form_10q.htm
 

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q
 

     (Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________
 
Commission file number 0-12247


SOUTHSIDE BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
   
TEXAS
75-1848732
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
   
1201 S. Beckham, Tyler, Texas
75701
(Address of principal executive offices)
(Zip Code)
903-531-7111
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer o
Accelerated filer  x
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

The number of shares of the issuer's common stock, par value $1.25, outstanding as of October 23, 2009 was 14,935,039 shares.


 
 
 

TABLE OF CONTENTS
 
 
                ITEM 4.  CONTROLS AND PROCEDURES

 
 
 


PART I.   FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share amounts)
   
September 30,
    
December 31,
  
ASSETS
  
2009
    
2008
  
Cash and due from banks
   $ 39,389     $ 64,067  
Interest earning deposits
     4,464       557  
Federal funds sold
     -       2,150  
Total cash and cash equivalents
     43,853       66,774  
Investment securities:
                
Available for sale, at estimated fair value
     264,712       278,378  
Held to maturity, at cost
     1,493       478  
Mortgage-backed and related securities:
                
Available for sale, at estimated fair value
     1,209,571       1,026,513  
Held to maturity, at cost
     236,072       157,287  
Federal Home Loan Bank stock, at cost
     36,838       39,411  
Other investments, at cost
     2,065       2,065  
Loans held for sale
     4,317       511  
Loans:
                
Loans
     1,015,724       1,022,549  
Less:  allowance for loan loss
     (18,445 )     (16,112 )
      Net Loans
     997,279       1,006,437  
Premises and equipment, net
     46,481       42,722  
Goodwill
     22,034       22,034  
Other intangible assets, net
     1,186       1,479  
Interest receivable
     15,545       16,352  
Deferred tax asset
     -       2,852  
Other assets
     60,117       36,945  
TOTAL ASSETS
   $ 2,941,563     $ 2,700,238  
LIABILITIES AND EQUITY
                
Deposits:
                
Noninterest bearing
   $ 375,509     $ 390,823  
Interest bearing
     1,411,739       1,165,308  
Total Deposits
     1,787,248       1,556,131  
Short-term obligations:
                
Federal funds purchased and repurchase agreements
     46,983       10,629  
FHLB advances
     219,597       229,385  
Other obligations
     2,433       1,857  
Total Short-term obligations
     269,013       241,871  
Long-term obligations:
                
FHLB  advances
     595,207       655,489  
Long-term debt
     60,311       60,311  
Total Long-term obligations
     655,518       715,800  
Deferred tax liability
     2,611       -  
Other liabilities
     23,804       25,347  
TOTAL LIABILITIES
     2,738,194       2,539,149  
                 
       Off-Balance-Sheet Arrangements, Commitments and Contingencies (Note 12)
                
                 
Shareholders' equity:
                
Common stock - $1.25 par, 40,000,000 shares authorized, 16,697,300 shares
     20,872       19,695  
 issued in 2009 and 15,756,096 shares issued in 2008
                
Paid-in capital
     145,726       131,112  
Retained earnings
     48,517       34,021  
Treasury stock (1,762,261 and 1,731,570 shares at cost)
     (23,545 )     (23,115 )
Accumulated other comprehensive income (loss)
     11,095       (1,096 )
TOTAL SHAREHOLDERS' EQUITY
     202,665       160,617  
Noncontrolling interest
     704       472  
TOTAL EQUITY
     203,369       161,089  
TOTAL LIABILITIES AND EQUITY
   $ 2,941,563     $ 2,700,238  

The accompanying notes are an integral part of these consolidated financial statements.

 
1
 

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
   
Three Months
    
Nine Months
  
   
Ended September 30,
    
Ended September 30,
  
   
2009
    
2008
    
2009
    
2008
  
Interest income
                        
Loans
   $ 17,121     $ 18,029     $ 53,316     $ 54,092  
Investment securities – taxable
     402       307       1,010       1,377  
Investment securities – tax-exempt
     2,266       851       5,139       2,829  
Mortgage-backed and related securities
     15,509       14,883       47,988       38,876  
Federal Home Loan Bank stock and other investments
     43       180       195       656  
Other interest earning assets
     58       10       138       101  
Total interest income
     35,399       34,260       107,786       97,931  
Interest expense
                                
Deposits
     5,474       7,257       17,532       25,880  
Short-term obligations
     1,020       1,986       3,355       7,125  
Long-term obligations
     6,242       5,209       19,544       11,853  
Total interest expense
     12,736       14,452       40,431       44,858  
Net interest income
     22,663       19,808       67,355       53,073  
Provision for loan losses
     2,973       3,150       9,980       8,336  
Net interest income after provision for loan losses
     19,690       16,658       57,375       44,737  
Noninterest income
                                
Deposit services
     4,543       4,739       12,995       13,823  
Gain on sale of securities available for sale
     6,706       822       26,413       6,574  
                                 
Total other-than-temporary impairment losses
     -       -       (5,627 )     -  
Portion of gain (loss) recognized in other comprehensive income (before taxes)
     (993 )     -       3,197       -  
Net impairment losses recognized in earnings
     (993 )     -       (2,430 )     -  
                                 
Gain on sale of loans
     392       239       1,274       1,551  
Trust income
     693       678       1,830       1,890  
Bank owned life insurance income
     325       314       1,362       1,382  
Other
     847       827       2,376       2,388  
Total noninterest income
     12,513       7,619       43,820       27,608  
Noninterest expense
                                
Salaries and employee benefits
     10,219       10,002       31,163       27,521  
Occupancy expense
     1,701       1,449       4,684       4,264  
Equipment expense
     453       327       1,242       968  
Advertising, travel & entertainment
     546       447       1,549       1,407  
ATM and debit card expense
     328       313       988       905  
Director fees
     168       134       480       425  
Supplies
     254       201       672       584  
Professional fees
     572       452       1,657       1,239  
Postage
     247       199       627       565  
Telephone and communications
     409       270       1,053       785  
FDIC Insurance
     719       220       3,180       688  
Other
     2,135       1,698       5,261       4,997  
Total noninterest expense
     17,751       15,712       52,556       44,348  
                                 
Income before income tax expense
     14,452       8,565       48,639       27,997  
Provision for income tax expense
     3,620       2,240       13,021       7,399  
Net income
     10,832       6,325       35,618       20,598  
Less: Net income attributable to the noncontrolling interest
     (335 )     (75 )     (1,599 )     (271 )
Net income attributable to Southside Bancshares, Inc.
   $ 10,497     $ 6,250     $ 34,019     $ 20,327  
Earnings per common share – basic
   $ 0.70     $ 0.43     $ 2.29     $ 1.40  
Earnings per common share – diluted
   $ 0.70     $ 0.42     $ 2.27     $ 1.36  
Dividends paid per common share
   $ 0.14     $ 0.16     $ 0.41     $ 0.41  


The accompanying notes are an integral part of these consolidated financial statements.

 
2
 

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
(in thousands, except share amounts)

   
Nine Months Ended
September 30,
  
   
2009
    
2008
  
Common Stock
            
Balance, beginning of period
   $ 19,695     $ 18,581  
Issuance of common stock (232,226 shares in 2009 and 177,933 shares in 2008)
     291       223  
Stock dividend
     886       824  
Balance, end of period
     20,872       19,628  
Paid-in capital
                
Balance, beginning of period
     131,112       115,250  
Issuance of common stock (232,226 shares in 2009 and 177,933 shares in 2008)
     1,426       1,344  
Stock compensation expense
     –       7  
Tax benefit of incentive stock options
     547       410  
Stock dividend
     12,641       13,422  
Balance, end of period
     145,726       130,433  
Retained earnings
                
Balance, beginning of period
     34,021       26,187  
Net income attributable to Southside Bancshares, Inc.
     34,019       20,327  
Cumulative effect of adoption of a new accounting principle on January 1, 2008
     –       (351 )
Dividends paid on common stock
     (5,996 )     (5,608 )
Stock dividend
     (13,527 )     (14,246 )
Balance, end of period
     48,517       26,309  
Treasury Stock
                
Balance, beginning of period
     (23,115 )     (22,983 )
Purchase of common stock (30,691 shares in 2009 and 6,713 shares in 2008)
     (430 )     (132 )
Balance, end of period
     (23,545 )     (23,115 )
Accumulated other comprehensive income (loss)
                
Balance, beginning of period
     (1,096 )     (4,707 )
Net unrealized gains (losses) on available-for sale securities, net of tax
     29,192       (2,218 )
Reclassification adjustment for gains on sales of available-for-sale securities included in net income, net of tax
     (17,168 )     (4,273 )
Non-credit portion of other-than-temporary impairment losses on available-for-sale
                
securities, net of tax
     (2,078 )     –  
Other-than-temporary impairment charges on available-for-sale securities included in
                
net income, net of tax
     1,579       –  
Adjustment to net periodic benefit cost, net of tax
     666       370  
Net change in accumulated other comprehensive income (loss)
     12,191       (6,121 )
Balance, end of period
     11,095       (10,828 )
Total shareholders’ equity
     202,665       142,427  
Noncontrolling interest
                
Balance, beginning of period
     472       498  
Net income attributable to noncontrolling interest shareholders
     1,599       271  
Capital distribution to noncontrolling interest shareholders
     (1,367 )     (584 )
Balance, end of period
     704       185  
Total equity
   $ 203,369     $ 142,612  
                 
Comprehensive income
                
Net income
   $ 35,618     $ 20,598  
Net change in accumulated other comprehensive income (loss)
     12,191       (6,121 )
Total comprehensive income
   $ 47,809     $ 14,477  


The accompanying notes are an integral part of these consolidated financial statements.

 
3
 

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
   
Nine Months Ended
September 30,
  
   
2009
    
2008
  
             
OPERATING ACTIVITIES:
            
Net income
   $ 35,618     $ 20,598  
Adjustments to reconcile net income to net cash provided by operations:
                
Depreciation
     2,101       1,820  
Amortization of premium
     10,491       5,424  
Accretion of discount and loan fees
     (2,933 )     (2,579 )
Provision for loan losses
     9,980       8,336  
Stock compensation expense
     –       7  
Decrease (increase) in interest receivable
     807       (1,241 )
Increase in other assets
     (799 )     (2,751 )
Net change in deferred taxes
     (1,116 )     (867 )
Decrease in interest payable
     (1,669 )     (362 )
(Decrease) increase in other liabilities
     (431 )     1,384  
(Increase) decrease in loans held for sale
     (3,806 )     1,347  
Gain on sale of securities available for sale
     (26,413 )     (6,574 )
Net other-than-temporary impairment losses
     2,430       –  
Loss on sale of assets
     –       81  
Loss on disposal of assets
     43       –  
Impairment on other real estate owned
     530       –  
Gain on sale of other real estate owned
     (18 )     –  
Net cash provided by operating activities
     24,815       24,623  
                 
INVESTING ACTIVITIES:
                
Proceeds from sales of investment securities available for sale
     204,813       80,139  
Proceeds from sales of mortgage-backed securities available for sale
     512,458       251,236  
Proceeds from maturities of investment securities available for sale
     55,913       65,055  
Proceeds from maturities of mortgage-backed securities available for sale
     205,156       93,864  
Proceeds from maturities of mortgage-backed securities held to maturity
     40,338       25,770  
Proceeds from redemption of FHLB stock
     3,141       897  
Purchases of investment securities available for sale
     (231,078 )     (151,318 )
Purchases of investment securities held to maturity
     (1,014 )     –  
Purchases of mortgage-backed securities available for sale
     (887,176 )     (668,188 )
Purchases of mortgage-backed securities held to maturity
     (119,611 )     (1,664 )
Purchases of FHLB stock and other investments
     (568 )     (15,362 )
Net increase in loans
     (5,070 )     (33,870 )
Purchases of premises and equipment
     (5,903 )     (2,851 )
Proceeds from sales of premises and equipment
     –       367  
Proceeds on bank owned life insurance
     1,086       713  
Proceeds from sales of other real estate owned
     864       305  
Proceeds from sales of repossessed assets
     2,003       2,870  
Net cash used in investing activities
     (224,648 )     (352,037 )


The accompanying notes are an integral part of these consolidated financial statements.


 
4
 

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED)
(in thousands)
   
Nine Months Ended
  
   
September 30,
  
   
2009
    
2008
  
FINANCING ACTIVITIES:
            
 Net increase in demand and savings accounts
    
53,373
      
70,022
  
 Net increase (decrease) in certificates of deposit
    
162,784
      
(122,249
)
 Net increase in federal funds purchased and repurchase agreements
    
36,354
      
3,921
  
 Proceeds from FHLB advances
    
5,249,074
      
13,874,696
  
 Repayment of FHLB advances
    
(5,319,144
)
    
(13,513,344
)
 Net capital distributions from non-controlling interest in consolidated entities
    
(1,367
)
    
(584
)
 Tax benefit of incentive stock options
    
547
      
410
  
 Purchase of common stock
    
(430
)
    
(132
)
 Proceeds from the issuance of common stock
    
1,717
      
1,567
  
 Dividends paid
    
(5,996
)
    
(5,608
)
      Net cash provided by financing activities
    
176,912
      
308,699
  
                 
Net decrease in cash and cash equivalents
    
(22,921
)
    
(18,715
)
Cash and cash equivalents at beginning of period
    
66,774
      
76,004
  
Cash and cash equivalents at end of period
  
$
43,853
    
$
57,289
  
                 
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
                
 Interest paid
  
$
42,100
    
$
45,220
  
 Income taxes paid
    
12,500
      
8,125
  
                 
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
                
 Acquisition of other repossessed assets and real estate through foreclosure
  
$
7,214
    
$
4,867
  
 5% stock dividend
    
13,527
      
14,246
  
 Adjustment to pension liability
    
(1,024
)
    
(393
)
 Unsettled trades to purchase securities
    
(2,158
)
    
(8,441
)
 Unsettled trades to sell securities
    
6,168
      
29,612
  
 Unsettled issuances of brokered CDs
    
14,875
      
–
  

The accompanying notes are an integral part of these consolidated financial statements



 
5
 

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS

1.     Basis of Presentation

In this report, the words “the Company,” “we,” “us,” and “our” refer to the combined entities of Southside Bancshares, Inc. and its subsidiaries.  The words “Southside” and “Southside Bancshares” refer to Southside Bancshares, Inc.  The words “Southside Bank” and “the Bank” refer to Southside Bank (which, subsequent to the internal merger of Fort Worth National Bank (“FWNB”) with and into Southside Bank, includes FWNB).  “FWBS” refers to Fort Worth Bancshares, Inc., a bank holding company acquired by Southside of which FWNB was a wholly-owned subsidiary.  “SFG” refers to Southside Financial Group, LLC, of which Southside owns a 50% interest and consolidates for financial reporting.

The consolidated balance sheet as of September 30, 2009, and the related consolidated statements of income, equity and cash flows and notes to the financial statements for the three and nine month periods ended September 30, 2009 and 2008 are unaudited; in the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included.  Such adjustments consisted only of normal recurring items.  All significant intercompany accounts and transactions are eliminated in consolidation.  The preparation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires the use of management’s estimates. These estimates are subjective in nature and involve matters of judgment.  Actual amounts could differ from these estimates.  We have evaluated subsequent events for potential recognition and or disclosure through November 6, 2009, the date the consolidated financial statements included in this Quarterly Report on Form 10-Q were issued.

The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) became effective on July 1, 2009. At that date, the ASC became FASB’s officially recognized source of authoritative U.S. GAAP applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”) and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

Interim results are not necessarily indicative of results for a full year.  These financial statements should be read in conjunction with the financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2008.  All share data has been adjusted to give retroactive recognition to stock splits and stock dividends.  For a description of our significant accounting and reporting policies, refer to Note 1 of the Notes to Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2008.


 
6
 

2.     Earnings Per Share

Earnings per share attributable to Southside Bancshares, Inc. on a basic and diluted basis has been adjusted to give retroactive recognition to stock splits and stock dividends and is calculated as follows (in thousands, except per share amounts):

   
Three Months
    
Nine Months
  
   
Ended September 30,
    
Ended September 30,
  
                         
   
2009
    
2008
    
2009
    
2008
  
    Basic and Diluted Earnings:
                        
       Net Income - Southside Bancshares, Inc.
   $ 10,497     $ 6,250     $ 34,019     $ 20,327  
                                 
      Basic weighted-average shares outstanding
     14,911       14,623       14,843       14,552  
       Add:   Stock options
     107       299       152       345  
       Diluted weighted-average shares outstanding
     15,018       14,922       14,995       14,897  
                                 
    Basic Earnings Per Share:
                                
       Net Income - Southside Bancshares, Inc.
   $ 0.70     $ 0.43     $ 2.29     $ 1.40  
                                 
    Diluted Earnings Per Share:
                                
       Net Income - Southside Bancshares, Inc.
   $ 0.70     $ 0.42     $ 2.27     $ 1.36  

For the three and nine month periods ended September 30, 2009 and 2008, there were no antidilutive options.

 
7
 

    3.     Comprehensive Income(Loss)

The components of other comprehensive income (loss) are as follows (in thousands):

   
Nine Months Ended September 30, 2009
  
   
Before-Tax
    
Tax (Expense)
    
Net-of-Tax
  
   
Amount
    
Benefit
    
Amount
  
Unrealized gains on securities:
                  
Unrealized holding gains arising during period
   $ 44,911     $ (15,719 )   $ 29,192  
Non credit portion of other-than-temporary
impairment losses on the AFS securities
     (3,197 )     1,119       (2,078 )
Less:  reclassification adjustment for gains
                        
   included in net income
     26,413       (9,245 )     17,168  
Less:  other-than-temporary impairment charges
 on AFS securities included in net income
     (2,430 )     851       (1,579 )
Net unrealized gains on securities
     17,731       (6,206 )     11,525  
   Change in pension plans
     1,024       (358 )     666  
Other comprehensive income
   $ 18,755     $ (6,564 )   $ 12,191  

 
Three Months Ended September 30, 2009
  
 
Before-Tax
  
Tax (Expense)
  
Net-of-Tax
  
 
Amount
  
Benefit
  
Amount
  
Unrealized gains on securities:
            
Unrealized holding gains arising during period
   $ 23,044     $ (8,066 )   $ 14,978  
Less:  reclassification adjustment for gains
                        
  included in net income
     6,706       (2,348 )     4,358  
   Less: other-than-temporary impairment charges
             on AFS securities included in net income
     (993 )     348       (645 )
Net unrealized gains on securities
     17,331       (6,066 )     11,265  
   Change in pension plans
     342       (120 )     222  
Other comprehensive income
   $ 17,673     $ (6,186 )   $ 11,487  

 
Nine Months Ended September 30, 2008
  
 
Before-Tax
  
Tax (Expense)
  
Net-of-Tax
  
 
Amount
  
Benefit
  
Amount
  
Unrealized losses on securities:
            
Unrealized holding losses arising during period
   $ (3,346 )   $ 1,128     $ (2,218 )
Less:  reclassification adjustment for gains
                        
  included in net income
     6,574       (2,301 )     4,273  
Net unrealized losses on securities
     (9,920 )     3,429       (6,491 )
   Change in pension plans
     393       (23 )     370  
Other comprehensive loss
   $ (9,527 )   $ 3,406     $ (6,121 )



 
8
 


 
Three Months Ended September 30, 2008
  
 
Before-Tax
  
Tax (Expense)
  
Net-of-Tax
  
 
Amount
  
Benefit
  
Amount
  
Unrealized losses on securities:
            
Unrealized holding losses arising during period
   $ (4,683 )   $ 1,639     $ (3,044 )
Less:  reclassification adjustment for gains
                        
  included in net income
     822       (288 )     534  
Net unrealized losses on securities
     (5,505 )     1,927       (3,578 )
   Change in pension plans
     131       (46 )     85  
Other comprehensive loss
   $ (5,374 )   $ 1,881     $ (3,493 )

4.     Securities

The amortized cost and estimated market value of investment and mortgage-backed securities as of September 30, 2009 and December 31, 2008, are reflected in the tables below (in thousands):

   
September 30, 2009
  
           
Gross
              
     
Amortized
    
Unrealized
  
Gross Unrealized Losses
  
Estimated
  
 AVAILABLE FOR SALE:
    
Cost
    
Gains
  
OTTI
  
Other
  
Market Value
  
Investment Securities:
                                
U.S. Treasury
  
$
4,896
  
$
–
  
$
–
  
$
–
  
$
4,896
  
Government-Sponsored Enterprise Debentures
    
40,446
    
–
    
–
    
1,074
    
39,372
  
State and Political Subdivisions
    
208,547
    
11,315
    
–
    
195
    
219,667
  
Other Stocks and Bonds
    
4,103
    
3
    
3,197
    
132
    
777
  
Mortgage-backed Securities:
                                
U.S. Government Agencies
    
104,025
    
4,585
    
–
    
74
    
108,536
  
Government-Sponsored Enterprises
    
1,072,894
    
29,813
    
–
    
1,672
    
1,101,035
  
Total
  
$
1,434,911
  
$
45,716
  
$
3,197
  
$
3,147
  
$
1,474,283
  


   
September 30, 2009
  
           
Gross
              
     
Amortized
    
Unrealized
  
Gross Unrealized Losses
  
Estimated
  
 HELD TO MATURITY:
    
Cost
    
Gains
  
OTTI
  
Other
  
Market Value
  
Investment Securities:
                                
State and Political Subdivisions
  
$
1,013
  
$
104
  
$
–
  
$
–
  
$
1,117
  
Other Stocks and Bonds
    
480
    
15
    
–
    
–
    
495
  
Mortgage-backed Securities:
                                
U.S. Government Agencies
    
18,267
    
578
    
–
    
41
    
18,804
  
Government-Sponsored Enterprises
    
217,805
    
6,872
    
–
    
7
    
224,670
  
Total
  
$
237,565
  
$
7,569
  
$
–
  
$
48
  
$
245,086
  



   
December 31, 2008
  
AVAILABLE FOR SALE:
  
Amortized Cost
    
Gross Unrealized Gains
    
Gross Unrealized Losses
    
Estimated Market Value
  
Investment Securities:
                        
U.S. Treasury
   $ 5,008     $ 23     $ –     $ 5,031  
Government-Sponsored Enterprise Debentures
     60,325       227       1       60,551  
State and Political Subdivisions
     203,052       10,154       1,612       211,594  
Other Stocks and Bonds
     6,711       –       5,509       1,202  
Mortgage-backed Securities:
                                
   U.S. Government Agencies
     166,123       2,405       229       168,299  
   Government-Sponsored Enterprises
     841,737       17,984       1,507       858,214  
Total
   $ 1,282,956     $ 30,793     $ 8,858     $ 1,304,891  


 
9
 


   
December 31, 2008
  
HELD TO MATURITY:
  
Amortized Cost
    
Gross Unrealized Gains
    
Gross Unrealized Losses
    
Estimated Market Value
  
Investment Securities:
                        
   Other Stocks and Bonds
   $ 478     $ 9     $ –     $ 487  
Mortgage-backed Securities:
                                
   U.S. Government Agencies
     22,778       300       –       23,078  
   Government-Sponsored Enterprises
     134,509       1,890       26       136,373  
Total
   $ 157,765     $ 2,199     $ 26     $ 159,938  

The following table represents the unrealized loss on securities for the nine months ended September 30, 2009 and year ended December 31, 2008 (in thousands):

 
Less Than 12 Months
  
More Than 12 Months
  
Total
  
 
Fair Value
  
Unrealized Loss
  
Fair Value
  
Unrealized Loss
  
Fair Value
  
Unrealized Loss
  
As of September 30, 2009:
                        
                         
Available for Sale
                        
Government-Sponsored Enterprise Debentures
   $ 39,372     $ 1,074     $ –     $ –     $ 39,372     $ 1,074  
State and Political Subdivisions
     1,606       62       3,722       133       5,328       195  
Other Stocks and Bonds
     –       –       583       3,329       583       3,329  
Mortgage-Backed Securities
     236,662       1,721       2,652       25       239,314       1,746  
Total
   $ 277,640     $ 2,857     $ 6,957     $ 3,487     $ 284,597     $ 6,344  
                                                 
Held to Maturity
                                                
Mortgage-Backed Securities
   $ 2,042     $ 48     $ –     $ –     $ 2,042     $ 48  
Total
   $ 2,042     $ 48     $ –     $ –     $ 2,042     $ 48  

As of December 31, 2008:
                                    
                                     
Available for Sale
                                    
Government-Sponsored Enterprise Debentures
   $ 29,999     $ 1     $ –     $ –     $ 29,999     $ 1  
State and Political Subdivisions
     45,686       1,496       1,193       116       46,879       1,612  
Other Stocks and Bonds
     253       89       949       5,420       1,202       5,509  
Mortgage-Backed Securities
     116,616       1,517       17,174       219       133,790       1,736  
Total
   $ 192,554     $ 3,103     $ 19,316     $ 5,755     $ 211,870     $ 8,858  
                                                 
Held to Maturity
                                                
Mortgage-Backed Securities
   $ 1,212     $ 1     $ 4,540     $ 25     $ 5,752     $ 26  
Total
   $ 1,212     $ 1     $ 4,540     $ 25     $ 5,752     $ 26  
                                                 

The turmoil in the capital markets had a significant impact on our estimate of fair value for certain of our securities.  We believe the market values are reflective of a combination of illiquidity and credit impairment.  At September 30, 2009 we have, in Available for Sale (“AFS”) Other Stocks and Bonds, $3.6 million amortized cost basis in pooled trust preferred securities (“TRUPs”).  Those securities are structured products with cash flows dependent upon securities issued by U.S. financial institutions, including banks and insurance companies.  Our estimate of fair value at September 30, 2009 for the TRUPs is approximately $286,000 and reflects the market illiquidity.  With the exception of the TRUPs, to the best of management’s knowledge and based on our consideration of the qualitative factors associated with each security, there were no securities in our investment and mortgage-backed securities portfolio at September 30, 2009 with an other-than-temporary impairment.

Given the facts and circumstances associated with the TRUPs we performed detailed cash flow modeling for each TRUP using an industry-accepted cash flow model. Prior to loading the required assumptions into the model we reviewed the financial condition of each of the underlying issuing banks within the TRUP collateral pool that had not deferred or defaulted as of September 30, 2009.  Management’s best estimate of a deferral assumption was assigned to each issuing bank based on the category in which it fell.  Our analysis of the underlying cash flows contemplated various default, deferral and recovery scenarios to arrive at our best estimate of cash flows.  Based on that detailed analysis, we have concluded that the other-than-temporary impairment, which captures the credit component in compliance with FASB ASC Topic 320, “Investments – Debt and Equity Securities,” was estimated at $2.4 million at September 30, 2009 and the non credit charge to other comprehensive income was estimated at $3.2

 
10
 

million.  Therefore, the carrying amount of the TRUPs was written down with $2.4 million recognized in earnings as of September 30, 2009.  The cash flow model assumptions represent management’s best estimate and consider a variety of qualitative factors, which include, among others, the credit rating downgrades, the severity and duration of the mark-to-market loss, and the structural nuances of each TRUP.  Management believes that the detailed review of the collateral and cash flow modeling support the conclusion that the TRUPs had an other-than-temporary impairment at September 30, 2009.  We will continue to update our assumptions and the resulting analysis each reporting period to reflect changing market conditions.  Additionally, we do not currently intend to sell the TRUPs and it is not more likely than not that we will be required to sell the TRUPs before the anticipated recovery of their amortized cost basis.

The table below provides more detail on the TRUPs (dollars in thousands).


 
TRUP
    
 
Par
    
Credit
Loss
    
 
Amortized Cost
    
 
Fair Value
    
 
Tranche
    
 
Credit Rating
                                     
1
  
$
2,000
  
$
  770
  
$
1,230
  
$
214
    
C1
    
Ca
2
    
2,000
    
  390
    
1,610
    
 36
    
B1
    
Ca
3
    
2,000
    
1,270
    
  730
    
 36
    
B2
    
Ca
   
$
6,000
  
$
2,430
  
$
3,570
  
$
286
            

The following table presents the impairment activity related to credit loss, which is recognized in earnings, and the impairment activity related to all other factors, which are recognized in other comprehensive income.

 
Nine Months Ended September 30, 2009
  
 
Impairment Related to Credit Loss
  
Impairment Related to All Other Factors
  
Total Impairment
  
 
 
                   
Balance, beginning of the period
   $ –     $ –     $ –  
Charges on securities for which other-than-temporary impairment charges were not previously recognized
     2,430       3,197       5,627  
Additional charges on securities for which other-than-temporary impairment charges were previously recognized
     –       –       –  
Balance, end of the period
   $ 2,430     $ 3,197     $ 5,627  
 

 
Three Months Ended September 30,2009
  
 
Impairment Related to Credit Loss
  
Impairment Related to All Other Factors
  
Total Impairment
  
 
 
                   
Balance, beginning of the period
   $ 1,437     $ 4,190     $ 5,627  
Charges on securities for which other-than-temporary impairment charges were not previously recognized
     –       –       –  
Additional charges on securities for which other-than-temporary impairment charges were previously recognized
     993       (993 )     –  
Balance, end of the period
   $ 2,430     $ 3,197     $ 5,627  


There were no securities transferred from AFS to Held to Maturity (“HTM”) during the nine months ended September 30, 2009 and 2008.  There were no sales from the HTM portfolio during the nine months ended September 30, 2009 or 2008.  There were $237.6 million of securities classified as HTM for the nine months ended September 30, 2009 compared to $157.8 million of securities classified as HTM for the year ended December 31, 2008.

Of the $26.4 million in net securities gains from the AFS portfolio for the nine months ended September 30, 2009, there were $26.5 million in realized gains and $100,000 in realized losses.  Of the $6.6 million in net securities gains from the AFS portfolio for the nine months ended September 30, 2008, there were $6.7 million in realized gains and $153,000 in realized losses.

 
11
 

The amortized cost and fair value of securities at September 30, 2009 are presented below by contractual maturity.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.  Mortgage-backed securities are presented in total by category due to the fact that mortgage-backed securities typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with varying maturities.  The characteristics of the underlying pool of mortgages, such as fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the certificate holder.  The term of a mortgage-backed pass-through security thus approximates the term of the underlying mortgages and can vary significantly due to prepayments.

 
   
September 30, 2009
  
   
Amortized Cost
    
Fair Value
  
   
(in thousands)
  
             
Available for sale securities:
            
             
Investment Securities
            
Due in one year or less
   $ 8,975     $ 9,035  
Due after one year through five years
     8,356       8,651  
Due after five years through ten years
     25,395       26,805  
Due after ten years
     215,266       220,221  
      257,992       264,712  
Mortgage-backed securities
     1,176,919       1,209,571  
Total
   $ 1,434,911     $ 1,474,283  

 
   
Amortized Cost
    
Fair Value
  
   
(in thousands)
  
             
Held to maturity securities:
            
             
Investment Securities
            
Due in one year or less
   $ –     $ –  
Due after one year through five years
     –       –  
Due after five years through ten years
     480       495  
Due after ten years
     1,013       1,117  
      1,493       1,612  
Mortgage-backed securities
     236,072       243,474  
Total
   $ 237,565     $ 245,086  

Investment and mortgage-backed securities with book values of $990.1 million at September 30, 2009 and $952.6 million at December 31, 2008 were pledged to collateralize Federal Home Loan Bank (“FHLB”) advances, repurchase agreements, public funds and trust deposits or for other purposes as required by law.


 
12
 

    5.     Loans and Allowance for Probable Loan Losses

The following table sets forth loan totals by category for the periods presented (in thousands):

 
At
    
At
  
 
September 30,
    
December 31,
  
 
2009
    
2008
  
Real Estate Loans:
          
   Construction
   $ 87,976     $ 120,153  
   1-4 Family Residential
     233,172       238,693  
   Other
     208,187       184,629  
Commercial Loans
     162,378       165,558  
Municipal Loans
     144,450       134,986  
Loans to Individuals
     179,561       178,530  
Total Loans
   $ 1,015,724     $ 1,022,549  

The summaries of the Allowance for Loan Losses and Reserve for Unfunded Loan Commitments are as follows (in thousands):

   
Three Months
    
Nine Months
  
   
Ended September 30,
    
Ended September 30,
  
                         
   
2009
    
2008
    
2009
    
2008
  
Allowance for Loan Losses:
                        
                         
Balance at beginning of period
   $ 18,804     $ 11,527     $ 16,112     $ 9,753  
Provision for loan losses
     2,973       3,150       9,980       8,336  
Loans charged off
     (3,860 )     (2,258 )     (9,029 )     (6,658 )
Recoveries of loans charged off
     528       509