees to better staff for peak customer
transaction times in lieu of full-time employees. In addition,
management is utilizing productivity gains to not fill certain vacancies created
by normal attrition. The combination of these initiatives resulted in
salary and employee benefit expense savings and improved productivity
gains.
Retirement expense decreased $825,000, or
25.2%, for the year ended December 31, 2006, when compared to the same period in
2005, primarily as a result of the amendments to the Plan in the fourth quarter
of 2005 that became effective in 2006. Our actuarial assumptions used
to determine net periodic pension costs were reduced for 2006 when compared to
2005. Specifically, the assumed long-term rate of return was 7.875%
and the assumed discount rate was 5.625%. On November 3, 2005, our
board of directors approved amendments to the Plan which affected future
participation in the Plan and reduced the accrual of future
benefits. A summary of the amendments to the Plan are presented in
“Note 14 – Employee Benefits” to our consolidated financial
statements.
Health and life insurance expense increased
$19,000, or 0.7%, for the year ended December 31, 2006, when compared to the
same period in 2005 due to increased health claims expense in the last quarter of
2006. We have a self-insured health plan which is supplemented with
stop loss insurance policies.
50
Occupancy expense increased $520,000, or 12.2%,
for the year ended December 31, 2006, compared to the same period in 2005 due
primarily to the opening of four de novo branch locations since September 30,
2005, combined with higher utility costs incurred during 2006 at existing
locations.
Advertising, travel and entertainment decreased
$225,000, or 11.4%, for the year ended December 31, 2006, compared to the same
period in 2005, due to a coordinated effort to reduce costs in this
area.
ATM and debit card expense increased $307,000,
or 47.4%, for the year ended December 31, 2006, compared to the same period in
2005. The increase was primarily due to an increase in combined use
of ATM and debit cards, point of sale activity and a new billing system from our
service provider.
Director fees decreased $90,000, or 13.3%, for
the year ended December 31, 2006, compared to the same period in 2005 due to a
decrease in the number of directors and a decrease in the amount paid to holding
company directors during 2006.
Telephone and communications expense increased
$130,000, or 21.9%, for the year ended December 31, 2006, compared to the same
period in 2005, primarily due to the opening of four de novo branch locations
since September 30, 2005 and the addition of disaster recovery communication
capabilities at a separate branch facility.
Other expense increased $216,000, or 5.2%, for
the year ended December 31, 2006, compared to the same period in
2005. The increase occurred primarily due to increases in computer
fees, taxes other than real estate, losses on OREO, bank analysis fees, student
loan origination and lender fee expense, and stored value card expense that were
partially offset by decreases in other losses and liability insurance
expense.
INCOME
TAXES
Pre-tax income for the year ended December 31,
2006 was $19.1 million compared to $17.9 million and $20.1 million for the years
ended December 31, 2005 and 2004, respectively.
Income tax expense was $4.1 million for the
year ended December 31, 2006 and represented an $807,000, or 24.5%, increase
from the year ended December 31, 2005. The effective tax rate as a
percentage of pre-tax income was 21.5% in 2006, 18.4% in 2005 and 19.7% in
2004. The increase in the effective tax rate and income tax expense
for 2006 was due to the decrease in our tax-exempt income as a percentage of
pre-tax income for the year ended December 31, 2006 when compared to December
31, 2005.
We decreased our municipal securities portfolio
during 2006 to balance the overall level of tax-free income from the municipal
investment securities and municipal loan portfolios. We continue to
review the appropriate level of tax-free income so as to minimize any
alternative minimum tax position in the future.
51
LENDING
ACTIVITIES
One of our main objectives is to seek
attractive lending opportunities in Texas, primarily in the counties in which we
operate. Substantially all of our loan originations are made to
borrowers who live in and conduct business in the counties in Texas in which we
operate, with the exception of municipal loans and purchases of automobile loan
portfolios throughout the United States. Municipal loans are made to
municipalities, counties, school districts, and colleges throughout the state of
Texas. Through SFG, we purchase portfolios of automobile loans from a
variety of lenders throughout the United States. We look forward to
the possibility that our loan growth will continue to accelerate in the future
as we work to identify and develop additional markets and strategies that will
allow us to expand our lending territory. Total loans as of December
31, 2007 increased $202.1 million, or 26.6%, and the average loan balance was up
$87.7 million, or 12.1%, when compared to 2006.
Construction loans increased $56.8 million, or
143.4%, from December 31, 2006. 1-4 Family residential loans
increased $10.5 million, or 4.6%, from December 31, 2006. Other
real estate loans increased $30.2 million, or 16.7%, from December 31, 2006 to
December 31, 2007. Commercial loans increased $35.2 million, or
29.6%, from December 31, 2006. Loans to individuals increased $63.0
million, or 73.2%, from December 31, 2006. Municipal loans as of
December 31, 2007 increased $6.4 million, or 6.0%, from December 31,
2006.
The increase in real estate loans was due to
our acquisition of Fort Worth National Bank, our expanding markets, economic
growth in our existing market areas, the continued strong commitment to real
estate lending and less refinancing of real estate loans on our books during
2007 when compared to 2006. The increase in our commercial loans is
reflective of our acquisition of Fort Worth National Bank, our expanding markets
and economic growth in our market area. The increase in loans to
individuals reflects automobile loan portfolios purchased by SFG and to a much
lesser extent, success in penetrating this competitive market in our market
areas. In our loan portfolio, loans dependent upon private household
income represent a significant concentration. Due to the number of
customers involved who work in all sectors of the numerous local, state and
national economies, we believe the risk in this portion of the portfolio is
adequately spread throughout the economic community, which assists in mitigating
this concentration.
The aggregate amount of loans that we are
permitted to make under applicable bank regulations to any one borrower,
including non affiliate related entities, for Southside Bank is 25% of Tier
1 capital and for Fort Worth National Bank is 15% of Total capital
.. Our legal lending limit at December 31, 2007, was approximately $37
million at Southside Bank and approximately $2.5 million at Fort Worth National
Bank. Our largest loan relationship at December 31, 2007 was
approximately $15.0 million.
The average yield on loans for the year ended
December 31, 2007, increased to 7.16% from 6.70% for the year ended December 31,
2006. This increase was reflective of Fort Worth National Bank loans
acquired, SFG loans, the repricing characteristics of the loans and interest
rates at the time loans repriced.
52
LOAN PORTFOLIO
COMPOSITION AND ASSOCIATED RISK
The following table sets forth loan totals by
category for the years presented:
|
December
31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Real Estate
Loans:
|
||||||||||||||||||||
|
Construction
|
$ | 96,356 | $ | 39,588 | $ | 35,765 | $ | 32,877 | $ | 35,306 | ||||||||||
|
1-4 Family
Residential
|
237,888 | 227,354 | 199,812 | 168,784 | 143,460 | |||||||||||||||
|
Other
|
211,280 | 181,047 | 162,147 | 153,998 | 144,668 | |||||||||||||||
|
Commercial
Loans
|
154,171 | 118,962 | 91,456 | 80,808 | 76,432 | |||||||||||||||
|
Municipal
Loans
|
112,523 | 106,155 | 109,003 | 103,963 | 96,135 | |||||||||||||||
|
Loans to
Individuals
|
149,012 | 86,041 | 82,181 | 83,589 | 93,134 | |||||||||||||||
|
Total
Loans
|
$ | 961,230 | $ | 759,147 | $ | 680,364 | $ | 624,019 | $ | 589,135 | ||||||||||
For purposes of this discussion, our loans are
divided into four categories: Real Estate Loans, Commercial Loans,
Municipal Loans and Loans to Individuals.
REAL ESTATE
LOANS
Real estate loans represent our greatest
concentration of loans. However, the amount of risk associated with
this group of loans is mitigated in part due to the type of loans involved and
geographic distribution. At December 31, 2007, the majority of
our real estate loans were collateralized by properties located in our market
areas. Of the $545.5 million in real estate loans, $237.9 million, or
43.6%, represent loans collateralized by residential dwellings that are
primarily owner occupied. Historically, the amount of losses suffered
on this type of loan has been significantly less than those on other
properties. Beginning in the third quarter of 2007, there were
well-publicized developments in the credit markets, beginning with a decline in
the sub-prime mortgage lending market, which later extended to the markets for
collateralized mortgage obligations, mortgage-backed securities and the lending
markets generally. We believe our markets have been relatively
resilient and we have not experienced effects
associated with these market trends; however, a continued decline in credit
markets generally could adversely effect our financial condition and results of
operation if we are unable to extend credit or sell loans into the secondary
market. Our loan policy requires an appraisal or evaluation on the
property, based on the size and complexity of the transaction, prior to funding
any real estate loan and also outlines the requirements for appraisals on
renewals.
We pursue an aggressive policy of reappraisal
on any real estate loan that is in the process of foreclosure and potential
exposures are recognized and reserved for or charged off as soon as they are
identified. Our ability to liquidate certain types of properties that
may be obtained through foreclosure could adversely affect the volume of our
nonperforming real estate loans.
Real estate loans are divided into three
categories: 1-4 Family Residential Mortgage Loans, Construction Loans and
Other. The Other category consists of $205.1 million of commercial
real estate loans, $3.3 million of loans secured by multifamily properties and
$2.9 million of loans secured by farm land. The Commercial Real
Estate portion of Other will be discussed in more detail below.
53
1-4 Family Residential Mortgage
Loans
Residential loan originations are generated by
our loan officers, in-house origination staff, marketing efforts, present
customers, walk-in customers and referrals from real estate agents and
builders. We focus our lending efforts primarily on the origination
of loans secured by first mortgages on owner-occupied, 1-4 family
residences. Substantially all of our 1-4 family residential mortgage
originations are secured by properties located in our market
area. Historically, we have originated a portion of our residential
mortgage loans for sale into the secondary market. These loans are
reflected on the balance sheet as loans held for sale. These
secondary market investors typically pay us a service release premium in
addition to a predetermined price based on the interest rate of the loan
originated. We retain liabilities related to early prepayments,
defaults, failure to adhere to origination and processing guidelines and other
issues. We have internal controls in place to mitigate many of these
liabilities and historically our realized liability has been extremely
low. In addition, many of the retained liabilities expire inside of
one year from the date a loan is sold. We warehouse these loans until
they are transferred to the secondary market investor, which usually occurs
within 45 days.
Our 1-4 family residential mortgage loans
generally have maturities ranging from five to 30 years. These loans
are typically fully amortizing with monthly payments sufficient to repay the
total amount of the loan or amortizing with a balloon feature, typically due in
fifteen years or less. Our 1-4 family residential mortgage loans are
made at both fixed and adjustable interest rates.
We review information concerning the income,
financial condition, employment and credit history when evaluating the
creditworthiness of the applicant.
We also make home equity loans, which are
included as part of the 1-4 Family Residential Mortgage Loans, and at December
31, 2007, these loans totaled $66.8 million. Under Texas law, these
loans are capped at 80% of appraised value.
Construction Loans
Our commercial construction loans and
construction loans to individuals are collateralized by property located
primarily in the market areas we serve. A majority of our
construction loans are directed toward properties that will be owner
occupied. Construction loans for projects built on speculation are
financed, but these typically have secondary sources of
repayment. Our construction loans have both adjustable and fixed
interest rates during the construction period. Construction loans to
individuals are typically priced and made with the intention of granting the
permanent loan on the property.
Commercial Real Estate
Loans
Commercial real estate loans primarily include
commercial office buildings, retail, medical facilities and offices, warehouse
facilities, hotels and churches. In determining whether to originate
commercial real estate loans, we generally consider such factors as the
financial condition of the borrower and the debt service coverage of the
property. Commercial real estate loans are made at both fixed and
adjustable interest rates for terms generally up to 20 years.
COMMERCIAL
LOANS
Our commercial loans are diversified to meet
most business needs. Loan types include short-term working capital
loans for inventory and accounts receivable and short and medium-term loans for
equipment or other business capital expansion. Management does not
consider there to be any material concentration of risk in any one industry
type, other than the medical industry. Loans to borrowers in the
medical industry include all loan types listed above for commercial
loans. Collateral for these loans varies depending on the type of
loan and financial strength of the borrower. The primary source of
repayment for loans in the medical community is cash flow from continuing
operations. The medical community represents a concentration of
risk in our Commercial loan and Commercial Real Estate loan
portfolio. See “Item 1. Business – Market
Area.” See “Item 1A. Risk Factors – We have a high concentration
of
54
loans directly
related to the medical community in our market area, primarily in Smith and
Gregg Counties.” We believe that risk in the medical community is
mitigated because it is spread among multiple practice types and multiple
specialties. Should the government change the amount it pays the
medical community through the various government health insurance programs or if
new government regulation impacts the profitability of the medical community,
the medical community could be adversely impacted, which in turn could result in
higher default rates by borrowers in the medical industry.
In our commercial loan underwriting, we assess
the creditworthiness, ability to repay, and the value and liquidity of the
collateral being offered. Terms of commercial loans are generally
commensurate with the useful life of the collateral offered.
MUNICIPAL
LOANS
We have a specific lending department that
makes loans to municipalities and school districts throughout the state of
Texas. The majority of the loans to municipalities and school
districts have tax or revenue pledges and in some cases, are additionally
supported by collateral. Municipal loans made without a direct pledge
of taxes or revenues are usually made based on some type of collateral that
represents an essential service. Lending money directly to these
municipalities allows us to earn a higher yield for similar durations than we
could if we purchased municipal securities. Total loans to
municipalities and school districts as of December 31, 2007 increased $6.4
million when compared to 2006. At December 31, 2007, we had total
loans to municipalities and school districts of $112.5 million.
LOANS TO
INDIVIDUALS
Substantially all of our consumer loan
originations are made to consumers in our market areas. The majority
of consumer loans outstanding are collateralized by titled equipment, primarily
vehicles, which accounted for approximately $108.8 million, or 73.0%, of total
loans to individuals at December 31, 2007. Home equity loans, which
are included in 1-4 family residential loans, have replaced some of the
traditional loans to individuals.
In addition, we make loans for a full range of
other consumer purposes, which may be secured or unsecured depending on the
credit quality and purpose of the loan. Automobile loans purchased by
SFG are also included in this category. The total of SFG automobile
loans included in loans to individuals at December 31, 2007 was $56.4
million. These high yield loans represent existing subprime
automobile loans with payment histories that are primarily collateralized by
used automobiles. Loan pools purchased through SFG are subjected to a
modeling system to determine the risk associated with the expected
defaults. Among other things, the model takes into consideration,
credit scores and estimated collateral values to determine the risk inherent in
each pool.
Management believes that the economy in our
market areas appears to remain relatively resilient amidst the housing and
credit market developments in other regions of the country. Most of
our loans to individuals are collateralized, which management believes should
assist in limiting our exposure.
Consumer loan terms vary according to the type
and value of collateral, length of contract and creditworthiness of the
borrower. The underwriting standards we employ for consumer loans
include an application, a determination of the applicant's payment history on
other debts, with the greatest weight being given to payment history with us,
and an assessment of the borrower's ability to meet existing obligations and
payments on the proposed loan. Although creditworthiness of the
applicant is a primary consideration, the underwriting process also includes a
comparison of the value of the collateral, if any, in relation to the proposed
loan amount.
55
LOAN MATURITIES AND
SENSITIVITY TO CHANGES IN INTEREST RATES
The following table represents loan maturities
and sensitivity to changes in interest rates. The amounts of total
loans outstanding at December 31, 2007, which, based on remaining scheduled
repayments of principal, are due in (1) one year or less, (2) more than one year
but less than five years, and (3) more than five years, are shown in the
following table. The amounts due after one year are classified
according to the sensitivity to changes in interest rates.
|
Due in
One
|
After One
but
|
||||||||||
|
Year
or
|
within
Five
|
After
Five
|
|||||||||
|
Less*
|
Years
|
Years
|
|||||||||
|
(in
thousands)
|
|||||||||||
|
Real Estate
Loans – Construction
|
$
|
68,511
|
$
|
13,651
|
$
|
14,194
|
|||||
|
Real Estate
Loans – 1-4 Family Residential
|
58,006
|
75,885
|
103,997
|
||||||||
|
Real Estate
Loans – Other
|
58,966
|
64,184
|
88,130
|
||||||||
|
Commercial
Loans
|
86,021
|
61,866
|
6,284
|
||||||||
|
Municipal
Loans
|
7,263
|
21,468
|
83,792
|
||||||||
|
Loans to
Individuals
|
56,010
|
86,580
|
6,422
|
||||||||
|
Total
Loans
|
$
|
334,777
|
$
|
323,634
|
$
|
302,819
|
|||||
|
Loans with
Maturities After
|
|||||
|
One Year for
Which:
|
Interest
Rates are Fixed or Predetermined
|
$ | 365,340 | ||
|
Interest
Rates are Floating or Adjustable
|
$ | 261,113 | |||
|
|
*
|
The volume of
commercial loans due within one year reflects our general policy of
attempting to limit a majority of these loans to a short-term
maturity. Nonaccrual loans totaling $2.9 million are reflected
in the due after five years column.
|
LOANS TO AFFILIATED
PARTIES
In the normal course of business, we make loans
to certain of our own executive officers and directors and their related
interests. As of December 31, 2007 and 2006, these loans totaled $2.2
million and $2.6 million, or 1.6% and 2.3% of Shareholders' Equity,
respectively. Such loans are made in the normal course of business at
normal credit terms, including interest rate and collateral requirements and do
not represent more than normal credit risks contained in the rest of the loan
portfolio for loans of similar types.
LOAN LOSS
EXPERIENCE AND ALLOWANCE FOR LOAN LOSSES
The loan loss allowance is based on the most
current review of the loan portfolio. Several methods are used to
maintain the review in the most current manner. First, the servicing
officer has the primary responsibility for updating significant changes in a
customer's financial position. Accordingly, each officer prepares
status updates on any credit deemed to be experiencing repayment difficulties
which, in the officer's opinion, would place the collection of principal or
interest in doubt. Second, our internal loan review department is
responsible for an ongoing review of our loan portfolio with specific goals set
for the loans to be reviewed on an annual basis.
At each review, a subjective analysis
methodology is used to grade the respective loan. Categories of
grading vary in severity from loans that do not appear to have a significant
probability of loss at the time of review to loans that indicate a probability
that the entire balance of the loan will be uncollectible. If full
collection of the loan balance appears unlikely at the time of review, estimates
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
56
risk associated
with them. In addition, a list of loans and loan relationships of
$50,000 or more is updated on a periodic basis in order to properly
allocate necessary allowances and keep management informed on the status of
attempts to correct the deficiencies noted with respect to the
loan.
Industry experience indicates that a portion of
our loans will become delinquent and a portion of the loans will require partial
or entire charge-off. Regardless of the underwriting criteria
utilized, losses may be experienced as a result of various factors beyond our
control, including, among other things, changes in market conditions affecting
the value of properties used as collateral for loans and problems affecting the
credit of the borrower and the ability of the borrower to make payments on the
loan. Our determination of the adequacy of allowance for loan losses
is based on various considerations, including an analysis of the risk
characteristics of various classifications of loans, previous loan loss
experience, specific loans which would have loan loss potential, delinquency
trends, estimated fair value of the underlying collateral, current economic
conditions, the views of the bank regulators (who have the authority to require
additional allowances), and geographic and industry loan
concentration.
As of December 31, 2007, our review of the loan
portfolio indicated that a loan loss allowance of $9.8 million was adequate to
cover probable losses in the portfolio.
57
The following table presents information
regarding the average amount of net loans outstanding, changes in the allowance
for loan losses, the ratio of net loans charged-off to average net loans
outstanding and an allocation of the allowance for loan losses.
LOAN LOSS
EXPERIENCE AND ALLOWANCE FOR LOAN LOSSES
|
Years Ended
December 31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(dollars in
thousands)
|
||||||||||||||||||||
|
Average Net
Loans
Outstanding
|
$ | 809,906 | $ | 722,252 | $ | 657,938 | $ | 604,658 | $ | 570,122 | ||||||||||
|
Balance of
Allowance for Loan Losses at Beginning of Period
|
$ | 7,193 | $ | 7,090 | $ | 6,942 | $ | 6,414 | $ | 6,195 | ||||||||||
|
Loan
Charge-Offs:
|
||||||||||||||||||||
|
Real
Estate-Construction
|
– | – | – | – | (17 | ) | ||||||||||||||
|
Real
Estate-1-4 Family
Residential
|
(33 | ) | (59 | ) | (36 | ) | (142 | ) | (63 | ) | ||||||||||
|
Real
Estate-Other
|
(7 | ) | (18 | ) | (53 | ) | (3 | ) | – | |||||||||||
|
Commercial
Loans
|
(95 | ) | (245 | ) | (438 | ) | (375 | ) | (693 | ) | ||||||||||
|
Loans to
Individuals
|
(2,612 | ) | (2,650 | ) | (2,469 | ) | (523 | ) | (703 | ) | ||||||||||
|
Total Loan
Charge-Offs
|
(2,747 | ) | (2,972 | ) | (2,996 | ) | (1,043 | ) | (1,476 | ) | ||||||||||
|
Recovery of
Loans Previously Charged-off:
|
||||||||||||||||||||
|
Real
Estate-Construction
|
– | – | – | – | – | |||||||||||||||
|
Real
Estate-1-4 Family
Residential
|
30 | 7 | 20 | – | – | |||||||||||||||
|
Real
Estate-Other
|
10 | – | – | 27 | 3 | |||||||||||||||
|
Commercial
Loans
|
98 | 87 | 54 | 323 | 179 | |||||||||||||||
|
Loans to
Individuals
|
1,909 | 1,901 | 1,607 | 296 | 304 | |||||||||||||||
|
Total
Recovery of Loans Previously Charged-Off
|
2,047 | 1,995 | 1,681 | 646 | 486 | |||||||||||||||
|
Net Loan
Charge-Offs
|
(700 | ) | (977 | ) | (1,315 | ) | (397 | ) | (990 | ) | ||||||||||
|
Allowance for
Loan Losses
Acquired
|
909 | – | – | – | – | |||||||||||||||
|
Provision for
Loan
Losses
|
2,351 | 1,080 | 1,463 | 925 | 1,209 | |||||||||||||||
|
Balance of
Allowance for Loan Losses at End of Period
|
$ | 9,753 | $ | 7,193 | $ | 7,090 | $ | 6,942 | $ | 6,414 | ||||||||||
|
Reserve for
Unfunded Loan Commitments at Beginning of Period
|
$ | – | $ | – | $ | – | $ | – | $ | – | ||||||||||
|
Provision for
Losses on Unfunded Loan Commitments
|
50 | – | – | – | – | |||||||||||||||
|
Reserve for
Unfunded Loan Commitments at End of Period
|
$ | 50 | $ | – | $ | – | $ | – | $ | – | ||||||||||
|
Ratio of Net
Charge-Offs to Average Net Loans Outstanding
|
0.09 | % | 0.14 | % | 0.20 | % | 0.07 | % | 0.17 | % | ||||||||||
58
Allocation of
Allowance for Loan Losses (dollars in thousands):
|
Years Ended
December 31,
|
||||||||||||||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||||||||||||||||||||||
|
Percent
|
Percent
|
Percent
|
Percent
|
Percent
|
||||||||||||||||||||||||||||||||||||
|
of
|
of
|
of
|
of
|
of
|
||||||||||||||||||||||||||||||||||||
|
Loans
|
Loans
|
Loans
|
Loans
|
Loans
|
||||||||||||||||||||||||||||||||||||
|
to
Total
|
to
Total
|
to
Total
|
to
Total
|
to
Total
|
||||||||||||||||||||||||||||||||||||
|
Amount
|
Loans
|
Amount
|
Loans
|
Amount
|
Loans
|
Amount
|
Loans
|
Amount
|
Loans
|
|||||||||||||||||||||||||||||||
|
Real
Estate
|
||||||||||||||||||||||||||||||||||||||||
|
Construction
|
$ | 1,031 | 10.0 | % | $ | 366 | 5.2 | % | $ | 329 | 5.3 | % | $ | 518 | 5.3 | % | $ | 510 | 6.0 | % | ||||||||||||||||||||
|
1-4
Family
Residential
|
1,313 | 24.8 | % | 1,221 | 30.0 | % | 1,101 | 29.4 | % | 909 | 27.0 | % | 906 | 24.3 | % | |||||||||||||||||||||||||
|
Other
|
2,594 | 22.0 | % | 2,327 | 23.8 | % | 2,397 | 23.8 | % | 2,186 | 24.6 | % | 1,798 | 24.6 | % | |||||||||||||||||||||||||
|
Commercial
Loans
|
2,126 | 16.0 | % | 1,536 | 15.7 | % | 1,482 | 13.4 | % | 1,485 | 13.0 | % | 1,339 | 13.0 | % | |||||||||||||||||||||||||
|
Municipal
Loans
|
277 | 11.7 | % | 262 | 14.0 | % | 269 | 16.0 | % | 318 | 16.7 | % | 238 | 16.3 | % | |||||||||||||||||||||||||
|
Loans to
Individuals
|
2,391 | 15.5 | % | 1,394 | 11.3 | % | 1,498 | 12.1 | % | 1,516 | 13.4 | % | 1,622 | 15.8 | % | |||||||||||||||||||||||||
|
Unallocated
|
21 | 0.0 | % | 87 | 0.0 | % | 14 | 0.0 | % | 10 | 0.0 | % | 1 | 0.0 | % | |||||||||||||||||||||||||
|
Ending
Balance
|
$ | 9,753 | 100.0 | % | $ | 7,193 | 100.0 | % | $ | 7,090 | 100.0 | % | $ | 6,942 | 100.0 | % | $ | 6,414 | 100.0 | % | ||||||||||||||||||||
See "Consolidated
Financial Statements - Note 7. Loans and Allowance for Probable Loan
Losses."
NONPERFORMING
ASSETS
Nonperforming assets consist of delinquent
loans 90 days or more past due, nonaccrual loans, OREO, repossessed assets and
restructured loans. Nonaccrual loans are those loans which are 90
days or more delinquent and collection in full of both the principal and
interest is in doubt. Additionally, some loans that are not
delinquent may be placed on nonaccrual status due to doubts about full
collection of principal or interest. When a loan is categorized as
nonaccrual, the accrual of interest is discontinued and the accrued balance is
reversed for financial statement purposes. Restructured loans
represent loans that have been renegotiated to provide a reduction or deferral
of interest or principal because of deterioration in the financial position of
the borrowers. Categorization of a loan as nonperforming is not in
itself a reliable indicator of potential loan loss. Other factors,
such as the value of collateral securing the loan and the financial condition of
the borrower must be considered in judgments as to potential loan
loss. OREO represents real estate taken in full or partial
satisfaction of debts previously contracted. The dollar amount of
OREO is based on a current evaluation of the OREO at the time it is recorded on
our books, net of estimated selling costs. Updated valuations are
obtained as needed and any additional impairments are recognized.
Total nonperforming
assets at December 31, 2007 were $3.9 million, representing an increase of $1.8
million, or 87.0%, from $2.1 million at December 31, 2006. OREO
decreased $198,000, or 56.4%, to $153,000 from December 31, 2006 to December 31,
2007. We are actively marketing all properties and none are being
held for investment purposes. From December 31, 2006 to December 31,
2007, nonaccrual loans increased $1.6 million, or 118.5%, to $2.9
million. Of this total, 4.5% are residential real estate loans, 17.0%
are commercial real estate loans, 5.4% are commercial loans, 72.7% are loans to
individuals and 0.4% are construction loans. Not including the $2.0
million increase in nonperforming assets attributable to the SFG automobile
loans, nonperforming assets for Southside would have decreased by
$148,000. Restructured loans increased $5,000, or 2.3%, to
$225,000. Loans 90 days past due or more increased $272,000, or
212.5%, to $400,000 and include residential mortgage loans and loans to
individuals. Repossessed assets increased $177,000, or 226.9%, to
$255,000.
59
The following table
presents information on nonperforming assets:
|
NONPERFORMING
ASSETS
|
||||||||||||||||||||
|
Years Ended
December 31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(dollars in
thousands)
|
||||||||||||||||||||
|
Loans 90 Days
Past Due:
|
||||||||||||||||||||
|
Real
Estate
|
$ | 286 | $ | 64 | $ | 912 | $ | 785 | $ | 248 | ||||||||||
|
Loans to
Individuals
|
114 | 64 | 33 | 22 | 20 | |||||||||||||||
|
Commercial
|
– | – | – | 20 | 4 | |||||||||||||||
| 400 | 128 | 945 | 827 | 272 | ||||||||||||||||
|
Loans on
Nonaccrual:
|
||||||||||||||||||||
|
Real
Estate
|
636 | 975 | 970 | 753 | 775 | |||||||||||||||
|
Loans to
Individuals
|
2,119 | 262 | 381 | 432 | 354 | |||||||||||||||
|
Commercial
|
158 | 96 | 380 | 1,063 | 418 | |||||||||||||||
| 2,913 | 1,333 | 1,731 | 2,248 | 1,547 | ||||||||||||||||
|
Restructured
Loans:
|
||||||||||||||||||||
|
Real
Estate
|
94 | 97 | 99 | 102 | 109 | |||||||||||||||
|
Loans to
Individuals
|
120 | 105 | 127 | 85 | 97 | |||||||||||||||
|
Commercial
|
11 | 18 | – | 6 | 13 | |||||||||||||||
| 225 | 220 | 226 | 193 | 219 | ||||||||||||||||
|
Total
Nonperforming Loans
|
3,538 | 1,681 | 2,902 | 3,268 | 2,038 | |||||||||||||||
|
Other Real
Estate Owned
|
153 | 351 | 145 | 214 | 195 | |||||||||||||||
|
Repossessed
Assets
|
255 | 78 | 10 | 41 | 48 | |||||||||||||||
|
Total
Nonperforming Assets
|
$ | 3,946 | $ | 2,110 | $ | 3,057 | $ | 3,523 | $ | 2,281 | ||||||||||
|
Percentage of
Total Assets
|
0.18 | % | 0.11 | % | 0.17 | % | 0.22 | % | 0.16 | % | ||||||||||
|
Percentage of
Loans and Leases,
|
||||||||||||||||||||
|
Net of
Unearned Discount
|
0.41 | % | 0.28 | % | 0.45 | % | 0.56 | % | 0.39 | % | ||||||||||
Nonperforming assets at December 31, 2007, as a
percentage of total assets increased to 0.18% from the previous year and as a
percentage of loans increased to 0.41%. Nonperforming assets hinder
our ability to earn money. Decreases in earnings can result from both
the loss of interest income and the costs associated with maintaining the OREO,
for taxes, insurance and other operating expenses. In addition to the
nonperforming assets, at December 31, 2007 in the opinion of management, we had
$279,000 of loans identified as potential problem loans. A potential
problem loan is a loan where information about possible credit problems of the
borrower is known, causing management to have serious doubts about the ability
of the borrower to comply with the present loan repayment terms and which may
result in a future classification of the loan in one of the nonperforming asset
categories.
60
The following is a summary of our recorded
investment in loans (primarily nonaccrual loans) for which impairment has been
recognized in accordance with SFAS 114 (in thousands):
|
Valuation
|
Carrying
|
|||||||||||
|
Total
|
Allowance
|
Value
|
||||||||||
|
Real Estate
Loans
|
$ | 636 | $ | 92 | $ | 544 | ||||||
|
Loans to
Individuals
|
2,230 | 396 | 1,834 | |||||||||
|
Commercial
Loans
|
170 | 65 | 105 | |||||||||
|
Balance at
December 31, 2007
|
$ | 3,036 | $ | 553 | $ | 2,483 | ||||||
|
Valuation
|
Carrying
|
|||||||||||
|
Total
|
Allowance
|
Value
|
||||||||||
|
Real Estate
Loans
|
$ | 975 | $ | 102 | $ | 873 | ||||||
|
Loans to
Individuals
|
357 | 109 | 248 | |||||||||
|
Commercial
Loans
|
114 | 14 | 100 | |||||||||
|
Balance at
December 31, 2007
|
$ | 1,446 | $ | 225 | $ | 1,221 | ||||||
The balances of impaired loans included above
with no valuation allowances were approximately $14,000 and $65,000 at December
31, 2007 and 2006, respectively.
For the years ended December 31, 2007 and 2006,
the average recorded investment in impaired loans was approximately $1,749,000
and $1,519,000, respectively.
The amount of interest recognized on loans that
were nonaccruing or restructured during the year was $102,000, $113,000 and
$80,000 for the years ended December 31, 2007, 2006 and 2005,
respectively. If these loans had been accruing interest at their
original contracted rates, related income would have been $231,000, $142,000 and
$177,000 for the years ended December 31, 2007, 2006 and 2005,
respectively.
For the years ended December 31, 2007, 2006 and
2005 we did not have an allowance for losses on OREO.
61
SECURITIES
ACTIVITY
Our securities portfolio plays a primary role
in management of our interest rate sensitivity and, therefore, is managed in the
context of the overall balance sheet. The securities portfolio
generates a substantial percentage of our interest income and serves as a
necessary source of liquidity.
We account for debt
and equity securities as follows:
|
|
·
|
Held to
Maturity (“HTM”). Debt securities that management has the
current intent and ability to hold until maturity are classified as HTM
and are carried at their remaining unpaid principal balance, net of
unamortized premiums or unaccreted discounts. Premiums are
amortized and discounts are accreted using the level interest yield method
over the estimated remaining term of the underlying
security.
|
|
|
·
|
Available for
Sale (“AFS”). Debt and equity securities that will be held for
indefinite periods of time, including securities that may be sold in
response to changes in market interest or prepayment rates, needs for
liquidity and changes in the availability of and the yield of alternative
investments are classified as AFS. These assets are carried at
market value. Market value is determined using quoted market
prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices for similar
securities or estimates from independent pricing
services. Unrealized gains and losses on AFS securities are
excluded from earnings and reported net of tax as a separate component of
shareholders' equity until
realized.
|
Purchase of premiums and discounts are
recognized in interest income using the interest method over the terms of the
securities. Declines in the fair value of HTM and AFS securities
below their cost that are deemed to be other-than-temporary are reflected in
earnings as realized losses. In estimating other-than-temporary
impairment losses, management considers (1) the length of time and the extent to
which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) our intent and ability to retain our
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. Gains and losses on the sale of
securities are recorded on the trade date and are determined using the specific
identification method.
Securities with limited marketability, such as
FHLB stock and other investments, are carried at cost, which approximates its
fair value.
Management attempts to deploy investable funds
into instruments that are expected to provide a reasonable overall return on the
portfolio given the current assessment of economic and financial conditions,
while maintaining acceptable levels of capital, interest rate and liquidity
risk. At December 31, 2007, the securities portfolio as a percentage
of total assets was 47.8% and was larger than loans, which were 43.8% of total
assets. For a discussion of our strategy in relation to the
securities portfolio, see “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Leverage Strategy.”
62
The following table sets forth the carrying
amount of investment securities and mortgage-backed securities at December 31,
2007, 2006 and 2005:
|
December
31,
|
||||||||||||
|
Available
for Sale:
|
2007
|
2006
|
2005
|
|||||||||
|
(in
thousands)
|
||||||||||||
|
Investment
Securities:
|
||||||||||||
|
U.S.
Treasury
|
$ | 4,886 | $ | 26,383 | $ | 23,770 | ||||||
|
Government
Sponsored Enterprise Debentures
|
31,759 | 9,923 | 21,525 | |||||||||
|
State and
Political
Subdivisions
|
66,244 | 55,135 | 68,339 | |||||||||
|
Other Stocks
and
Bonds
|
7,039 | 7,511 | 7,606 | |||||||||
|
Mortgage-backed
Securities:
|
||||||||||||
|
U.S.
Government
Agencies
|
89,720 | 71,399 | 69,732 | |||||||||
|
Government
Sponsored
Enterprises
|
633,060 | 564,650 | 519,396 | |||||||||
|
Other Private
Issues
|
4,773 | 7,115 | 3,307 | |||||||||
|
Total
|
$ | 837,481 | $ | 742,116 | $ | 713,675 | ||||||
|
December
31,
|
||||||||||||
|
Held to
Maturity:
|
2007
|
2006
|
2005
|
|||||||||
|
(in
thousands)
|
||||||||||||
|
Investment
Securities:
|
||||||||||||
|
Other Stocks
and
Bonds
|
$ | 475 | $ | 1,351 | $ | – | ||||||
|
Mortgage-backed
Securities:
|
||||||||||||
|
U.S.
Government
Agencies
|
25,965 | 30,788 | 35,400 | |||||||||
|
Government
Sponsored
Enterprises
|
164,000 | 195,374 | 193,921 | |||||||||
|
Total
|
$ | 190,440 | $ | 227,513 | $ | 229,321 | ||||||
We invest in mortgage-backed and related
securities, including mortgage participation certificates, which are insured or
guaranteed by U.S. Government agencies and GSEs, and collateralized mortgage
obligations (“CMOs”) and real estate mortgage investment conduits
(“REMICs”). Mortgage-backed securities (which also are known as
mortgage participation certificates or pass-through certificates) represent a
participation interest in a pool of single-family or multi-family mortgages, the
principal and interest payments on which are passed from the mortgage
originators, through intermediaries (generally U.S. Government agencies, GSEs,
and direct whole loans) that pool and repackage the participation interests in
the form of securities, to investors such as us. U.S. Government
agencies, primarily Government National Mortgage Association (“GNMA”) and GSEs,
primarily Freddie Mac, and Federal National Mortgage Association (“FNMA”)
guarantee the payment of principal and interest to investors. GSEs
are not backed by the full faith and credit of the United States
government. Freddie Mac, FNMA and FHLB are the primary GSEs with
which we purchase securities. The whole loans we purchase are all AAA
rated CMO and REMIC tranches that are rated AAA due to credit support and/or
insurance coverage.
Mortgage-backed securities typically are issued
with stated principal amounts, and the securities are backed by pools of
mortgages that have loans with varying maturities. The
characteristics of the underlying pool of mortgages, such as fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder. The term of a mortgage-backed pass-through security thus
approximates the term of the underlying mortgages and can vary significantly due
to prepayments.
Our mortgage-backed securities include CMOs,
which include securities issued by entities that have qualified under the
Internal Revenue Code of 1986, as amended, as REMICs. CMOs and REMICs
(collectively CMOs) were developed in response to investor concerns regarding
the uncertainty of cash flows associated with the prepayment option of the
underlying mortgagor and are typically issued by governmental agencies, GSEs and
special purpose entities, such as trusts, corporations or partnerships,
63
established by
financial institutions or other similar institutions. A CMO can be
collateralized by loans or securities which are insured or guaranteed by FNMA,
Freddie Mac, GNMA, or whole loans which, in our case, are all currently rated
AAA. In contrast to pass-through mortgage-backed securities, in which
cash flow is received pro rata by all security holders, the cash flow from the
mortgages underlying a CMO is segmented and paid in accordance with a
predetermined priority to investors holding various CMO classes. By
allocating the principal and interest cash flows from the underlying collateral
among the separate CMO classes, different classes of bonds are created, each
with its own stated maturity, estimated average life, coupon rate and prepayment
characteristics.
Like most fixed-income securities,
mortgage-backed and related securities are subject to interest rate
risk. However, unlike most fixed-income securities, the mortgage
loans underlying a mortgage-backed or related security generally may be prepaid
at any time without penalty. The ability to prepay a mortgage loan
generally results in significantly increased price and yield volatility (with
respect to mortgage-backed and related securities) than is the case with
non-callable fixed income securities. Furthermore, mortgage-backed
derivative securities often are more sensitive to changes in interest rates and
prepayments than traditional mortgage-backed securities and are, therefore, even
more volatile.
The combined investment securities,
mortgage-backed securities, and FHLB stock and other investments portfolio
increased to $1.05 billion at December 31, 2007, compared to $996.1 million
at December 31, 2006, an increase of $53.7 million, or
5.4%. This is a result of an increase in mortgage-backed securities
of $48.2 million, or 5.5%, during 2007 when compared to 2006. Another
change in our securities portfolio during 2007 included an $11.1 million, or
20.1%, increase in our ownership of securities issued by state and political
subdivisions. FHLB stock decreased $5.8 million, or 22.5%, due to
stock buybacks by FHLB as our FHLB advances decreased. The changes in
U. S. Treasury and U. S. Government agency securities were related to collateral
needs for public fund deposits.
During 2007, short-term interest rates
increased while long-term interest rates increased less, creating an inverted
yield curve. We used this interest rate environment to reposition a
portion of the securities portfolio in an attempt to slightly reduce the overall
duration and minimize prepayment of premium mortgage-backed
securities. Higher coupon premium mortgage-backed securities were
replaced as they prepaid with mortgage-backed securities that had
characteristics which potentially might reduce the prepayment
exposure. Specific low selling yield or long duration municipal
securities were sold due to the anticipated growth of our municipal loan
portfolio and the amount of tax free income we can support without being subject
to alternative minimum tax long-term.
The market value of the securities portfolio at
December 31, 2007 was $1.03 billion, which represented a net unrealized gain as
of that date of $5.9 million. The net unrealized gain was comprised
of $9.2 million in unrealized gains and $3.3 million of unrealized
losses. Management determined that $4.8 million of whole loan
mortgage-backed securities, which represented the only non agency collateralized
mortgage-backed securities, had an other-than-temporary impairment due to credit
concerns at December 31, 2007. The impairment charge recognized was
$58,000 and is reflected in gain (loss) on securities available for
sale. To the best of management’s knowledge, none of the remaining
securities in Southside’s investment and mortgage-backed securities portfolio at
December 31, 2007 had an other-than-temporary impairment. The market
value of the AFS securities portfolio at December 31, 2007 was $837.5 million,
which represented a net unrealized gain as of that date of $5.9
million. The net unrealized gain was comprised of $8.7 million of
unrealized gains and $2.8 million of unrealized losses. Net
unrealized gains and losses on AFS securities, which is a component of
shareholders’ equity on the consolidated balance sheet, can fluctuate
significantly as a result of changes in interest rates. Because
management cannot predict the future direction of interest rates, the effect on
shareholders’ equity in the future cannot be determined; however, this risk is
monitored closely through the use of shock tests on the AFS securities portfolio
using an array of interest rate assumptions.
64
There were no securities transferred from AFS
to HTM during 2005, 2006 and 2007. There were no sales from the HTM
portfolio during the years ended December 31, 2007, 2006 or
2005. There were $190.4 million and $227.5 million of securities
classified as HTM for the years ended December 31, 2007 and 2006,
respectively.
The maturities classified according to the
sensitivity to changes in interest rates of the December 31, 2007
securities portfolio and the weighted yields are presented
below. Tax-exempt obligations are shown on a taxable equivalent
basis. Mortgage-backed securities are included in maturity categories
based on their stated maturity date. Expected maturities may differ
from contractual maturities because issuers may have the right to call or prepay
obligations.
|
MATURING
|
||||||||||||||||||
|
Within 1
Year
|
After 1
But
Within 5
Years
|
After 5
But
Within 10
Years
|
After 10
Years
|
|||||||||||||||
|
Available
For Sale:
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
||||||||||
|
(dollars in
thousands)
|
||||||||||||||||||
|
Investment
Securities:
|
||||||||||||||||||
|
U.S.
Treasury
|
$
|
4,886
|
3.75
|
%
|
$
|
–
|
–
|
$
|
–
|
–
|
$
|
–
|
–
|
|||||
|
Government
Sponsored Enterprise Debentures
|
31,759
|
4.31
|
%
|
–
|
–
|
–
|
–
|
–
|
–
|
|||||||||
|
State and
Political Subdivisions
|
4,437
|
4.80
|
%
|
11,922
|
6.38
|
%
|
22,846
|
6.00
|
%
|
27,039
|
6.66
|
%
|
||||||
|
Other Stocks
and Bonds
|
–
|
–
|
–
|
–
|
–
|
–
|
7,039
|
7.54
|
%
|
|||||||||
|
Mortgage-backed
Securities:
|
||||||||||||||||||
|
U.S.
Government Agencies
|
–
|
–
|
–
|
–
|
7,798
|
4.63
|
%
|
81,922
|
5.65
|
%
|
||||||||
|
Government
Sponsored Enterprises
|
221
|
4.13
|
%
|
15,066
|
4.61
|
%
|
108,884
|
5.05
|
%
|
508,889
|
5.46
|
%
|
||||||
|
Other Private
Issues
|
–
|
–
|
–
|
–
|
–
|
–
|
4,773
|
5.48
|
%
|
|||||||||
|
Total
|
$
|
41,303
|
4.30
|
%
|
$
|
26,988
|
5.39
|
%
|
$
|
139,528
|
5.18
|
%
|
$
|
629,662
|
5.56
|
%
|
||
|
MATURING
|
||||||||||||||||||
|
Within 1
Year
|
After 1
But
Within 5
Years
|
After 5
But
Within 10
Years
|
After 10
Years
|
|||||||||||||||
|
Held to
Maturity:
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
||||||||||
|
(dollars in
thousands)
|
||||||||||||||||||
|
Investment
Securities:
|
||||||||||||||||||
|
Other Stocks
and Bonds
|
$
|
–
|
–
|
|
$
|
–
|
–
|
$
|
–
|
–
|
$
|
475
|
6.78
|
%
|
||||
|
Mortgage-backed
Securities:
|
||||||||||||||||||
|
U.S.
Government Agencies
|
–
|
–
|
|
–
|
–
|
2,004
|
4.54
|
%
|
23,961
|
4.98
|
%
|
|||||||
|
Government
Sponsored Enterprises
|
–
|
–
|
|
11,938
|
4.48
|
%
|
102,915
|
4.78
|
%
|
49,147
|
5.30
|
%
|
||||||
|
Total
|
$
|
–
|
–
|
|
$
|
11,938
|
4.48
|
%
|
$
|
104,919
|
4.78
|
%
|
$
|
73,583
|
5.21
|
%
|
||
At December 31, 2007, there were no holders of
any one issuer, other than the U. S. government and its agencies in an amount
greater than 10% of our shareholders’ equity.
65
DEPOSITS AND
BORROWED FUNDS
Deposits provide us with our primary source of
funds. The increase of $248.0 million, or 19.3%, in total deposits
during 2007 provided us with funds for the growth in loans. Deposits
increased during 2007 primarily due to branch expansion, increased market
penetration and the acquisition of Fort Worth National Bank which accounted for
approximately $109.0 million of the increase. Time deposits increased
a total of $98.2 million, or 18.7%, during 2007 when compared to
2006. Noninterest bearing demand deposits increased $31.3 million, or
9.6%, during 2007. Interest bearing demand deposits increased $116.0
million, or 30.3%, and saving deposits increased $2.5 million, or 5.0%, during
2007. The latter three categories, which are considered the lowest
cost deposits, comprised 59.3% of total deposits at December 31, 2007 compared
to 59.1% at December 31, 2006.
The following table sets forth deposits by
category at December 31, 2007, 2006, and 2005:
|
Years Ended
December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Noninterest
Bearing Demand Deposits
|
$ | 357,083 | $ | 325,771 | $ | 310,541 | ||||||
|
Interest
Bearing Demand
Deposits
|
498,221 | 382,265 | 360,250 | |||||||||
|
Savings
Deposits
|
52,975 | 50,454 | 48,835 | |||||||||
|
Time
Deposits
|
622,212 | 523,985 | 391,187 | |||||||||
|
Total
Deposits
|
$ | 1,530,491 | $ | 1,282,475 | $ | 1,110,813 | ||||||
During the year ended December 31, 2007, total
time deposits of $100,000 or more increased $55.3 million, or 27.4% from
December 31, 2006.
The table below sets forth the maturity
distribution of time deposits of $100,000 or more at December 31, 2007 and
2006:
|
December 31,
2007
|
December 31,
2006
|
|||||||||||||||||||||||
|
Time
Certificates of Deposit
|
Other Time
Deposits
|
Total
|
Time
Certificates of Deposit
|
Other Time
Deposits
|
Total
|
|||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Three months
or
less
|
$ | 79,461 | $ | 21,000 | $ | 100,461 | $ | 48,529 | $ | 28,000 | $ | 76,529 | ||||||||||||
|
Over three to
six
months
|
44,919 | 21,000 | 65,919 | 35,770 | 21,000 | 56,770 | ||||||||||||||||||
|
Over six to
twelve months
|
46,458 | 7,000 | 53,458 | 38,534 | 7,000 | 45,534 | ||||||||||||||||||
|
Over twelve
months
|
37,257 | – | 37,257 | 22,973 | – | 22,973 | ||||||||||||||||||
|
Total
|
$ | 208,095 | $ | 49,000 | $ | 257,095 | $ | 145,806 | $ | 56,000 | $ | 201,806 | ||||||||||||
At December 31, 2007, we had a total of $132.9
million in brokered CDs that represented 8.7% of our deposits. During
the year ended December 31, 2007, we did not issue any brokered CDs; however,
our brokered CDs increased $9.5 million through the acquisition of Fort Worth
National Bank. We have used long-term brokered CDs more than
long-term FHLB funding as the brokered CDs better matched overall ALCO
objectives due to the calls we controlled. These brokered CDs have
maturities from approximately one to four years and are callable by Southside at
any time in six months or less. During the first quarter of 2008, due
to the significant decrease in interest rates since December 31, 2007, we have
called approximately $91.3 million of our brokered CDs. At December
31, 2006, we had $123.5 million in brokered CDs and at December 31, 2005, we had
$19.8 million in brokered CDs. Our current policy allows for a
maximum of $150 million in brokered CDs. The potential higher
interest cost and lack of customer loyalty are risks associated with the use of
brokered CDs.
66
Short-term obligations, consisting primarily of
FHLB advances and federal funds purchased and repurchase agreements, increased
$33.8 million, or 10.3%, during 2007 when compared to 2006. FHLB
advances are collateralized by FHLB stock, nonspecified loans and
securities. Short-term obligations are summarized as
follows:
|
Years Ended
December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(dollars in
thousands)
|
||||||||||||
|
Federal funds
purchased and repurchase agreements
|
||||||||||||
|
Balance at
end of
period
|
$
|
7,023
|
$
|
5,675
|
$
|
2,400
|
||||||
|
Average
amount outstanding during the period (1)
|
4,519
|
8,727
|
6,485
|
|||||||||
|
Maximum
amount outstanding during the period (3)
|
10,250
|
13,775
|
9,875
|
|||||||||
|
Weighted
average interest rate during the period (2)
|
5.3%
|
5.2%
|
3.6%
|
|||||||||
|
Interest rate
at end of
period
|
4.7%
|
5.5%
|
4.3%
|
|||||||||
|
FHLB
advances
|
||||||||||||
|
Balance at
end of
period
|
$
|
353,792
|
$
|
322,241
|
$
|
312,271
|
||||||
|
Average
amount outstanding during the period (1)
|
272,711
|
367,068
|
274,689
|
|||||||||
|
Maximum
amount outstanding during the period (3)
|
383,059
|
396,416
|
337,808
|
|||||||||
|
Weighted
average interest rate during the period (2)
|
4.8%
|
4.4%
|
3.5%
|
|||||||||
|
Interest rate
at end of
period
|
4.1%
|
4.7%
|
3.7%
|
|||||||||
|
Other
obligations
|
||||||||||||
|
Balance at
end of
period
|
$
|
2,500
|
$
|
1,605
|
$
|
2,174
|
||||||
|
Average
amount outstanding during the period (1)
|
772
|
901
|
1,109
|
|||||||||
|
Maximum
amount outstanding during the period (3)
|
2,500
|
2,500
|
2,500
|
|||||||||
|
Weighted
average interest rate during the period (2)
|
5.0%
|
4.8%
|
3.0%
|
|||||||||
|
Interest rate
at end of
period
|
3.6%
|
5.0%
|
4.0%
|
|||||||||
|
(1)
|
The average
amount outstanding during the period was computed by dividing the total
daily outstanding principal balances by the number of days in the
period.
|
|
(2)
|
The weighted
average interest rate during the period was computed by dividing the
actual interest expense by the average balance outstanding during the
period.
|
|
(3)
|
The maximum
amount outstanding at any month-end during the
period.
|
67
Long-term
obligations are summarized as follows:
|
December
31,
|
December
31,
|
|||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Federal Home
Loan Bank Advances (1)
|
||||||||
|
Varying
maturities to
2017
|
$ | 86,247 | $ | 129,379 | ||||
|
Long-term
Debt (2)
|
||||||||
|
Southside
Statutory Trust III Due 2033 (3)
|
20,619 | 20,619 | ||||||
|
Southside
Statutory Trust IV Due 2037 (4)
|
23,196 | – | ||||||
|
Southside
Statutory Trust V Due 2037 (5)
|
12,887 | – | ||||||
|
Magnolia
Trust Company I Due 2035 (6)
|
3,609 | – | ||||||
|
Total
Long-term
Debt
|
60,311 | 20,619 | ||||||
|
Total
Long-term
Obligations
|
$ | 146,558 | $ | 149,998 | ||||
(1) At
December 31, 2007, the weighted average cost of these advances was
4.77%.
|
|
(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 7.77% through March 30, 2008 and adjusts
quarterly at a rate equal to three-month LIBOR plus 294 basis
points.
|
|
|
(4)
|
This debt
carries a fixed rate of 6.518% through October 30, 2012 and thereafter,
adjusts quarterly at a rate equal to three-month LIBOR plus 130 basis
points.
|
|
|
(5)
|
This debt
carries a fixed rate of 7.48% through December 15, 2012 and thereafter,
adjusts quarterly at a rate equal to three-month LIBOR plus 225 basis
points.
|
|
|
(6)
|
This debt
carries an adjustable rate of 6.815% through February 24, 2008 and adjusts
quarterly at a rate equal to three-month LIBOR plus 180 basis
points.
|
Long-term FHLB advances decreased $43.1
million, or 33.3%, during 2007 to $86.2 million when compared to $129.4 million
in 2006. The decrease was the result of a decrease in long-term FHLB
advances purchased and long-term advances rolling into the short-term
category.
Long-term debt increased $39.7 million, or
192.5%, for the year ended December 31, 2007 and consisted of our junior
subordinated debentures issued in 2003 and August 2007 in connection with the
issuance of trust preferred securities by Southside Statutory Trusts III, IV and
V and the assumption in October 2007 of $3.6 million of junior subordinated
debentures issued by Fort Worth Bancshares, Inc. to Magnolia Trust Company I in
October 2007. In August 2007, we issued $36.1 million of junior
subordinated debentures in connection with the issuance of trust preferred
securities by our subsidiaries Southside Statutory Trusts IV and V.
CAPITAL
RESOURCES
Our total shareholders' equity at December 31,
2007 of $132.3 million increased 19.6%, or $21.7 million, from December 31, 2006
and represented 6.0% of total assets at December 31, 2007 compared to 5.8% at
December 31, 2006.
Net income for 2007 of $16.7 million was the
major contributor to the increase in shareholders' equity at December 31, 2007
along with the issuance of $1.6 million in common stock (168,543 shares) through
our incentive stock option and dividend reinvestment plans, and a decrease of
$9.8 million in accumulated other comprehensive loss which more than offset $6.5
million in cash dividends paid. The decrease in accumulated other
comprehensive loss is composed of an $8.7 million, net of tax, unrealized gain
on securities, net of reclassification adjustment (see “Note 4 – Comprehensive Income (Loss)”)
and a decrease of $1.1 million, net of tax, related to the change in the
unfunded status of our defined benefit plans. Our dividend policy
requires that any cash dividend payments may not exceed consolidated earnings
for that year. Shareholders should not anticipate a continuation of
the cash dividend simply because of the existence of a dividend reinvestment
program. The payment of dividends will depend upon future earnings,
our financial condition, and other related factors including the discretion of
the board of directors.
68
We are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on our financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
we must meet specific capital guidelines that involve quantitative measures of
our assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. Our capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation
to ensure capital adequacy require us to maintain minimum amounts and ratios
(set forth in the table below) of Total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Tier 1 Capital is defined as
the sum of shareholders’ equity and qualifying subordinated debt, excluding
unrealized gains or losses on debt securities available for sale, unrealized
gains on equity securities available for sale and unrealized gains or losses on
cash flow hedges, net of deferred income taxes; plus certain mandatorily
redeemable capital securities, less nonqualifying intangible assets net of
applicable deferred income taxes, and certain nonfinancial equity
investments. Total capital is defined as the sum of Tier 1 Capital, a
qualifying portion of the allowance for loan losses, and qualifying subordinated
debt. Management believes, as of December 31, 2007, that we meet all
capital adequacy requirements to which we are subject.
To be categorized as well capitalized, we must
maintain minimum Total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the following table:
|
To Be
Well
|
||||||||||||||||||||||||
|
Capitalized
Under
|
||||||||||||||||||||||||
|
For Capital
Adequacy
|
Prompt
Corrective
|
|||||||||||||||||||||||
|
Actual
|
Purposes
|
Action
Provisions
|
||||||||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
|
As of
December 31, 2007:
|
(dollars in
thousands)
|
|||||||||||||||||||||||
|
Total Capital
(to Risk Weighted Assets)
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 182,148 | 17.02 | % | $ | 85,603 | 8.00 | % | N/A | N/A | ||||||||||||||
|
Southside
Bank
Only
|
$ | 157,854 | 16.41 | % | $ | 76,936 | 8.00 | % | $ | 96,170 | 10.00 | % | ||||||||||||
|
Fort Worth
National Bank Only
|
$ | 16,745 | 15.51 | % | $ | 8,639 | 8.00 | % | $ | 10,798 | 10.00 | % | ||||||||||||
|
Tier 1
Capital (to Risk Weighted Assets)
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 159,690 | 14.92 | % | $ | 42,802 | 4.00 | % | N/A | N/A | ||||||||||||||
|
Southside
Bank
Only
|
$ | 149,099 | 15.50 | % | $ | 38,468 | 4.00 | % | $ | 57,702 | 6.00 | % | ||||||||||||
|
Fort Worth
National Bank Only
|
$ | 15,697 | 14.54 | % | $ | 4,319 | 4.00 | % | $ | 6,479 | 6.00 | % | ||||||||||||
|
Tier 1
Capital (to Average Assets) (1)
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 159,690 | 7.73 | % | $ | 82,625 | 4.00 | % | N/A | N/A | ||||||||||||||
|
Southside
Bank Only
|
$ | 149,099 | 7.67 | % | $ | 77,797 | 4.00 | % | $ | 97,246 | 5.00 | % | ||||||||||||
|
Fort Worth
National Bank Only
|
$ | 15,697 | 13.13 | % | $ | 4,783 | 4.00 | % | $ | 5,979 | 5.00 | % | ||||||||||||
|
As of
December 31, 2006:
|
||||||||||||||||||||||||
|
Total Capital
(to Risk Weighted Assets)
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 152,198 | 17.76 | % | $ | 68,540 | 8.00 | % | N/A | N/A | ||||||||||||||
|
Southside
Bank
Only
|
$ | 146,458 | 17.09 | % | $ | 68,540 | 8.00 | % | $ | 85,675 | 10.00 | % | ||||||||||||
|
Tier 1
Capital (to Risk Weighted Assets)
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 145,005 | 16.93 | % | $ | 34,270 | 4.00 | % | N/A | N/A | ||||||||||||||
|
Southside
Bank
Only
|
$ | 139,265 | 16.26 | % | $ | 34,270 | 4.00 | % | $ | 51,405 | 6.00 | % | ||||||||||||
|
Tier 1
Capital (to Average Assets) (1)
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 145,005 | 7.68 | % | $ | 75,570 | 4.00 | % | N/A | N/A | ||||||||||||||
|
Southside
Bank
Only
|
$ | 139,265 | 7.37 | % | $ | 75,542 | 4.00 | % | $ | 94,427 | 5.00 | % | ||||||||||||
|
|
(1)
|
Refers to
quarterly average assets as calculated by bank regulatory
agencies.
|
69
The table below summarizes our key equity
ratios for the years ended December 31, 2007, 2006 and 2005:
|
Years Ended
December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Return on
Average
Assets
|
0.87%
|
0.81%
|
0.86%
|
|||||||||
|
Return on
Average Shareholders' Equity
|
14.05%
|
13.48%
|
13.88%
|
|||||||||
|
Dividend
Payout Ratio -
Basic
|
39.06%
|
40.52%
|
40.00%
|
|||||||||
|
Dividend
Payout Ratio -
Diluted
|
40.32%
|
41.96%
|
41.82%
|
|||||||||
|
Average
Shareholders' Equity to Average Total Assets
|
6.22%
|
5.99%
|
6.20%
|
|||||||||
ACCOUNTING
PRONOUNCEMENTS
See “Note 1 – Summary of Significant Accounting
and Reporting Policies” in the accompanying notes to our consolidated financial
statements in this report.
EFFECTS OF
INFLATION
Our consolidated financial statements, and
their related notes, have been prepared in accordance with GAAP that require the
measurement of financial position and operating results in terms of historical
dollars, without considering the change in the relative purchasing power of
money over time and due to inflation. The impact of inflation is
reflected in the increased cost of our operations. Unlike many
industrial companies, nearly all of our assets and liabilities are
monetary. As a result, interest rates have a greater impact on our
performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and
services. Inflation can affect the amount of money customers have for
deposits, as well as ability to repay loans.
MANAGEMENT OF
LIQUIDITY
Liquidity management involves our ability to
convert assets to cash with a minimum of loss to enable us to meet our
obligations to our customers at any time. This means addressing (1)
the immediate cash withdrawal requirements of depositors and other funds
providers; (2) the funding requirements of all lines and letters of credit; and
(3) the short-term credit needs of customers. Liquidity is provided
by short-term investments that can be readily liquidated with a minimum risk of
loss. Cash, interest earning deposits, federal funds sold and
short-term investments with maturities or repricing characteristics of one year
or less continue to be a substantial percentage of total assets. At
December 31, 2007, these investments were 19.0% of total assets, as compared
with 16.1% for December 31, 2006, and 17.6% for December 31,
2005. Liquidity is further provided through the matching, by time
period, of rate sensitive interest earning assets with rate sensitive interest
bearing liabilities. Southside Bank has three lines of credit for the
purchase of overnight federal funds at prevailing rates. Two $15.0
million and one $10.0 million unsecured lines of credit have been established
with Bank of America, Frost Bank and TIB -The Independent Bankers Bank,
respectively. Fort Worth National Bank has one unsecured line of
credit for the purchase of federal funds of $2.5 million with Frost
Bank. At December 31, 2007, the amount of additional funding
Southside Bank and Fort Worth National Bank could obtain from FHLB using
unpledged securities at FHLB was approximately $390 million and $43 million,
respectively, net of FHLB stock purchases required. Southside Bank
obtained a $12.0 million letter of credit from FHLB as collateral for a portion
of its public fund deposits.
Interest rate sensitivity management seeks to
avoid fluctuating net interest margins and to enhance consistent growth of new
interest income through periods of changing interest rates. The ALCO
closely monitors various liquidity ratios, interest rate spreads and margins,
interest rate simulation tests utilizing various interest rate scenarios
including immediate shocks and market value of portfolio equity (“MVPE”) with
interest rates immediately shocked plus and minus 200 basis points to assist in
determining our overall interest rate risk and adequacy of the liquidity
position. In addition, the ALCO
70
utilizes a
simulation model to determine the impact of net interest income of several
different interest rate scenarios. By utilizing this technology, we
can determine changes that need to be made to the asset and liability mixes to
minimize the change in net interest income under these various interest rate
scenarios.
OFF-BALANCE-SHEET
ARRANGEMENTS
Financial Instruments with
Off-Balance-Sheet Risk. In the normal course of business, we are a party
to certain financial instruments, with off-balance-sheet risk, to meet the
financing needs of our customers. These off-balance-sheet instruments
include commitments to extend credit and standby letters of
credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount reflected in the financial
statements. The contract or notional amounts of these instruments
reflect the extent of involvement and exposure to credit loss we have in these
particular classes of financial instruments.
Commitments to extend credit are agreements to
lend to a customer provided that the terms established in the contract are
met. Commitments generally have fixed expiration dates and may
require payment of fees. Since some commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Standby letters of credit are
conditional commitments issued to guarantee the performance of a customer to a
third party. These guarantees are primarily issued to support public
and private borrowing arrangements. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan commitments to customers.
We had outstanding unused commitments to extend
credit of $127.2 million and $105.2 million at December 31, 2007 and 2006,
respectively. Each commitment has a maturity date and the commitment
expires on that date with the exception of credit card and ready reserve
commitments, which have no stated maturity date. Unused commitments
for credit card and ready reserve at December 31, 2007 and 2006 were $8.8
million and $8.2 million, respectively, and are reflected in the due after one
year category. We had outstanding standby letters of credit of $5.1
million and $3.5 million at December 31, 2007 and 2006,
respectively.
The scheduled
maturities of unused commitments as of December 31, 2007 and 2006 were as
follows (in thousands):
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Unused
commitments:
|
||||||||
|
Due in one
year or
less
|
$ | 96,264 | $ | 61,821 | ||||
|
Due after one
year
|
30,954 | 43,333 | ||||||
|
Total
|
$ | 127,218 | $ | 105,154 | ||||
We apply the same credit policies in making
commitments and standby letters of credit as we do for on-balance-sheet
instruments. We evaluate each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary, upon extension of credit is based on management's credit evaluation
of the borrower. Collateral held varies but may include cash or cash
equivalents, negotiable instruments, real estate, accounts receivable,
inventory, property, plant, and equipment.
71
COMMITMENTS AND
CONTRACTUAL OBLIGATIONS
The following summarizes our contractual cash
obligations and commercial commitments at December 31, 2007, and the effect such
obligations are expected to have on liquidity and cash flow in future
periods. Payments for borrowings do not include
interest.
|
Payments Due
By Period
|
||||||||||||||||||||
|
Less than 1
Year
|
1-3
Years
|
3-5
Years
|
More than 5
Years
|
Total
|
||||||||||||||||
|
Contractual
obligations:
|
(in
thousands)
|
|||||||||||||||||||
|
Long-term
debt, including current maturities (1)
|
$ | – | $ | – | $ | – | $ | 60,311 | $ | 60,311 | ||||||||||
|
FHLB advances
(2)
|
340,672 | 75,228 | 20,343 | 3,796 | 440,039 | |||||||||||||||
|
Operating
leases
(3)
|
1,040 | 1,480 | 569 | – | 3,089 | |||||||||||||||
|
Deferred
compensation agreements (4)
|
641 | 348 | 386 | 2,417 | 3,792 | |||||||||||||||
|
Time deposits
(5)
|
434,715 | 90,668 | 96,829 | – | 622,212 | |||||||||||||||
|
Securities
purchased not paid
for
|
6,141 | – | – | – | 6,141 | |||||||||||||||
|
Capital lease
obligations
|
– | – | – | – | – | |||||||||||||||
|
Purchase
obligations
|
– | – | – | – | – | |||||||||||||||
|
Total
contractual
obligations
|
$ | 783,209 | $ | 167,724 | $ | 118,127 | $ | 66,524 | $ | 1,135,584 | ||||||||||
(1) The
total balance of long-term debt was $60.3 million at December 31,
2007. The scheduled maturities and interest rates were as
follows:
|
·
|
Floating rate
debt of $20.6 million with a scheduled maturity of 2033, that was indexed
to three-month LIBOR and adjusts on a quarterly basis. The rate
of interest for the first quarter of 2008 associated with this debt is
7.77%.
|
|
·
|
Floating rate
debt of $3.6 million with a scheduled maturity of 2035, that was indexed
to three-month LIBOR and adjusts on a quarterly basis. The rate
of interest for the first quarter of 2008 associated with this debt is
6.815%.
|
|
·
|
Debt of $23.2
million with a scheduled maturity of 2037, which carries a fixed rate of
6.518% through October 2012 and thereafter adjusts quarterly at a rate
equal to three-month LIBOR plus 130 basis
points.
|
|
·
|
Debt of $12.9
million with a scheduled maturity of 2037, which carries a fixed rate of
7.48% through December 2012 and thereafter adjusts quarterly at a rate
equal to three-month LIBOR plus 225 basis
points.
|
(2) We
had FHLB advances with maturity dates ranging from 2008 through 2017, with a
total balance of $440,039 at December 31, 2007. Callable FHLB
advances are presented based on contractual maturity.
(3) We
had various operating leases for our office machines that total $431,000 and
expire on or before the end of 2012. In addition, we have operating
leases totaling $2.7 million on our retail branch locations and loan production
offices which have future commitments of up to five years and additional
options, that we control, beyond the commitment period.
(4) We
have deferred compensation agreements (the “agreements”) with seven officers
totaling $3.8 million. Payments from the agreements are to commence
at the time of retirement. As of December 31, 2007, $80,000 in
payments had been made from such agreements. Of the seven officers
included in the agreements, two were eligible for retirement at December 31,
2007 and one retired officer is currently receiving benefits. One
officer becomes eligible in 2012. The remaining three officers are
eligible at various dates after five years. The totals reflected
under five years assume the retirement of the two eligible officers at December
31, 2007 and the retirement of the eligible officer in
2012. Additional information regarding executive compensation is
incorporated into “Item 11. Executive Compensation” of this Annual
Report on Form 10-K.
(5) We
had callable brokered CDs with maturity dates ranging from 2008 to 2012, with a
total balance of $132.9 million at December 31, 2007. During the
first quarter of 2008, we called $91.3 million of brokered CDs of which $11.0
million are now reflected in the less than one year column. All other
callable brokered CDs are presented based on contractual
maturity.
On February 8, 2008
we filed a Form 8-K reporting our entry into a Master Software License
Maintenance Services Agreement with Jack Henry & Associates for
approximately $2.0 million and annual maintenance and licensing fees for
approximately $346,000 per year.
We expect to contribute $3.0 million to our
defined benefit plan during 2008. We also expect to contribute to our
defined benefit plan in future years, however, those amounts are indeterminable
at this time. See the table in “Item 7A. Quantitative and
Qualitative Disclosures about Market Risk,” that shows the expected maturities
for interest earning assets and interest bearing liabilities as of December 31,
2007.
72
|
ITEM 7A.
|
QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
In the banking industry, a major risk exposure
is changing interest rates. The primary objective of monitoring our
interest rate sensitivity, or risk, is to provide management the tools necessary
to manage the balance sheet to minimize adverse changes in net interest income
as a result of changes in the direction and level of interest
rates. Federal Reserve monetary control efforts, the effects of
deregulation and legislative changes have been significant factors affecting the
task of managing interest rate sensitivity positions in recent
years.
The interest rate risk inherent in assets and
liabilities may be determined by analyzing the extent to which such assets and
liabilities are "interest rate sensitive" and by measuring an institution's
interest rate sensitivity "gap." An asset or liability is said to be
interest rate sensitive within a defined time period if it matures or reprices
within that period. The difference or mismatch between the amount of
interest earning assets maturing or repricing within a defined period and the
amount of interest bearing liabilities maturing or repricing within the same
period is defined as the interest rate sensitivity gap. An
institution is considered to have a negative gap if the amount of interest
bearing liabilities maturing or repricing within a specified time period exceeds
the amount of interest earning assets maturing or repricing within the same
period. If more interest earning assets than interest bearing
liabilities mature or reprice within a specified period, then the institution is
considered to have a positive gap. Accordingly, in a rising interest
rate environment in an institution with a negative gap, the cost of its rate
sensitive liabilities would theoretically rise at a faster pace than the yield
on its rate sensitive assets, thereby diminishing future net interest
income. In a falling interest rate environment, a negative gap would
indicate that the cost of rate sensitive liabilities would decline at a faster
pace than the yield on rate sensitive assets and improve net interest
income. For an institution with a positive gap, the reverse would be
expected. A table is presented in this item that reflects interest
sensitivity gaps for four different intervals as of December 31,
2007.
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 market value of portfolio equity modeling. Through these
simulations we attempt to estimate the impact on net interest income of a 200
basis point parallel shift in the yield curve. Our policy guidelines
seek to limit the estimated change in net interest income to 10 percent of
forecasted net interest income over the succeeding 12 months and 200 basis point
parallel rate shock. Our policy guidelines limit the change in market
value of equity in a 200 basis point parallel rate shock to 20 percent of the
base case. The results of the valuation analysis as of December 31,
2007, were within policy guidelines for all scenarios except for the immediate
down 200 basis point shock scenario, which reflected net interest income would
increase approximately 11%. Due to the level of our interest bearing
demand and savings deposit rates at December 31, 2007, some of these rates
cannot move down 200 basis points. As part of the overall
assumptions, certain assets and liabilities have been given reasonable
floors. This type of simulation analysis requires numerous
assumptions including but not limited to changes in balance sheet mix,
prepayment rates on mortgage-related assets and fixed rate loans, cash flows and
repricings of all financial instruments, changes in volumes and pricing, future
shapes of the yield curve, relationship of market interest rates to each other
(basis risk), credit spread and deposit sensitivity. Assumptions are
based on management’s best estimates but may not accurately reflect actual
results under certain changes in interest rates.
The following table provides information about
our financial instruments that are sensitive to changes in interest
rates. Except for the effects of prepayments and scheduled principal
amortization on fixed rate loans and mortgage-backed securities, the table
presents principal cash flows and related weighted average interest rates by the
contractual term to maturity. Adjustable rate student loans totaling
$5.3 million are classified in the one year category. Callable FHLB
Advances are presented based on contractual maturity. During the
first quarter of 2008, we called $91.3 million of brokered CDs, of which $11.0
million are now presented in the 2008 column. All other callable
brokered CDs are presented based on contractual maturity. Loans held
for sale totaling $3.4 million are classified in the one year
category. Nonaccrual loans totaling $2.9 million are not included in
total loans. All instruments are classified as other than
trading.
73
|
EXPECTED
MATURITY DATE
|
||||||||||||||||||||||||||||||||
|
(dollars in
thousands)
|
||||||||||||||||||||||||||||||||
|
Years Ending
December 31,
|
||||||||||||||||||||||||||||||||
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
Total
|
Fair
Value
|
|||||||||||||||||||||||||
|
Loans:
|
||||||||||||||||||||||||||||||||
|
Fixed
Rate
|
$ | 226,144 | $ | 101,447 | $ | 68,805 | $ | 51,234 | $ | 40,256 | $ | 100,950 | $ | 588,836 | $ | 601,861 | ||||||||||||||||
| 7.12 | % | 7.46 | % | 8.83 | % | 10.28 | % | 12.15 | % | 5.81 | % | 7.77 | % | |||||||||||||||||||
|
Adjustable
Rate
|
111,994 | 24,010 | 13,505 | 7,490 | 16,887 | 198,956 | 372,842 | 372,842 | ||||||||||||||||||||||||
| 7.69 | % | 7.14 | % | 7.87 | % | 7.38 | % | 7.21 | % | 6.78 | % | 7.15 | % | |||||||||||||||||||
|
Mortgage-backed
Securities:
|
||||||||||||||||||||||||||||||||
|
Fixed
Rate
|
279,651 | 219,378 | 156,764 | 103,024 | 68,677 | 88,496 | 915,990 | 915,938 | ||||||||||||||||||||||||
| 5.47 | % | 5.32 | % | 5.25 | % | 5.18 | % | 5.06 | % | 4.94 | % | 5.28 | % | |||||||||||||||||||
|
Adjustable
Rate
|
– | – | – | – | – | 1,528 | 1,528 | 1,528 | ||||||||||||||||||||||||
| – | – | – | – | – | 5.03 | % | 5.03 | % | ||||||||||||||||||||||||
|
Investments
and Other Interest Earning Assets:
|
||||||||||||||||||||||||||||||||
|
Fixed
Rate
|
62,896 | 2,145 | 3,954 | 3,835 | 1,988 | 53,927 | 128,745 | 128,747 | ||||||||||||||||||||||||
| 4.37 | % | 5.75 | % | 6.90 | % | 6.10 | % | 6.59 | % | 6.44 | % | 5.42 | % | |||||||||||||||||||
|
Adjustable
Rate
|
– | – | – | – | – | 5,541 | 5,541 | 5,541 | ||||||||||||||||||||||||
| – | – | – | – | – | 7.38 | % | 7.38 | % | ||||||||||||||||||||||||
|
Total
Interest Earning Assets
|
$ | 680,685 | $ | 346,980 | $ | 243,028 | $ | 165,583 | $ | 127,808 | $ | 449,398 | $ | 2,013,482 | $ | 2,026,457 | ||||||||||||||||
| 6.28 | % | 6.07 | % | 6.44 | % | 6.88 | % | 7.60 | % | 6.16 | % | 6.37 | % | |||||||||||||||||||
|
Savings
Deposits
|
$ | 5,297 | $ | 2,649 | $ | 2,649 | $ | 2,649 | $ | 2,649 | $ | 37,082 | $ | 52,975 | $ | 52,975 | ||||||||||||||||
| 1.29 | % | 1.29 | % | 1.29 | % | 1.29 | % | 1.29 | % | 1.29 | % | 1.29 | % | |||||||||||||||||||
|
NOW
Deposits
|
126,070 | 5,690 | 5,690 | 5,690 | 5,690 | 79,666 | 228,496 | 228,496 | ||||||||||||||||||||||||
| 3.61 | % | 0.85 | % | 0.85 | % | 0.85 | % | 0.85 | % | 0.85 | % | 2.37 | % | |||||||||||||||||||
|
Money Market
Deposits
|
31,927 | 10,641 | 10,641 | 10,641 | 10,641 | 31,924 | 106,415 | 106,415 | ||||||||||||||||||||||||
| 3.05 | % | 3.05 | % | 3.05 | % | 3.05 | % | 3.05 | % | 3.05 | % | 3.05 | % | |||||||||||||||||||
|
Platinum
Money Market
|
91,455 | 13,881 | 13,881 | 13,881 | 13,881 | 16,331 | 163,310 | 163,310 | ||||||||||||||||||||||||
| 3.95 | % | 3.95 | % | 3.95 | % | 3.95 | % | 3.95 | % | 3.95 | % | 3.95 | % | |||||||||||||||||||
|
Certificates
of Deposit
|
434,715 | 67,853 | 22,815 | 83,286 | 13,543 | – | 622,212 | 630,210 | ||||||||||||||||||||||||
| 4.79 | % | 4.86 | % | 4.70 | % | 5.42 | % | 5.09 | % | – | 4.89 | % | ||||||||||||||||||||
|
FHLB
Advances
|
340,672 | 56,346 | 18,882 | 15,450 | 4,893 | 3,796 | 440,039 | 442,223 | ||||||||||||||||||||||||
| 3.99 | % | 4.82 | % | 4.55 | % | 5.59 | % | 4.82 | % | 5.16 | % | 4.20 | % | |||||||||||||||||||
|
Other
Borrowings
|
9,523 | – | – | – | – | 60,311 | 69,834 | 70,203 | ||||||||||||||||||||||||
| 4.42 | % | – | – | – | – | 7.17 | % | 6.79 | % | |||||||||||||||||||||||
|
Total
Interest Bearing Liabilities
|
$ | 1,039,659 | $ | 157,060 | $ | 74,558 | $ | 131,597 | $ | 51,297 | $ | 229,110 | $ | 1,683,281 | $ | 1,693,832 | ||||||||||||||||
| 4.24 | % | 4.44 | % | 3.87 | % | 4.81 | % | 3.67 | % | 3.18 | % | 4.12 | % | |||||||||||||||||||
74
Residential fixed rate loans are assumed to
have annual prepayment rates between 7% and 35% of the
portfolio. Residential adjustable rate loans are assumed to have
annual prepayment rates between 12% and 50%. Commercial and
multi-family real estate loans are assumed to prepay at an annualized rate
between 8% and 40%. Consumer loans are assumed to prepay at an
annualized rate between 8% and 30%. Commercial loans are assumed to
prepay at an annual rate between 8% and 45%. Municipal loans are
assumed to prepay at an annual rate between 6% and 18%. Fixed and
adjustable rate mortgage-backed securities, including CMOs and REMICs, have
annual payment assumptions ranging from 6% to 50%. At December 31,
2007, the contractual maturity of substantially all of our mortgage-backed or
related securities was in excess of ten years. The actual maturity of
a mortgage-backed or related security is less than its stated maturity due to
regular principal payments and prepayments of the underlying
mortgages. Prepayments that are faster than anticipated may shorten
the life of the security and affect its yield to maturity. The yield
to maturity is based upon the interest income and the amortization of any
premium or accretion of any discount related to the security. In
accordance with GAAP, premiums and discounts are amortized or accreted over the
estimated lives of the loans, which decrease and increase interest income,
respectively. The prepayment assumptions used to determine the
amortization period for premiums and discounts can significantly affect the
yield of the mortgage-backed or related security, and these assumptions are
reviewed periodically to reflect actual prepayments. Although
prepayments of underlying mortgages depend on many factors, including the type
of mortgages, the coupon rate, the age of mortgages, the geographical location
of the underlying real estate collateralizing the mortgages and general levels
of market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments. During
periods of falling mortgage interest rates, if the coupon rate of the underlying
mortgages exceeds the prevailing market interest rates offered for mortgage
loans, refinancing may increase and accelerate the prepayment of the underlying
mortgages and the related security. At December 31, 2007, of the
$917.5 million of mortgage-backed and related securities we held, $1.5 million
were secured by floating rate mortgage loans, and $916.0 million were secured by
fixed-rate mortgage loans.
We assume 70% of savings accounts and non
public fund transaction accounts at December 31, 2007, are core deposits and
are, therefore, expected to mature after five years. All public fund
transaction accounts are assumed to mature within one year. We assume
30% of money market accounts at December 31, 2007, are core deposits and are,
therefore, expected to mature after five years. We assume 10% of our
platinum money market accounts are core deposits and are, therefore, expected to
mature after five years. Fixed maturity deposits reprice at
maturity.
In evaluating our exposure to interest rate
risk, certain limitations inherent in the method of analysis presented in the
foregoing table must be considered. For example, although certain
assets and liabilities may have similar maturities or periods to repricing, they
may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market
rates. Certain assets, such as adjustable rate mortgages, have
features which restrict changes in interest rates. Prepayment and
early withdrawal levels associated with mortgage-backed securities may deviate
significantly from those assumed in calculating the table. Finally,
the ability of many borrowers to service their debt may decrease in the event of
an interest rate increase. We consider all of these factors in
monitoring our exposure to interest rate risk.
75
The following table sets forth certain
information as of December 31, 2007 with respect to rate sensitive assets and
liabilities and interest sensitivity gap (dollars in thousands):
|
Rate
Sensitive Assets (RSA)
|
1-3
Mos.
|
4-12
Mos.
|
1-5
Yrs.
|
Over 5
Yrs.
|
Total
|
|||||||||||||||
|
Loans(1)
|
$ | 324,544 | $ | 195,653 | $ | 325,485 | $ | 115,996 | $ | 961,678 | ||||||||||
|
Securities
|
124,818 | 222,834 | 559,765 | 142,423 | 1,049,840 | |||||||||||||||
|
Other
Interest Earning Assets
|
1,964 | – | – | – | 1,964 | |||||||||||||||
|
Total Rate
Sensitive Assets
|
$ | 451,326 | $ | 418,487 | $ | 885,250 | $ | 258,419 | $ | 2,013,482 | ||||||||||
|
Rate
Sensitive Liabilities (RSL)
|
||||||||||||||||||||
|
Interest
Bearing Deposits
|
$ | 334,414 | $ | 355,050 | $ | 318,941 | $ | 165,003 | $ | 1,173,408 | ||||||||||
|
Other
Interest Bearing Liabilities
|
293,822 | 56,373 | 95,571 | 64,107 | 509,873 | |||||||||||||||
|
Total Rate
Sensitive Liabilities
|
$ | 628,236 | $ | 411,423 | $ | 414,512 | $ | 229,110 | $ | 1,683,281 | ||||||||||
|
Gap (2)
|
(176,910 | ) | 7,064 | 470,738 | 29,309 | 330,201 | ||||||||||||||
|
Cumulative
Gap
|
(176,910 | ) | (169,846 | ) | 300,892 | 330,201 | ||||||||||||||
|
Cumulative
Ratio of RSA to RSL
|
0.72 | 0.84 | 1.21 | 1.20 | 1.20 | |||||||||||||||
|
Gap/Total
Earning Assets
|
(8.8 | %) | 0.4 | % | 23.4 | % | 1.5 | % | 16.4 | % | ||||||||||
|
|
(1) Amount
is equal to total loans less nonaccrual loans at December 31,
2007.
|
| (2) Gap equals Total RSA minus Total RSL. |
The ALCO monitors the desired gap along with
various liquidity ratios to ensure a satisfactory liquidity position for
us. Management continually evaluates the condition of the economy,
the pattern of market interest rates and other economic data to determine the
types of investments that should be made and at what
maturities. Using this analysis, management from time to time assumes
calculated interest sensitivity gap positions to maximize net interest income
based upon anticipated movements in the general level of interest
rates. Regulatory authorities also monitor our gap position along
with other liquidity ratios. In addition, we utilize a simulation
model to determine the impact of net interest income under several different
interest rate scenarios. By utilizing this technology, we can
determine changes that need to be made to the asset and liability mixes to
minimize the change in net interest income under these various interest rate
scenarios.
76
|
ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
|
|
|
The
information required by this item is set forth in Part
IV.
|
|
ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND
|
|
FINANCIAL
DISCLOSURE
|
None.
|
ITEM 9A. CONTROLS AND
PROCEDURES
|
|
|
Evaluation
of Disclosure Controls and
Procedures
|
|
|
Our Chief
Executive Officer ("CEO") and our Chief Financial Officer ("CFO")
undertook an evaluation of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act of 1934, as
amended) as of December 31, 2007 and concluded that our disclosure
controls and procedures were effective as of that
date.
|
Management’s
Report on Internal Control Over Financial Reporting
|
|
Management is
responsible for establishing and maintaining adequate internal control
over financial reporting. Internal control over financial
reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934, as amended, as a process designed by, or under the
supervision of, our CEO and CFO and effected by our board of directors,
management and other personnel to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures
that:
|
|
|
·
|
pertain to
the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of our
assets;
|
|
|
·
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of our management and
directors; and
|
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial
statements.
|
|
|
Because of
its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risks
that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may
deteriorate.
|
|
|
Management
assessed the effectiveness of our internal control over financial
reporting as of December 31, 2007. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in Internal
Control-Integrated Framework.
|
|
|
Management
has excluded Fort Worth Bancshares, Inc. ("FWNB") from its assessment of
internal control over financial reporting as of December 31, 2007 because
it was acquired by the Company in a purchase business combination in the
fourth quarter of 2007. FWNB is a wholly owned subsidiary whose
total assets and net income represent approximately 7% and
|
77
|
|
1%,
respectively, of the related consolidated financial statement amounts as
of and for the year ended December 31, 2007. Based on this
assessment, management concluded that we maintained effective internal
control over financial reporting as of December 31,
2007.
|
|
|
The
effectiveness of the Company's internal control over financial reporting
as of December 31, 2007 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report
which appears herein.
|
|
|
Changes
in Internal Control Over Financial
Reporting
|
|
|
No changes
were made to our internal control over financial reporting (as defined in
Rule 13a-15(f) under the Exchange Act of 1934, as amended) during the last
fiscal quarter of the period covered by this report that materially
affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
PART III
|
ITEM 10.
|
DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE
GOVERNANCE
|
|
|
The
information required by this Item is incorporated herein by reference to
our Proxy Statement (Schedule 14A) for our 2008 Annual Meeting of
shareholders to be filed with the SEC within 120 days of our fiscal
year-end.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
|
|
The
information required by this Item is incorporated herein by reference to
our Proxy Statement (Schedule 14A) for our 2008 Annual Meeting of
shareholders to be filed with the SEC within 120 days of our fiscal
year-end.
|
|
ITEM 12.
|
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
|
|
|
The other
information required by this Item is incorporated herein by reference to
our Proxy Statement (Schedule 14A) for our 2008 Annual Meeting of
shareholders to be filed with the SEC within 120 days of our fiscal
year-end.
|
|
ITEM 13.
|
CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
|
|
The
information required by this Item is incorporated herein by reference to
our Proxy Statement (Schedule 14A) for our 2008 Annual Meeting of
shareholders to be filed with the SEC within 120 days of our fiscal
year-end.
|
78
|
|
The
information required by this Item is incorporated herein by reference to
our Proxy Statement (Schedule 14A) for our 2008 Annual Meeting of
shareholders to be filed with the SEC within 120 days of our fiscal
year-end.
|
PART IV
|
ITEM 15.
|
EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES
|
(a)
|
|
1.
|
Financial
Statements
|
|
|
The following
consolidated financial statements of Southside Bancshares, Inc. and its
subsidiaries are filed as part of this
report.
|
|
|
Consolidated
Balance Sheets as of December 31, 2007 and
2006.
|
|
|
Consolidated
Statements of Income for the years ended December 31, 2007, 2006 and
2005.
|
|
|
Consolidated
Statements of Shareholders' Equity for the years ended December 31, 2007,
2006 and 2005.
|
|
|
Consolidated
Statements of Cash Flow for the years ended December 31, 2007, 2006 and
2005.
|
|
|
Notes to
Consolidated Financial Statements.
|
|
|
2.
|
Financial
Statement Schedules
|
|
|
All schedules
are omitted because they are not applicable or not required, or because
the required information is included in the consolidated financial
statements or notes thereto.
|
|
|
3.
|
Exhibits
|
|
Exhibit
No.
|
|||
|
3
(a)(i)
|
–
|
Articles of
Amendment effective May 10, 2000 to Articles of Incorporation of SoBank,
Inc. (now named Southside Bancshares, Inc.) (filed as Exhibit 3(a)(i) to
the Registrant’s Form 10-Q for the quarter ended September 30, 2000
and incorporated herein by reference).
|
|
|
3
(b)
|
–
|
Bylaws as
amended and restated and in effect on February 28, 2008, of Southside
Bancshares, Inc. (filed as Exhibit 3(b) to the Registrant’s Form 8-K,
filed March 5, 2008, and incorporated herein by
reference).
|
|
| 4 |
–
|
Management agrees to furnish to the Securities and Exchange Commission, upon request, a copy of any other agreements or instruments of Southside Bancshares, Inc. and its subsidiaries defining the rights of holders of any long-term debt whose authorization does not exceed 10% of total assets. | |
|
** 10
(a)(i) |
–
|
Deferred Compensation Plan for B. G. Hartley effective February 13, 1984, as amended June 28, 1990, December 15, 1994, November 20, 1995, December 21,1999 and June 29, 2001 (filed as Exhibit 10(a)(i) to the Registrant’s Form 10-Q for the quarter ended June 30, 2001, and incorporated herein by reference). |
79
|
** 10
(a)(ii)
|
–
|
Deferred
Compensation Plan for Robbie N. Edmonson effective February 13, 1984,
as amended June 28, 1990 and March 16, 1995 (filed as Exhibit 10(a)(ii) to
the Registrant's Form 10-K for the year ended December 31, 1995, and
incorporated herein by reference).
|
|
|
10 (a)(iii)
|
Agreement and Plan of Merger dated May 17, 2007, as amended, by and among Southside Bancshares, Inc., Southside Merger Sub, Inc. and Fort Worth Bancshares, Inc. (filed as Exhibit 10(a) to the Registrant's Form 10-Q for the quarter ended September 30, 2007, and incorporated herein by reference). | ||
|
** 10
(b)
|
–
|
Officers
Long-term Disability Income Plan effective June 25, 1990 (filed as Exhibit
10(b) to the Registrant's Form 10-K for the year ended June 30, 1990,
and incorporated herein by reference).
|
|
|
** 10
(c)
|
–
|
Retirement
Plan Restoration Plan for the subsidiaries of SoBank, Inc. (now named
Southside Bancshares, Inc.) (filed as Exhibit 10(c) to the Registrant's
Form 10-K for the year ended December 31, 1992, and incorporated
herein by reference).
|
|
|
** 10
(e)
|
–
|
Form of
Deferred Compensation Agreement dated June 30, 1994 with Andy Wall as
amended November 13, 1995 (filed as Exhibit 10(e) to the Registrant's
Form 10-K for the year ended December 31, 1995, and incorporated herein by
reference).
|
|
|
** 10
(f)
|
–
|
Form of
Deferred Compensation Agreements dated June 30, 1994 with each of Sam
Dawson, Lee Gibson and Jeryl Story as amended October 15, 1997 and Form of
Deferred Compensation Agreement dated October 15, 1997 with Lonny Uzzell
(filed as Exhibit 10(f) to the Registrant’s Form 10-K for the year ended
December 31, 1997, and incorporated herein by
reference).
|
|
|
** 10
(g)
|
–
|
Postretirement
Agreement for B. G. Hartley effective June 20, 2001 (filed as
Exhibit
10(g) to the
Registrant’s Form 10-Q for the quarter ended June 30, 2001, and
incorporated herein by reference).
|
|
|
** 10
(h)
|
–
|
Split dollar
compensation plan dated October 13, 2004, with Jeryl Wayne Story (filed as
exhibit 10(h) to the Registrant’s Form 8-K, filed October 19, 2004, and
incorporated herein by reference).
|
|
|
** 10
(i)
|
–
|
Split dollar
compensation plan dated September 7, 2004, with Lee R. Gibson, III (filed
as exhibit 10(i) to the Registrant’s Form 8-K, filed October 19, 2004, and
incorporated herein by reference).
|
|
|
** 10
(j)
|
–
|
Split dollar
compensation plan dated August 27, 2004, with B. G. Hartley (filed as
exhibit 10
(j) to the Registrant’s Form 8-K filed October 19, 2004, and incorporated
herein by
reference).
|
|
|
** 10
(k)
|
–
|
Split dollar
compensation plan dated August 31, 2004, with Charles E. Dawson (filed as
exhibit 10(k) to the Registrant’s Form 8-K, filed October 19, 2004, and
incorporated herein by
reference).
|
80
|
** 10
(l) |
–
|
Employment agreement dated October 22, 2007, by and between Southside Bank and Lee R. Gibson (filed as exhibit 10 (l) to the Registrant’s Form 8-K, filed October 26, 2007, and incorporated herein by reference). | |
|
** 10
(m) |
–
|
Employment agreement dated October 22, 2007, by and between Southside Bank and Sam Dawson (filed as exhibit 10 (m) to the Registrant’s Form 8-K, filed October 26, 2007, and incorporated herein by reference). | |
|
* 21
|
–
|
Subsidiaries
of the Registrant.
|
|
|
* 23
|
–
|
Consent of
Independent Registered Public Accounting Firm.
|
|
|
* 31.1
|
–
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
* 31.2
|
–
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
* 32
|
–
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
*Filed
herewith.
|
|||
|
**Compensation
plan, benefit plan or employment contract or
arrangement
|
|||
81
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
SOUTHSIDE
BANCSHARES, INC.
|
||
|
|
||
|
BY: /s/
|
B. G.
HARTLEY
|
|
|
B. G.
Hartley, Chairman of the Board
|
||
|
and Chief
Executive Officer
|
||
|
(Principal
Executive Officer)
|
||
|
BY: /s/
|
LEE R.
GIBSON
|
|
|
Lee R.
Gibson, CPA, Executive Vice President
|
||
|
and Chief
Financial Officer (Principal Financial
|
||
|
and
Accounting Officer)
|
||
|
DATE: MARCH
6, 2008
|
||
82
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
|
Signature
|
Title
|
Date
|
|
|
/s/
|
B. G.
HARTLEY
|
||
|
(B. G.
Hartley)
|
Chief
Executive Officer,
|
March 6,
2008
|
|
|
Chairman of
the Board
|
|||
|
and
Director
|
|||
|
/s/
|
ROBBIE N.
EDMONSON
|
||
|
(Robbie N.
Edmonson)
|
Vice Chairman
of the Board
|
March 6,
2008
|
|
|
and
Director
|
|||
|
/s/
|
SAM
DAWSON
|
||
|
(Sam
Dawson)
|
President and
Secretary
|
March 6,
2008
|
|
|
and
Director
|
|||
|
/s/
|
HERBERT C.
BUIE
|
||
|
(Herbert C.
Buie)
|
Director
|
March 6,
2008
|
|
|
/s/
|
ALTON
CADE
|
||
|
(Alton
Cade)
|
Director
|
March 6,
2008
|
|
|
/s/
|
MICHAEL D.
GOLLOB
|
||
|
(Michael D.
Gollob)
|
Director
|
March 6,
2008
|
|
|
/s/
|
MELVIN B.
LOVELADY
|
||
|
(Melvin B.
Lovelady)
|
Director
|
March 6,
2008
|
|
|
/s/
|
JOE
NORTON
|
||
|
(Joe
Norton)
|
Director
|
March 6,
2008
|
|
|
/s/
|
PAUL W.
POWELL
|
||
|
(Paul W.
Powell)
|
Director
|
March 6,
2008
|
|
|
/s/
|
WILLIAM
SHEEHY
|
||
|
(William
Sheehy)
|
Director
|
March 6,
2008
|
83
Report of Independent Registered Public
Accounting Firm
To the Board of
Directors and Shareholders of
Southside
Bancshares, Inc.
In our opinion, the
accompanying consolidated balance sheets and the related consolidated statements
of income, shareholders' equity and cash flow present fairly, in all material
respects, the financial position of Southside Bancshares, Inc. and its
subsidiaries at December 31, 2007 and 2006, and the results of their operations
and their cash flow for each of the three years in the period ended December 31,
2007 in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible
for these financial statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in Management's Report on Internal
Control Over Financial Reporting appearing under Item 9A. Our
responsibility is to express opinions on these financial statements and on the
Company's internal control over financial reporting based on our integrated audits. We conducted our
audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
As
discussed in Note 1 to the consolidated financial statements, the Company
changed the manner in which it accounts for defined benefit pension and other
postretirement plans in 2006.
A company’s
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
84
As described in
Management's Report on Internal Control Over Financial Reporting, management has
excluded Fort Worth Bancshares, Inc. ("FWNB") from its assessment of internal
control over financial reporting as of December 31, 2007, because it was
acquired by the Company in a purchase business combination in the fourth quarter
of 2007. We have also excluded FWNB from our audit of internal
control over financial reporting. FWNB is a wholly owned subsidiary
whose total assets and net income represent approximately 7% and 1%,
respectively, of the related consolidated financial statement amounts as of and
for the year ended December 31, 2007.
/s/
PricewaterhouseCoopers LLP
Dallas,
Texas
March 3,
2008
85
|
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
|
||||||||
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||
|
(in
thousands, except share amounts)
|
||||||||
|
December 31,
2007
|
December 31,
2006
|
|||||||
|
ASSETS
|
||||||||
|
Cash and due
from
banks
|
$ | 74,040 | $ | 52,537 | ||||
|
Interest
earning
deposits
|
1,414 | 550 | ||||||
|
Federal funds
sold
|
550 | 1,925 | ||||||
|
Total cash
and cash
equivalents
|
76,004 | 55,012 | ||||||
|
Investment
securities:
|
||||||||
|
Available for
sale, at estimated fair
value
|
109,928 | 98,952 | ||||||
|
Held to
maturity, at
cost
|
475 | 1,351 | ||||||
|
Mortgage-backed
and related securities:
|
||||||||
|
Available for
sale, at estimated fair
value
|
727,553 | 643,164 | ||||||
|
Held to
maturity, at
cost
|
189,965 | 226,162 | ||||||
|
Federal Home
Loan Bank and FRB stock, at
cost
|
19,850 | 25,614 | ||||||
|
Other
investments, at
cost
|
2,069 | 882 | ||||||
|
Loans held
for
sale
|
3,361 | 3,909 | ||||||
|
Loans:
|
||||||||
|
Loans
|
961,230 | 759,147 | ||||||
|
Less: allowance
for loan
losses
|
(9,753 |
)
|
(7,193 | ) | ||||
|
Net
Loans
|
951,477 | 751,954 | ||||||
|
Premises and
equipment,
net
|
40,249 | 32,641 | ||||||
|
Goodwill
|
21,639 | – | ||||||
|
Other
intangible assets,
net
|
1,925 | – | ||||||
|
Interest
receivable
|
11,784 | 10,110 | ||||||
|
Deferred tax
asset
|
4,320 | 8,678 | ||||||
|
Other
assets
|
35,723 | 32,547 | ||||||
|
TOTAL
ASSETS
|
$ | 2,196,322 | $ | 1,890,976 | ||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
|
Deposits:
|
||||||||
|
Noninterest
bearing
|
$ | 357,083 | $ | 325,771 | ||||
|
Interest
bearing
|
1,173,408 | 956,704 | ||||||
|
Total
Deposits
|
1,530,491 | 1,282,475 | ||||||
|
Short-term
obligations:
|
||||||||
|
Federal funds
purchased and repurchase
agreements
|
7,023 | 5,675 | ||||||
|
FHLB
advances
|
353,792 | 322,241 | ||||||
|
Other
obligations
|
2,500 | 1,605 | ||||||
|
Total
Short-term
obligations
|
363,315 | 329,521 | ||||||
|
Long-term
obligations:
|
||||||||
|
FHLB
advances
|
86,247 | 129,379 | ||||||
|
Long-term
debt
|
60,311 | 20,619 | ||||||
|
Total
Long-term
obligations
|
146,558 | 149,998 | ||||||
|
Other
liabilities
|
23,132 | 18,378 | ||||||
|
TOTAL
LIABILITIES
|
2,063,496 | 1,780,372 | ||||||
|
Off-Balance-Sheet
Arrangements, Commitments and Contingencies (Note 18)
|
||||||||
|
Minority
Interest in Southside Financial
Group
|
498 | – | ||||||
|
Shareholders'
equity:
|
||||||||
|
Common
stock: ($1.25 par, 20,000,000 shares authorized, 14,865,134 and
14,075,653 shares issued)
|
18,581 | 17,594 | ||||||
|
Paid-in
capital
|
115,250 | 100,736 | ||||||
|
Retained
earnings
|
26,187 | 29,648 | ||||||
|
Treasury
stock (1,724,857 and 1,718,737 shares at
cost)
|
(22,983 |
)
|
(22,850 | ) | ||||
|
Accumulated
other comprehensive
loss
|
(4,707 |
)
|
(14,524 | ) | ||||
|
TOTAL
SHAREHOLDERS'
EQUITY
|
132,328 | 110,604 | ||||||
|
TOTAL
LIABILITIES AND SHAREHOLDERS'
EQUITY
|
$ | 2,196,322 | $ | 1,890,976 | ||||
The accompanying
notes are an integral part of these consolidated financial
statements.
86
|
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
|
||||||||||||
|
CONSOLIDATED
STATEMENTS OF INCOME
|
||||||||||||
|
(in
thousands, except per share data)
|
Years Ended
December 31,
|
|||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Interest
income
|
||||||||||||
|
Loans
|
$
|
55,904
|
$
|
46,413
|
$
|
38,852
|
||||||
|
Investment
securities –
taxable
|
2,580
|
2,498
|
1,978
|
|||||||||
|
Investment
securities - tax
exempt
|
2,112
|
2,139
|
3,181
|
|||||||||
|
Mortgage-backed
and related
securities
|
43,767
|
44,401
|
34,584
|
|||||||||
|
Federal Home
Loan Bank stock and other investments
|
1,193
|
1,409
|
1,032
|
|||||||||
|
Other
interest earning
assets
|
185
|
92
|
54
|
|||||||||
|
Total
interest
income
|
105,741
|
96,952
|
79,681
|
|||||||||
|
Interest
expense
|
||||||||||||
|
Deposits
|
41,458
|
30,690
|
17,221
|
|||||||||
|
Short-term
obligations
|
13,263
|
16,534
|
9,892
|
|||||||||
|
Long-term
obligations
|
7,142
|
8,060
|
11,309
|
|||||||||
|
Total
interest
expense
|
61,863
|
55,284
|
38,422
|
|||||||||
|
Net interest
income
|
43,878
|
41,668
|
41,259
|
|||||||||
|
Provision for
loan
losses
|
2,351
|
1,080
|
1,463
|
|||||||||
|
Net interest
income after provision for loan losses
|
41,527
|
40,588
|
39,796
|
|||||||||
|
Noninterest
income
|
||||||||||||
|
Deposit
services
|
17,280
|
15,482
|
14,594
|
|||||||||
|
Gain on
securities available for
sale
|
897
|
743
|
228
|
|||||||||
|
Gain on sale
of
loans
|
1,922
|
1,817
|
1,807
|
|||||||||
|
Trust
income
|
2,106
|
1,711
|
1,422
|
|||||||||
|
Bank owned
life insurance
income
|
1,142
|
1,067
|
951
|
|||||||||
|
Other
|
3,071
|
2,661
|
2,246
|
|||||||||
|
Total
noninterest
income
|
26,418
|
23,481
|
21,248
|
|||||||||
|
Noninterest
expense
|
||||||||||||
|
Salaries and
employee
benefits
|
29,361
|
28,275
|
27,479
|
|||||||||
|
Occupancy
expense
|
4,881
|
4,777
|
4,257
|
|||||||||
|
Equipment
expense
|
1,017
|
899
|
847
|
|||||||||
|
Advertising,
travel and
entertainment
|
1,812
|
1,742
|
1,967
|
|||||||||
|
ATM and debit
card
expense
|
1,006
|
955
|
648
|
|||||||||
|
Director
fees
|
605
|
587
|
677
|
|||||||||
|
Supplies
|
692
|
637
|
628
|
|||||||||
|
Professional
fees
|
1,268
|
1,386
|
1,339
|
|||||||||
|
Postage
|
662
|
618
|
572
|
|||||||||
|
Telephone and
communications
|
800
|
723
|
593
|
|||||||||
|
Other
|
5,181
|
4,368
|
4,152
|
|||||||||
|
Total
noninterest
expense
|
47,285
|
44,967
|
43,159
|
|||||||||
|
Income before
income tax
expense
|
20,660
|
19,102
|
17,885
|
|||||||||
|
Provision
(benefit) for income tax
expense
|
||||||||||||
|
Current
|
4,068
|
8,582
|
1,569
|
|||||||||
|
Deferred
|
(92
|
)
|
(4,482
|
)
|
1,724
|
|||||||
|
Total income
taxes
|
3,976
|
4,100
|
3,293
|
|||||||||
|
Net
Income
|
$
|
16,684
|
$
|
15,002
|
$
|
14,592
|
||||||
|
Earnings per
common share –
basic
|
$
|
1.28
|
$
|
1.16
|
$
|
1.15
|
||||||
|
Earnings per
common share –
diluted
|
$
|
1.24
|
$
|
1.12
|
$
|
1.10
|
||||||
|
Dividends
declared per common
share
|
$
|
0.50
|
$
|
0.47
|
$
|
0.46
|
||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
87
|
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
|
||||||||||||||||||||||||||||
|
(in
thousands, except share amounts)
|
||||||||||||||||||||||||||||
|
Compre-hensive
Income
|
Common
Stock
|
Paid In
Capital
|
Retained
Earnings
|
Treasury
Stock
|
Accu-
mulated Other
Compre-
hensive
Income
(Loss)
|
Total
Share-
holders’
Equity
|
||||||||||||||||||||||
|
Balance at
December 31, 2004
|
$ | 15,608 | $ | 75,268 | $ | 33,718 | $ | (17,853 | ) | $ | (2,044 | ) | $ | 104,697 | ||||||||||||||
|
Net
Income
|
$ | 14,592 | 14,592 | 14,592 | ||||||||||||||||||||||||
|
Other
comprehensive loss, net of tax
|
||||||||||||||||||||||||||||
|
Unrealized
losses on securities, net of reclassification adjustment
|
(5,034 | ) | (5,034 | ) | (5,034 | ) | ||||||||||||||||||||||
|
Minimum
pension liability adjustment
|
2,569 | 2,569 | 2,569 | |||||||||||||||||||||||||
|
Comprehensive
income
|
$ | 12,127 | ||||||||||||||||||||||||||
|
Common stock
issued (275,667 shares)
|
345 | 1,703 | 2,048 | |||||||||||||||||||||||||
|
Tax benefit
of incentive stock options
|
629 | 629 | ||||||||||||||||||||||||||
|
Dividends
paid on common
stock
|
(5,214 | ) | (5,214 | ) | ||||||||||||||||||||||||
|
Purchase of
233,550 shares of common stock
|
(4,997 | ) | (4,997 | ) | ||||||||||||||||||||||||
|
Stock
dividend
|
680 | 10,362 | (11,042 | ) | – | |||||||||||||||||||||||
|
Balance at
December 31, 2005
|
16,633 | 87,962 | 32,054 | (22,850 | ) | (4,509 | ) | 109,290 | ||||||||||||||||||||
|
Net
Income
|
$ | 15,002 | 15,002 | 15,002 | ||||||||||||||||||||||||
|
Other
comprehensive loss, net of tax
|
||||||||||||||||||||||||||||
|
Unrealized
losses on securities, net of reclassification adjustment
|
(1,883 | ) | (1,883 | ) | (1,883 | ) | ||||||||||||||||||||||
|
Minimum
pension liability adjustment
|
298 | 298 | 298 | |||||||||||||||||||||||||
|
Comprehensive
income
|
$ | 13,417 | ||||||||||||||||||||||||||
|
Adjustment to
initially apply SFAS 158, net of tax
|
(8,430 | ) | (8,430 | ) | ||||||||||||||||||||||||
|
Common stock
issued (186,658 shares)
|
233 | 1,517 | 1,750 | |||||||||||||||||||||||||
|
Stock
compensation expense
|
27 | 27 | ||||||||||||||||||||||||||
|
Tax benefit
of incentive stock options
|
252 | 252 | ||||||||||||||||||||||||||
|
Dividends
paid on common stock
|
(5,702 | ) | (5,702 | ) | ||||||||||||||||||||||||
|
Stock
dividend
|
728 | 10,978 | (11,706 | ) | – | |||||||||||||||||||||||
|
Balance at
December 31, 2006
|
17,594 | 100,736 | 29,648 | (22,850 | ) | (14,524 | ) | 110,604 | ||||||||||||||||||||
|
Net
Income
|
$ | 16,684 | 16,684 | 16,684 | ||||||||||||||||||||||||
|
Other
comprehensive income, net of tax
|
||||||||||||||||||||||||||||
|
Unrealized
gains on securities, net of reclassification adjustment
|
8,691 | 8,691 | 8,691 | |||||||||||||||||||||||||
|
Adjustment to
net periodic benefit cost
|
1,126 | 1,126 | 1,126 | |||||||||||||||||||||||||
|
Comprehensive
income
|
$ | 26,501 | ||||||||||||||||||||||||||
|
Common stock
issued (168,543 shares)
|
211 | 1,430 | 1,641 | |||||||||||||||||||||||||
|
Stock
compensation expense
|
27 | 27 | ||||||||||||||||||||||||||
|
Tax benefit
of incentive stock options
|
154 | 154 | ||||||||||||||||||||||||||
|
Dividends
paid on common stock
|
(6,466 | ) | (6,466 | ) | ||||||||||||||||||||||||
|
Purchase of
6,120 shares of common stock
|
(133 | ) | (133 | ) | ||||||||||||||||||||||||
|
Stock
dividend
|
776 | 12,903 | (13,679 | ) | – | |||||||||||||||||||||||
|
Balance at
December 31, 2007
|
$ | 18,581 | $ | 115,250 | $ | 26,187 | $ | (22,983 | ) | $ | (4,707 | ) | $ | 132,328 | ||||||||||||||
The accompanying
notes are an integral part of these consolidated financial
statements.
88
|
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
|
||||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOW
|
||||||||||||
|
(in
thousands)
|
Years Ended
December 31,
|
|||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
OPERATING
ACTIVITIES:
|
||||||||||||
|
Net
income
|
$
|
16,684
|
$
|
15,002
|
$
|
14,592
|
||||||
|
Adjustments
to reconcile net income to net cash provided by
operations:
|
||||||||||||
|
Depreciation
|
2,255
|
2,275
|
2,171
|
|||||||||
|
Amortization
of
premium
|
4,952
|
5,741
|
8,741
|
|||||||||
|
Accretion of
discount and loan
fees
|
(2,667
|
)
|
(2,089
|
)
|
(1,120
|
)
|
||||||
|
Provision for
loan
losses
|
2,351
|
1,080
|
1,463
|
|||||||||
|
Stock
compensation
expense
|
27
|
27
|
–
|
|||||||||
|
Increase in
interest
receivable
|
(1,113
|
)
|
(806
|
)
|
(754
|
)
|
||||||
|
Decrease
(increase) in other
assets
|
2,405
|
(3,436
|
)
|
(8,593
|
)
|
|||||||
|
Net change in
deferred
taxes
|
(532
|
)
|
(292
|
)
|
400
|
|||||||
|
Increase in
interest
payable
|
259
|
931
|
1,056
|
|||||||||
|
(Decrease)
increase in other
liabilities
|
(1,644
|
)
|
1,104
|
(303
|
)
|
|||||||
|
Decrease
(increase) in loans held for
sale
|
548
|
372
|
(517
|
)
|
||||||||
|
Gain on
securities available for
sale
|
(897
|
)
|
(743
|
)
|
(228
|
)
|
||||||
|
Gain on sale
of
assets
|
(41
|
)
|
(1
|
)
|
(66
|
)
|
||||||
|
Loss (gain)
on sale of other real estate
owned
|
1
|
6
|
(12
|
)
|
||||||||
|
Impairment of
other real estate
owned
|
13
|
–
|
–
|
|||||||||
|
Gain on sale
of repossessed
assets
|
(1
|
)
|
–
|
–
|
||||||||
|
Earnings
allocated to minority
interest
|
(2
|
)
|
–
|
–
|
||||||||
|
Net cash
provided by operating
activities
|
22,598
|
19,171
|
16,830
|
|||||||||
|
INVESTING
ACTIVITIES:
|
||||||||||||
|
Proceeds from
sales of investment securities available for sale
|
25,202
|
52,640
|
93,351
|
|||||||||
|
Proceeds from
sales of mortgage-backed securities available for sale
|
90,323
|
75,354
|
106,400
|
|||||||||
|
Proceeds from
maturities of investment securities available for sale
|
95,890
|
24,460
|
70,923
|
|||||||||
|
Proceeds from
maturities of mortgage-backed securities available for
sale
|
102,584
|
107,029
|
125,720
|
|||||||||
|
Proceeds from
maturities of mortgage-backed securities held to maturity
|
37,481
|
35,806
|
27,266
|
|||||||||
|
Proceeds from
maturities of investment securities held to maturity
|
900
|
–
|
–
|
|||||||||
|
Proceeds from
redemption of FHLB stock
|
11,206
|
4,457
|
–
|
|||||||||
|
Proceeds from
sale of other
investments
|
44
|
–
|
–
|
|||||||||
|
Purchases of
investment securities available for sale
|
(130,113
|
)
|
(55,155
|
)
|
(151,280
|
)
|
||||||
|
Purchases of
investment securities held to
maturity
|
–
|
(1,348
|
)
|
–
|
||||||||
|
Purchases of
mortgage-backed securities available for sale
|
(254,613
|
)
|
(237,001
|
)
|
(359,007
|
)
|
||||||
|
Purchases of
mortgage-backed securities held to maturity
|
(2,180
|
)
|
(41,282
|
)
|
(9,538
|
)
|
||||||
|
Purchases of
FHLB stock and other
investments
|
(5,686
|
)
|
(1,346
|
)
|
(2,788
|
)
|
||||||
|
Net increase
in
loans
|
(96,898
|
)
|
(81,248
|
)
|
(58,944
|
)
|
||||||
|
Net cash paid
in
acquisition
|
(32,030
|
)
|
–
|
–
|
||||||||
|
Purchases of
premises and
equipment
|
(4,581
|
)
|
(1,306
|
)
|
(5,456
|
)
|
||||||
|
Proceeds from
sales of premises and
equipment
|
–
|
1
|
66
|
|||||||||
|
Proceeds from
sales of repossessed
assets
|
439
|
426
|
924
|
|||||||||
|
Proceeds from
sales of other real estate
owned
|
334
|
514
|
225
|
|||||||||
|
Net cash used
in investing
activities
|
(161,698
|
)
|
(117,999
|
)
|
(162,138
|
)
|
||||||
(continued)
89
|
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
|
||||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOW (continued)
|
||||||||||||
|
(in
thousands)
|
Years Ended
December 31,
|
|||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
FINANCING
ACTIVITIES:
|
||||||||||||
|
Net increase
in demand and savings accounts
|
114,612
|
38,864
|
98,547
|
|||||||||
|
Net increase
in certificates of deposit
|
32,183
|
132,636
|
71,277
|
|||||||||
|
Net
(decrease) increase in federal funds purchased and repurchase
agreements
|
(4,901
|
)
|
3,275
|
(6,100
|
)
|
|||||||
|
Proceeds from
FHLB advances
|
7,908,163
|
7,456,291
|
3,995,852
|
|||||||||
|
Repayment of
FHLB advances
|
(7,921,744
|
)
|
(7,525,355
|
)
|
(4,004,737
|
)
|
||||||
|
Proceeds from
issuance of long-term debt
|
36,083
|
–
|
–
|
|||||||||
|
Net capital
contributions from minority interest investment in consolidated
entities
|
500
|
–
|
–
|
|||||||||
|
Tax benefit
of incentive stock options
|
154
|
252
|
629
|
|||||||||
|
Proceeds from
the issuance of common stock
|
1,641
|
1,750
|
2,048
|
|||||||||
|
Purchase of
common stock
|
(133
|
)
|
–
|
(4,997
|
)
|
|||||||
|
Dividends
paid
|
(6,466
|
)
|
(5,702
|
)
|
(5,214
|
)
|
||||||
|
Net cash
provided by financing activities
|
160,092
|
102,011
|
147,305
|
|||||||||
|
Net increase
in cash and cash equivalents
|
20,992
|
3,183
|
1,997
|
|||||||||
|
Cash and cash
equivalents at beginning of year
|
55,012
|
51,829
|
49,832
|
|||||||||
|
Cash and cash
equivalents at end of year
|
$
|
76,004
|
$
|
55,012
|
$
|
51,829
|
||||||
|
SUPPLEMENTAL
DISCLOSURES FOR CASH FLOW INFORMATION:
|
||||||||||||
|
Interest
paid
|
$
|
61,603
|
$
|
54,353
|
$
|
37,365
|
||||||
|
Income taxes
paid
|
$
|
4,200
|
$
|
3,450
|
$
|
2,700
|
||||||
|
SUPPLEMENTAL
DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
|
||||||||||||
|
Acquisition
of other repossessed assets and real estate through
foreclosure
|
$
|
741
|
$
|
1,220
|
$
|
1,037
|
||||||
|
Adjustment to
initially apply SFAS 158
|
$
|
–
|
$
|
6,276
|
$
|
–
|
||||||
|
Adjustment to
pension liability
|
$
|
(1,707
|
)
|
$
|
(451
|
)
|
$
|
(3,892
|
)
|
|||
|
Payment of 5%
stock dividend
|
$
|
13,679
|
$
|
11,706
|
$
|
11,042
|
||||||
|
Unsettled
trades to purchase securities
|
$
|
(6,141
|
)
|
$
|
–
|
$
|
(7,533
|
)
|
||||
We purchased all of
the common stock of Fort Worth Bancshares, Inc. for $37.0 million. In
conjunction with the acquisition, liabilities were assumed as
follows:
|
Fair value of
assets acquired
|
$
|
152,344
|
$
|
–
|
$
|
–
|
||||||
|
Cash paid for
the common stock
|
(36,956
|
)
|
–
|
–
|
||||||||
|
Liabilities
assumed
|
$
|
115,388
|
$
|
–
|
$
|
–
|
The accompanying
notes are an integral part of these consolidated financial
statements.
90
|
NOTES TO
FINANCIAL
STATEMENTS Southside
Bancshares, Inc. and Subsidiaries
|
|
1.
|
SUMMARY OF
SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES
|
The significant
accounting and reporting policies of Southside Bancshares, Inc. (the "Company"),
and its wholly owned subsidiaries, Southside Delaware Financial Corporation,
Southside Bank (“Southside Bank”), Fort Worth Bancshares, Inc., Fort Worth
Bancorporation, Inc., Fort Worth National Bank and the nonbank subsidiary, are
summarized below.
Organization and Basis of
Presentation. The consolidated financial statements include
the accounts of Southside Bancshares, Inc., Southside Delaware Financial
Corporation, Southside Bank, Fort Worth Bancshares, Inc., Fort Worth
Bancorporation, Inc., Fort Worth National Bank and the nonbank
subsidiary. We offer a full range of financial services to
commercial, industrial, financial and individual customers. All
significant intercompany accounts and transactions are eliminated in
consolidation. The preparation of these consolidated financial
statements in conformity with United States generally accepted accounting
principles (“GAAP”) requires the use of management’s estimates. These estimates
are subjective in nature and involve matters of judgment. Actual
amounts could differ from these estimates.
Cash
Equivalents. Cash equivalents, for purposes of reporting cash
flow, include cash, amounts due from banks and federal funds sold.
Basic and Diluted Earnings
per Common Share. Basic earnings per common share is based on
net income divided by the weighted-average number of common shares outstanding
during the period. Diluted earnings per common share include the
dilutive effect of stock options granted using the treasury stock
method. A reconciliation of the weighted-average shares used in
calculating basic earnings per common share and the weighted average common
shares used in calculating diluted earnings per common share for the reported
periods is provided in “Note 3 – Earnings Per Share.”
Comprehensive
Income. Comprehensive income includes all changes in
shareholders’ equity during a period, except those resulting from transactions
with shareholders. Besides net income, other components of
comprehensive income include the after tax effect of changes in the fair value
of securities available for sale and changes in the funded status of defined
benefit retirement plans. Comprehensive income is reported in the
accompanying consolidated statements of changes in shareholders’ equity and in
“Note 4 – Comprehensive Income (Loss).”
Loans. All
loans are stated at principal outstanding net of unearned discount and other
deferred expenses or fees. Interest income on loans is recognized
using the level yield method. Loans receivable that management has
the intent and ability to hold for the foreseeable future or until maturity or
pay-off are reported at their outstanding principal adjusted for any
charge-offs, the allowance for loan losses, and any unamortized deferred fees or
costs on originated loans and unamortized premiums or discounts on purchased
loans. A loan is considered impaired, based on current information
and events, if it is probable that we will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Substantially all of our impaired loans are
collateral-dependent, and as such, are measured for impairment based on the fair
value of the collateral.
Loans Acquired Through
Transfer. Loans acquired through the completion of a transfer,
including loans acquired in a business combination, that have evidence of
deterioration of credit quality since origination and for which it is probable,
at acquisition, that we will be unable to collect all contractually required
payment receivable are initially recorded at fair value (as determined by the
present value of expected future cash flows) with no valuation allowance. The
difference between the undiscounted cash flows expected at acquisition and the
investment in the loan, or the “accretable yield,” is recognized as interest
income on a level-yield method over the life of the loan. Contractually required
payments for interest and principal that exceed the undiscounted cash flows
expected at acquisition, or the “non-accretable difference,” are not recognized
as a yield adjustment or as a loss accrual or a valuation allowance. Increases
in expected cash flows subsequent to the initial investment are recognized
prospectively through adjustment of the yield on the loan over its remaining
life. Decreases in expected cash flows are recognized as impairment. Valuation
91
allowances on these
impaired loans reflect only losses incurred after the acquisition (meaning the
present value of all cash flows expected at acquisition that ultimately are not
to be received).
Loans Held For
Sale. Loans originated and intended for sale in the secondary
market are carried at the lower of aggregate cost or fair value, as determined
by aggregate outstanding commitments from investors or current investor yield
requirements. Net unrealized losses are recognized through a
valuation allowance by charges to income.
Gains or losses on
sales of mortgage loans are recognized based on the difference between the
selling price and the carrying value of the related mortgage loans
sold.
Loan
Fees. We treat loan fees, net of direct costs, as an
adjustment to the yield of the related loan over its term.
Allowance for Loan
Losses. An allowance for loan losses is provided through
charges to income in the form of a provision for loan losses. Loans
which management believes are uncollectible are charged against this account
with subsequent recoveries, if any, credited to the account. The
amount of the allowance for loan losses is determined by management's evaluation
of the quality and inherent risks in the loan portfolio, economic conditions and
other factors which warrant current recognition.
Nonaccrual
Loans. A loan is placed on nonaccrual when principal or
interest is contractually past due 90 days or more unless, in the determination
of management, the principal and interest on the loan are well collateralized
and in the process of collection. In addition, a loan is placed on
nonaccrual when, in the opinion of management, the future collectibility of
interest and principal is in serious doubt. When classified as
nonaccrual, accrued interest receivable on the loan is reversed and the future
accrual of interest is suspended. Payments of contractual interest
are recognized as income only to the extent that full recovery of the principal
balance of the loan is reasonably certain.
Other Real Estate
Owned. Other Real Estate Owned (“OREO”) includes real estate
acquired in full or partial settlement of loan obligations. OREO is
carried at the lower of (1) the recorded amount of the loan for which the
foreclosed property previously served as collateral or (2) the fair market value
of the property net of estimated selling costs. Prior to foreclosure,
the recorded amount of the loan is written down, if necessary, to the appraised
fair market value of the real estate to be acquired, less selling costs, by
charging the allowance for loan losses. Any subsequent reduction in
fair market value is charged to results of operations through the Allowance for
Losses on OREO account. Costs of maintaining and operating foreclosed properties
are expensed as incurred. Expenditures to complete or improve
foreclosed properties are capitalized only if expected to be recovered;
otherwise, they are expensed.
Securities. We
use the specific identification method to determine the basis for computing
realized gain or loss. We account for debt and equity securities as
follows:
Held to Maturity
(“HTM”). Debt securities that management has the positive intent and
ability to hold until maturity are classified as HTM and are carried at their
remaining unpaid principal balance, net of unamortized premiums or unaccreted
discounts. Premiums are amortized and discounts are accreted using
the level interest yield method over the estimated remaining term of the
underlying security.
Available for Sale
(“AFS”). Debt and equity securities that will be held for indefinite
periods of time, including securities that may be sold in response to changes in
market interest or prepayment rates, needs for liquidity and changes in the
availability of and the yield of alternative investments are classified as
AFS. These assets are carried at market value. Market
value is determined using published quotes as of the close of
business. If quoted market prices are not available, fair values are
based on quoted market prices for similar securities or estimates from
independent pricing services. Unrealized gains and losses on AFS
securities are excluded from earnings and reported net of tax in Accumulated
Other Comprehensive Income until realized.
92
Purchase premiums
and discounts are recognized in interest income using the interest method over
the terms of the securities. Declines in the fair value of HTM and
AFS securities below their cost that are deemed to be other-than-temporary are
reflected in earnings as realized losses. In estimating
other-than-temporary impairment losses, management considers (1) the length of
time and the extent to which the fair value has been less than cost, (2) the
financial condition and near-term prospects of the issuer, and (3) our intent
and ability to retain our investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value. Gains
and losses on the sale of securities are recorded on the trade date and are
determined using the specific identification method.
Securities with
limited marketability, such as stock in the FHLB, are carried at
cost.
Premises and
Equipment. Bank premises and equipment are stated at cost, net
of accumulated depreciation. Depreciation is computed on a straight
line basis over the estimated useful lives of the related
assets. Useful lives are estimated to be fifteen to forty years for
premises and three to ten years for equipment. Leasehold improvements
are generally depreciated over the lesser of the term of the respective leases
or the estimated useful lives of the improvements. Maintenance and
repairs are charged to income as incurred while major improvements and
replacements are capitalized.
Goodwill and Other
Intangibles. Intangible assets consist primarily of core
deposits and customer relationships. Intangible assets with definite useful
lives are amortized on an accelerated basis over their estimated life. Goodwill
and intangible assets that have indefinite useful lives are subject to at least
an annual impairment test and more frequently if a triggering event occurs. If
any such impairment is determined, a write-down is recorded.
Repurchase
Agreements. We sell certain securities under agreements to
repurchase. The agreements are treated as collateralized financing
transactions and the obligations to repurchase securities sold are reflected as
a liability in the accompanying consolidated balance sheets. The
dollar amount of the securities underlying the agreements remains in the asset
account.
Income
Taxes. We file a consolidated federal income tax
return. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of changes
in tax rates is recognized in income in the period the change
occurs.
Use of
Estimates. In preparing consolidated financial statements in
conformity with GAAP, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the allowance
for loan losses, assumptions used in the defined benefit plan, the fair values
of financial instruments, and the status of contingencies are particularly
subject to change.
Fair Value of Financial
Instruments. Fair values of financial instruments are
estimated using relevant market information and other
assumptions. Fair value estimates involve uncertainties and matters
of significant judgment. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
estimation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows.
Stock
Options. Prior to January 1, 2006, we applied the provisions
of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees” and related interpretations, in accounting for our stock-based
compensation plans. Under Opinion 25, compensation cost is measured
as the excess, if any, of the quoted market price of our stock at the date of
the grant above the amount an employee must pay to acquire the
stock. The Financial Accounting Standards Board (“FASB”) published
Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based
Compensation” (“SFAS 123”) on January 1,
93
1996, which
encourages, but does not require, companies to recognize compensation expense
for grants of stock, stock options and other equity instruments to employees
based on new fair value accounting rules. Companies that choose not
to adopt the new rules will continue to apply existing rules, but will be
required to disclose pro forma net income and earnings per share under the new
method. We elected to provide the pro forma disclosures for
2005.
We adopted the
provisions of SFAS 123R, “Share-Based Payment (Revised 2004),” on January 1,
2006 using a modified version of prospective application in accordance with SFAS
123R. Among other things, SFAS 123R eliminates the ability to account
for stock-based compensation using APB 25 and requires that such transactions be
recognized as compensation cost in the income statement based on their fair
values on the date of the grant.
Pro Forma Net
Income and Net Income Per Common Share
Had the
compensation cost for our stock-based compensation plans been determined
consistent with the requirements of SFAS 123R, our net income and net income per
common share for 2005, would approximate the pro forma amounts below (in
thousands, except per share amounts, net of taxes):
|
Year Ended
December 31,
|
||||||||
|
As Reported
2005
|
Pro
Forma
2005
|
|||||||
|
FAS123
Charge
|
$ | – | $ | 60 | ||||
|
Net
Income
|
$ | 14,592 | $ | 14,532 | ||||
|
Net Income
per Common Share-Basic
|
$ | 1.15 | $ | 1.15 | ||||
|
Net Income
per Common Share-Diluted
|
$ | 1.10 | $ | 1.10 | ||||
The effects of
applying SFAS 123R in this pro forma disclosure are not indicative of future
amounts.
Loss
Contingencies. Loss contingencies, including claims and legal
actions arising in the ordinary course of business are recorded as liabilities
when the likelihood of loss is probable and an amount or range of loss can be
reasonably estimated.
Trust
Assets. Assets of our trust department, other than cash on
deposit at Southside Bank, are not included in the accompanying financial
statements because they are not our assets.
General. Certain
prior period amounts have been reclassified to conform to current year
presentation and had no impact on net income or equity.
Accounting
Pronouncements.
Statements of
Financial Accounting Standards
SFAS No. 141,
“Business Combinations (Revised 2007).” SFAS 141R replaces SFAS 141,
“Business Combinations,” and applies to all transactions and other events in
which one entity obtains control over one or more other businesses.
SFAS 141R requires an acquirer, upon initially obtaining control of another
entity, to recognize the assets, liabilities and any non-controlling interest in
the acquiree at fair value as of the acquisition date. Contingent consideration
is required to be recognized and measured at fair value on the date of
acquisition rather than at a later date when the amount of that consideration
may be determinable beyond a reasonable doubt. This fair value approach replaces
the cost-allocation process required under SFAS 141 whereby the cost of an
acquisition was allocated to the individual assets acquired and liabilities
assumed based on their estimated fair value. SFAS 141R 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 SFAS 141. Under SFAS 141R, the requirements of SFAS 146,
Accounting for Costs Associated with Exit or Disposal Activities,” would have to
be met in order to accrue for a restructuring plan in purchase accounting.
Pre-acquisition contingencies are to be recognized at fair value, unless it is a
non-contractual contingency that is not likely to materialize, in which case,
nothing should be recognized in purchase accounting and, instead, that
contingency would be subject to the probable and estimable recognition
criteria of SFAS 5, “Accounting for Contingencies.” SFAS 141R is
expected to have a significant impact on our accounting for business
combinations closing on or after January 1, 2009.
94
SFAS No. 160,
“Noncontrolling Interest in Consolidated Financial Statements, an amendment of
ARB Statement No. 51.” SFAS 160 amends Accounting Research Bulletin
(ARB) No. 51, “Consolidated Financial Statements,” to establish accounting
and reporting standards for the non-controlling interest in a subsidiary and for
the deconsolidation of a subsidiary. SFAS 160 clarifies that a
non-controlling interest in a subsidiary, which is sometimes referred to as
minority interest, is an ownership interest in the consolidated entity that
should be reported as a component of equity in the consolidated financial
statements. Among other requirements, SFAS 160 requires consolidated net
income to be reported at amounts that include the amounts attributable to both
the parent and the non-controlling interest. It also requires disclosure, on the
face of the consolidated income statement, of the amounts of consolidated net
income attributable to the parent and to the non-controlling interest.
SFAS 160 is effective for us on January 1, 2009 and is not expected to
have a significant impact on our financial statements.
SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities, including an
amendment of FASB Statement No. 115.” SFAS 159, issued by the
Financial Accounting Standards Board (“FASB”) in February 2007, allows entities
to irrevocably elect fair value as the initial and subsequent measurement
attribute for certain financial assets and financial liabilities that are not
otherwise required to be measured at fair value, with changes in fair value
recognized in earnings as they occur. We will adopt SFAS 159 on
January 1, 2008. We have not yet determined if, or to what extent, we
will elect to use the fair value option to value our financial assets and
liabilities. The impact of the implementation of SFAS 159 is not
expected to have a material effect upon adoption.
SFAS No. 157,
“Fair Value Measurements.” SFAS 157 defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures about fair
value measurements. SFAS 157 is effective for us on January 1, 2008
and did not have a material impact on our consolidated financial
statements.
SFAS No. 155,
“Accounting for Certain Hybrid Financial Instruments — an amendment of FASB
Statements No. 133 and 140.” SFAS 155 amends SFAS 133,
“Accounting for Derivative Instruments and Hedging Activities” and
SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities.” SFAS 155 permits, but does not require,
fair value accounting for hybrid financial instruments that contain an embedded
derivative that would otherwise require bifurcation in accordance with
SFAS 133. SFAS 155 also eliminated the temporary exemption
for interests in securitized financial assets provided for by SFAS 133,
Derivatives Implementation Group (“DIG”) Issue D1, “Application of Statement 133
to Beneficial Interests in Securitized Financial Assets.” However, in
January 2007, the FASB issued interpretive guidance in SFAS 133, DIG
Issue B40, “Application of Paragraph 13(b) to Securitized Interests in
Prepayable Financial Assets.” In DIG Issue B40, the FASB concluded that a
securitized interest in prepayable financial assets was not subject to the
bifurcation requirements of SFAS 155 provided that the interest met both
the following criteria: (1) the right to accelerate the settlement of the
securitized interest cannot be controlled by the investor; and (2) the
securitized interest itself does not contain an embedded derivative for which
bifurcation would be required other than an embedded derivative that results
solely from the embedded call options in the underlying financial assets. The
guidance in DIG Issue B40 is effective upon the adoption of SFAS 155.
SFAS 155 was effective for all financial instruments acquired or issued
after December 31, 2006 as well as to those hybrid financial instruments
that had been previously bifurcated under SFAS 133. The adoption of SFAS
155 did not have a material impact on our consolidated financial
statements.
95
Emerging Issues
Task Force Consensuses
In September 2006,
the Emerging Issues Task Force (“EITF”) reached a final consensus on Issue 06-4,
“Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements.” EITF 06-4
requires that for a split-dollar life insurance arrangement, an employer should
recognize a liability for future benefits in accordance with SFAS 106,
“Employers' Accounting for Postretirement Benefits Other Than
Pensions.” Under the guidance, the purchase of an endorsement type
policy does not constitute a settlement since the policy does not qualify as
nonparticipating because the policyholders are subject to the favorable and
unfavorable experience of the insurance company. EITF 06-4 is
effective for fiscal years beginning after December 15, 2007. We
adopted EITF 06-4 as of January 1, 2008 as a change in accounting principle
through a cumulative-effect adjustment to retained earnings. The
amount of the adjustment was approximately $350,000.
In September 2006,
the EITF reached a final consensus on Issue 06-5, “Accounting for Purchases of
Life Insurance.” EITF 06-5 provides guidance on FASB Technical
Bulletin No. 85-4, “Accounting for Purchases of Life
Insurance.” Under the guidance, the policyholder should consider any
additional amounts included in the contractual terms of the policy in
determining the amount that could be realized under the insurance
contract. In addition, the policyholder should also determine the
amount that could be realized under the life insurance contract assuming the
surrender of an individual-life by individual-life policy. EITF 06-5
was effective for fiscal years beginning after December 15, 2006. The
adoption of EITF 06-5 did not have a material impact on our consolidated
financial statements.
Financial
Accounting Standards Board Staff Positions and Interpretations
FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of
FASB Statement 109.” FASB Interpretation No. 48 (“FIN 48”) prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. Benefits from tax positions should be recognized in the financial
statements only when it is more likely than not that the tax position will be
sustained upon examination by the appropriate taxing authority that would have
full knowledge of all relevant information. A tax position that meets the
more-likely-than-not recognition threshold is measured at the largest amount of
benefit that is greater than fifty percent likely of being realized upon
ultimate settlement. Tax positions that previously failed to meet the
more-likely-than-not recognition threshold should be recognized in the first
subsequent financial reporting period in which that threshold is met. Previously
recognized tax positions that no longer meet the more-likely-than-not
recognition threshold should be derecognized in the first subsequent financial
reporting period in which that threshold is no longer met. Interpretation 48
also provides guidance on the accounting for and disclosure of unrecognized tax
benefits, interest and penalties.
We adopted the
provisions of FIN 48 on January 1, 2007. As of the date of adoption, we had no
unrecognized tax benefits and thus had accrued no interest or penalties on such
benefits. At adoption and December 31, 2007, we did not anticipate a
significant increase in unrecognized tax benefits during the subsequent 12
months. As of January 1, 2007, our 2003 through 2006 tax years were
open to examination by the Internal Revenue Service and state taxing
jurisdictions. There were no material changes in these items during the current
quarter. While we typically do not incur significant interest or
penalties on income tax liabilities, it is our policy to classify such amounts
as interest expense and miscellaneous expense, respectively. We did not change
our policy on classification of interest and penalties upon adoption of FIN
48.
96
2. MERGERS
AND ACQUISITIONS
The acquisition
described below was accounted for as a purchase transaction in accordance with
SFAS No. 141, “Business Combinations” with all cash consideration funded through
the issuance of $36.1 million of junior subordinated debentures. The
purchase price has been allocated to the underlying assets and liabilities based
on estimated fair values at the date of acquisition. The operating
results of the acquired company are included with our results of operations
since their date of acquisition.
Fort Worth Bancshares,
Inc. On October 10, 2007, we acquired Fort Worth Bancshares,
Inc. (“FWBS”) and its wholly owned subsidiaries, Fort Worth Bancorporation, Inc.
and Fort Worth National Bank. FWBS is a privately-held bank holding company
located in Fort Worth, Texas. We purchased all of the outstanding
shares for approximately $37.0 million. The purchase price includes
$36.7 million in cash and approximately $0.3 million in acquisition-related
costs.
The total purchase
price paid for the acquisition of FWBS was allocated based on the estimated fair
values of the assets acquired and liabilities assumed, as of the acquisition
date, as set forth below (in thousands).
|
FWBS
|
||||
|
Cash and cash
equivalents
|
$ | 4,926 | ||
|
Securities
available for
sale
|
5,544 | |||
|
FHLB stock
and other
investments
|
946 | |||
|
Loans
|
105,605 | |||
|
Premises and
equipment
|
5,282 | |||
|
Core deposit
intangible
asset
|
2,047 | |||
|
Goodwill
|
21,639 | |||
|
Other
assets
|
6,355 | |||
|
Deposits
|
(100,930 | ) | ||
|
Other
borrowings
|
(11,858 | ) | ||
|
Other
liabilities
|
(2,600 | ) | ||
| $ | 36,956 | |||
With this
acquisition, Tarrant County becomes our second largest lending market and third
largest deposit market. We have retained the Fort Worth National Bank
charter and will continue to operate Fort Worth National Bank under that
name.
97
3. EARNINGS
PER SHARE
Earnings per share
on a basic and diluted basis as required by Statement of Financial Accounting
Standard No. 128, "Earnings Per Share" (“SFAS 128”), has been adjusted to give
retroactive recognition to stock splits and stock dividends and is calculated as
follows (in thousands, except per share amounts):
|
Years Ended
December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Basic
Earnings and Shares:
|
||||||||||||
|
Net
Income
|
$
|
16,684
|
$
|
15,002
|
$
|
14,592
|
||||||
|
Weighted-average
basic shares
outstanding
|
13,057
|
12,874
|
12,649
|
|||||||||
|
Basic
Earnings Per Share:
|
||||||||||||
|
Net
Income
|
$
|
1.28
|
$
|
1.16
|
$
|
1.15
|
||||||
|
Diluted
Earnings and Shares:
|
||||||||||||
|
Net
Income
|
$
|
16,684
|
$
|
15,002
|
$
|
14,592
|
||||||
|
Weighted-average
basic shares
outstanding
|
13,057
|
12,874
|
12,649
|
|||||||||
|
Add: Stock
options
|
388
|
496
|
622
|
|||||||||
|
Weighted-average
diluted shares
outstanding
|
13,445
|
13,370
|
13,271
|
|||||||||
|
Diluted
Earnings Per Share:
|
||||||||||||
|
Net
Income
|
$
|
1.24
|
$
|
1.12
|
$
|
1.10
|
||||||
For the years ended December 31, 2007, 2006
and 2005, there were no antidilutive options.
98
|
4.
|
COMPREHENSIVE
INCOME (LOSS)
|
The components of
other comprehensive income (loss) as required by Statement of Financial
Accounting Standard No. 130, "Reporting Comprehensive Income” (“SFAS 130”) are
as follows (in thousands):
|
Year Ended
December 31, 2007
|
||||||||||||
|
Before-Tax
|
Tax
(Expense)
|
Net-of-Tax
|
||||||||||
|
Amount
|
Benefit
|
Amount
|
||||||||||
|
Unrealized
gains on securities:
|
||||||||||||
|
Unrealized
holding gains arising during period
|
$ | 14,064 | $ | (4,781 | ) | $ | 9,283 | |||||
|
Less: reclassification
adjustment for gains realized in net income
|
897 | (305 | ) | 592 | ||||||||
|
Net
unrealized gains
|
13,167 | (4,476 | ) | 8,691 | ||||||||
|
Change in
pension plans
|
1,707 | (581 | ) | 1,126 | ||||||||
|
Other
comprehensive income
|
$ | 14,874 | $ | (5,057 | ) | $ | 9,817 | |||||
|
Year Ended
December 31, 2006
|
||||||||||||
|
Before-Tax
|
Tax
(Expense)
|
Net-of-Tax
|
||||||||||
|
Amount
|
Benefit
|
Amount
|
||||||||||
|
Unrealized
losses on securities:
|
||||||||||||
|
Unrealized
holding losses arising during period
|
$ | (2,110 | ) | $ | 717 | $ | (1,393 | ) | ||||
|
Less: reclassification
adjustment for gains realized in net income
|
743 | (253 | ) | 490 | ||||||||
|
Net
unrealized losses
|
(2,853 | ) | 970 | (1,883 | ) | |||||||
|
Change in
pension
plans
|
451 | (153 | ) | 298 | ||||||||
|
Other
comprehensive
loss
|
$ | (2,402 | ) | $ | 817 | $ | (1,585 | ) | ||||
|
Year Ended
December 31, 2005
|
||||||||||||
|
Before-Tax
|
Tax
(Expense)
|
Net-of-Tax
|
||||||||||
|
Amount
|
Benefit
|
Amount
|
||||||||||
|
Unrealized
losses on securities:
|
||||||||||||
|
Unrealized
holding losses arising during period
|
$ | (7,399 | ) | $ | 2,515 | $ | (4,884 | ) | ||||
|
Less: reclassification
adjustment for gains realized in net income
|
228 | (78 | ) | 150 | ||||||||
|
Net
unrealized losses
|
(7,627 | ) | 2,593 | (5,034 | ) | |||||||
|
Change in
pension
plans
|
3,892 | (1,323 | ) | 2,569 | ||||||||
|
Other
comprehensive
loss
|
$ | (3,735 | ) | $ | 1,270 | $ | (2,465 | ) | ||||
The components of
accumulated other comprehensive loss as of December 31, 2007 and 2006, are
reflected in the table below (in thousands):
|
Years Ended
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Unrealized
gains (losses) on AFS securities
|
$ | 2,836 | $ | (5,855 | ) | |||
|
Net unfunded
liability for defined benefit plans
|
(7,543 | ) | (8,669 | ) | ||||
|
Total
|
$ | (4,707 | ) | $ | (14,524 | ) | ||
99
|
5.
|
CASH AND DUE
FROM BANKS
|
We are required to
maintain cash reserve balances with the Federal Reserve Bank. The
reserve balances were $250,000 as of December 31, 2007 and 2006.
|
6.
|
SECURITIES
|
The amortized cost
and estimated market value of investment and mortgage-backed securities as of
December 31, 2007 and 2006, are reflected in the tables below (in
thousands):
|
AVAILABLE FOR
SALE
|
||||||||||||||||
|
Gross
|
Gross
|
Estimated
|
||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
|
December 31,
2007
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
|
Investment
Securities:
|
||||||||||||||||
|
U.S.
Treasury
|
$ | 4,880 | $ | 8 | $ | 2 | $ | 4,886 | ||||||||
|
Government
Sponsored Enterprise Debentures
|
31,764 | 3 | 8 | 31,759 | ||||||||||||
|
State and
Political Subdivisions
|
64,868 | 1,599 | 223 | 66,244 | ||||||||||||
|
Other Stocks
and Bonds
|
7,586 | – | 547 | 7,039 | ||||||||||||
|
Mortgage-backed
Securities:
|
||||||||||||||||
|
U.S.
Government Agencies
|
88,937 | 1,234 | 451 | 89,720 | ||||||||||||
|
Government
Sponsored Enterprises
|
628,768 | 5,847 | 1,555 | 633,060 | ||||||||||||
|
Other Private
Issues
|
4,773 | – | – | 4,773 | ||||||||||||
|
Total
|
$ | 831,576 | $ | 8,691 | $ | 2,786 | $ | 837,481 | ||||||||
|
HELD TO
MATURITY
|
||||||||||||||||
|
Gross
|
Gross
|
Estimated
|
||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
|
December 31,
2007
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
|
Investment
Securities:
|
||||||||||||||||
|
Other
Stocks and
Bonds
|
$ | 475 | $ | 2 | $ | – | $ | 477 | ||||||||
|
Mortgage-backed
Securities:
|
||||||||||||||||
|
U.S.
Government
Agencies
|
25,965 | 36 | 58 | 25,943 | ||||||||||||
|
Government
Sponsored
Enterprises
|
164,000 | 501 | 531 | 163,970 | ||||||||||||
|
Total
|
$ | 190,440 | $ | 539 | $ | 589 | $ | 190,390 | ||||||||
|
AVAILABLE FOR
SALE
|
||||||||||||||||
|
Gross
|
Gross
|
Estimated
|
||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
|
December 31,
2006
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
|
Investment
Securities:
|
||||||||||||||||
|
U.S.
Treasury
|
$ | 27,104 | $ | – | $ | 721 | $ | 26,383 | ||||||||
|
Government
Sponsored Enterprise Debentures
|
9,923 | – | – | 9,923 | ||||||||||||
|
State and
Political Subdivisions
|
54,037 | 1,488 | 390 | 55,135 | ||||||||||||
|
Other Stocks
and Bonds
|
7,611 | 12 | 112 | 7,511 | ||||||||||||
|
Mortgage-backed
Securities:
|
||||||||||||||||
|
U.S.
Government Agencies
|
72,183 | 425 | 1,209 | 71,399 | ||||||||||||
|
Government
Sponsored Enterprises
|
570,777 | 1,250 | 7,377 | 564,650 | ||||||||||||
|
Other Private
Issues
|
7,190 | 20 | 95 | 7,115 | ||||||||||||
|
Total
|
$ | 748,825 | $ | 3,195 | $ | 9,904 | $ | 742,116 | ||||||||
100
|
HELD TO
MATURITY
|
||||||||||||||||
|
Gross
|
Gross
|
Estimated
|
||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
|
December 31,
2006
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
|
Investment
Securities:
|
||||||||||||||||
|
Other
Stocks and
Bonds
|
$ | 1,351 | $ | 7 | $ | 16 | $ | 1,342 | ||||||||
|
Mortgage-backed
Securities:
|
||||||||||||||||
|
U.S.
Government
Agencies
|
30,788 | – | 407 | 30,381 | ||||||||||||
|
Government
Sponsored
Enterprises
|
195,374 | 97 | 3,104 | 192,367 | ||||||||||||
|
Total
|
$ | 227,513 | $ | 104 | $ | 3,527 | $ | 224,090 | ||||||||
The following table
represents the unrealized loss on securities for the years ended December 31,
2007 and 2006 (in thousands):
|
Less Than 12
Months
|
More Than 12
Months
|
Total
|
||||||||||||||||||||||
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
|||||||||||||||||||
|
As of
December 31, 2007:
|
||||||||||||||||||||||||
|
Available for
Sale
|
||||||||||||||||||||||||
|
U.S.
Treasury
|
$ | 394 | $ | 2 | $ | – | $ | – | $ | 394 | $ | 2 | ||||||||||||
|
Government
Sponsored Enterprise Debentures
|
13,237 | 8 | – | – | 13,237 | 8 | ||||||||||||||||||
|
State and
Political Subdivisions
|
537 | 29 | 12,918 | 194 | 13,455 | 223 | ||||||||||||||||||
|
Other Stocks
and Bonds
|
3,332 | 254 | 3,707 | 293 | 7,039 | 547 | ||||||||||||||||||
|
Mortgage-Backed
Securities
|
71,071 | 154 | 146,458 | 1,852 | 217,529 | 2,006 | ||||||||||||||||||
|
Total
|
$ | 88,571 | $ | 447 | $ | 163,083 | $ | 2,339 | $ | 251,654 | $ | 2,786 | ||||||||||||
|
Held to
Maturity
|
||||||||||||||||||||||||
|
Mortgage-Backed
Securities
|
$ | 10,975 | $ | 29 | $ | 74,568 | $ | 560 | $ | 85,543 | $ | 589 | ||||||||||||
|
Total
|
$ | 10,975 | $ | 29 | $ | 74,568 | $ | 560 | $ | 85,543 | $ | 589 | ||||||||||||
|
As of
December 31, 2006:
|
||||||||||||||||||||||||
|
Available for
Sale
|
||||||||||||||||||||||||
|
U.S.
Treasury
|
$ | 13,859 | $ | 135 | $ | 12,524 | $ | 586 | $ | 26,383 | $ | 721 | ||||||||||||
|
State and
Political Subdivisions
|
1,626 | 13 | 12,524 | 377 | 14,150 | 390 | ||||||||||||||||||
|
Other Stocks
and Bonds
|
2,632 | 65 | 3,956 | 47 | 6,588 | 112 | ||||||||||||||||||
|
Mortgage-Backed
Securities
|
199,263 | 1,623 | 317,464 | 7,058 | 516,727 | 8,681 | ||||||||||||||||||
|
Total
|
$ | 217,380 | $ | 1,836 | $ | 346,468 | $ | 8,068 | $ | 563,848 | $ | 9,904 | ||||||||||||
|
Held to
Maturity
|
||||||||||||||||||||||||
|
Other Stocks
and Bonds
|
$ | 862 | $ | 16 | $ | – | $ | – | $ | 862 | $ | 16 | ||||||||||||
|
Mortgage-Backed
Securities
|
27,912 | 138 | 175,750 | 3,373 | 203,662 | 3,511 | ||||||||||||||||||
|
Total
|
$ | 28,774 | $ | 154 | $ | 175,750 | $ | 3,373 | $ | 204,524 | $ | 3,527 | ||||||||||||
Declines in the
fair value of HTM and AFS securities below their cost that are deemed to be
other-than-temporary are reflected in earnings as realized losses. In estimating
other-than-temporary impairment losses, management considers, among other
things, (i) the length of time and the extent to which the fair value has been
less than cost, (ii) the financial condition and near-term prospects of the
issuer, and (iii) our intent and ability to retain our investment in the issuer
for a period of time sufficient to allow for any anticipated recovery in fair
value.
101
Management
determined that $4.8 million of whole loan mortgage-backed securities, that
represented the only non agency collateralized mortgage-backed securities, had
an other-than-temporary impairment due to credit concerns at December 31,
2007. The impairment charge recognized was $58,000 and is reflected
in gain (loss) on securities available for sale. To the best
of management’s knowledge, none of the remaining securities in Southside’s
investment and mortgage-backed securities portfolio at December 31, 2007 had an
other-than-temporary impairment.
Management has the
ability and intent to hold the securities classified as HTM until they mature,
at which time we will receive full value for the securities. Furthermore, as of
December 31, 2007, management also had the ability and intent to hold the
securities classified as AFS for a period of time sufficient for a recovery of
cost. The unrealized losses are largely due to increases in market interest
rates over the yields available at the time the underlying securities were
purchased. The fair value is expected to recover as the bonds approach their
maturity date or repricing date or if market yields for such investments
decline. Management does not believe any of the securities are impaired due to
reasons of credit quality.
Interest income
recognized on AFS and HTM securities for the years presented:
|
Years Ended
December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
U.S.
Treasury
|
$
|
715
|
$
|
1,042
|
$
|
508
|
||||||
|
U.S.
Government
Agencies
|
671
|
337
|
723
|
|||||||||
|
State and
Political
Subdivisions
|
2,692
|
2,727
|
3,564
|
|||||||||
|
Other Stocks
and
Bonds
|
614
|
531
|
364
|
|||||||||
|
Mortgage-backed
Securities
|
43,767
|
44,401
|
34,584
|
|||||||||
|
Total
interest income on
securities
|
$
|
48,459
|
$
|
49,038
|
$
|
39,743
|
||||||
There were no
securities transferred from AFS to HTM during 2006 and 2007. There
were no sales from the HTM portfolio during the years ended December 31, 2007,
2006 or 2005. There were $190.4 million and $227.5 million of
securities classified as HTM for the years ended December 31, 2007 and 2006,
respectively.
Of the $0.9 million
in net securities gains from the AFS portfolio in 2007, there were $1.0 million
in realized gains and $0.1 million in realized losses. Of the $0.7
million in net securities gains from the AFS portfolio in 2006, there were $1.6
million in realized gains and $0.9 million in realized losses. Of the
$0.2 million in net securities gains from the AFS portfolio in 2005, there were
$1.6 million in realized gains and $1.4 million in realized losses.
102
The amortized cost
and fair value of securities at December 31, 2007, 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.
|
Amortized
Cost
|
Fair
Value
|
|||||||
|
(in
thousands)
|
||||||||
|
Available for
sale securities:
|
||||||||
|
Investment
Securities
|
||||||||
|
Due in one
year or
less
|
$ | 41,092 | $ | 41,082 | ||||
|
Due after one
year through five years
|
11,765 | 11,922 | ||||||
|
Due after
five years through ten years
|
22,637 | 22,846 | ||||||
|
Due after ten
years
|
33,604 | 34,078 | ||||||
| 109,098 | 109,928 | |||||||
|
Mortgage-backed
securities
|
722,478 | 727,553 | ||||||
|
Total
|
$ | 831,576 | $ | 837,481 | ||||
|
Amortized
Cost
|
Fair
Value
|
|||||||
|
(in
thousands)
|
||||||||
|
Held to
maturity securities:
|
||||||||
|
Investment
Securities
|
||||||||
|
Due in one
year or
less
|
$ | – | $ | – | ||||
|
Due after one
year through five years
|
– | – | ||||||
|
Due after
five years through ten years
|
– | – | ||||||
|
Due after ten
years
|
475 | 477 | ||||||
| 475 | 477 | |||||||
|
Mortgage-backed
securities
|
189,965 | 189,913 | ||||||
|
Total
|
$ | 190,440 | $ | 190,390 | ||||
Investment and
mortgage-backed securities with book values of $496.8 million and $454.6 million
were pledged as of December 31, 2007 and 2006, respectively, to
collateralize FHLB advances, repurchase agreements, public funds and trust
deposits or for other purposes as required by law.
Securities with
limited marketability, such as FHLB stock and other investments, are carried at
cost, which approximates its fair value. These securities have no
maturity date.
103
|
7.
|
LOANS AND
ALLOWANCE FOR PROBABLE LOAN LOSSES
|
Loans in the
accompanying consolidated balance sheets are classified as follows:
|
December
31,
|
December
31,
|
|||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Real Estate
Loans:
|
||||||||
|
Construction
|
$ | 96,356 | $ | 39,588 | ||||
|
1-4 family
residential
|
237,888 | 227,354 | ||||||
|
Other
|
211,280 | 181,047 | ||||||
|
Commercial
loans
|
154,171 | 118,962 | ||||||
|
Municipal
loans
|
112,523 | 106,155 | ||||||
|
Loans to
individuals
|
149,012 | 86,041 | ||||||
|
Total
loans
|
961,230 | 759,147 | ||||||
|
Less: Allowance
for loan
losses
|
9,753 | 7,193 | ||||||
|
Net
loans
|
$ | 951,477 | $ | 751,954 | ||||
The following is a
summary of the Allowance for Loan Losses and Reserve for Unfunded Loan
Commitments for the years ended December 31, 2007, 2006 and 2005:
|
Years Ended
December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Allowance For
Loan Losses
|
||||||||||||
|
Balance at
beginning of
year
|
$
|
7,193
|
$
|
7,090
|
$
|
6,942
|
||||||
|
Provision for
loan
losses
|
2,351
|
1,080
|
1,463
|
|||||||||
|
Allowance for
loan losses
acquired
|
909
|
–
|
–
|
|||||||||
|
Loans charged
off
|
(2,747
|
)
|
(2,972
|
)
|
(2,996
|
)
|
||||||
|
Recoveries of
loans charged
off
|
2,047
|
1,995
|
1,681
|
|||||||||
|
Balance at
end of
year
|
$
|
9,753
|
$
|
7,193
|
$
|
7,090
|
||||||
|
Reserve For
Unfunded Loan Commitments
|
||||||||||||
|
Balance at
beginning of
year
|
$
|
–
|
$
|
–
|
$
|
–
|
||||||
|
Provision for
losses on unfunded loan commitments
|
50
|
–
|
–
|
|||||||||
|
Balance at
end of
year
|
$
|
50
|
$
|
–
|
$
|
–
|
||||||
Nonaccrual loans at
December 31, 2007 and 2006 were $2.9 million and $1.3 million,
respectively. Loans with terms modified in troubled debt
restructuring at December 31, 2007 and 2006 were $225,000 and $220,000,
respectively.
For the years ended
December 31, 2007 and 2006, the average recorded investment in impaired loans
was approximately $1,749,000 and $1,519,000, respectively.
The amount of
interest recognized on nonaccrual or restructured loans was $102,000, $113,000
and $80,000 for the years ended December 31, 2007, 2006 and 2005,
respectively. If these loans had been accruing interest at their
original contracted rates, related income would have been $231,000, $142,000 and
$177,000 for the years ended December 31, 2007, 2006 and 2005,
respectively.
104
The following is a
summary of our recorded investment in loans (primarily nonaccrual loans) for
which impairment has been recognized in accordance with SFAS114:
|
Total
|
Valuation
Allowance
|
Carrying
Value
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Real Estate
Loans
|
$
|
636
|
$
|
92
|
$
|
544
|
||||||
|
Loans to
Individuals
|
2,230
|
396
|
1,834
|
|||||||||
|
Commercial
Loans
|
170
|
65
|
105
|
|||||||||
|
Balance at
December 31,
2007
|
$
|
3,036
|
$
|
553
|
$
|
2,483
|
||||||
|
Total
|
Valuation
Allowance
|
Carrying
Value
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Real Estate
Loans
|
$
|
975
|
$
|
102
|
$
|
873
|
||||||
|
Loans to
Individuals
|
357
|
109
|
248
|
|||||||||
|
Commercial
Loans
|
114
|
14
|
100
|
|||||||||
|
Balance at
December 31,
2006
|
$
|
1,446
|
$
|
225
|
$
|
1,221
|
||||||
The balances of
impaired loans included above with no valuation allowances were approximately
$14,000 and $65,000 at December 31, 2007 and 2006, respectively.
8. PREMISES
AND EQUIPMENT
|
December
31,
|
December
31,
|
|||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Premises
|
$ | 48,149 | $ | 40,323 | ||||
|
Furniture and
equipment
|
18,837 | 15,998 | ||||||
| 66,986 | 56,321 | |||||||
|
Less:
accumulated
depreciation
|
26,737 | 23,680 | ||||||
|
Total
|
$ | 40,249 | $ | 32,641 | ||||
Depreciation
expense was $2.3 million, $2.3 million and $2.2 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
105
9. GOODWILL
AND CORE DEPOSIT INTANGIBLE ASSETS
Goodwill. Goodwill
totaled $21.6 million at December 31, 2007. During the fourth quarter
of 2007, we recorded goodwill totaling $21.6 million in connection with the
acquisition of Fort Worth National Bancshares, Inc. See Note 2 – Mergers and
Acquisition. There was no goodwill recorded as of December 31, 2006
and 2005.
Core Deposit
Intangibles. Core deposit intangible assets were as follows
(in thousands):
|
Gross
Intangible Assets
|
Accumulated
Amortization
|
Net
Intangible Assets
|
||||||||||
|
December 31,
2007
|
||||||||||||
|
Core
deposits
|
$
|
2,047
|
$
|
(122
|
)
|
$
|
1,925
|
|||||
|
$
|
2,047
|
$
|
(122
|
)
|
$
|
1,925
|
||||||
There were no core
deposit intangibles at December 31, 2006.
During the fourth
quarter of 2007, we recorded core deposit intangibles totaling $2.0 million in
connection with the acquisition of Fort Worth National Bancshares,
Inc. Core deposit intangibles are amortized on an accelerated basis
over their estimated lives, which range from 4 to 10 years. See Note
2 – Mergers and Acquisitions.
For the year ended
December 31, 2007, amortization expense related to intangible assets totaled
$122,000. The estimated aggregate future amortization expense for
intangible assets remaining as of December 31, 2007 is as follows (in
thousands):
|
2008
|
$ | 446 | ||
|
2009
|
383 | |||
|
2010
|
319 | |||
|
2011
|
255 | |||
|
2012
|
198 | |||
|
Thereafter
|
324 | |||
| $ | 1,925 |
106
10. OTHER
REAL ESTATE OWNED
For the years ended
December 31, 2007, 2006 and 2005, we did not have an allowance for losses on
OREO.
For the years ended
December 31, 2007 and 2006, the total of OREO was $153,000 and $351,000,
respectively. OREO is reflected in other assets in our consolidated
balance sheets.
For the years ended
December 31, 2007, 2006 and 2005, OREO properties expense exceeded income by
$28,000, $143,000 and $24,000, respectively.
11. INTEREST
BEARING DEPOSITS
|
December 31,
2007
|
December 31,
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Savings
deposits
|
$ | 52,975 | $ | 50,454 | ||||
|
Money market
demand deposits
|
106,415 | 80,510 | ||||||
|
Platinum
money market deposits
|
163,310 | 106,375 | ||||||
|
NOW demand
deposits
|
228,496 | 195,380 | ||||||
|
Certificates
and other time deposits of $100,000 or more
|
257,095 | 201,806 | ||||||
|
Certificates
and other time deposits under $100,000
|
365,117 | 322,179 | ||||||
|
Total
|
$ | 1,173,408 | $ | 956,704 | ||||
For the years ended
December 31, 2007, 2006 and 2005, interest expense on time deposits of $100,000
or more was $10.7 million, $7.8 million and $5.0 million,
respectively.
At December 31,
2007, the scheduled maturities of certificates and other time deposits are as
follows (in thousands):
|
2008
|
$
|
434,715
|
|
2009
|
67,853
|
|
|
2010
|
22,815
|
|
|
2011
|
83,286
|
|
|
2012 and
thereafter
|
13,543
|
|
|
$
|
622,212
|
At December 31,
2007, we had a total of $132.9 million in brokered CDs that represented 8.7% of
our deposits. We have utilized long-term brokered CDs more than
long-term FHLB funding as the brokered CDs better match overall ALCO objectives
due to the calls we control. These brokered CDs have maturities from
approximately one to four years and calls from 1 to 5 months and are reflected
in the CDs under $100,000 category. During the first quarter of 2008,
due to the significant decrease in interest rates since December 31, 2007, we
called approximately $91.3 million of our brokered CDs. Approximately
$11.0 million of the called CDs are now reflected in the 2008 maturity schedule
above. At December 31, 2006, we had $123.5 million in brokered
CDs. Our current policy allows for a maximum of $150 million in
brokered CDs.
The aggregate
amount of demand deposit overdrafts that have been reclassified as loans were
$1.9 million and $1.6 million for December 31, 2007 and 2006,
respectively.
107
12. SHORT-TERM
BORROWINGS
Information related
to short-term borrowings is provided in the table below:
|
Years Ended
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(dollars in
thousands)
|
||||||||
|
Federal funds
purchased and repurchase agreements
|
||||||||
|
Balance at
end of period
|
$ | 7,023 | $ | 5,675 | ||||
|
Average
amount outstanding during the period (1)
|
4,519 | 8,727 | ||||||
|
Maximum
amount outstanding during the period (3)
|
10,250 | 13,775 | ||||||
|
Weighted
average interest rate during the period (2)
|
5.3 | % | 5.2 | % | ||||
|
Interest rate
at end of period
|
4.7 | % | 5.5 | % | ||||
|
FHLB
advances
|
||||||||
|
Balance at
end of period
|
$ | 353,792 | $ | 322,241 | ||||
|
Average
amount outstanding during the period (1)
|
272,711 | 367,068 | ||||||
|
Maximum
amount outstanding during the period (3)
|
383,059 | 396,416 | ||||||
|
Weighted
average interest rate during the period (2)
|
4.8 | % | 4.4 | % | ||||
|
Interest rate
at end of period
|
4.1 | % | 4.7 | % | ||||
|
Other
obligations
|
||||||||
|
Balance at
end of period
|
$ | 2,500 | $ | 1,605 | ||||
|
Average
amount outstanding during the period (1)
|
772 | 901 | ||||||
|
Maximum
amount outstanding during the period (3)
|
2,500 | 2,500 | ||||||
|
Weighted
average interest rate during the period (2)
|
5.0 | % | 4.8 | % | ||||
|
Interest rate
at end of period
|
3.6 | % | 5.0 | % | ||||
|
|
(1)
|
The average
amount outstanding during the period was computed by dividing the total
daily outstanding principal balances by the number of days in the
period.
|
|
|
(2)
|
The weighted
average interest rate during the period was computed by dividing the
actual interest expense by the average balance outstanding during the
period.
|
|
|
(3)
|
The maximum
amount outstanding at any month-end during the
period.
|
Southside Bank has
three lines of credit for the purchase of federal funds. Two $15.0
million and one $10.0 million unsecured lines of credit have been established
with Bank of America, Frost Bank and TIB – The Independent Bankers Bank,
respectively. Fort Worth National Bank has one unsecured line of
credit for the purchase of federal funds with Frost Bank of $2.5
million. At December 31, 2007, the amount of additional funding
Southside Bank and Fort Worth National Bank could obtain from FHLB using
unpledged securities at FHLB was approximately $390 million and $43 million,
respectively, net of FHLB stock purchases required. Southside Bank
has obtained a $12.0 million letter of credit from FHLB as collateral for a
portion of its public fund deposits. There were no federal funds
purchased at December 31, 2007. Federal funds purchased totaled $5.7
million at December 31, 2006.
Securities sold
under agreements to repurchase are secured by short-term borrowings that
typically mature within one year. Securities sold under agreements to
repurchase are stated at the amount of cash received in connection with the
transaction. Securities sold under agreements to repurchase totaled
$7.0 million at December 31, 2007. There were no securities sold
under agreements to repurchase at December 31, 2006.
108
|
|
13. LONG-TERM
OBLIGATIONS
|
|
Years Ended
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(dollars in
thousands)
|
||||||||
|
FHLB
advances
|
||||||||
|
Balance at
end of period
|
$ | 86,247 | $ | 129,379 | ||||
|
Weighted
average interest rate during the period (1)
|
4.6 | % | 4.1 | % | ||||
|
Interest rate
at end of period
|
4.8 | % | 4.5 | % | ||||
|
Long-term
debt (2)
|
||||||||
|
Balance at
end of period
|
$ | 60,311 | $ | 20,619 | ||||
|
Weighted
average interest rate during the period (1)
|
7.8 | % | 8.0 | % | ||||
|
Interest rate
at end of period
|
7.2 | % | 8.3 | % | ||||
Maturities of fixed
rate long-term obligations based on scheduled repayments at December 31, 2007
are as follows (in thousands):
|
Under 1
Year
|
Due 1-5
Years
|
Due 6-10
Years
|
Over 10
Years
|
Total
|
||||||||||||||||
|
FHLB
advances
|
$ | 1,880 | $ | 80,571 | $ | 3,796 | $ | – | $ | 86,247 | ||||||||||
|
Long-term
debt
|
– | – | – | 60,311 | 60,311 | |||||||||||||||
|
Total
long-term obligations
|
$ | 1,880 | $ | 80,571 | $ | 3,796 | $ | 60,311 | $ | 146,558 | ||||||||||
FHLB advances
represent borrowings with fixed interest rates ranging from 2.0% to 7.6% and
with maturities of one to ten years. FHLB advances are collateralized
by FHLB stock, nonspecified real estate loans and mortgage-backed
securities.
|
Years Ended
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Long-term
Debt
|
||||||||
|
Southside
Statutory Trust III Due 2033 (3)
|
$ | 20,619 | $ | 20,619 | ||||
|
Southside
Statutory Trust IV Due 2037 (4)
|
23,196 | – | ||||||
|
Southside
Statutory Trust V Due 2037 (5)
|
12,887 | – | ||||||
|
Magnolia
Trust Company I Due 2035 (6)
|
3,609 | – | ||||||
|
Total
Long-term
Debt
|
$ | 60,311 | $ | 20,619 | ||||
|
(1)
|
The weighted
average interest rate during the period was computed by dividing the
actual interest expense by the average balance outstanding during the
period.
|
|
(2)
|
This
long-term debt consists of trust preferred securities that qualify under
the risk-based capital guidelines as Tier 1 capital, subject to certain
limitations.
|
|
(3)
|
This debt
carries an adjustable rate of 7.77% through March 30, 2008 and adjusts
quarterly at a rate equal to three-month LIBOR plus 294 basis
points.
|
|
(4)
|
This debt
carries a fixed rate of 6.518% through October 30, 2012 and thereafter,
adjusts quarterly at a rate equal to three-month LIBOR plus 130 basis
points.
|
|
(5)
|
This debt
carries a fixed rate of 7.48% through December 15, 2012 and thereafter,
adjusts quarterly at a rate equal to three-month LIBOR plus 225 basis
points.
|
|
(6)
|
This debt
carries an adjustable rate of 6.815% through February 24, 2008 and adjusts
quarterly at a rate equal to three-month LIBOR plus 180 basis
points.
|
The long-term debt
was $60,311,000 for the year ended December 31, 2007. The long-term debt was
$20,619,000 for the year ended December 31, 2006. During the third
quarter ended September 30, 2007, we issued $36.1 million of junior subordinated
debentures in connection with the issuance of trust preferred securities by our
subsidiaries Southside Statutory Trusts IV and V. The $36.1 million
in debentures were issued to fund the purchase of Fort Worth Bancshares,
Inc. In addition, as a result of the acquisition, we assumed $3.6
million of junior subordinated debentures issued to Magnolia Trust Company
I.
109
14. EMPLOYEE
BENEFITS
Southside Bank has
a deferred compensation agreement with seven of its executive officers, which
generally provides for payment of an aggregate amount of $3.8 million over a
maximum period of fifteen years after retirement or death. Deferred
compensation expense was $8,000, $83,000 and $112,000 for the years ended
December 31, 2007, 2006 and 2005, respectively. For both years ended
December 31, 2007 and 2006, the deferred compensation plan liability totaled
$2.3 million.
We provide accident
and health insurance for substantially all employees through a self funded
insurance program. Our healthcare plan was amended December 2006 to
eliminate retiree health insurance for all current employees effective December
31, 2006. Effective July 31, 2007, the healthcare plan no longer
provides health insurance coverage for any current retirees. The cost
of health care benefits was $2,958,000, $2,489,000 and $2,469,000 for the years
ended December 31, 2007, 2006 and 2005, respectively. There were no
retirees participating in the health insurance plan as of December 31,
2007. There were nineteen retirees participating in the health
insurance plan as of December 31, 2006.
We have an Employee
Stock Ownership Plan (the “ESOP”) which covers substantially all
employees. Contributions to the ESOP are at the sole discretion of
the board of directors. There were no contributions to the ESOP for
the years ended December 31, 2007, 2006 and 2005. At December 31,
2007 and 2006, 248,778 and 252,368 shares of common stock were owned by the
ESOP, respectively. The number of shares has been adjusted as a
result of stock splits and stock dividends. These shares are treated
as externally held shares for dividend and earnings per share
calculations.
We have an
officer’s long-term disability income policy which provides coverage in the
event they become disabled as defined under its terms. Individuals
are automatically covered under the policy if they (a) have been elected as an
officer, (b) have been an employee of Southside Bank for three years and (c)
receive earnings of $50,000 or more on an annual basis. The policy
provides, among other things, that should a covered individual become totally
disabled he would receive 66-2/3%, not to exceed $15,000 per month, of their
current salary. The benefits paid out of the policy are limited by
the benefits paid to the individual under the terms of our other Company
sponsored benefit plans.
We entered into
split dollar agreements with eight of our executive officers. The
agreements provide we will be the beneficiary of BOLI insuring the executives’
lives. The agreements provide the executives the right to designate
the beneficiaries of the death benefits guaranteed in each
agreement. The agreements originally provided for death benefits of
an initial aggregate amount of $4.5 million. The individual amounts
are increased annually on the anniversary date of the agreement by inflation
adjustment factors ranging from 3% to 5%. As of December 31, 2007,
the expected death benefits total $5.0 million. The agreements also
state that before and after the executive’s retirement dates, we shall also pay
an annual gross-up bonus to the executive in an amount sufficient to enable the
executive to pay federal income tax on both the economic benefit and on the
gross-up bonus. There was no expense associated with the
postretirement liability for the year ended December 31, 2006. The
expense required to record the postretirement liability associated with the
split dollar post retirement bonuses was $34,000 for the year ended December 31,
2007.
110
We have a defined
benefit pension plan (“the Plan”) pursuant to which participants are entitled to
benefits based on final average monthly compensation and years of credited
service determined in accordance with plan provisions.
On November 3,
2005, our board of directors approved amendments to the Plan which affected
future participation in the Plan and reduced the accrual of future
benefits.
Entrance into the
Plan by new employees was frozen effective December 31,
2005. Employees hired after December 31, 2005 are not eligible to
participate in the plan. All other employees are eligible to
participate under the plan on the first day of the month coincident with or next
following the first anniversary of hire. Employees are vested upon
the earlier of five years credited service or the employee attaining 60 years of
age. Benefits are payable monthly commencing on the later of age 65
or the participant’s date of retirement. Eligible participants
may retire at reduced benefit levels after reaching age 55. We
contribute amounts to the pension fund sufficient to satisfy funding
requirements of the Employee Retirement Income Security Act.
Plan assets, which
consist primarily of marketable equity and debt instruments, are valued using
market quotations. Plan obligations and the annual pension expense
are determined by independent actuaries and through the use of a number of
assumptions. Key assumptions in measuring the plan obligations
include the discount rate, the rate of salary increases and the estimated future
return on plan assets. In determining the discount rate, we utilized
a cash flow matching analysis to determine a range of appropriate discount rates
for the defined benefit pension plan and restoration plans. In
developing the cash flow matching analysis, we constructed a portfolio of high
quality non-callable bonds (rated AA- or better) to match as closely as possible
the timing of future benefit payments of the plans at December 31,
2007. Based on this cash flow matching analysis, we were able to
determine an appropriate discount rate.
Salary increase
assumptions are based upon historical experience and anticipated future
management actions. The expected long-term rate of return assumption
reflects the average return expected based on the investment strategies and
asset allocation on the assets invested to provide for the Plan’s
liabilities. We considered broad equity and bond indices, long-term
return projections, and actual long-term historical Plan performance when
evaluating the expected long-term rate of return assumption. At
December 31, 2007, the weighted-average actuarial assumptions used to determine
the benefit obligation of the Plan were: a discount rate of 6.25%; a
long-term rate of return on Plan assets of 7.50%; and assumed salary increases
of 4.50%. Material changes in pension benefit costs may occur in the
future due to changes in these assumptions. Future annual amounts
could be impacted by changes in the number of Plan participants, changes in the
level of benefits provided, changes in the discount rates, changes in the
expected long-term rate of return, changes in the level of contributions to the
Plan and other factors.
Plan assets
included 151,347 shares of our stock at December 31, 2007 and
2006. Our stock included in plan assets was purchased at fair market
value. The number of shares has been adjusted as a result of stock
splits and stock dividends. During 2007, our underfunded status
decreased $4.8 million to an underfunded status of $520,000 at December 31, 2007
from an underfunded status of $5.3 million at December 31, 2006.
We have a nonfunded
supplemental retirement plan (the “Restoration Plan”) for our employees whose
benefits under the principal retirement plan are reduced because of compensation
deferral elections or limitations under federal tax laws.
111
We use a
measurement date of December 31 for our plans.
|
2007
|
2006
|
|||||||||||||||
|
Defined
Benefit
Pension
Plan
|
Restoration
Plan
|
Defined
Benefit
Pension
Plan
|
Restoration
Plan
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Change in
Projected Benefit Obligation:
|
||||||||||||||||
|
Benefit
obligation at end of prior year
|
$ | 39,615 | $ | 3,050 | $ | 39,510 | $ | 3,518 | ||||||||
|
Service
cost
|
1,330 | 61 | 1,339 | 68 | ||||||||||||
|
Interest
cost
|
2,313 | 168 | 2,190 | 183 | ||||||||||||
|
Actuarial
gain
|
(1,892 | ) | (300 | ) | (1,519 | ) | (630 | ) | ||||||||
|
Benefits
paid
|
(1,028 | ) | (80 | ) | (1,128 | ) | (80 | ) | ||||||||
|
Expenses
paid
|
(92 | ) | – | (93 | ) | – | ||||||||||
|
Plan
change
|
– | – | (684 | ) | (9 | ) | ||||||||||
|
Benefit
obligation at end of year
|
40,246 | 2,899 | 39,615 | 3,050 | ||||||||||||
|
Change in
Plan Assets:
|
||||||||||||||||
|
Fair value of
plan assets at end of prior year
|
34,328 | – | 30,085 | – | ||||||||||||
|
Actual
return
|
1,518 | – | 3,464 | – | ||||||||||||
|
Employer
contributions
|
5,000 | 80 | 2,000 | 80 | ||||||||||||
|
Benefits
paid
|
(1,028 | ) | (80 | ) | (1,128 | ) | (80 | ) | ||||||||
|
Expenses
paid
|
(92 | ) | – | (93 | ) | – | ||||||||||
|
Fair value of
plan assets at end of year
|
39,726 | – | 34,328 | – | ||||||||||||
|
Funded status
at end of year
|
(520 | ) | (2,899 | ) | (5,287 | ) | (3,050 | ) | ||||||||
|
Accrued
benefit liability recognized
|
$ | (520 | ) | $ | (2,899 | ) | $ | (5,287 | ) | $ | (3,050 | ) | ||||
|
Accumulated
benefit obligation at end of year
|
$ | 31,179 | $ | 2,185 | $ | 30,281 | $ | 2,062 | ||||||||
Amounts related to
our defined benefit pension and restoration plans recognized as a component of
other comprehensive income were as follows:
|
2007
|
||||||||
|
Defined
Benefit
Pension
Plan
|
Restoration
Plan
|
|||||||
|
(in
thousands)
|
||||||||
|
Recognition
of net
loss
|
$ | 483 | $ | 85 | ||||
|
Recognition
of prior service
credit
|
(42 | ) | (2 | ) | ||||
|
Net gain
occurring during the
year
|
881 | 300 | ||||||
|
Recognition
of transition
obligation
|
– | 2 | ||||||
| 1,322 | 385 | |||||||
|
Deferred tax
expense
|
(450 | ) | (131 | ) | ||||
|
Other
comprehensive income, net of
tax
|
$ | 872 | $ | 254 | ||||
112
Amounts recognized
as a component of accumulated other comprehensive loss as of December 31, 2007
were as follows:
|
2007
|
||||||||
|
Defined
Benefit
Pension
Plan
|
Restoration
Plan
|
|||||||
|
(in
thousands)
|
||||||||
|
Net
loss
|
$ | (11,053 | ) | $ | (978 | ) | ||
|
Prior service
credit
|
590 | 12 | ||||||
| (10,463 | ) | (966 | ) | |||||
|
Deferred tax
benefit
|
3,558 | 328 | ||||||
|
Accumulated
other comprehensive loss, net of
tax
|
$ | (6,905 | ) | $ | (638 | ) | ||
At December 31,
2007 and 2006, the assumptions used to determine the benefit obligation were as
follows:
|
2007
|
2006
|
|||||||||||||||
|
Defined
Benefit
Pension
Plan
|
Restoration
Plan
|
Defined
Benefit
Pension
Plan
|
Restoration
Plan
|
|||||||||||||
|
Discount
rate
|
6.25 | % | 6.25 | % | 6.05 | % | 6.05 | % | ||||||||
|
Compensation
increase rate
|
4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % | ||||||||
Net periodic
pension cost and postretirement benefit cost for the years ended December 31,
2007, 2006 and 2005 included the following components:
|
2007
|
2006
|
2005
|
||||||||||
|
Defined
Benefit Pension Plan
|
(in
thousands)
|
|||||||||||
|
Service
cost
|
$
|
1,330
|
$
|
1,339
|
$
|
2,011
|
||||||
|
Interest
cost
|
2,313
|
2,190
|
2,024
|
|||||||||
|
Expected
return on assets
|
(2,529
|
)
|
(2,324
|
)
|
(2,125
|
)
|
||||||
|
Net loss
amortization
|
483
|
784
|
643
|
|||||||||
|
Prior service
(credit) cost amortization
|
(42
|
)
|
(42
|
)
|
1
|
|||||||
|
Net periodic
benefit cost
|
$
|
1,555
|
$
|
1,947
|
$
|
2,554
|
||||||
|
Restoration
Plan
|
||||||||||||
|
Service
cost
|
$
|
61
|
$
|
68
|
$
|
102
|
||||||
|
Interest
cost
|
168
|
183
|
184
|
|||||||||
|
Transition
obligation recognition
|
3
|
3
|
3
|
|||||||||
|
Net loss
amortization
|
85
|
180
|
202
|
|||||||||
|
Prior service
credit amortization
|
(2
|
)
|
(2
|
)
|
(1
|
)
|
||||||
|
Net periodic
benefit cost
|
$
|
315
|
$
|
432
|
$
|
490
|
||||||
113
For the years ended
December 31, 2007, 2006, and 2005, the assumptions used to determine net
periodic pension cost and postretirement benefit cost were as
follows:
|
2007
|
2006
|
2005
|
||||||||
|
Defined
Benefit Pension Plan
|
||||||||||
|
Discount
rate
|
6.05%
|
5.625%
|
5.75%
|
|||||||
|
Expected
long-term rate of return on plan assets
|
7.50%
|
7.875%
|
8.50%
|
|||||||
|
Compensation
increase rate
|
4.50%
|
4.50%
|
4.50%
|
|||||||
|
Restoration
Plan
|
||||||||||
|
Discount
rate
|
6.05%
|
5.625%
|
5.75%
|
|||||||
|
Compensation
increase rate
|
4.50%
|
4.50%
|
4.50%
|
|||||||
The amounts in
accumulated other comprehensive loss that are expected to be recognized as
components of net periodic benefit cost during 2008 are as follows (in
thousands):
|
Defined
Benefit
|
Restoration
|
|||||||
|
Pension
Plan
|
Plan
|
|||||||
|
Net
Loss
|
$ | 437 | $ | 68 | ||||
|
Prior service
credit
|
(42 | ) | (2 | ) | ||||
| 395 | 66 | |||||||
|
Deferred tax
benefit
|
(134 | ) | (22 | ) | ||||
|
Other
comprehensive loss, net of tax
|
$ | 261 | $ | 44 | ||||
The asset
allocation for the defined benefit pension plan by asset category, is as
follows:
|
Percentage of
Plan Assets
at December
31,
|
|||||
|
2007
|
2006
|
||||
|
Asset
Category
|
|||||
|
Equity
securities
|
61.1%
|
65.3%
|
|||
|
Debt
securities
|
26.8%
|
32.1%
|
|||
|
Other
|
12.1%
|
2.6%
|
|||
|
Total
|
100.0%
|
100.0%
|
|||
We attempt to
invest Plan assets to employ investment strategies that achieve a weighted
average target asset allocation of 60% to 70% in equity securities, 30% to 40%
in fixed income and approximately 5% to 10% in cash. In late December
2007, we made a contribution of $2.0 million in cash into the Plan
assets. This caused the asset category percentages to fall outside
the target asset allocations we attempt to stay within as of December 31,
2007. During 2006, our Plan assets met the target
allocations.
As of December 31,
2007, expected future benefit payments related to our defined benefit pension
plan and restoration plan were as follows (in thousands):
|
Defined
Benefit Pension Plan
|
Restoration
Plan
|
|||||||
|
2008
|
$ | 1,354 | $ | 90 | ||||
|
2009
|
1,425 | 96 | ||||||
|
2010
|
1,560 | 104 | ||||||
|
2011
|
1,638 | 111 | ||||||
|
2012
|
1,883 | 199 | ||||||
|
2013 through
2017
|
12,992 | 1,127 | ||||||
| $ | 20,852 | $ | 1,727 | |||||
114
We expect to
contribute $3.0 million to our defined benefit pension plan and $80,000 to our
postretirement benefit plan in 2008.
401(k)
Plan
We have a 401(k)
defined contribution plan (the “401(k) Plan”) covering substantially all
employees, who have completed one year of service and are age twenty-one or
older. A participant may elect to defer a percentage of their
compensation subject to certain limits based on federal tax laws. For
the years ended December 31, 2007, 2006 and 2005, expense attributable to the
401(k) Plan amounted to $77,000, $70,000 and $62,000, respectively.
Incentive Stock
Options
In April 1993, we
adopted the Southside Bancshares, Inc. 1993 Incentive Stock Option Plan ("the
ISO Plan"), a stock-based incentive compensation plan. The ISO Plan
expired March 31, 2003. Prior to January 1, 2006, we applied APB
Opinion 25 and related Interpretations in accounting for the ISO Plan and
disclosed the pro forma information required by SFAS123 and
SFAS148. There was no compensation expense recognized for the stock
options.
As of January 1,
2006, we transitioned to fair value based accounting for stock-based
compensation using a modified version of prospective application in accordance
with Statement of Financial Accounting Standards No. 123R, (“SFAS 123R”),
Share-Based Payment. The compensation cost charged against income for
the ISO Plan was $27,000 for the years ended December 31, 2007 and
2006. The financial statements for the year ended December 31, 2005
have not been restated in connection with the transition to SFAS 123R and do not
reflect the recognition of the compensation cost related to the stock
options.
A summary of the
status of our nonvested options as of December 31, 2007 is as
follows:
|
Weighted
|
||||||||
|
Number
of
|
Average
Grant-
|
|||||||
|
Options
|
Date Fair
Value
|
|||||||
|
Nonvested at
beginning of the period
|
12,257 | $ | 4.91 | |||||
|
Granted
|
– | – | ||||||
|
Vested
|
(6,127 | ) | $ | 4.91 | ||||
|
Forfeited
|
(383 | ) | $ | 4.91 | ||||
|
Nonvested at
end of period
|
5,747 | $ | 4.91 | |||||
As of December 31,
2007, there was $7,000 of total unrecognized compensation cost related to the
ISO Plan for nonvested options granted in March 2003. The cost is
expected to be recognized over a weighted-average period of three
months.
The fair value of
each stock option granted is estimated on the date of grant using the
Black-Scholes method of option pricing with the following weighted-average
assumptions for grants in 2003: dividend yield of 1.93%; risk-free
interest rate of 4.93%; expected life of 6 years; and expected volatility of
28.90%.
Under the ISO Plan,
we were authorized to issue shares of common stock pursuant to "Awards" granted
in the form of incentive stock options (intended to qualify under Section 422 of
the Internal Revenue Code of 1986, as amended). Before the ISO Plan
expired, awards were granted to selected employees and directors. No
stock options have been available for grant under the ISO Plan since its
expiration in March 2003. Currently, we do not offer share-based
payment programs to our employees.
The ISO Plan
provided that the exercise price of any stock option not be less than the fair
market value of the common stock on the date of grant. The
outstanding stock options have contractual terms of 10 years. All
options vest on a graded schedule, 20% per year for 5 years, beginning on the
first anniversary date of the grant date.
115
A summary of the
status of our stock options as of December 31, 2007, 2006 and 2005, and the
changes during the years ended on those dates is presented below:
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Number of
Options
|
Weighted
Average Exercise Prices
|
Number of
Options
|
Weighted
Average Exercise Prices
|
Number of
Options
|
Weighted
Average Exercise Prices
|
|||||||||||||||||||
|
Outstanding
at beginning of year
|
604,281 | $ | 5.76 | 762,275 | $ | 5.68 | 1,019,124 | $ | 5.38 | |||||||||||||||
|
Granted
|
– | – | – | – | – | – | ||||||||||||||||||
|
Exercised
|
(127,241 | ) | $ | 5.65 | (156,462 | ) | $ | 5.29 | (255,208 | ) | $ | 4.48 | ||||||||||||
|
Forfeited
|
(383 | ) | $ | 12.61 | (1,532 | ) | $ | 12.61 | (1,641 | ) | $ | 6.97 | ||||||||||||
|
Expired
|
– | – | – | – | – | – | ||||||||||||||||||
|
Outstanding
at end of year
|
476,657 | $ | 5.79 | 604,281 | $ | 5.76 | 762,275 | $ | 5.68 | |||||||||||||||
|
Exercisable
at end of year
|
470,910 | $ | 5.71 | 592,024 | $ | 5.62 | 741,586 | $ | 5.49 | |||||||||||||||
The following table
summarizes information about stock options outstanding and exercisable at
December 31, 2007:
|
Options
Outstanding
|
Options
Exercisable
|
||||||||||||||
|
Range of
Exercise Prices
|
Number
Outstanding
|
Weighted
Average Remaining Contract Life in Years
|
Weighted
Average Exercise Price
|
Number
Exercisable
|
Weighted
Average Exercise Price
|
||||||||||
| $ |
5.25 to $ 5.89
|
456,650
|
2.00
|
$
|
5.49
|
456,650
|
$
|
5.49
|
|||||||
| $ |
12.61 to $ 12.61
|
20,007
|
5.25
|
$
|
12.61
|
14,260
|
$
|
12.61
|
|||||||
| $ |
5.25 to $ 12.61
|
476,657
|
2.13
|
$
|
5.79
|
470,910
|
$
|
5.71
|
|||||||
The total intrinsic
value of stock options for the year ended December 31, 2007 is summarized as
follows (dollars in thousands):
|
Number
of
|
Aggregate
|
||||
|
Shares
|
Intrinsic
Value
|
||||
|
Options
Outstanding
|
476,657
|
$
|
7,097
|
||
|
Options
Exercisable
|
470,910
|
$
|
7,049
|
||
The total intrinsic
value (i.e., the amount by which the fair value of the underlying common stock
exceeds the exercise price of a stock option on exercise date) of stock options
exercised during the years ended December 31, 2007, 2006 and 2005 were $2.0
million, $2.5 million and $3.5 million, respectively.
Cash received from
stock option exercises for the years ended December 31, 2007, 2006 and
2005 was $587,000, $828,000 and $1.1 million, respectively. The
tax benefit realized for the deductions related to the stock option exercises
were $154,000, $252,000 and $629,000 for the years ended December 31, 2007, 2006
and 2005, respectively.
116
15. SHAREHOLDERS'
EQUITY
Cash dividends
declared and paid were $0.50, $0.47 and $0.46 per share for the years ended
December 31, 2007, 2006 and 2005, respectively. Future dividends will
depend on our earnings, financial condition and other factors which the board of
directors considers to be relevant. Our dividend policy requires that
any cash dividend payments made not exceed consolidated earnings for that
year.
We are subject to
various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on our financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, we must meet specific capital guidelines
that involve quantitative measures of our assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. Our capital amounts and classification are also subject to
qualitative judgments by the regulators regarding components, risk weightings,
and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require us to
maintain minimum amounts and ratios (set forth in the table below) of Total and
Tier 1 capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier 1 capital (as defined) to average assets (as
defined). At December 31, 2007, we exceeded all regulatory minimum
capital requirements.
117
As of December 31,
2007, the most recent notification from the FDIC categorized us as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized we must maintain
minimum Total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set
forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's
category.
|
Actual
|
For Capital
Adequacy Purposes
|
To Be Well
Capitalized Under Prompt Corrective Actions Provisions
|
||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||
|
As of
December 31, 2007:
|
(dollars in
thousands)
|
|||||||||||||||
|
Total Capital
(to Risk Weighted Assets)
|
||||||||||||||||
|
Consolidated
|
$
|
182,148
|
17.02
|
%
|
$
|
85,603
|
8.00
|
%
|
N/A
|
N/A
|
||||||
|
Southside
Bank Only
|
$
|
157,854
|
16.41
|
%
|
$
|
76,936
|
8.00
|
%
|
$
|
96,170
|
10.00
|
%
|
||||
|
Fort Worth
National Bank Only
|
$
|
16,745
|
15.51
|
%
|
$
|
8,639
|
8.00
|
%
|
$
|
10,798
|
10.00
|
%
|
||||
|
Tier 1
Capital (to Risk Weighted Assets)
|
||||||||||||||||
|
Consolidated
|
$
|
159,690
|
14.92
|
%
|
$
|
42,802
|
4.00
|
%
|
N/A
|
N/A
|
||||||
|
Southside
Bank Only
|
$
|
149,099
|
15.50
|
%
|
$
|
38,468
|
4.00
|
%
|
$
|
57,702
|
6.00
|
%
|
||||
|
Fort Worth
National Bank Only
|
$
|
15,697
|
14.54
|
%
|
$
|
4,319
|
4.00
|
%
|
$
|
6,479
|
6.00
|
%
|
||||
|
Tier 1
Capital (to Average Assets) (1)
|
||||||||||||||||
|
Consolidated
|
$
|
159,690
|
7.73
|
%
|
$
|
82,625
|
4.00
|
%
|
N/A
|
N/A
|
||||||
|
Southside
Bank Only
|
$
|
149,099
|
7.67
|
%
|
$
|
77,797
|
4.00
|
%
|
$
|
97,246
|
5.00
|
%
|
||||
|
Fort Worth
National Bank Only
|
$
|
15,697
|
13.13
|
%
|
$
|
4,783
|
4.00
|
%
|
$
|
5,979
|
5.00
|
%
|
||||
|
As of
December 31, 2006:
|
||||||||||||||||
|
Total Capital
(to Risk Weighted Assets)
|
||||||||||||||||
|
Consolidated
|
$
|
152,198
|
17.76
|
%
|
$
|
68,540
|
8.00
|
%
|
N/A
|
N/A
|
||||||
|
Southside
Bank Only
|
$
|
146,458
|
17.09
|
%
|
$
|
68,540
|
8.00
|
%
|
$
|
85,675
|
10.00
|
%
|
||||
|
Tier 1
Capital (to Risk Weighted Assets)
|
||||||||||||||||
|
Consolidated
|
$
|
145,005
|
16.93
|
%
|
$
|
34,270
|
4.00
|
%
|
N/A
|
N/A
|
||||||
|
Southside
Bank Only
|
$
|
139,265
|
16.26
|
%
|
$
|
34,270
|
4.00
|
%
|
$
|
51,405
|
6.00
|
%
|
||||
|
Tier 1
Capital (to Average Assets) (1)
|
||||||||||||||||
|
Consolidated
|
$
|
145,005
|
7.68
|
%
|
$
|
75,570
|
4.00
|
%
|
N/A
|
N/A
|
||||||
|
Southside
Bank Only
|
$
|
139,265
|
7.37
|
%
|
$
|
75,542
|
4.00
|
%
|
$
|
94,427
|
5.00
|
%
|
||||
(1) Refers
to quarterly average assets as calculated by bank regulatory
agencies.
Our payment of
dividends is limited under regulation. The amount that can be paid in
any calendar year without prior approval of our regulatory agencies cannot
exceed the lesser of net profits (as defined) for that year plus the net profits
for the preceding two calendar years, or retained earnings.
118
16. DIVIDEND
REINVESTMENT AND COMMON STOCK REPURCHASE PLAN
We have a Dividend
Reinvestment Plan funded by stock authorized but not yet
issued. Proceeds from the sale of the common stock will be used for
general corporate purposes and could be directed to our
subsidiaries. For the year ended December 31, 2007, 42,752 shares
were sold under this plan at an average price of $21.56 per share, reflective of
other trades at the time of each sale. For the year ended December
31, 2006, 39,758 shares were sold under this plan at an average price of $23.20
per share, reflective of other trades at the time of each sale.
We instituted a
Common Stock Repurchase Plan in late 1994. Under the repurchase plan, our board
of directors establishes, on a quarterly basis, total dollar limitations and
price per share for stock to be repurchased. Our board reviews this
plan in conjunction with our capital needs and Southside Bank and may, at their
discretion, modify or discontinue the plan. During 2007, 6,120 shares
of common stock were purchased under this plan at a cost of
$133,000. During 2006, no shares of common stock were purchased under
this plan.
17. INCOME
TAXES
The provisions for
income taxes included in the accompanying statements of income consist of the
following (in thousands):
|
Years Ended
December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Current tax
provision
|
$
|
4,068
|
$
|
8,582
|
$
|
1,569
|
||||||
|
Deferred tax
(benefit) expense
|
(92
|
)
|
(4,482
|
)
|
1,724
|
|||||||
|
Provision for
tax expense charged to operations
|
$
|
3,976
|
$
|
4,100
|
$
|
3,293
|
||||||
The components of
the net deferred tax asset as of December 31, 2007 and 2006 are summarized below
(in thousands):
|
Assets
|
Liabilities
|
|||||||
|
Writedowns on
OREO
|
$ | 55 | ||||||
|
Allowance for
loan losses
|
3,139 | |||||||
|
Retirement
and other benefit plans
|
(1,740 | ) | ||||||
|
Unrealized
gains on securities available for sale
|
(1,434 | ) | ||||||
|
Premises and
equipment
|
(270 | ) | ||||||
|
FHLB stock
dividends
|
(295 | ) | ||||||
|
Unfunded
status of defined benefit plan
|
3,886 | |||||||
|
State
Business Tax Credit
|
762 | |||||||
|
Other
|
217 | |||||||
|
Gross
deferred tax assets (liabilities)
|
8,059 | (3,739 | ) | |||||
|
Net deferred
tax asset at December 31, 2007
|
$ | 4,320 | ||||||
|
Writedowns on
OREO
|
$ | 71 | ||||||
|
Allowance for
loan losses
|
2,446 | |||||||
|
Retirement
and other benefit plans
|
(664 | ) | ||||||
|
Unrealized
losses on securities available for sale
|
3,016 | |||||||
|
Premises and
equipment
|
(312 | ) | ||||||
|
FHLB stock
dividends
|
(1,136 | ) | ||||||
|
Alternative
minimum tax credit
|
625 | |||||||
|
Unfunded
status of defined benefit plan
|
4,466 | |||||||
|
Other
|
166 | |||||||
|
Gross
deferred tax assets (liabilities)
|
10,790 | (2,112 | ) | |||||
|
Net deferred
tax asset at December 31, 2006
|
$ | 8,678 | ||||||
119
A reconciliation of
tax at statutory rates and total tax expense is as follows (dollars in
thousands):
|
Years Ended
December 31,
|
||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||
|
Amount
|
Percent of
Pre-Tax Income
|
Amount
|
Percent of
Pre-Tax Income
|
Amount
|
Percent of
Pre-Tax Income
|
|||||||||||
|
Statutory Tax
Expense
|
$
|
7,024
|
34.0%
|
$
|
6,495
|
34.0%
|
$
|
6,081
|
34.0%
|
|||||||
|
Increase
(Decrease) in Taxes from:
|
||||||||||||||||
|
Tax Exempt
Interest
|
(2,470
|
)
|
(12.0%
|
)
|
(2,415
|
)
|
(12.6%
|
)
|
(2,808
|
)
|
(15.7%
|
)
|
||||
|
State
Business Tax
Credit
|
(779
|
)
|
(3.8%
|
)
|
–
|
–
|
–
|
–
|
||||||||
|
State
Business
Tax
|
106
|
0.5%
|
–
|
–
|
–
|
–
|
||||||||||
|
Other
Net
|
95
|
0.5%
|
20
|
0.1%
|
20
|
0.1%
|
||||||||||
|
Provision for
Tax Expense Charged to Operations
|
$
|
3,976
|
19.2%
|
$
|
4,100
|
21.5%
|
$
|
3,293
|
18.4%
|
|||||||
18. OFF-BALANCE-SHEET
ARRANGEMENTS, COMMITMENTS AND CONTINGENCIES
Financial Instruments with
Off-Balance-Sheet Risk. In the normal course of business, we are a party
to certain financial instruments, with off-balance-sheet risk, to meet the
financing needs of our customers. These off-balance-sheet instruments
include commitments to extend credit and standby letters of
credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount reflected in the financial
statements. The contract or notional amounts of these instruments
reflect the extent of involvement and exposure to credit loss we have in these
particular classes of financial instruments.
Commitments to
extend credit are agreements to lend to a customer provided that the terms
established in the contract are met. Commitments generally have fixed
expiration dates and may require payment of fees. Since some
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. Standby letters of credit are conditional commitments
issued to guarantee the performance of a customer to a third
party. These guarantees are primarily issued to support public and
private borrowing arrangements. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
commitments to customers.
We had outstanding
unused commitments to extend credit of $127.2 million and $105.2 million at
December 31, 2007 and 2006, respectively. Each commitment has a
maturity date and the commitment expires on that date with the exception of
credit card and ready reserve commitments, which have no stated maturity
date. Unused commitments for credit card and ready reserve at
December 31, 2007 and 2006 were $8.8 million and $8.2 million, respectively, and
are reflected in the due after one year category. We had outstanding
standby letters of credit of $5.1 million and $3.5 million at December 31, 2007
and 2006, respectively.
The scheduled
maturities of unused commitments as of December 31, 2007 and 2006 were as
follows (in thousands):
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Unused
commitments:
|
||||||||
|
Due in one
year or less
|
$ | 96,264 | $ | 61,821 | ||||
|
Due after one
year
|
30,954 | 43,333 | ||||||
|
Total
|
$ | 127,218 | $ | 105,154 | ||||
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
120
credit evaluation
of the borrower. Collateral held varies but may include cash or cash
equivalents, negotiable instruments, real estate, accounts receivable,
inventory, property, plant, and equipment.
Lease Commitments. We lease
certain branch facilities and office equipment under operating
leases. Rent expense for branch facilities was $773,000, $697,000 and
$643,000 for the years ended December 31, 2007, 2006 and 2005,
respectively. Rent expense for leased equipment was $181,000,
$217,000 and $178,000 for the years ended December 31, 2007, 2006 and 2005,
respectively.
Future minimum
rental commitments due under non-cancelable operating leases at December 31,
2007 were as follows (in thousands):
|
2008
|
$ | 1,040 | ||
|
2009
|
802 | |||
|
2010
|
678 | |||
|
2011
|
437 | |||
|
2012
|
132 | |||
|
Thereafter
|
– | |||
| $ | 3,089 |
It is expected that
certain leases will be renewed, or equipment replaced with new leased equipment,
as these leases expire.
Securities. In the normal
course of business we buy and sell securities. There were $6.1
million unsettled trades to sell securities at December 31,
2007. There were no unsettled trades to purchase or sell securities
at December 31, 2006.
Litigation. We are involved
with various litigation in the normal course of business. Management,
after consulting with our legal counsel, believes that any liability resulting
from litigation will not have a material effect on the financial position and
results of operations and our liquidity.
121
19. SIGNIFICANT
GROUP CONCENTRATIONS OF CREDIT RISK
Although we have a
diversified loan portfolio, a significant portion of our loans are
collateralized by real estate. Repayment of these loans is in part
dependent upon the economic conditions in the market area. Part of
the risk associated with real estate loans has been mitigated since 43.6% of
this group represents loans collateralized by residential dwellings that are
primarily owner occupied. Losses on this type of loan have
historically been less than those on speculative properties. Many of
the remaining real estate loans are collateralized primarily with owner occupied
commercial real estate. The oil and gas industry remains a
significant component of the East Texas economy and as such the health of the
oil and gas industry has an effect on our business.
A significant
portion of our loan portfolio is dependent on the medical
community. Medical loan types include commercial loans and commercial
real estate loans. Collateral for these loans varies depending on the
type of loan and financial strength of the borrower. The primary
source of repayment for loans in the medical community is cash flow from
continuing operations. The medical community represents a
concentration of risk in our Commercial loan and Commercial Real Estate loan
portfolio. See “Item 1. Business – Market
Area.” We believe that risk in the medical community is mitigated
because it is spread among multiple practice types and multiple
specialties. Should the government change the amount it pays the
medical community through the various government health insurance programs or if
new government regulation impacts the profitability of the medical community,
the medical community could be adversely impacted which in turn could result in
higher default rates by borrowers in the medical industry.
The mortgage-backed
securities we hold consist almost exclusively of government pass-through
securities which are either directly or indirectly backed by the full faith and
credit of the United States Government or guaranteed by GSEs, FNMA or Freddie
Mac. GSEs are not backed by the full faith and credit of the United
States government.
122
20. DISCLOSURES
ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of
Financial Accounting Standard No. 107, "Disclosures about Fair Value of
Financial Instruments" (“SFAS 107”), requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other estimation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Such techniques and
assumptions, as they apply to individual categories of our financial
instruments, are as follows:
|
|
Cash and cash
equivalents - The carrying amounts for cash and cash equivalents is
a reasonable estimate of those assets' fair
value.
|
|
|
Investment and mortgage-backed
and related securities - Fair values for these securities are based
on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market prices
for similar securities or estimates from independent pricing
services.
|
|
|
FHLB stock and other
investments - The carrying amount of FHLB stock is a reasonable
estimate of those assets’ fair
value.
|
|
|
Loans receivable - For
adjustable rate loans that reprice frequently and with no significant
change in credit risk, the carrying amounts are a reasonable estimate of
those assets' fair value. The fair value of fixed rate loans is
estimated by discounting the future cash flows using the current rates at
which similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities. Nonperforming loans are
estimated using discounted cash flow analyses or underlying value of the
collateral where applicable.
|
|
|
Deposit liabilities -
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount on demand at the reporting date, that is,
the carrying value. Fair values for fixed rate certificates of
deposits are estimated using a discounted cash flow calculation that
applies interest rates currently being offered for deposits of similar
remaining maturities.
|
|
|
Federal funds purchased and
repurchase agreements - Federal funds purchased and repurchase
agreements generally have an original term to maturity of one day and thus
are considered short-term borrowings. Consequently, their
carrying value is a reasonable estimate of fair
value.
|
|
|
FHLB advances - The
fair value of these advances is estimated by discounting the future cash
flows using rates at which advances would be made to borrowers with
similar credit ratings and for the same remaining
maturities.
|
|
|
Long-term debt - The
carrying amount for floating long-term debt is a reasonable estimate of
the debts’ fair value due to the fact the debt floats based on LIBOR and
resets quarterly. The carrying amount for the fixed rate
long-term debt is estimated by discounting future cash flows using rates
at which fixed rate long-term debt would be made to borrowers with similar
credit ratings and for the remaining
maturities.
|
123
The following table
presents our assets, liabilities, and unrecognized financial instruments at both
their respective carrying amounts and fair value:
|
At December
31, 2007
|
At December
31, 2006
|
|||||||||||||||
|
Carrying
|
Carrying
|
|||||||||||||||
|
Amount
|
Fair
Value
|
Amount
|
Fair
Value
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Financial
assets:
|
||||||||||||||||
|
Cash and cash
equivalents
|
$ | 76,004 | $ | 76,004 | $ | 55,012 | $ | 55,012 | ||||||||
|
Investment
securities:
|
||||||||||||||||
|
Available for
sale, at estimated fair value
|
109,928 | 109,928 | 98,952 | 98,952 | ||||||||||||
|
Held to
maturity, at cost
|
475 | 477 | 1,351 | 1,342 | ||||||||||||
|
Mortgage-backed
and related securities:
|
||||||||||||||||
|
Available for
sale, at estimated fair value
|
727,553 | 727,553 | 643,164 | 643,164 | ||||||||||||
|
Held to
maturity, at cost
|
189,965 | 189,913 | 226,162 | 222,748 | ||||||||||||
|
Federal Home
Loan Bank stock and
other
investments, at cost
|
21,919 | 21,919 | 26,496 | 26,496 | ||||||||||||
|
Loans, net of
allowance for loan losses
|
951,477 | 964,502 | 751,954 | 748,473 | ||||||||||||
|
Loans held
for sale
|
3,361 | 3,361 | 3,909 | 3,909 | ||||||||||||
|
Financial
liabilities:
|
||||||||||||||||
|
Retail
deposits
|
$ | 1,530,491 | $ | 1,538,489 | $ | 1,282,475 | $ | 1,281,305 | ||||||||
|
Federal funds
purchased and repurchase agreements
|
7,023 | 7,023 | 5,675 | 5,675 | ||||||||||||
|
FHLB
advances
|
440,039 | 442,223 | 451,620 | 448,383 | ||||||||||||
|
Long-term
debt
|
60,311 | 60,680 | 20,619 | 20,619 | ||||||||||||
As discussed
earlier, the fair value estimate of financial instruments for which quoted
market prices are unavailable is dependent upon the assumptions
used. Consequently, those estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instruments. Accordingly, the aggregate
fair value amounts presented in the above fair value table do not necessarily
represent our underlying value.
The estimated fair
value of our commitments to extend credit, credit card arrangements and letters
of credit, was not material at December 31, 2007 or 2006.
124
21. PARENT
COMPANY FINANCIAL INFORMATION
Condensed financial
information for Southside Bancshares, Inc. (parent company only) was as
follows
(in thousands,
except share amounts):
|
CONDENSED
BALANCE SHEETS
|
December
31,
|
December
31,
|
||||||
|
2007
|
2006
|
|||||||
|
ASSETS
|
||||||||
|
Cash and due
from banks
|
$ | 5,694 | $ | 4,433 | ||||
|
Investment in
bank subsidiaries at equity in underlying net assets
|
180,993 | 124,801 | ||||||
|
Investment in
nonbank subsidiaries at equity in underlying net assets
|
1,717 | 634 | ||||||
|
Other
assets
|
1,021 | 1,382 | ||||||
|
TOTAL
ASSETS
|
$ | 189,425 | $ | 131,250 | ||||
|
LIABILITIES
|
||||||||
|
Long-term
debt
|
$ | 56,702 | $ | 20,619 | ||||
|
Other
liabilities
|
395 | 27 | ||||||
|
TOTAL
LIABILITIES
|
57,097 | 20,646 | ||||||
|
SHAREHOLDERS'
EQUITY
|
||||||||
|
Common stock
($1.25 par, 20,000,000 shares authorized: 14,865,134 and 14,075,653 shares
issued)
|
18,581 | 17,594 | ||||||
|
Paid-in
capital
|
115,250 | 100,736 | ||||||
|
Retained
earnings
|
26,187 | 29,648 | ||||||
|
Treasury
stock (1,724,857 and 1,718,737 shares, at cost)
|
(22,983 | ) | (22,850 | ) | ||||
|
Accumulated
other comprehensive loss
|
(4,707 | ) | (14,524 | ) | ||||
|
TOTAL
SHAREHOLDERS' EQUITY
|
132,328 | 110,604 | ||||||
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
$ | 189,425 | $ | 131,250 | ||||
125
CONDENSED
STATEMENTS OF INCOME
|
Years Ended
December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
INCOME
|
(in
thousands)
|
|||||||||||
|
Dividends
from subsidiary
|
$
|
9,800
|
$
|
7,600
|
$
|
5,400
|
||||||
|
Interest
income
|
82
|
50
|
39
|
|||||||||
|
TOTAL
INCOME
|
9,882
|
7,650
|
5,439
|
|||||||||
|
EXPENSE
|
||||||||||||
|
Interest
expense
|
2,726
|
1,681
|
1,305
|
|||||||||
|
Other
|
923
|
907
|
726
|
|||||||||
|
TOTAL
EXPENSE
|
3,649
|
2,588
|
2,031
|
|||||||||
|
Income before
income tax expense
|
6,233
|
5,062
|
3,408
|
|||||||||
|
Income tax
benefit
|
1,213
|
863
|
677
|
|||||||||
|
Income before
equity in undistributed earnings of subsidiaries
|
7,446
|
5,925
|
4,085
|
|||||||||
|
Equity in
undistributed earnings of subsidiaries
|
9,238
|
9,077
|
10,507
|
|||||||||
|
NET
INCOME
|
$
|
16,684
|
$
|
15,002
|
$
|
14,592
|
||||||
CONDENSED
STATEMENTS OF CASH FLOW
|
Years Ended
December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
OPERATING
ACTIVITIES:
|
||||||||||||
|
Net
Income
|
$
|
16,684
|
$
|
15,002
|
$
|
14,592
|
||||||
|
Adjustments
to reconcile net income to net cash provided by
operations:
|
||||||||||||
|
Equity in
undistributed earnings of subsidiaries
|
(9,238
|
)
|
(9,077
|
)
|
(10,507
|
)
|
||||||
|
Decrease
(increase) in other assets
|
361
|
1,792
|
(2,008
|
)
|
||||||||
|
Increase
(decrease) in other liabilities
|
368
|
12
|
(10
|
)
|
||||||||
|
Net cash
provided by operating activities
|
8,175
|
7,729
|
2,067
|
|||||||||
|
INVESTING
ACTIVITIES:
|
||||||||||||
|
Cash paid in
acquisition
|
(36,956
|
)
|
–
|
–
|
||||||||
|
Investment in
subsidiaries
|
(1,083
|
)
|
–
|
–
|
||||||||
|
Net cash used
in investing activities
|
(38,039
|
)
|
–
|
–
|
||||||||
|
FINANCING
ACTIVITIES:
|
||||||||||||
|
Purchase of
common stock
|
(133
|
)
|
–
|
(4,997
|
)
|
|||||||
|
Proceeds from
issuance of long-term debt
|
36,083
|
–
|
–
|
|||||||||
|
Proceeds from
issuance of common stock
|
1,641
|
1,750
|
2,048
|
|||||||||
|
Dividends
paid
|
(6,466
|
)
|
(5,702
|
)
|
(5,214
|
)
|
||||||
|
Net cash
provided by (used in) financing activities
|
31,125
|
(3,952
|
)
|
(8,163
|
)
|
|||||||
|
Net increase
(decrease) in cash and cash equivalents
|
1,261
|
3,777
|
(6,096
|
)
|
||||||||
|
Cash and cash
equivalents at beginning of year
|
4,433
|
656
|
6,752
|
|||||||||
|
Cash and cash
equivalents at end of year
|
$
|
5,694
|
$
|
4,433
|
$
|
656
|
||||||
126
|
|
22.QUARTERLY
FINANCIAL INFORMATION OF REGISTRANT
|
|
|
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
(UNAUDITED)
|
|
|
(in
thousands, except per share data)
|
|
2007
|
||||||||||||||||
|
Fourth
|
Third
|
Second
|
First
|
|||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||
|
Interest
income
|
$ | 30,689 | $ | 25,475 | $ | 24,380 | $ | 25,197 | ||||||||
|
Interest
expense
|
17,133 | 15,240 | 14,319 | 15,171 | ||||||||||||
|
Net interest
income
|
13,556 | 10,235 | 10,061 | 10,026 | ||||||||||||
|
Provision for
loan losses
|
1,397 | 620 | 217 | 117 | ||||||||||||
|
Noninterest
income
|
7,215 | 6,403 | 6,662 | 6,138 | ||||||||||||
|
Noninterest
expense
|
13,051 | 11,542 | 11,456 | 11,236 | ||||||||||||
|
Income before
income tax expense
|
6,323 | 4,476 | 5,050 | 4,811 | ||||||||||||
|
Provision for
income tax expense
|
1,489 | 976 | 463 | 1,048 | ||||||||||||
|
Net
income
|
4,834 | 3,500 | 4,587 | 3,763 | ||||||||||||
|
Earnings per
share
|
||||||||||||||||
|
Basic:
|
$ | 0.37 | $ | 0.27 | $ | 0.35 | $ | 0.29 | ||||||||
|
Diluted:
|
$ | 0.36 | $ | 0.26 | $ | 0.34 | $ | 0.28 | ||||||||
|
2006
|
||||||||||||||||
|
Fourth
|
Third
|
Second
|
First
|
|||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||
|
Interest
income
|
$ | 25,357 | $ | 25,101 | $ | 23,925 | $ | 22,569 | ||||||||
|
Interest
expense
|
15,157 | 14,739 | 13,388 | 12,000 | ||||||||||||
|
Net interest
income
|
10,200 | 10,362 | 10,537 | 10,569 | ||||||||||||
|
Provision for
loan losses
|
125 | 226 | 448 | 281 | ||||||||||||
|
Noninterest
income
|
6,230 | 6,186 | 5,967 | 5,098 | ||||||||||||
|
Noninterest
expense
|
10,850 | 11,120 | 11,563 | 11,434 | ||||||||||||
|
Income before
income tax expense
|
5,455 | 5,202 | 4,493 | 3,952 | ||||||||||||
|
Provision for
income tax expense
|
1,276 | 1,150 | 950 | 724 | ||||||||||||
|
Net
income
|
4,179 | 4,052 | 3,543 | 3,228 | ||||||||||||
|
Earnings per
share
|
||||||||||||||||
|
Basic:
|
$ | 0.32 | $ | 0.31 | $ | 0.28 | $ | 0.25 | ||||||||
|
Diluted:
|
$ | 0.31 | $ | 0.30 | $ | 0.27 | $ | 0.24 | ||||||||
127
|
Exhibit
No.
|
INDEX TO EXHIBITS
|
||
|
3
(a)(i)
|
–
|
Articles of
Amendment effective May 10, 2000 to Articles of Incorporation of SoBank,
Inc. (now named Southside Bancshares, Inc.) (filed as Exhibit 3(a)(i) to
the Registrant’s Form 10-Q for the quarter ended September 30, 2000
and incorporated herein by reference).
|
|
|
3
(b)
|
–
|
Bylaws as
amended and restated and in effect on February 28, 2008, of Southside
Bancshares, Inc. (filed as Exhibit 3(b) to the Registrant’s Form 8-K,
filed March 5, 2008, and incorporated herein by
reference).
|
|
|
4
|
–
|
Management
agrees to furnish to the Securities and Exchange Commission, upon request,
a copy of any other agreements or instruments of Southside Bancshares,
Inc. and its subsidiaries defining the rights of holders of any long-term
debt whose authorization does not exceed 10% of total
assets.
|
|
|
** 10
(a)(i)
|
–
|
Deferred
Compensation Plan for B. G. Hartley effective February 13, 1984, as
amended June 28, 1990, December 15, 1994, November 20, 1995, December
21,1999 and June 29, 2001 (filed as Exhibit 10(a)(i) to the Registrant’s
Form 10-Q for the quarter ended June 30, 2001, and incorporated herein by
reference).
|
|
|
** 10
(a)(ii)
|
–
|
Deferred
Compensation Plan for Robbie N. Edmonson effective February 13, 1984,
as amended June 28, 1990 and March 16, 1995 (filed as Exhibit 10(a)(ii) to
the Registrant's Form 10-K for the year ended December 31, 1995, and
incorporated herein by reference).
|
|
|
10(a)(iii)
|
–
|
Agreement and Plan of Merger dated May 17, 2007, as amended, by and among Southside Bancshares, Inc., Southside Merger Sub, Inc. and Fort Worth Bancshares, Inc. (filed as Exhibit 10(a) to the Registrant's Form 10-Q for the quarter ended September 30, 2007, and incorporated herein by reference). | |
|
** 10
(b)
|
–
|
Officers
Long-term Disability Income Plan effective June 25, 1990 (filed as Exhibit
10(b) to the Registrant's Form 10-K for the year ended June 30, 1990,
and incorporated herein by reference).
|
|
|
** 10
(c)
|
–
|
Retirement
Plan Restoration Plan for the subsidiaries of SoBank, Inc. (now named
Southside Bancshares, Inc.) (filed as Exhibit 10(c) to the Registrant's
Form 10-K for the year ended December 31, 1992, and incorporated
herein by reference).
|
|
|
** 10
(e)
|
–
|
Form of
Deferred Compensation Agreement dated June 30, 1994 with Andy Wall as
amended November 13, 1995 (filed as Exhibit 10(e) to the Registrant's
Form 10-Kfor the year ended December 31, 1995, and incorporated herein by
reference).
|
|
|
** 10
(f)
|
–
|
Form of
Deferred Compensation Agreements dated June 30, 1994 with each of Sam
Dawson, Lee Gibson and Jeryl Story as amended October 15, 1997 and Form of
Deferred Compensation Agreement dated October 15, 1997 with Lonny Uzzell
(filed as Exhibit 10(f) to the Registrant’s Form 10-K for the year ended
December 31, 1997, and incorporated herein by
reference).
|
|
** 10
(g)
|
–
|
Postretirement
Agreement for B. G. Hartley effective June 20, 2001 (filed as
Exhibit
10(g) to the
Registrant’s Form 10-Q for the quarter ended June 30, 2001, and
incorporated herein by reference).
|
|
|
** 10
(h)
|
–
|
Split dollar
compensation plan dated October 13, 2004, with Jeryl Wayne Story (filed as
exhibit 10(h) to the Registrant’s Form 8-K, filed October 19, 2004, and
incorporated herein by reference).
|
|
|
** 10
(i)
|
–
|
Split dollar
compensation plan dated September 7, 2004, with Lee R. Gibson, III (filed
as exhibit 10(i) to the Registrant’s Form 8-K, filed October 19, 2004, and
incorporated herein by reference).
|
|
|
** 10
(j)
|
–
|
Split dollar
compensation plan dated August 27, 2004, with B. G. Hartley (filed as
exhibit 10
(j) to the Registrant’s Form 8-K filed October 19, 2004, and incorporated
herein by
reference).
|
|
|
** 10
(k)
|
–
|
Split dollar
compensation plan dated August 31, 2004, with Charles E. Dawson (filed as
exhibit 10(k) to the Registrant’s Form 8-K, filed October 19, 2004, and
incorporated herein by reference).
|
|
|
** 10
(l)
|
–
|
Employment
agreement dated October 22, 2007, by and between Southside Bank and Lee R.
Gibson (filed as exhibit 10 (l) to the Registrant’s Form 8-K, filed
October 26, 2007, and incorporated herein by
reference).
|
|
|
** 10
(m)
|
–
|
Employment
agreement dated October 22, 2007, by and between Southside Bank and Sam
Dawson (filed as exhibit 10 (m) to the Registrant’s Form 8-K, filed
October 26, 2007, and incorporated herein by
reference).
|
|
|
* 21
|
–
|
Subsidiaries
of the Registrant.
|
|
|
* 23
|
–
|
Consent of
Independent Registered Public Accounting Firm.
|
|
|
* 31.1
|
–
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
* 31.2
|
–
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
* 32
|
–
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
*Filed
herewith.
|
|||
|
**Compensation
plan, benefit plan or employment contract or
arrangement
|
|||