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, 2009
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
or other jurisdiction of incorporation or organization)
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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. Yes [
] No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes [ ] No
[X]
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X ] No [ ]
Indicate
by check mark 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
[ ] No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer
[ ] Accelerated
filer [ü]
Non-accelerated
filer [ ] (Do not check if a smaller reporting
company)
Smaller reporting company [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [ ] No [X]
The
aggregate market value of the common stock held by non-affiliates of the
registrant as of June 30, 2009 was $292,579,158.
As of
February 12, 2010, 14,988,726 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 15, 2010 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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PART I
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PART II
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PART III
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PART IV.
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INDEX TO EXHIBITS
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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 “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.
PART
I
FORWARD-LOOKING
INFORMATION
The disclosures set forth in this item
are qualified by the section captioned “Cautionary Notice Regarding
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 that was formed
in 1960. The Tyler metropolitan area has a population of
approximately 198,000 and is located approximately 90 miles east of Dallas,
Texas and 90 miles west of Shreveport, Louisiana.
At December
31, 2009, our total assets were $3.02 billion, total loans were $1.03 billion,
deposits were $1.87 billion, and total equity was $202.2 million. For
the years ended December 31, 2009 and 2008, our net income was $44.4 million and
$30.7 million, respectively, and diluted earnings per common share were $2.96
and $2.06, respectively. We have paid a cash dividend every year
since 1970 (including dividends paid by Southside Bank prior to the
incorporation of Southside Bancshares).
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 that we serve. These services
include consumer and commercial loans, deposit accounts, trust services, safe
deposit services and brokerage services.
Our consumer
loan services include 1-4 family residential mortgage loans, home equity loans,
home improvement loans, automobile loans and other installment
loans. Commercial loan services include short-term working capital
loans for inventory and accounts receivable, short and medium-term loans for
equipment or other business capital expansion, commercial real estate loans and
municipal loans. We also offer construction loans for 1-4 family
residential and commercial real estate.
We offer a
variety of deposit accounts with a wide range of interest rates and terms,
including savings, money market, interest and noninterest bearing checking
accounts and certificates of deposit (“CDs”). Our trust services
include investment, management, administration and advisory services, primarily
for individuals and, to a lesser extent, partnerships and
corporations. At December 31, 2009, our trust department managed
approximately $657 million of trust assets.
We and our
subsidiaries are subject to comprehensive regulation, examination and
supervision by the Board of Governors of the Federal Reserve System (the
“Federal Reserve”), the Texas Department of Banking (the “TDB”) and the Federal
Deposit Insurance Corporation (the “FDIC”) and are subject to numerous laws and
regulations relating to internal controls, the extension of credit, making of
loans to individuals, deposits, and all other facets of our
operations.
1
On October
10, 2007, Southside completed the acquisition of FWBS and its wholly-owned
subsidiaries, Fort Worth Bancorporation, Inc., FWNB and Magnolia Trust Company
I. Southside purchased all of the outstanding capital stock of FWBS
for approximately $37 million. FWNB operated two banking offices in
Fort Worth, one banking office in Arlington and a loan production office in
Austin. At the time of purchase FWNB had approximately $124 million
in total assets, $105 million in loans and $103 million in
deposits.
Our
administrative offices are located at 1201 South Beckham Avenue, Tyler,
Texas 75701, and our telephone number is 903-531-7111. Our website
can be found at www.southside.com. Our
public filings with the Securities and Exchange Commission (the “SEC”) may be
obtained free of charge at either our website or the SEC’s website, www.sec.gov, as soon as reasonably
practicable after filing with the SEC.
RECENT
DEVELOPMENTS
During July
2009, we opened a full service branch in Gresham, Texas, just south of Tyler,
replacing a loan production office we have operated for several years in close
proximity. We are in the process of building a full service branch on
the west side of Tyler on Highway 64, which we anticipate will open during the
second half of 2010. In addition, we are building a new facility
adjacent to our headquarters in Tyler which will house our Trust
department. It is anticipated to be completed during the second half
of 2010. We are also in the process of opening a full service bank in
a leased space in a grocery store in Tyler, Texas. It is anticipated
to open during the second quarter of 2010. We continue to explore
opportunities to expand into either additional grocery store or traditional
branch locations. During the fourth quarter of 2009, we completed a
core banking computer system conversion. This new system should
provide for our core computer system needs for many years.
MARKET
AREA
We consider
our primary market area to be all of Smith, Gregg, Tarrant, Travis, Cherokee,
Anderson, Kaufman, Henderson and Wood Counties in Texas, and to a lesser extent,
portions of adjoining counties. Our expectation is that our presence
in all of the market areas we serve should 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 45 banking centers, 18 of which are located in grocery
stores. The branches are located in and around Tyler, Longview,
Lindale, Gresham, Jacksonville, Bullard, Chandler, Hawkins, Seven Points,
Palestine, Forney, Gun Barrel City, Athens, Whitehouse, Fort Worth, Arlington
and Austin. Our advertising is designed to target the market areas we
serve. The type and amount of advertising done in each market area is
directly attributable to our market share in that market area combined with
overall cost.
We also
maintain 12 motor bank facilities. Our customers may also access
various banking services through our 48 automated teller machines (“ATMs”) and
ATMs owned by others, through debit cards, and through our automated telephone,
internet and electronic banking products. These products allow our
customers to apply for loans from their computers, access account information
and conduct various other transactions from their telephones and
computers.
2
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 twenty 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. Beginning in the fourth quarter of 2008, as oil
prices declined significantly and consumers all across the United States were
impacted even more severely by the economic slowdown, our market areas began to
experience a greater slowdown in economic activity. During 2009, our
market areas experienced the effects of the housing-led slowdown that impacted
the other regions of the United States. Some economists believe the
national recession ended in the latter part of 2009. However, we are
well aware that any economic recovery could be uneven. 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 2009, 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 with 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
continue to increase.
EMPLOYEES
At February
12, 2010, we employed approximately 560 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, 2009 and as of February 12, 2010 were as follows:
B. G.
Hartley (Age 80), 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 62), 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 78), Vice Chairman of the Board of Southside Bancshares, Inc. and
Southside Bank since 1998. He joined Southside Bank as a vice
president in 1968.
Jeryl
Story (Age 58), Senior 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.
3
Lee R.
Gibson (Age 53), Senior 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.
Michael
Coogan (Age 50), Executive Vice President and Treasurer of Southside
Bank. He became an officer of Southside Bank in 2009.
All the
individuals named above serve in their capacity as officers of Southside
Bancshares, Inc. and Southside Bank and are appointed annually by the board of
directors of each entity.
SUPERVISION
AND REGULATION
General
Banking is a
complex, highly regulated industry. As bank holding companies under
federal law, Southside Bancshares, Inc. (the “Company”) and its wholly-owned
subsidiary, Southside Delaware Financial Corporation, (collectively, the
“Holding Companies”) are subject to regulation, supervision and examination by
the Board of Governors of the Federal Reserve System (“Federal
Reserve”). As a Texas-chartered state bank, Southside Bank is subject
to regulation, supervision and examination by the Texas Department of Banking
(“TDB”), as its chartering authority, and by the Federal Deposit Insurance
Corporation (“FDIC”), as its primary federal regulator and deposit
insurer. This system of regulation and supervision applicable to us
establishes a comprehensive framework for our operations and is intended
primarily for the protection of the FDIC’s Deposit Insurance Fund (“DIF”) and
the public rather than our shareholders and creditors.
The earnings
of Southside Bank and, therefore, the earnings of the Holding Companies, are
affected by general economic conditions, changes in federal and state laws and
regulations and actions of various regulatory authorities, including those
referenced above. Proposals to change the laws and regulations
applicable to us are frequently introduced at both the federal and state
levels. Current proposals include an extensive restructuring of the
regulatory framework within which we operate. The likelihood, timing,
and scope of any such change and the impact any such change may have on us are
impossible to determine with any certainty. Set forth below is a
brief description of the significant federal and state laws and regulations to
which we are currently subject. These descriptions do not purport to
be complete and are qualified in their entirety by reference to the particular
statutory or regulatory provision.
Holding Company
Regulation
As bank
holding companies regulated under the Bank Holding Company Act of 1956 (“BHCA”),
as amended, the Holding Companies are registered with and subject to regulation,
supervision and examination by the Federal Reserve. The Holding
Companies are required to file annual and other reports with, and furnish
information to, the Federal Reserve, which makes periodic inspections of the
Holding Companies.
Permitted Activities. Under the BHCA, a bank
holding company is generally permitted to engage in, or acquire direct or
indirect control of more than 5 percent of the voting shares of any company
engaged in the following activities:
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·
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banking
or managing or controlling banks;
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·
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furnishing
services to or performing services for our subsidiaries;
and
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·
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any
activity that the Federal Reserve determines to be so closely related to
banking as to be a proper incident to the business of banking,
including:
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o
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factoring
accounts receivable;
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o
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making,
acquiring, brokering or servicing loans and usual related
activities;
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o
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leasing
personal or real property;
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4
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o
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operating
a nonbank depository institution, such as a savings
association;
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o
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performing
trust company functions;
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o
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conducting
financial and investment advisory
activities;
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o
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conducting
discount securities brokerage
activities;
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o
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underwriting
and dealing in government obligations and money market
instruments;
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o
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providing
specified management consulting and counseling
activities;
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o
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performing
selected data processing services and support
services;
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o
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acting
as agent or broker in selling credit life insurance and other types of
insurance in connection with credit transactions;
and
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o
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performing
selected insurance underwriting
activities.
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The Federal
Reserve has the authority to order a bank holding company or its subsidiaries to
terminate any of these activities or to terminate its ownership or control of
any subsidiary when it has reasonable cause to believe that the bank holding
company’s continued ownership, activity or control constitutes a serious risk to
the financial safety, soundness or stability of it or any of its bank
subsidiaries.
Under the
BHCA, a bank holding company meeting certain eligibility requirements may elect
to become a “financial holding company.” A financial holding company
and companies under its control may engage in activities that are “financial in
nature,” as defined by the Gramm-Leach-Bliley Act (“GLBA”) and Federal Reserve
interpretations, and therefore may engage in a broader range of activities than
those permitted for bank holding companies and their
subsidiaries. Financial activities specifically include insurance
brokerage and underwriting, securities underwriting and dealing, merchant
banking, investment advisory and lending activities. Financial
holding companies and their subsidiaries also may engage in additional
activities that are determined by the Federal Reserve, in consultation with the
Treasury Department, to be “financial in nature or incidental to” a financial
activity or are determined by the Federal Reserve unilaterally to be
“complementary” to financial activities. The Holding Companies have
not sought financial holding company status. However, there can be no
assurance that they will not make such an election in the future. If
the Holding Companies were to elect financial holding company status, Southside
Bank and any other insured depository institution controlled by the Holding
Companies would have to be well capitalized, well managed, and have at least a
satisfactory rating under the Community Reinvestment Act (discussed
below).
Capital
Adequacy. Each of the federal banking agencies, including the
Federal Reserve and the FDIC, has issued substantially similar risk-based and
leverage capital guidelines applicable to the banking organizations they
supervise.
The
agencies’ risk-based guidelines define a three-tier capital
framework. Tier 1 capital principally consists of shareholder’s
equity less any amounts of goodwill, other intangible assets, interest-only
strips receivables, deferred tax assets, non-financial equity investments and
other items that are required to be deducted by the Federal
Reserve. Perpetual, non-cumulative preferred stock, certain
trust-preferred securities, and certain minority interests in consolidated
subsidiaries also may be included in Tier 1 capital. Tier 2 capital
principally consists of perpetual and trust preferred stock not qualifying as
Tier 1 capital, mandatorily convertible debt, limited amounts of
term-subordinated debt, intermediate-term preferred stock, and, subject to
limitations, general allowances for loan and lease losses, and other
adjustments. Tier 3 capital includes subordinated debt that is
unsecured, fully paid, has an original maturity of at least two years, is not
redeemable before maturity without prior approval by the Federal Reserve and
includes a lock-in clause precluding payment of either interest or principal if
the payment would cause the issuing bank’s risk-based capital ratio to fall or
remain below the requirement minimum. The sum of Tier 1 and Tier 2
capital less investments in unconsolidated subsidiaries represents qualifying
total capital.
5
Risk-based
capital ratios are calculated by dividing, as appropriate, total capital and
Tier 1 capital by risk-weighted assets. Assets and off-balance sheet
exposures are assigned to one of four categories of risk weights, based
primarily on relative credit risk. Under these risk-based capital
requirements, the Holding Companies and Southside Bank are each generally
required to maintain a minimum ratio of total capital to risk-weighted assets of
at least 8% and a minimum ratio of Tier 1 capital to risk-weighted assets of at
least 4%. To the extent we engage in trading activities, we are
required to adjust our risk-based capital ratios to take into consideration
market risks that may result from movements in market prices of covered trading
positions in trading accounts, or from foreign exchange or commodity positions,
whether or not in trading accounts, including changes in interest rates, equity
prices, foreign exchange rates or commodity prices. Any capital
required to be maintained under these provisions may consist of Tier 3
capital.
Each of the federal bank regulatory
agencies, including the Federal Reserve and the FDIC, also have established
minimum leverage capital requirements for the banking organizations they
supervise. These requirements provide that banking organizations that
meet certain criteria, including excellent asset quality, high liquidity, low
interest rate exposure and good earnings, and that have received the highest
regulatory rating must maintain a ratio of Tier 1 capital to total adjusted
average assets of at least 3%. Institutions not meeting these
criteria, as well as institutions with supervisory, financial or operational
weaknesses, are expected to maintain a minimum Tier 1 capital to total adjusted
average assets ratio equal to 100 to 200 basis points above this stated
minimum. Holding companies experiencing internal growth or making
acquisitions are expected to maintain strong capital positions substantially
above the minimum supervisory levels without significant reliance on intangible
assets. The Federal Reserve also continues to consider a “tangible
Tier 1 capital leverage ratio” (deducting all intangibles) and other indicators
of capital strength in evaluating proposals for expansion or new
activity.
In 2004,
the Basel Committee on Banking Supervision published a new set of risk-based
capital standards (“Basel II”) in order to update the original international
capital standards that had been put in place in 1988 (“Basel
I”). Basel II adopts a three-pillar framework comprised of minimum
capital requirements, supervisory assessment of capital adequacy and market
discipline. Basel II provides several options for determining capital
requirements for credit and operational risk. In December 2007, the
agencies adopted a final rule implementing Basel II’s advanced
approach. The final rule became effective on April 1,
2008. Compliance with the final rule is mandatory only for “core
banks” - U.S. banking organizations with over $250 billion in banking assets or
on-balance-sheet foreign exposures of at least $10 billion. Other
U.S. banking organizations that meet applicable qualification requirements may
elect, but are not required, to comply with the final rule. The final
rule also allows a banking organization’s primary federal regulator to determine
that application of the rule would not be appropriate in light of the
organization’s asset size, level of complexity, risk profile or scope of
operations. In July 2008, in order to address the potential
competitive inequalities resulting from the now bifurcated risk-based capital
system in the United States, the agencies agreed to issue a proposed rule that
would provide non-core banks with the option to adopt an approach consistent
with Basel II’s standardized approach. At this
time, U.S. banking organizations not subject to the final rule are required to
continue to use the existing Basel I risk-based capital rules. The
Holding Companies are not required, and have not elected, to comply with the
final rule.
Increases
in regulatory capital requirements appear to be likely, but the federal
regulators have not identified specific increases. In September 2009,
the Treasury Department released a set of principles for financial regulatory
reform, including a general recommendation for increased capital for banks and
bank holding companies across the board (with even higher requirements for
systemically risky banking organizations). In December 2009, the
Basel Committee on Board Supervision issued proposals for regulatory capital
changes, including greater emphasis on common equity as a component of Tier 1
capital. Both sets of proposals also recommend enhanced leverage and
liquidity requirements.
6
The
ratios of Tier 1 capital, total capital to risk-adjusted assets, and leverage
capital of the Company and Southside Bank as of December 31, 2009, are
shown in the following table.
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Capital
Adequacy Ratios
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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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Risk-based
capital ratios:
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Tier
1 Capital (1)
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4.0 | % | 6.0 | % | 17.87 | % | 17.69 | % | ||||||||
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Total
risk-based capital (2)
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8.0 | 10.0 | 19.12 | 18.94 | ||||||||||||
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Tier
1 leverage ratio (3)
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4.0 | 5.0 | 8.03 | 7.95 | ||||||||||||
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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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Source
of Strength. Federal Reserve policy requires a bank holding
company to act as a source of financial strength and to take measures to
preserve and protect bank subsidiaries in situations where additional
investments in a troubled bank may not otherwise be warranted. As a
result, a bank holding company may be required to contribute additional capital
to its subsidiaries in the form of capital notes or other instruments which
qualify as capital under regulatory rules. Any loans from the holding
company to its subsidiary banks likely will be unsecured and subordinated to the
bank’s depositors and perhaps to other creditors of the bank. See
also Bank Regulation - Prompt
Corrective Action.
Dividends. The
principal source of our liquidity at the parent company level is dividends from
Southside Bank. Southside Bank is subject to federal and state
restrictions on its ability to pay dividends to Southside Delaware Financial
Corporation, the direct parent of Southside Bank, which in turn may affect the
ability of Southside Delaware to pay dividends to the Company. We
must pay essentially all of our operating expenses from funds we receive from
Southside Bank. Therefore, shareholders may receive dividends from us
only to the extent that funds are available after payment of our operating
expenses. Consistent with its “source of strength” policy, the
Federal Reserve discourages bank holding companies from paying dividends except
out of operating earnings and prefers that dividends be paid only if, after the
payment, the prospective rate of earnings retention appears consistent with the
bank holding company’s capital needs, asset quality and overall financial
condition.
Change
in Control. Subject to certain exceptions, under the BHCA and
the Change in Bank Control Act (“CBCA”), and the regulations promulgated
thereunder, persons who intend to acquire direct or indirect control of a
depository institution, must give 60 days prior notice to the appropriate
federal banking agency. With respect to the Holding Companies,
“control” is conclusively presumed to exist where an acquiring party directly or
indirectly owns, controls or has the power to vote at least 25% of our voting
securities. Under the Federal Reserve’s CBCA regulations, a
rebuttable presumption of control would arise with respect to an acquisition
where, after the transaction, the acquiring party owns, controls or has the
power to vote at least 10% (but less than 25%) of our voting
securities.
On
September 22, 2008, the Federal Reserve issued a policy statement on minority
equity investments in banks and bank holding companies, that permits investors
to (1) acquire up to 33 percent of the total equity of a target bank or bank
holding company, subject to certain conditions, including that the acquiring
investor does not acquire 15 percent or more of any class of voting securities,
and (2) designate at least one director, without triggering the various
regulatory requirements associated with control.
7
Acquisitions. The
BHCA provides that a bank holding company must obtain the prior approval of the
Federal Reserve (i) for the acquisition of more than five percent of the voting
stock in any bank or bank holding company, (ii) for the acquisition of
substantially all the assets of any bank or bank holding company or (iii) in
order to merge or consolidate with another bank holding company.
Regulatory
Examination. Federal and state banking agencies require the
Holding Companies and Southside Bank to prepare annual reports on financial
condition and to conduct an annual audit of financial affairs in compliance with
minimum standards and procedures. Southside Bank, and in some cases
the Holding Companies and any nonbank affiliates, must undergo regular on-site
examinations by the appropriate banking agency. A bank regulator
conducting an examination has complete access to the books and records of the
examined institution, and the results of the examination are
confidential. The cost of examinations may be assessed against the
examined organization as the agency deems necessary or
appropriate. The FDIC has developed a method for insured depository
institutions to provide supplemental disclosure of the estimated fair market
value of assets and liabilities, to the extent feasible and practicable, in any
balance sheet, financial statement, report of condition or any other
report.
Enforcement
Authority. The Federal
Reserve has broad enforcement powers over bank holding companies and their
nonbank subsidiaries and has authority to prohibit activities that represent
unsafe or unsound banking practices or constitute knowing or reckless violations
of laws or regulations. These powers may be exercised through the
issuance of cease and desist orders, civil money penalties or other
actions. Civil money penalties can be as high as $1,000,000 for each
day the activity continues.
Bank
Regulation
Southside
Bank is a Texas-chartered commercial bank, the deposits of which are insured up
to the applicable limits by the DIF of the FDIC. It is not a member
of the Federal Reserve System. The Bank is subject to extensive
regulation, examination and supervision by the TDB, as its chartering authority,
and by the FDIC, as its primary federal regulator and deposit
insurer. The federal and state laws applicable to banks regulate,
among other things, the scope of their business and investments, lending and
deposit-taking activities, borrowings, maintenance of retained earnings and
reserve accounts, distribution of earnings and payment of
dividends.
Permitted
Activities and Investments. Under the Federal Deposit
Insurance Act (“FDIA”), the activities and investments of state nonmember banks
are generally limited to those permissible for national banks, notwithstanding
state law. With FDIC approval, a state nonmember bank may engage in activities
not permissible for a national bank if the FDIC determines that the activity
does not pose a significant risk to the DIF and that the bank meets its minimum
capital requirements. Similarly, under Texas law, a state bank may
engage in those activities permissible for national banks domiciled in
Texas. The TDB may permit a Texas state bank to engage in additional
activities so long as the performance of the activity by the bank would not
adversely affect the safety and soundness of the bank.
Brokered
Deposits. Southside Bank also may be restricted in its ability
to accept, renew or roll over brokered deposits, depending on its capital
classification. Only “well capitalized” banks are permitted to
accept, renew or roll over brokered deposits. The FDIC may, on a
case-by-case basis, permit banks that are adequately capitalized to accept
brokered deposits if the FDIC determines that acceptance of such deposits would
not constitute an unsafe or unsound banking practice with respect to the
bank. Undercapitalized banks generally may not accept, renew or roll
over brokered deposits.
Loans to
One Borrower. Under Texas law, without the approval of the TDB
and subject to certain limited exceptions, the maximum aggregate amount of loans
that Southside Bank is permitted to make to any one borrower is 25% of Tier 1
capital.
8
Insider
Loans. Under Regulation O of the Federal Reserve, as made
applicable to state nonmember banks by section 18(j)(2) of the FDIA, Southside
Bank is subject to quantitative restrictions on extensions of credit to its
executive officers and directors, the executive officers and directors of the
Holding Companies, any owner of 10% or more of its stock or the stock of
Southside Bancshares, Inc., and certain entities affiliated with any such
persons. In general, any such extensions of credit must (i) not
exceed certain dollar limitations, (ii) be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with third parties and (iii) not involve more than the
normal risk of repayment or present other unfavorable
features. Additional restrictions are imposed on extensions of credit
to executive officers. Certain extensions of credit also require the
approval of a bank’s board of directors.
Deposit
Insurance. The deposits of Southside Bank are insured by the
DIF of the FDIC, up to the applicable limits established by law and are subject
to the deposit insurance premium assessments of the DIF. In February
2009, the FDIC adopted a long-term DIF restoration plan, as well as an
additional emergency assessment for 2009. The restoration plan increases base
assessment rates for banks in all risk categories with the goal of raising the
DIF reserve ratio from 0.40% to 1.15% within seven years. Banks in the best risk
category, paid initial base rates ranging from 12 to 16 basis points of
assessable deposits beginning April 1, 2009, partially up from the initial base
rate range of 12 to 14 basis points. Additionally, the FDIC adopted a final rule
imposing a special emergency assessment to all financial institutions of 5 basis
points of insured deposits as of June 30, 2009. Our special emergency assessment
totaled $1.3 million and was collected on September 30,
2009. Currently, initial base rate assessments for all FDIC-insured
institutions range from 12 to 45 basis points, with assessment rates of 12 to 16
basis points for banks in the best risk category.
In November 2009, the FDIC issued a
rule that required all insured depository institutions, with limited exceptions,
to prepay their estimated quarterly risk-based assessments for the fourth
quarter of 2009 and for all of 2010, 2011 and 2012. In December 2009,
we paid $9.9 million in prepaid risk-based assessments, which included $625,000
related to the fourth quarter of 2009 that would have otherwise been payable in
the first quarter of 2010 and is included in deposit insurance expense for
2009. The remaining $9.3 million in prepaid deposit insurance is
included in other assets in the accompanying consolidated balance sheet as of
December 31, 2009.
In addition, all FDIC-insured
institutions are required to pay a pro rata portion of the interest due on bonds
issued by the Financing Corporation (“FICO”) to fund the closing and disposal of
failed thrift institutions by the Resolution Trust Corporation. FICO
assessments are set quarterly, and in 2009 ranged from 114 basis points in
the first quarter to 102 basis points in the fourth
quarter. These assessments will continue until the FICO bonds mature
in 2017 through 2019.
Effective
November 21, 2008 and until December 31, 2009, the FDIC expanded deposit
insurance limits for certain accounts under the FDIC’s Temporary Liquidity
Guarantee Program. Provided an institution has not opted out of the
Temporary Liquidity Guarantee Program, the FDIC will fully guarantee funds
deposited in noninterest bearing transaction accounts, including
(i) interest on Lawyer Trust Accounts or IOLTA accounts, and
(ii) negotiable order of withdrawal or NOW accounts with rates no higher
than 0.50 percent if the institution has committed to maintain the interest
rate at or below that rate. In conjunction with the increased deposit
insurance coverage, insurance assessments also increase. Southside
Bank has not opted out of the Temporary Liquidity Guarantee
Program. In May 2009, the FDIC deposit insurance limits provision
which was set to expire on December 31, 2009 was extended until December 31,
2013 under the Helping Families Save Their Homes Act of 2009.
Capital
Adequacy. See Holding Company Regulation – Capital
Adequacy.
Prompt Corrective
Action. The Federal Deposit Insurance Improvement Act
of 1991 (“FDICIA”), among other things, identifies five capital categories for
insured depository institutions (well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized). FDICIA requires the federal banking agencies,
including the FDIC, to implement systems for “prompt corrective action” for
insured depository institutions that do not meet minimum capital requirements
within these categories. Under such systems, federal banking
regulators are required to rate insured depository institutions on the basis of
the five capital categories described. The FDICIA imposes
progressively more restrictive restraints on operations, management and capital
distributions, as the classification of a bank or thrift
deteriorates. Failure to meet the capital guidelines could also
subject a depository institution to capital
9
raising
requirements. An “undercapitalized” bank must develop a capital
restoration plan and its parent holding company must guarantee the bank’s
compliance with the plan. The liability of the parent holding company
under any such guarantee is limited to the lesser of 5% of the bank’s assets at
the time it became “undercapitalized” or the amount needed to comply with the
plan. Furthermore, in the event of the bankruptcy of the parent
holding company, such guarantee would take priority over the parent’s general
unsecured creditors. The Bank currently meets the criteria for
“well-capitalized.”
Within the
“prompt corrective action” regulations, the federal banking agencies also have
established procedures for “downgrading” an institution to a lower capital
category based on supervisory factors other than
capital. Specifically, a federal banking agency may, after notice and
an opportunity for a hearing, reclassify a well-capitalized institution as
adequately capitalized and may require an adequately capitalized institution or
an undercapitalized institution to comply with supervisory actions as if it were
in the next lower category if the institution is operating in an unsafe or
unsound condition or the institution has received and not corrected a
less-than-satisfactory rating for any of the categories of asset quality,
management, earnings or liquidity in its most recent examination. The
FDIC may not, however, reclassify a significantly undercapitalized institution
as critically undercapitalized.
In
addition to the “prompt corrective action” directives, failure to meet capital
guidelines may subject a banking organization to a variety of other enforcement
remedies, including additional substantial restrictions on its operations and
activities, termination of deposit insurance by the FDIC and, under certain
conditions, the appointment of a conservator or receiver.
Standards
for Safety and Soundness. The FDIA also requires the federal
banking regulatory agencies to prescribe, by regulation or guideline,
operational and managerial standards for all insured depository institutions
relating to: (i) internal controls; (ii) information systems and internal audit
systems; (iii) loan documentation; (iv) credit underwriting; (v) interest
rate risk exposure; and (vi) asset quality. The agencies also
must prescribe standards for asset quality, earnings, and stock valuation, as
well as standards for compensation, fees and benefits. The federal
banking agencies have adopted regulations and Interagency Guidelines Prescribing
Standards for Safety and Soundness (“Guidelines”) to implement these required
standards. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes
impaired. Under the regulations, if the FDIC determines that
Southside Bank fails to meet any standards prescribed by the Guidelines, it may
require Southside Bank to submit an acceptable plan to achieve compliance,
consistent with deadlines for the submission and review of such safety and
soundness compliance plans.
Dividends. All
dividends paid by Southside Bank are paid to the Company, as the sole indirect
shareholder of Southside Bank, through Southside Delaware Financial
Corporation. The ability of Southside Bank, as a Texas state bank, to
pay dividends is restricted under federal and state law and
regulations. As an initial matter, the FDICIA and the regulations of
the FDIC generally prohibit an insured depository institution from making a
capital distribution (including payment of dividend) if, thereafter, the
institution would not be at least adequately capitalized. Under Texas
law, Southside Bank generally may not pay a dividend reducing its capital and
surplus without the prior approval of the Texas Banking
Commissioner. All dividends must be paid out of net profits then on
hand, after deducting expenses, including losses and provisions for loan
losses.
Southside
Bank’s general dividend policy is to pay dividends at levels consistent with
maintaining liquidity and preserving applicable capital ratios and servicing
obligations. Southside Bank’s dividend policies are subject to the
discretion of its board of directors and will depend upon such factors as future
earnings, financial conditions, cash needs, capital adequacy, compliance with
applicable statutory and regulatory requirements and general business
conditions. The exact amount of future dividends paid by Southside
Bank will be a function of its general profitability (which cannot be accurately
estimated or assured), applicable tax rates in effect from year to year and the
discretion of its board of directors.
10
Transactions
with Affiliates. Southside Bank is subject to
sections 23A and 23B of the Federal Reserve Act (“FRA”) and the Federal
Reserve’s Regulation W, as made applicable to state nonmember banks by section
18(j) of the FDIA. Sections 23A and 23B of the FRA restrict a bank’s
ability to engage in certain transactions with its affiliates. An
affiliate of a bank is any company or entity that controls, is controlled by or
is under common control with the bank. In a holding company context,
the parent bank holding company and any companies controlled by such parent
holding company are generally affiliates of the bank.
Specifically,
section 23A places limits on the amount of “covered transactions,” which
include loans or extensions of credit to, and investments in or certain other
transactions with, affiliates. It also limits the amount of any
advances to third parties that are collateralized by the securities or
obligations of affiliates. The aggregate of all covered transactions
is limited to 10 percent of the bank’s capital and surplus for any one
affiliate and 20 percent for all affiliates. Additionally,
within the foregoing limitations, each covered transaction must meet specified
collateral requirements ranging from 100 to 130 percent of the loan amount,
depending on the type of collateral. Further, banks are prohibited
from purchasing low quality assets from an affiliate.
Section
23B, among other things, prohibits a bank from engaging in certain transactions
with affiliates unless the transactions are on terms substantially the same, or
at least as favorable to the bank, as those prevailing at the time for
comparable transactions with nonaffiliated companies. Except for
limitations on low quality asset purchases and transactions that are deemed to
be unsafe or unsound, Regulation W generally excludes affiliated depository
institutions from treatment as affiliates.
Anti-Tying
Regulations. Under the BHCA and Federal Reserve’s regulations,
a bank is prohibited from engaging in certain tying or reciprocity arrangements
with its customers. In general, a bank may not extend credit, lease,
sell property, or furnish any services or fix or vary the consideration for
these products or services on the condition that either: (i) the customer obtain
or provide some additional credit, property, or services from or to the bank,
the bank holding company or subsidiaries thereof or (ii) the customer not obtain
credit, property, or service from a competitor, except to the extent reasonable
conditions are imposed to assure the soundness of the credit
extended. A bank may, however, offer combined-balance products and
may otherwise offer more favorable terms if a customer obtains two or more
traditional bank products. Also, certain foreign transactions are
exempt from the general rule.
Community Reinvestment
Act. Under the Community Reinvestment Act (“CRA”),
Southside Bank has a continuing and affirmative obligation, consistent with safe
and sound banking practices, to help meet the needs of our entire community,
including low- and moderate-income neighborhoods. The CRA does not
establish specific lending requirements or programs for banks nor does it limit
a bank’s discretion to develop the types of products and services that it
believes are best suited to its particular community.
On a periodic
basis, the FDIC is charged with preparing a written evaluation of our record of
meeting the credit needs of the entire community and assigning a rating -
outstanding, satisfactory, needs to improve or substantial
noncompliance. Banks are rated based on their actual performance in
meeting community credit needs. The FDIC will take that rating into
account in its evaluation of any application made by the bank for, among other
things, approval of the acquisition or establishment of a branch or other
deposit facility, an office relocation, a merger or the acquisition of shares of
capital stock of another financial institution. A bank’s CRA rating
may be used as the basis to deny or condition an application. In
addition, as discussed above, a bank holding company may not become a financial
holding company unless each of its subsidiary banks has a CRA rating of at least
“Satisfactory.” Southside Bank was last examined for compliance with
the CRA on March 12, 2007 and received a rating of “Outstanding.”
Branch
Banking. Pursuant to the Texas Finance Code, all banks located
in Texas are authorized to branch statewide. Accordingly, a bank
located anywhere in Texas has the ability, subject to regulatory approval, to
establish branch facilities near any of our facilities and within our market
area. If other banks were to establish branch facilities near our
facilities, it is uncertain whether these branch facilities would have a
material adverse effect on our business.
11
The
Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 provides for
nationwide interstate banking and branching, subject to certain age and deposit
concentration limits that may be imposed under applicable state
laws. Texas law permits interstate branching in two manners, with
certain exceptions. First, a bank with its main office outside of
Texas may establish a branch in the State of Texas by merging with a bank
located in Texas that is at least five years old, so long as the resulting
institution and its affiliates would not hold more than 20% of the total
deposits in the state after the acquisition. In addition, a bank with
its main office outside of Texas generally may establish a branch in the State
of Texas on a de novo basis if the bank’s main office is located in a state that
would permit Texas banks to establish a branch on a de novo basis in that
state.
The FDIC has
adopted regulations under the Reigle-Neal Act to prohibit an out-of-state bank
from using the interstate branching authority primarily for the purpose of
deposit production. These regulations include guidelines to ensure
that interstate branches operated by an out-of-state bank in a host state are
reasonably helping to meet the credit needs of the communities served by the
out-of-state bank.
Consumer
Protection Regulation. The activities of Southside Bank are
subject to a variety of statutes and regulations designed to protect
consumers. Interest and other charges collected or contracted for by
the banks are subject to state usury laws and federal laws concerning interest
rates. Loan operations are also subject to federal laws applicable to credit
transactions, such as:
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the
federal Truth-In-Lending Act and Regulation Z issued by the Federal
Reserve, governing disclosures of credit terms to consumer
borrowers;
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the
Home Mortgage Disclosure Act and Regulation C issued by the Federal
Reserve, requiring financial institutions to provide information to enable
the public and public officials to determine whether a financial
institution is fulfilling its obligation to help meet the housing needs of
the community it serves;
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the
Equal Credit Opportunity Act and Regulation B issued by the Federal
Reserve, prohibiting discrimination on the basis of race, creed or other
prohibited factors in extending
credit;
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the
Fair Credit Reporting Act and Regulation V issued by the Federal Reserve,
governing the use and provision of information to consumer reporting
agencies;
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the
Fair Debt Collection Act, governing the manner in which consumer debts may
be collected by collection agencies;
and
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the
guidance of the various federal agencies charged with the responsibility
of implementing such federal laws.
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Deposit
operations also are subject to:
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the
Truth in Savings Act and Regulation DD issued by the Federal Reserve,
governing disclosure of deposit account terms to
consumers;
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the
Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures
for complying with administrative subpoenas of financial records;
and
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the
Electronic Funds Transfer Act and Regulation E issued by the Federal
Reserve, which governs automatic deposits to and withdrawals from deposit
accounts and customers’ rights and liabilities arising from the use of
automated teller machines and other electronic banking
services.
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In
addition, Southside Bank also may be subject to certain state laws and
regulations designed to protect consumers.
12
Commercial
Real Estate Lending. Lending operations that
involve concentration of commercial real estate loans are subject to enhanced
scrutiny by federal banking regulators. The regulators have issued
guidance with respect to the risks posed by commercial real estate lending
concentrations. Real estate loans generally include land development,
construction loans, loans secured by multi-family property and nonfarm
nonresidential real property where the primary source of repayment is derived
from rental income associated with the property. The guidance
prescribes the following guidelines for examiners to help identify institutions
that are potentially exposed to concentration risk and may warrant greater
supervisory scrutiny:
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total
reported loans for construction, land development and other land represent
100 percent or more of the institutions total capital,
or
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total
commercial real estate loans represent 300 percent or more of the
institution’s total capital and the outstanding balance of the
institution’s commercial real estate loan portfolio has increased by
50 percent or more during the prior 36
months.
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In October 2009, the federal banking
agencies issued additional guidance on real estate lending that emphasizes these
considerations.
Anti-Money
Laundering. Southside Bank is subject to the
regulations of the Financial Crimes Enforcement Network (“FinCEN”), which
implement the Bank Secrecy Act, as amended by the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001, or the “USA Patriot Act.” The USA Patriot Act
gives the federal government the power to address terrorist threats through
enhanced domestic security measures, expanded surveillance powers, increased
information sharing, and broadened anti-money laundering
requirements. Title III of the USA Patriot Act includes measures
intended to encourage information sharing among banks, regulatory agencies and
law enforcement bodies. Further, certain provisions of Title III
impose affirmative obligations on a broad range of financial institutions,
including state-chartered banks like Southside Bank.
The USA Patriot Act and the related
FinCEN regulations impose certain requirements with respect to financial
institutions, including the following:
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establishment
of anti-money laundering programs, including adoption of written
procedures and an ongoing employee training program, designation of a
compliance officer and auditing of the
program;
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establishment
of a program specifying procedures for obtaining information from
customers seeking to open new accounts, including verifying the identity
of customers within a reasonable period of
time;
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establishment
of enhanced due diligence policies, procedures and controls designed to
detect and report money laundering, and for financial institutions that
administer, maintain or manage private bank accounts or correspondent
accounts for non-U.S. persons;
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prohibitions
on correspondent accounts for foreign shell banks and compliance with
recordkeeping obligations with respect to correspondent accounts of
foreign banks;
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filing
of suspicious activities reports if a bank believes a customer may be
violating U.S. laws and regulations;
and
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requirements
that bank regulators consider bank holding company or bank compliance in
connection with merger or acquisition
transactions.
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Bank regulators routinely examine
institutions for compliance with these obligations and have been active in
imposing “cease and desist” orders and money penalty sanctions against
institutions found to be violating these obligations.
13
The
Federal Bureau of Investigation can send bank regulatory agencies lists of the
names of persons suspected of involvement in terrorist activities. Southside
Bank can be requested to search its records for any relationships or
transactions with persons on those lists and required to report any identified
relationships or transactions.
OFAC. The Office of Foreign
Assets Control (“OFAC”) is responsible for helping to insure that U.S. entities
do not engage in transactions with certain prohibited parties, as defined by
various Executive Orders and Acts of Congress. OFAC has sent, and
will continue to send, bank regulatory agencies lists of names of persons and
organizations suspected of aiding, harboring or engaging in terrorist acts,
known as Specially Designated Nationals and Blocked Persons. If we
find a name on any transaction, account or wire transfer that is on an OFAC
list, we must freeze such account, file a suspicious activity report and notify
the appropriate authorities.
Privacy
and Data Security. Under federal law, financial institutions
are generally prohibited from disclosing consumer information to non-affiliated
third parties unless the consumer has been given the opportunity to object and
has not objected to such disclosure. Financial institutions are
further required to disclose their privacy policies to consumers
annually. To the extent state laws are more protective of consumer
privacy, financial institutions must comply with state law privacy
provisions.
In addition,
federal and state banking agencies have prescribed standards for maintaining the
security and confidentiality of consumer information. Southside Bank
is subject to such standards, as well as standards for notifying consumers in
the event of a security breach. Under federal law, Southside Bank
must disclose its privacy policy for collecting and protecting confidential
customer information to consumers, permit consumers to “opt out” of having
non-public customer information disclosed to non-affiliated third parties, with
some exceptions, and allow customers to opt out of receiving marketing
solicitations based on information about the customer received from another
subsidiary. States may adopt more extensive privacy
protections. Southside Bank is similarly required to have an
information security program to safeguard the confidentiality and security of
customer information and to ensure proper disposal. Customers must be
notified when unauthorized disclosure involves sensitive customer information
that may be misused.
Regulatory
Examination. See Holding Company
Regulation.
Enforcement
Authority. Southside Bank and its “institution-affiliated
parties,” including management, employees, agents, independent contractors and
consultants, such as attorneys and accountants and others who participate in the
conduct of the institution’s affairs, are subject to potential civil and
criminal penalties for violations of law, regulations or written orders of a
government agency. Violations can include failure to timely file
required reports, filing false or misleading information or submitting
inaccurate reports. Civil penalties may be as high as $1,000,000 a
day for such violations, and criminal penalties for some financial institution
crimes may include imprisonment for 20 years. Regulators have
flexibility to commence enforcement actions against institutions and
institution-affiliated parties, and the FDIC has the authority to terminate
deposit insurance. When issued by a banking agency, cease-and-desist
orders may, among other things, require affirmative action to correct any harm
resulting from a violation or practice, including restitution, reimbursement,
indemnifications or guarantees against loss. A financial institution
may also be ordered to restrict its growth, dispose of certain assets, rescind
agreements or contracts, or take other actions determined to be appropriate by
the ordering agency. The federal banking agencies also may remove a
director or officer from an insured depository institution (or bar them from the
industry) if a violation is willful or reckless.
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. These 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. Recently, in response to the financial crisis, the Federal
Reserve has established several innovative programs to stabilize certain
financial institutions and to ensure the availability of credit. The
nature of future monetary policies and the effect of such policies on Southside
Bank’s future business and earnings, therefore, cannot be predicted
accurately.
14
Capital
Purchase Program. Under Title I of
the Emergency Economic Stabilization Act (“EESA”) enacted in October 2008, as
amended by the America Recovery and Reinvestment Act (“ARRA”) in February 2009,
the U.S. Treasury Department (“Treasury”) established the Troubled Asset Relief
Program (“TARP”), which includes the Capital Purchase Program
(“CPP”). Under the CPP, the Treasury, upon application by a bank
holding company and approval by the Federal Reserve Board and the primary
federal regulator of the subsidiary bank or banks, purchased senior preferred
stock from the company. Because of our sound financial condition and
the conditions that are or may be imposed on use of the CPP funds or on the
institutions that received CPP funds, we chose not to apply for such
funds.
Evolving Legislation and Regulatory
Action. Proposals for new statutes and regulations are
frequently circulated, and may include wide-ranging changes to the structures,
regulations and competitive relationships of financial
institutions. In December 2009, the House of Representatives approved
legislation that would make wide-ranging changes to the framework and substance
of federal bank regulation, and the U.S. Senate is now considering comparable
regulation. If approved, the proposed legislation could substantially
change the financial institution regulatory system and expand or contract the
powers of banking institutions and bank holding companies. Such
legislation may change existing bank statutes and regulations, as well as our
current operating environment significantly. Specifically, the
Federal Reserve’s regulation of bank holding companies may increase and a new
consumer protection agency may be created that would oversee the retail business
of banks. We cannot predict whether new legislation will be enacted
and, if enacted, the effect that it, or any regulations, would have on our
business, financial condition or results of operations.
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 an economic environment that continues to pose significant
challenges for us and could adversely affect our financial condition and results
of operations.
We continue
to operate in a challenging and uncertain economic
environment. Financial institutions continue to be affected by
declines in the real estate market and constrained financial
markets. We retain direct exposure to the residential and commercial
real estate markets, and we could be affected by these
events. Continued declines in real estate values, home sales volumes
and financial stress on borrowers as a result of the uncertain economic
environment, including unemployment and new job losses, could have an adverse
effect on our borrowers or their customers, which could adversely affect our
financial condition and results of operations. In addition, the
effects of the national economic recession and any residual deterioration in
local economic conditions in our markets could drive losses beyond those which
are provided for in our allowance for loan losses and result in the following
consequences:
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increase
in loan delinquencies;
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increases
in nonperforming assets and
foreclosures;
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decreases
in demand for our products and services, which could adversely affect our
liquidity position;
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decreases
in the value of the collateral securing our loans, especially real estate,
which could reduce customers’ borrowing
power;
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decrease
in the credit quality of our non U.S. Government and non U.S. Agency
investment securities, especially our trust preferred, corporate and
municipal securities, could adversely affect our financial condition and
results of operations;
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an
adverse or unfavorable resolution of the Fannie Mae or Freddie Mac
receivership could adversely affect our financial condition and results of
operation; and
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decrease
in the real estate values subject to ad-valorem taxes by municipalities
that impact the municipalities ability to repay its debt, could adversely
affect our municipal loans or debt securities and adversely affect our
financial condition and results of
operations.
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We
continue to face market volatility, which could adversely impact our results of
operations and access to capital.
The capital
and credit markets have been experiencing volatility and disruption for more
than two years. While volatility in, and disruption of,
these markets no longer remain at unprecedented levels, in some cases, the
markets have produced downward pressure on stock prices and credit capacity
without regard to an issuer’s underlying financial strength. If
current levels of market disruption and volatility continue or worsen, there can
be no assurance that we will not experience adverse effects, which may be
material, on our ability to access capital and on our results of operations and
financial condition, including our liquidity position.
Emergency measures designed to
stabilize the U.S. financial system are beginning to wind
down.
Since
2008, various legislative and regulatory actions have been implemented in
response to the financial crises affecting the banking system and financial
markets and to the recession. Many of these programs are beginning to
expire. The wind-down of these programs may have a direct adverse
effect on us or a broader adverse impact on the financial
sector. TARP was established pursuant to EESA, as amended by ARRA,
whereby the Treasury has the authority to, among other things, spend up to
$700 billion to purchase equity in financial institutions, purchase
mortgages, mortgage-backed securities and certain other financial instruments
from financial institutions for the purpose of stabilizing and providing
liquidity to the U.S. financial markets. Though TARP was scheduled to
expire on December 31, 2009, Treasury announced that it will extend TARP until
October 3, 2010, in order to retain an adequate financial stability reserve if
financial conditions worsen and threaten the economy. Treasury has
stated that any new TARP commitments in 2010 will be limited to the purposes of
foreclosure mitigation, stabilizing the housing market, and providing capital to
small and community banks as a source of credit for businesses. On
October 21, 2009, the FDIC voted to end the Debt Guarantee Program portion of
the Temporary Liquidity Guarantee Program, which guarantees certain
“newly-issued unsecured debt” of banks and certain holding
companies. The Debt Guarantee Program expired on October 31, 2009,
with the guarantee period on such debt expiring on December 30,
2012. The Transaction Account Guarantee portion of the program, which
guarantees non-interest bearing bank transaction accounts on an unlimited basis,
is scheduled to continue until June 30, 2010. The Federal Reserve
will begin to sell off its portfolio of mortgage-backed securities, which it
previously purchased in order to stabilize the residential mortgage
market.
We cannot
predict the effect that the wind-down of these various governmental programs
will have on current financial market conditions, or on our business, financial
condition, results of operations, access to credit and the trading price of our
common stock.
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, or 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:
16
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our
ability to originate loans and obtain
deposits;
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our
ability to retain deposits in a rising rate
environment;
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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.
Any
substantial, unexpected or prolonged change in market interest rates could have
a material adverse effect on our financial condition and results of
operations. See the section captioned “Net Interest Income” in
“Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations” for further discussion related to our management of
interest rate risk.
We
are subject to credit quality risks and our credit policies may not be
sufficient to avoid losses.
We are
subject to the risk of losses resulting from the failure of borrowers,
guarantors and related parties to pay interest and principal amounts on their
loans. Although we maintain credit policies and credit underwriting
and monitoring and collection procedures, these policies and procedures may not
prevent losses, particularly during periods in which the local, regional or
national economy suffers a general decline. If borrowers fail to
repay their loans, our financial condition and results of operations would be
adversely affected.
Our
interest rate risk, liquidity, market value of securities and profitability are
subject to risks associated with the successful implementation of our balance
sheet and leverage strategy.
We
implemented a balance sheet and leverage strategy in 1998 for the purpose of
enhancing overall profitability by maximizing the use of our
capital. The effectiveness of our balance sheet and 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 Agency mortgage-backed and related
securities, adverse changes in the market liquidity of our Agency
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 balance
sheet and leverage strategy is flawed or poorly implemented, we may incur
significant losses. See the section captioned “Balance Sheet and
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 further decline
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, 2009, approximately 51.8% 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 and continuing
throughout 2008 and 2009, there were well-publicized developments in the credit
markets, beginning with a decline in the sub-prime mortgage lending market,
which later extended to the markets for collateralized mortgage obligations,
mortgage-backed securities and the lending markets generally. This
decline has continued to result in restrictions in the resale markets for
non-conforming loans and has had an adverse effect on retail mortgage
lending
17
operations
in many markets. A further decline in the credit markets generally
could adversely affect our financial condition and results of operations if we
are unable to extend credit or sell loans in the secondary market. An
adverse change in the economy affecting values of real estate generally or in
our primary markets specifically could significantly impair the value of
collateral and our ability to sell the collateral upon
foreclosure. Furthermore, it is likely that, in a declining real
estate market, we would be required to further increase our allowance for loan
losses. If we are required to liquidate the collateral securing a
loan to satisfy the debt during a period of reduced real estate values or to
increase our allowance for loan losses, our profitability and financial
condition could be adversely impacted.
We
have a high concentration of loans directly related to the medical community in
our market area, primarily in Smith and Gregg counties. A negative
change adversely impacting the medical community, for any reason, could result
in losses and materially and adversely affect our business, financial condition,
results of operations and future prospects.
A significant
portion of our loan portfolio is dependent on the medical
community. The primary source of repayment for loans in the medical
community is cash flow from continuing operations. However, changes
in the amount the government pays the medical community through the various
government health insurance programs could adversely impact the medical
community, which in turn could result in higher default rates by borrowers in
the medical industry. Healthcare reform or increased regulation of
the medical community could also negatively impact profitability and cash flow
in the medical community. It is likely that, should there be any
significant adverse impact to the medical community, our profitability and
financial condition would also be adversely impacted.
Our allowance for probable loan losses
may be insufficient.
We maintain
an allowance for probable loan losses, which is a reserve established through a
provision for probable loan losses charged to expense. This allowance
represents management’s best estimate of probable losses that may exist within
the existing portfolio of loans. The allowance, in the judgment of
management, is necessary to reserve for estimated loan losses and risks inherent
in the loan portfolio. The level of the allowance reflects
management’s continuing evaluation of industry concentrations; specific credit
risks; loan loss experience; current loan portfolio quality; present economic,
political and regulatory conditions; and unidentified losses inherent in the
current loan portfolio. The determination of the appropriate level of
the allowance for probable loan losses inherently involves a high degree of
subjectivity and requires us to make significant estimates and assumptions
regarding current credit risks and future trends, all of which may undergo
material changes. Changes in economic conditions affecting the value
of properties used as collateral for loans, problems affecting the credit of
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
18
associated
with an environmental hazard could have a material adverse effect on our
financial condition and results of operations.
Our
profitability depends significantly on economic conditions in the State of
Texas.
Our success
depends primarily on the general economic conditions of the State of Texas and
the specific local markets in which we operate. Unlike larger
national or other regional banks that are more geographically diversified,
we provide banking and financial services to customers primarily in
the Texas areas of Tyler, Longview, Lindale, Whitehouse, Chandler, Gresham,
Athens, Palestine, Jacksonville, Hawkins, Bullard, Forney, Seven Points, Gun
Barrel City, Fort Worth, Austin and Arlington. The local economic
conditions in these areas have a significant impact on the demand for our
products and services, as well as the ability of our customers to repay loans,
the value of the collateral securing loans and the stability of our deposit
funding sources. A significant decline in general economic
conditions, caused by inflation, recession, acts of terrorism, outbreak of
hostilities or other international or domestic occurrences, unemployment,
changes in securities markets or other factors could impact these local economic
conditions and, in turn, have a material adverse effect on our financial
condition and results of operations.
We
operate in a highly competitive industry and market area.
We face
substantial competition in all areas of our operations from a variety of
different competitors, many of which are larger and may have more financial
resources. Such competitors primarily include national, regional, and
community banks within the various markets we operate. Additionally,
various out-of-state banks have entered or have announced plans to enter the
market areas in which we currently operate. We also face competition
from many other types of financial institutions, including, without limitation,
savings and loans, credit unions, finance companies, brokerage firms, insurance
companies, factoring companies and other financial
intermediaries. The financial services industry could become even
more competitive as a result of legislative, regulatory and technological
changes, continued consolidation and recent trends in the credit and mortgage
lending markets. Banks, securities firms and insurance companies can
merge under the umbrella of a financial holding company, which can offer
virtually any type of financial service, including banking, securities
underwriting, insurance (both agency and underwriting) and merchant
banking. Also, technology has lowered barriers to entry and made it
possible for nonbanks to offer products and services traditionally provided by
banks, such as automatic transfer and automatic payment systems. Many
of our competitors have fewer regulatory constraints and may have lower cost
structures. Additionally, due to their size, many competitors may be
able to achieve economies of scale and, as a result, may offer a broader range
of products and services as well as better pricing for those products and
services than we can.
Our ability to compete successfully
depends on a number of factors, including, among other things:
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the
ability to develop, maintain and build upon long-term customer
relationships based on top quality service, high ethical standards and
safe, sound assets;
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the
ability to expand our market
position;
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the
scope, relevance and pricing of products and services offered to meet
customer needs and demands;
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the
rate at which we introduce new products and services relative to our
competitors;
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customer
satisfaction with our level of service;
and
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industry
and general economic trends.
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Failure to perform in any of these
areas could significantly weaken our competitive position, which could adversely
affect our growth and profitability, which, in turn, could have a material
adverse effect on our financial condition and results of
operations.
19
We
are subject or may become subject to extensive government regulation and
supervision.
Southside
Bancshares, Inc., primarily through Southside Bank, and certain nonbank
subsidiaries, is subject to extensive federal and state regulation and
supervision. Banking regulations are primarily intended to protect
depositors’ funds, federal deposit insurance funds and the banking system as a
whole, not shareholders. These regulations affect our lending
practices, capital structure, investment practices and dividend policy and
growth, among other things. Congress and federal and state regulatory
agencies continually review banking laws, regulations and policies for possible
changes. Changes to statutes, regulations or regulatory policies,
including changes in interpretation or implementation of statutes, regulations
or policies, could affect us in substantial and unpredictable
ways. Such changes could subject us to additional costs, limit
deposit fees and other types of fees we charge, limit the types of financial
services and products we may offer and/or increase the ability of nonbanks to
offer competing financial services and products, among other
things. Additionally, proposed legislation affecting the regulation
of banking institutions may be enacted in 2010, but the specific terms of such
legislation are difficult to foresee. While we cannot predict the
regulatory changes that may arise out of the current financial and economic
environment, any regulatory changes or increased regulatory scrutiny could
increase costs directly related to complying with new regulatory
requirements. Failure to comply with laws, regulations or policies
could result in sanctions by regulatory agencies, civil money penalties and/or
reputation damage, which could have a material adverse effect on our business,
financial condition and results of operations. While our policies and
procedures are designed to prevent any such violations, there can be no
assurance that such violations will not occur. See the section
captioned “Supervision and Regulation” in “Item 1. Business” and
“Note 15 –
Shareholders’ Equity” to our consolidated financial statements included in this
report.
We may become subject to increased
regulatory capital changes.
In September
2009, the Treasury recommended, among other things, that regulatory capital
requirements for all banks be increased. The federal bank regulators
and Congress have discussed changes in the capital rules as
well. Although it is uncertain whether any changes will be made, any
such changes likely would result in higher capital requirements which would
affect our asset portfolios and financial performance.
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
developing and marketing new delivery systems and/or new products and services,
we may invest significant time and resources. Initial timetables for the
introduction and development of new lines of business and/or new products or
services may not be achieved and price and profitability targets may not prove
feasible. External factors, such as compliance with regulations,
competitive alternatives, and shifting market preferences, may also impact the
successful implementation of a new line of business or a new product or
service. Furthermore, any new line of business and/or new product or
service could have a significant impact on the effectiveness of our system of
internal controls. Failure to successfully manage these risks in the
development and implementation of new lines of business or new products or
services could have a material adverse effect on our business, results of
operations and financial condition.
We
rely on dividends from our subsidiaries for most of our revenue.
Southside
Bancshares, Inc. is a separate and distinct legal entity from our
subsidiaries. We receive substantially all of our revenue from
dividends from our subsidiaries. These dividends are the principal
source of funds to pay dividends on our common stock and interest and principal
on our debt. Various federal and/or state laws and regulations limit
the amount of dividends that Southside Bank, and certain nonbank subsidiaries
may pay to Southside Bancshares, Inc. Also, Southside Bancshares,
Inc.’s right to participate in a distribution of assets upon a subsidiary’s
liquidation or reorganization is subject to the prior claims of the subsidiary’s
creditors. In the event Southside Bank is unable to pay dividends to
Southside Bancshares, Inc., Southside Bancshares, Inc. may not be able to
service debt, pay obligations or pay dividends on common stock. The
inability to receive dividends from Southside Bank could have a material adverse
effect on Southside Bancshares, Inc.’s business, financial condition and results
of operations. See the section captioned “Supervision and Regulation”
in “Item 1. Business” and “Note 15 – Shareholders’ Equity” to our
consolidated financial statements included in this report.
20
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
conditions, increased interest rates and competitive pressures and we may be
unable to obtain funds on terms that are favorable to us. We chose
not to participate in the CPP, which was effectively closed in December 2009,
and in the future if we need to obtain additional funds, we may not be able to
obtain them on terms as favorable to us as they may have been had we
participated in the CPP. If we are unable to obtain funds, we could
be restricted in our ability to extend credit, and may not be able to obtain
sufficient funds to support growth through branching or acquisition
initiatives.
The
holders of our junior subordinated debentures have rights that are senior to
those of our shareholders.
On September
4, 2003, we issued $20.6 million of floating rate junior subordinated debentures
in connection with a $20.0 million trust preferred securities issuance by our
subsidiary, Southside Statutory Trust III. These junior subordinated
debentures mature in September 2033. On August 8 and 10, 2007, we
issued $23.2 million and $12.9 million, respectively, of five-year fixed rate
converting to floating rate thereafter, junior subordinated debentures in
connection with $22.5 million and $12.5 million, respectively, trust preferred
securities issuances by our subsidiaries Southside Statutory Trust IV and V,
respectively. Trust IV matures October 2037 and Trust V matures
September 2037. As part of the acquisition of FWBS on October 10,
2007, we assumed $3.6 million of floating rate junior subordinated debentures
issued to Magnolia Trust Company I in connection with $3.5 million of trust
preferred securities issued in 2005 that matures in 2035.
We
conditionally guarantee payments of the principal and interest on the trust
preferred securities. Our junior subordinated debentures are senior
to our shares of common stock. As a result, we must make payments on
the junior subordinated debentures (and the related trust preferred securities)
before any dividends can be paid on our common stock and, in the event of
bankruptcy, dissolution or liquidation, the holders of the debentures must be
satisfied before any distributions can be made to the holders of common
stock. We have the right to defer distributions on our junior
subordinated debentures (and the related trust preferred securities) for up to
five years, during which time no dividends may be paid to holders of common
stock.
Acquisitions
and potential acquisitions may disrupt our business and dilute shareholder
value.
During 2007,
we completed the acquisition of FWBS. This was our first
acquisition. Aside from this acquisition, we occasionally investigate
potential merger or acquisition partners that appear to be culturally similar,
have experienced management and possess either significant or attractive market
presence or have potential for improved profitability through financial
management, economies of scale or expanded services. Acquiring other
banks, businesses or branches involves various risks commonly associated with
acquisitions, including, among other things:
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potential
exposure to unknown or contingent liabilities of the target
company;
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exposure
to potential asset quality issues of the target
company;
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difficulty
and expense of integrating the operations and personnel of the target
company;
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potential
disruption to our business;
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potential
diversion of our management’s time and
attention;
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the
possible loss of key employees and customers of the target
company;
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difficulty
in estimating the value of the target company;
and
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potential
changes in banking or tax laws or regulations that may affect the target
company.
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21
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.
We
may not be able to attract and retain skilled people.
Our success depends, in large part, on
our ability to attract and retain key people. Competition for the
best people in most activities we engage in can be intense, and we may not be
able to hire people or to retain them. The unexpected loss of
services of one or more of our key personnel could have a material adverse
impact on our business because of their skills, knowledge of our market,
relationships in the communities we serve, years of industry experience and the
difficulty of promptly finding qualified replacement
personnel. Although we have employment agreements with certain of our
executive officers, there is no guarantee that these officers will remain
employed with the Company.
Our
information systems may experience an interruption or breach in
security.
We rely
heavily on communications and information systems to conduct our
business. Any failure, interruption or breach in security of these
systems could result in failures or disruptions in our customer relationship
management, general ledger, deposit, loan and other systems. While we
have policies and procedures designed to prevent or limit the effect of the
failure, interruption or security breach of our information systems, there can
be no assurance that we can prevent any such failures, interruptions or security
breaches or, if they do occur, that they will be adequately
addressed. The occurrence of any failures, interruptions or security
breaches of our information systems could damage our reputation, result in a
loss of customer business, subject us to additional regulatory scrutiny, or
expose us to civil litigation and possible financial liability, any of which
could have a material adverse effect on our financial condition and results of
operations.
We
continually encounter technological change.
The financial
services industry is continually undergoing rapid technological change with
frequent introductions of new technology-driven products and
services. The effective use of technology increases efficiency and
enables financial institutions to better serve customers and to reduce
costs. Our future success depends, in part, upon our ability to
address the needs of our customers by using technology to provide products and
services that will satisfy customer demands, as well as to create additional
efficiencies in our operations. Many of our competitors have
substantially greater resources to invest in technological
improvements. We may not be able to effectively implement new
technology-driven products and services or be successful in marketing these
products and services to our customers and even if we implement such products
and services, we may incur substantial costs in doing so. Failure to
successfully keep pace with technological change affecting the financial
services industry could have a material adverse impact on our business,
financial condition and results of operations.
We
are subject to claims and litigation pertaining to fiduciary
responsibility.
From time to
time, customers make claims and take legal action pertaining to our performance
of our fiduciary responsibilities. Whether customer claims and legal
action related to our performance of our fiduciary responsibilities are founded
or unfounded, defending claims is costly and diverts management’s attention, and
if such claims and legal actions are not resolved in a manner favorable to us,
they may result in significant financial liability and/or adversely affect our
market perception and products and services as well as impact customer demand
for those products and services. Any financial liability or
reputation damage could have a material adverse effect on our business,
financial condition and results of operations.
22
Severe
weather, natural disasters, acts of war or terrorism and other external events
could significantly impact our business.
Severe
weather, natural disasters, acts of war or terrorism and other adverse external
events could have a significant impact on our ability to conduct
business. Such events could affect the stability of our deposit base,
impair the ability of borrowers to repay outstanding loans, impair the value of
collateral securing loans, cause significant property damage, result in loss of
revenue and/or cause us to incur additional expenses. For example,
because of our location and the location of the market areas we serve, severe
weather is more likely than in other areas of the country. Although
management has established disaster recovery policies and procedures, there can
be no assurance of the effectiveness of such policies and procedures, and the
occurrence of any such event could have a material adverse effect on our
business, financial condition and results of operations.
Current
market developments may adversely affect our industry, business and results of
operations.
Dramatic
declines in the housing market during the past few years, with falling home
prices and increasing foreclosures and unemployment, have resulted in
significant write-downs of asset values by financial institutions, including
government-sponsored entities and major commercial and investment
banks. These write-downs, initially of mortgage-backed securities but
spreading to credit default swaps and other derivative securities, have caused
many financial institutions to seek additional capital, to merge with larger and
stronger institutions and, in some cases, to fail. Reflecting concern
about the stability of the financial markets generally and the strength of
counterparties, many lenders and institutional investors have reduced, and in
some cases, ceased to provide funding to borrowers including other financial
institutions. The resulting lack of available credit, lack of
confidence in the financial sector, increased volatility in the financial
markets and reduced business activity could materially and adversely affect our
business, financial condition and results of operations.
Funding
to provide liquidity may not be available to us on favorable terms or at
all.
Liquidity
is the ability to meet cash flow needs on a timely basis at a reasonable
cost. The liquidity of Southside Bank is used to make loans and
leases to repay deposit liabilities as they become due or are demanded by
customers. Liquidity policies and limits are established by the board
of directors. Management and our investment committee regularly
monitor the overall liquidity position of Southside Bank and the Company to
ensure that various alternative strategies exist to cover unanticipated events
that could affect liquidity. Management and our investment committee
also establish policies and monitor guidelines to diversify Southside Bank’s
funding sources to avoid concentrations in excess of board approved policies in
any one market source. Funding sources include federal funds
purchased, securities sold under repurchase agreements, non-core deposits, and
short- and long-term debt. Southside Bank is also a member of the
Federal Home Loan Bank System, which provides funding through advances to
members that are collateralized with mortgage-related assets.
We
maintain a portfolio of securities that can be used as a secondary source of
liquidity. There are other sources of liquidity available to us
should they be needed. These sources include sales or securitizations
of loans, our ability to acquire additional national market, non-core deposits,
additional collateralized borrowings such as Federal Home Loan Bank advances,
the issuance and sale of debt securities, and the issuance and sale of preferred
or common securities in public or private transactions. Southside
Bank also can borrow from the Federal Reserve’s discount window.
We have
historically had access to a number of alternative sources of liquidity, but
given the volatility in the credit and liquidity markets, there is no assurance
that we will be able to obtain such liquidity on terms that are favorable to us,
or at all. For example, the cost of out-of-market deposits may exceed
the cost of deposits of similar maturity in our local market area, making them
unattractive sources of funding; financial institutions may be unwilling to
extend credit to banks because of concerns about the banking industry and the
economy generally; there may not be a market for the issuance of additional
trust preferred securities; and, given recent downturns in the economy, there
may not be a viable market for raising equity capital.
If we
were unable to access any of these funding sources when needed, we might be
unable to meet customers’ needs, which could adversely impact our financial
condition, results of operations, cash flows and liquidity, and level of
regulatory-qualifying capital.
23
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:
|
·
|
actual
or anticipated variations in quarterly results of
operations;
|
|
·
|
recommendations
by securities analysts;
|
|
·
|
operating
and stock price performance of other companies that investors deem
comparable to us;
|
|
·
|
news
reports relating to trends, concerns and other issues in the financial
services industry;
|
|
·
|
perceptions
in the marketplace regarding us and/or our
competitors;
|
|
·
|
new
technology used, or services offered, by
competitors;
|
|
·
|
significant
acquisitions or business combinations, strategic partnerships, joint
ventures or capital commitments by or involving us or our
competitors;
|
|
·
|
failure
to integrate acquisitions or realize anticipated benefits from
acquisitions;
|
|
·
|
changes
in government regulations; and
|
|
·
|
geopolitical
conditions such as acts or threats of terrorism or military
conflicts.
|
General
market fluctuations, industry factors and general economic and political
conditions and events, such as economic slowdowns or recessions, interest rate
changes or credit loss trends, could also cause our stock price to decrease
regardless of operating results.
The
trading volume in our common stock is less than that of other larger financial
services companies.
Although our
common stock is listed for trading on the NASDAQ Global Select Market, the
trading volume is low, and you are not assured liquidity with respect to
transactions in our common stock. A public trading market having the
desired characteristics of depth, liquidity and orderliness depends on the
presence in the marketplace of willing buyers and sellers of our common stock at
any given time. This presence depends on the individual decisions of
investors and general economic and market conditions over which we have no
control. Given the lower trading volume of our common stock,
significant sales of our common stock, or the expectation of these sales, could
cause our stock price to fall.
An
investment in our common stock is not an insured deposit.
Our common
stock is not a bank deposit and, therefore, is not insured against loss by the
FDIC, any other deposit insurance fund or by any other public or private
entity. Investment in our common stock is inherently risky for the
reasons described in this “Risk Factors” section and elsewhere in this report
and is subject to the same market forces that affect the price of common stock
in any company. As a result, if you acquire our common stock, you may
lose some or all of your investment.
Provisions
of our articles of incorporation and amended and restated bylaws, as well as
state and federal banking regulations, could delay or prevent a takeover of us
by a third party.
Our articles
of incorporation and amended and restated bylaws could delay, defer or prevent a
third party from acquiring us, despite the possible benefit to our shareholders,
or otherwise adversely affect the price of our common stock. These
provisions include, among others, requiring advance notice for raising business
matters or nominating directors at shareholders’ meetings and staggered board
elections.
24
Any individual, acting alone or with
other individuals, who are seeking to acquire, directly or indirectly, 10.0% or
more of our outstanding common stock must comply with the Change in Bank Control
Act, which requires prior notice to the Federal Reserve for any
acquisition. Additionally, any entity that wants to acquire 5.0% or
more of our outstanding common stock, or otherwise control us, may need to
obtain the prior approval of the Federal Reserve under the BHCA of 1956, as
amended. As a result, prospective investors in our common stock need
to be aware of and comply with those requirements, to the extent
applicable.
We
may issue additional securities, which could dilute your ownership
percentage.
In certain
situations, our board of directors has the authority, without any vote of our
shareholders, to issue shares of our authorized but unissued
stock. In the future, we may issue additional securities, through
public or private offerings, to raise additional capital or finance
acquisitions. Any such issuance would dilute the ownership of current
holders of our common stock.
RISKS
ASSOCIATED WITH THE BANKING INDUSTRY
The
earnings of financial services companies are significantly affected by general
business and economic conditions.
Our
operations and profitability are impacted by general business and economic
conditions in the United States and abroad. These conditions include
short-term and long-term interest rates, inflation, money supply, political
issues, legislative and regulatory changes, fluctuations in both debt and equity
capital markets, broad trends in industry and finance, and the strength of the
U.S. economy and the local economies in which we operate, all of which are
beyond our control. A deterioration in economic conditions could
result in an increase in loan delinquencies and nonperforming assets, decreases
in loan collateral values and a decrease in demand for our products and
services, among other things, any of which could have a material adverse impact
on our financial condition and results of operations.
Financial
services companies depend on the accuracy and completeness of information about
customers and counterparties.
In deciding
whether to extend credit or enter into other transactions, we may rely on
information furnished by or on behalf of customers and counterparties, including
financial statements, credit reports and other financial
information. We may also rely on representations of those customers,
counterparties or other third parties, such as independent auditors, as to the
accuracy and completeness of that information. Reliance on inaccurate
or misleading financial statements, credit reports or other financial
information could have a material adverse impact on our business, financial
condition and results of operations.
Consumers
may decide not to use banks to complete their financial
transactions.
Technology
and other changes are allowing parties to complete financial transactions that
historically have involved banks through alternative methods. For
example, consumers can now maintain funds that would have historically been held
as bank deposits in brokerage accounts or mutual funds. Consumers can
also complete transactions such as paying bills and/or transferring funds
directly without the assistance of banks. The process of eliminating
banks as intermediaries could result in the loss of fee income, as well as the
loss of customer deposits and the related income generated from those
deposits. The loss of these revenue streams and the lower cost
deposits as a source of funds could have a material adverse effect on our
financial condition and results of operations.
The
soundness of other financial institutions could adversely affect
us.
Financial
services institutions are interrelated as a result of trading, clearing,
counterparty or other relationships. We have exposure to many
different industries and counterparties, and we routinely execute transactions
with counterparties in the financial services industry, including brokers and
dealers, commercial banks, investment banks, mutual and hedge funds, and other
institutional clients. Many of these transactions expose us to credit
risk in the event of default of our counterparty or client. In
addition, our credit risk may be exacerbated when the collateral held by us
cannot be realized or is liquidated at
25
prices
not sufficient to recover the full amount of the loan or derivative exposure due
us. There is no assurance that any such losses would not materially
and adversely affect our results of operations or earnings.
ITEM 1B. UNRESOLVED STAFF
COMMENTS
None
|
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 at 1015 South Jackson Street, Jacksonville,
Texas;
|
|
·
|
Gresham
main branch and motor bank at 16691 FM 2493, Tyler,
Texas;
|
|
·
|
Gun
Barrel City main branch and motor bank facility at 901 West Main, Gun
Barrel City, Texas;
|
|
·
|
Arlington
branch and motor bank facility at 2831 West Park Row, Arlington,
Texas;
|
|
·
|
Fort
Worth branch and motor bank facility at 9516 Clifford Street, Fort Worth,
Texas;
|
|
·
|
48
ATM’s located throughout our market
areas.
|
Southside
Bank currently operates full service banks in leased space in 18 grocery stores,
two lending centers and two full service branches in leased office space in the
following locations:
|
·
|
one
in Bullard, Texas;
|
|
·
|
one
in Lindale, Texas;
|
|
·
|
one
in Flint, Texas;
|
26
|
·
|
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;
|
|
·
|
Fort
Worth branch and motor bank facility at 701 West Magnolia, Fort Worth,
Texas;
|
|
·
|
Fort
Worth branch at 707 West Magnolia, Fort Worth,
Texas;
|
|
·
|
Forney
loan production office at 413 North McGraw, Forney, Texas;
and
|
|
·
|
Austin
loan production office at 8200 North Mopac, Suite 130, Austin,
Texas.
|
SFG
currently operates its business in leased office space in the following
location:
|
·
|
1600
East Pioneer Parkway, Suite 300, Arlington,
Texas.
|
We are in the
process of building a full service branch at 3815 State Highway 64 West, Tyler,
Texas, which we anticipate will open during the second half of
2010. In addition, we are building a new facility adjacent to our
headquarters at 1305 South Beckham, Tyler, Texas, which will house our Trust
department. It is anticipated to be completed during the second half
of 2010. We are also in the process of opening a full service bank in
a leased space in a grocery store in Tyler, Texas. It is anticipated
to open during the second quarter of 2010. We will continue to
explore opportunities to expand either into additional grocery store or
traditional branch locations.
All of the
properties detailed above are suitable and adequate to provide the banking
services intended based on the type of property described. In
addition, the properties for the most part are fully utilized but designed with
productivity in mind and can handle the additional business volume we anticipate
they will generate. As additional potential needs are identified,
individual property enhancements or the need to add properties will be
evaluated.
|
ITEM 3. LEGAL
PROCEEDINGS
|
We are party
to legal proceedings arising in the normal conduct of
business. Management believes that such litigation is not material to
our financial position or results of operations.
27
|
PART
II
|
|
ITEM 5. MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS
|
|
|
AND ISSUER PURCHASES
OF EQUITY SECURITIES
|
MARKET
INFORMATION
Our common
stock trades on the NASDAQ Global Select Market under the symbol
"SBSI." The high/low prices shown below represent the daily weighted
average prices on the NASDAQ Global Select Market for the period from January 1,
2008 to December 31, 2009. During the second quarter of 2009 and the
first quarter of 2008, we declared and paid a 5% stock
dividend. Stock prices listed below have been adjusted to give
retroactive recognition to such stock dividends.
|
Year
Ended
|
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
||||
|
December
31, 2009
|
$
|
21.98
–
13.26
|
$
|
25.22
– 18.38
|
$
|
25.31
– 20.52
|
$
|
22.45
– 19.81
|
|
December
31, 2008
|
$
|
21.88
–
17.21
|
$
|
23.22
– 17.55
|
$
|
24.28
– 14.81
|
$
|
23.36
– 18.13
|
See "Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Capital Resources" for a discussion of our common stock repurchase
program.
SHAREHOLDERS
There were approximately 1,000 holders
of record of our common stock, the only class of equity securities currently
issued and outstanding, as of February 12, 2010.
DIVIDENDS
Cash
dividends declared and paid were $0.75 and $0.60 per share for the years ended
December 31, 2009 and 2008, respectively. Stock dividends of 5% were
also declared and paid during each of the years ended December 31, 2009, 2008
and 2007. We have paid a cash dividend at least once every year since
1970 (including dividends paid by Southside Bank prior to the incorporation of
Southside Bancshares). 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, 2009
|
$
|
0.13
|
$
|
0.14
|
$
|
0.14
|
$
|
0.34
|
|
December
31, 2008
|
$
|
0.12
|
$
|
0.13
|
$
|
0.16
|
$
|
0.19
|
STOCK-BASED
COMPENSATION PLANS
Information
regarding stock-based compensation awards outstanding and available for future
grants as of December 31, 2009, 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 13 –
Employee Benefits" to our consolidated financial statements included in this
report.
UNREGISTERED
SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER SECURITY
REPURCHASES
During 2009, we did not approve any
additional funding for our stock repurchase plan. No common stock was
purchased during the fourth quarter ended December 31, 2009.
28
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.
|
Period
Ending
|
||||||
|
Index
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
12/31/09
|
|
Southside
Bancshares, Inc.
|
100.00
|
94.90
|
129.60
|
110.83
|
137.41
|
124.92
|
|
Russell
2000
|
100.00
|
104.55
|
123.76
|
121.82
|
80.66
|
102.58
|
|
Southside
Bancshares Peer Group 2009*
|
100.00
|
105.93
|
117.16
|
101.94
|
101.63
|
105.43
|
|
*Southside
Bancshares Peer Group 2009 contains 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 Encore Bancshares, Inc.
|
||||||
|
Source
: SNL Financial LC, Charlottesville, VA
©
2010
|
|
29
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, 2009. This information should be
read in conjunction with "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and “Item
8. Financial Statements and Supplementary Data,” as set forth in this
report. Please refer to “Item 1. Business” for a discussion of our acquisition
of FWBS in 2007.
|
As
of and For the Years Ended December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Investment
Securities
|
$ | 266,553 | $ | 278,856 | $ | 110,403 | $ | 100,303 | $ | 121,240 | ||||||||||
|
Mortgage-backed
and Related Securities
|
$ | 1,480,847 | $ | 1,183,800 | $ | 917,518 | $ | 869,326 | $ | 821,756 | ||||||||||
|
Loans,
Net of Allowance for Loan Losses
|
$ | 1,013,680 | $ | 1,006,437 | $ | 951,477 | $ | 751,954 | $ | 673,274 | ||||||||||
|
Total
Assets
|
$ | 3,024,288 | $ | 2,700,238 | $ | 2,196,322 | $ | 1,890,976 | $ | 1,783,462 | ||||||||||
|
Deposits
|
$ | 1,870,421 | $ | 1,556,131 | $ | 1,530,491 | $ | 1,282,475 | $ | 1,110,813 | ||||||||||
|
Long-term
Obligations
|
$ | 592,830 | $ | 715,800 | $ | 146,558 | $ | 149,998 | $ | 229,032 | ||||||||||
|
Income
Statement Data:
|
||||||||||||||||||||
|
Interest
& Deposit Service Income
|
$ | 162,822 | $ | 154,571 | $ | 123,021 | $ | 112,434 | $ | 94,275 | ||||||||||
|
Net
Income attributable to Southside Bancshares, Inc.
|
$ | 44,396 | $ | 30,696 | $ | 16,684 | $ | 15,002 | $ | 14,592 | ||||||||||
|
Per
Share Data:
|
||||||||||||||||||||
|
Earnings
Per Common Share:
|
||||||||||||||||||||
|
Basic
|
$ | 2.98 | $ | 2.10 | $ | 1.16 | $ | 1.06 | $ | 1.05 | ||||||||||
|
Diluted
|
$ | 2.96 | $ | 2.06 | $ | 1.12 | $ | 1.02 | $ | 1.00 | ||||||||||
|
Cash
Dividends Paid Per Common Share
|
$ | 0.75 | $ | 0.60 | $ | 0.50 | $ | 0.47 | $ | 0.46 | ||||||||||
30
|
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, 2009, 2008, and 2007 and financial condition as of
December 31, 2009 and 2008. 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 this “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.” By their nature, certain of the market risk disclosures
are only estimates and could be materially different from what actually occurs
in the future. As a result, actual income gains and losses could
materially differ from those that have been estimated. Other factors
that could cause actual results to differ materially from forward-looking
statements include, but are not limited to, the following:
|
·
|
general
economic conditions, either globally, nationally, in the State of Texas,
or in the specific markets in which we operate, including, without
limitation, the deterioration of the commercial real estate, residential,
real estate, construction and development, credit and liquidity markets,
which could cause an adverse change in the Company’s net interest margin,
or a decline in the value of the Company’s assets, which could result in
realized losses;
|
|
·
|
legislation,
regulatory changes or changes in monetary or fiscal policy that adversely
affect the businesses in which we are engaged, including the Federal
Reserve’s actions with respect to interest rates and other regulatory
responses to current economic
conditions;
|
|
·
|
adverse
changes in the status or financial condition of the Government-Sponsored
Enterprises (the “GSEs”) impacting the GSEs’ guarantees or ability to pay
or issue debt;
|
|
·
|
adverse
changes in the credit portfolio of other U. S. financial institutions
relative to the performance of certain of our investment
securities;
|
|
·
|
impact
of future legislation including but not limited to the financial reform
legislation being considered and additional increases in depositors
insurance premiums due to FDIC regulation
changes;
|
31
|
·
|
economic
or other disruptions caused by acts of terrorism in the United States,
Europe or other areas;
|
|
·
|
changes
in the interest rate yield curve such as flat, inverted or steep yield
curves, or changes in the interest rate environment that impact interest
margins and may impact prepayments on the mortgage-backed securities
portfolio;
|
|
·
|
increases
in the Company’s nonperforming
assets;
|
|
·
|
the
Company’s ability to maintain adequate liquidity to fund its operations
and growth;
|
|
·
|
failure
of assumptions underlying allowance for loan losses and other
estimates;
|
|
·
|
unexpected
outcomes of, and the costs associated with, existing or new litigation
involving us;
|
|
·
|
changes
impacting our balance sheet and leverage
strategy;
|
|
·
|
our
ability to monitor interest rate
risk;
|
|
·
|
significant
increases in competition in the banking and financial services
industry;
|
|
·
|
changes
in consumer spending, borrowing and saving
habits;
|
|
·
|
technological
changes;
|
|
·
|
our
ability to increase market share and control
expenses;
|
|
·
|
the
effect of changes in federal or state tax
laws;
|
|
·
|
the
effect of compliance with legislation or regulatory
changes;
|
|
·
|
the
effect of changes in accounting policies and
practices;
|
|
·
|
risks
of mergers and acquisitions including the related time and cost of
implementing transactions and the potential failure to achieve expected
gains, revenue growth or expense
savings;
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·
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credit
risks of borrowers, including any increase in those risks due to changing
economic conditions; and
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·
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risks
related to loans secured by real estate, including the risk that the value
and marketability of collateral could
decline.
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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.
32
CRITICAL
ACCOUNTING ESTIMATES
Our
accounting and reporting estimates conform with U.S. generally accepted
accounting principles (“GAAP”) and general practices within the financial
services industry. The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying
notes. Actual results could differ from those
estimates. We consider our critical accounting policies to include
the following:
Allowance for Losses
on Loans. The allowance for losses on loans represents our
best estimate of probable losses inherent in the existing loan
portfolio. The allowance for losses on loans is increased by the
provision for losses on loans charged to expense and reduced by loans
charged-off, net of recoveries. The provision for losses on loans is
determined based on our assessment of several factors: reviews and
evaluations of specific loans, changes in the nature and volume of the loan
portfolio, current economic conditions and the related impact on specific
borrowers and industry groups, historical loan loss experience, the level of
classified and nonperforming loans and the results of regulatory
examinations.
The loan loss
allowance is based on the most current review of the loan
portfolio. The servicing officer has the primary responsibility for
updating significant changes in a customer's financial position. Each
officer prepares status updates on any credit deemed to be experiencing
repayment difficulties which, in the officer's opinion, would place the
collection of principal or interest in doubt. Our internal loan
review department is responsible for an ongoing review of our loan portfolio
with specific goals set for the loans to be reviewed on an annual
basis.
At each review, a subjective analysis
methodology is used to grade the respective loan. Categories of
grading vary in severity from loans that do not appear to have a significant
probability of loss at the time of review to loans that indicate a probability
that the entire balance of the loan will be uncollectible. If full
collection of the loan balance appears unlikely at the time of review, estimates
of future expected cash flows or appraisals of the collateral securing the debt
are used to allocate the necessary allowances. The internal loan
review department maintains a list of all loans or loan relationships that are
graded as having more than the normal degree of risk associated with
them. In addition, a list of specifically reserved loans or loan
relationships of $50,000 or more is updated on a periodic basis in order to
properly allocate necessary allowance and keep management informed on the status
of attempts to correct the deficiencies noted with respect to the
loan.
Loans are
considered impaired if, based on current information and events, it is probable
that we will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally based on
the present value of expected future cash flows discounted at the historical
effective interest rate stipulated in the loan agreement, except that all
collateral-dependent loans are measured for impairment based on the fair value
of the collateral. In measuring the fair value of the collateral, in
addition to relying on third party appraisals, 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, 2009, our review of
the loan portfolio indicated that a loan loss allowance of $19.9 million was
adequate to cover probable losses in the portfolio.
Refer to
“Loan Loss Experience and Allowance for Loan Losses” and “Note 1 – Summary of
Significant Accounting and Reporting Policies” to our consolidated financial
statements included in this report for a detailed description of our estimation
process and methodology related to the allowance for loan losses.
33
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 for securities are volatile and may
be influenced by a number of factors, including market interest rates,
prepayment speeds, discount rates and the shape of yield curves. Fair
values for most investment and mortgage-backed securities are based on quoted
market prices, where available. If quoted market prices are not
available, fair values are based on the quoted prices of similar instruments or
our estimate of fair value by using a range of fair value estimates in the
market place as a result of the illiquid market specific to the type of
security.
At September 30, 2008 and continuing at
December 31, 2009, the valuation inputs for our available for sale (“AFS”) trust
preferred securities (“TRUPs”) became unobservable as a result of the
significant market dislocation and illiquidity in the
marketplace. Although we continue to primarily rely on non-binding
prices compiled by third party vendors, the visibility of the observable market
data (Level 2) to determine the values of these securities has become less
clear. Fair values of financial assets are determined in an orderly transaction
and not a forced liquidation or distressed sale at the measurement
date. While we feel the financial market conditions at December 31,
2009 reflect the market illiquidity from forced liquidation or distressed sales
for these TRUPs, we determined that the fair value provided by our pricing
service continues to be an appropriate fair value for financial statement
measurement and therefore, as we verified the reasonableness of that fair value,
we have not otherwise adjusted the fair value provided by our
vendor. However, the severe decline in estimated fair value is caused
by the significant illiquidity in this market which contrasts sharply with our
assessment of the fundamental performance of these
securities. Therefore, we believe the estimate of fair value is still
not clearly based on observable market data and will be based on a
range of fair value data points from the market place as a result of the
illiquid market specific to this type of security. Accordingly, we
determined that the TRUPs security valuation is based on Level 3
inputs.
Impairment of
Investment Securities and Mortgage-backed
Securities. Investment and mortgage-backed securities
classified as AFS are carried at fair value and the impact of changes in fair
value are recorded on our consolidated balance sheet as an unrealized gain or
loss in “Accumulated other comprehensive income (loss),” a separate
component of shareholders’ equity. Securities classified as AFS or
held to maturity (“HTM”) are subject to our review to identify when a decline in
value is other-than-temporary. Factors considered in determining
whether a decline in value is other-than-temporary include: whether the decline
is substantial; the duration of the decline; the reasons for the decline in
value; whether the decline is related to a credit event, a change in interest
rate or a change in the market discount rate; and the financial condition and
near-term prospects of the issuer. Additionally, we do not currently
intend to sell the security and it is not more likely than not that we will be
required to sell the security before the anticipated recovery of its amortized
cost basis. When it is determined that a decline in value is
other-than-temporary, the carrying value of the security is reduced to its
estimated fair value, with a corresponding charge to earnings for the credit
portion and the non credit portion to other comprehensive income. For
certain assets we consider expected cash flows of the investment in determining
if impairment exists.
The
turmoil in the capital markets had a significant impact on our estimate of fair
value for certain of our securities. We believe the market values are
reflective of a combination of illiquidity and credit impairment. At
December 31, 2009 we have, in AFS Other Stocks and Bonds, $3.0 million amortized
cost basis in pooled TRUPs. Those securities are structured products
with cash flows dependent upon securities issued by U.S. financial institutions,
including banks and insurance companies. Our estimate of fair value at December
31, 2009 for the TRUPs is approximately $270,000 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 other securities in our investment
and mortgage-backed securities portfolio at December 31, 2009 with an
other-than-temporary impairment. Given the facts and circumstances
associated with the TRUPs, we performed detailed cash flow modeling for each
TRUP using an industry accepted model. Prior to loading the required assumptions
into the model, we reviewed the financial condition of the underlying issuing
banks within the TRUP collateral pool that had not deferred or defaulted as of
December 31, 2009.
34
Management’s
best estimate of a default assumption, based on a third party method, was
assigned to each issuing bank based on the category in which it
fell. Our analysis of the underlying cash flows contemplated various
default, deferral and recovery scenarios to arrive at our best estimate of cash
flows. Based on that detailed analysis, we have concluded that the
other-than-temporary impairment which captures the credit component in
compliance with the FASB ASC Topic 320, “Investments – Debt and Equity
Securities,” was estimated at $3.0 million at December 31, 2009 and the non
credit charge to other comprehensive income was estimated at $2.7
million. Therefore, the carrying amount of the TRUPs was written down
with $3.0 million recognized in earnings as of December 31, 2009. The
cash flow model assumptions represent management’s best estimate and consider a
variety of qualitative factors, which include, among others, the credit rating
downgrades, severity and duration of the mark-to market loss, and structural
nuances of each TRUP. Management believes the detailed review of the
collateral and cash flow modeling support the conclusion that the TRUPs had an
other-than-temporary impairment at December 31, 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.
Defined Benefit
Pension Plan. The plan obligations and related assets of our
defined benefit pension plan (the “Plan”) are presented in “Note 13 – Employee
Benefits” to our consolidated financial statements included in this
report. Entry into the Plan by new employees was frozen effective
December 31, 2005. Plan assets, which consist primarily of marketable equity and
debt instruments, are valued using observable market quotations. Plan
obligations and the annual pension expense are determined by independent
actuaries and through the use of a number of assumptions. Key
assumptions in measuring the plan obligations include the discount rate, the
rate of salary increases and the estimated future return on plan
assets. In determining the discount rate, we utilized a cash flow
matching analysis to determine a range of appropriate discount rates for our
defined benefit pension and restoration plans. In developing the cash
flow matching analysis, we constructed a portfolio of high quality non-callable
bonds (rated AA- or better) to match as close as possible the timing of future
benefit payments of the plans at December 31, 2009. 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, 2009, the weighted-average actuarial assumptions of the Plan were:
a discount rate of 6.1%; a long-term rate of return on Plan assets of 7.5%; and
assumed salary increases of 4.5%. 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.
35
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OVERVIEW
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OPERATING RESULTS
During the
year ended December 31, 2009, our net income increased $13.7 million, or 44.6%,
to $44.4 million, from $30.7 million for the same period in 2008. The
increase in net income was primarily attributable to the increase in net
interest income and noninterest income partially offset by an increase in the
provision for loan losses and noninterest expense. The increase in
noninterest income driven primarily by gain on sale of AFS securities that are
non-recurring was offset by an increase in noninterest expense due primarily to
increases in salaries and employee benefits due to our overall growth and
expansion. Earnings per diluted share increased $0.90, or 43.7% to
$2.96, for the year ended December 31, 2009, from $2.06 for the same period in
2008.
During
the year ended December 31, 2008, our net income increased $14.0 million, or
84.0%, to $30.7 million, from $16.7 million for the same period in
2007. The increase in net income was primarily attributable to the
increase in net interest income and noninterest income partially offset by an
increase in the provision for loan losses and noninterest
expense. The increase in noninterest income driven primarily by gain
on sale of AFS securities that are non-recurring was offset by an increase in
noninterest expense due primarily to increases in salaries and employee benefits
due to the acquisition of FWBS during the fourth quarter of 2007 and an interest
in SFG in the third quarter of 2007 as well as normal salary increases and new
employees. Earnings per diluted share were $2.06 and $1.12, respectively, for
the years ended December 31, 2008 and 2007.
FINANCIAL
CONDITION
Our total
assets increased $324.1 million, or 12.0%, to $3.02 billion at December 31, 2009
from $2.70 billion at December 31, 2008. The increase was
attributable to growth in our investment and mortgage-backed securities as well
as loan growth. At December 31, 2009, loans were $1.03 billion
compared to $1.02 billion at December 31, 2008. Our securities
portfolio increased by $284.7 million, or 19.5%, to $1.75 billion as compared to
$1.46 billion at December 31, 2008. The increase in our securities
was comprised entirely of U.S. Agency mortgage-backed and related securities and
municipal securities. Our increase in loans and securities was funded
by increases in deposits.
Our
nonperforming assets at December 31, 2009 increased to $23.5 million, and
represented 0.78% of total assets, compared to $15.8 million, or 0.58%, of total
assets at December 31, 2008. Nonaccruing loans increased to $18.6
million and the ratio of nonaccruing loans to total loans increased to 1.80% at
December 31, 2009 as compared to $14.3 million and 1.40% at December 31,
2008. Other Real Estate Owned (“OREO”) increased to $1.9 million at
December 31, 2009 from $318,000 at December 31, 2008. Loans 90 days
past due at December 31, 2009 decreased to $323,000 compared to $593,000 at
December 31, 2008. Repossessed assets increased to $654,000 at
December 31, 2009 from $433,000 at December 31, 2008. Restructured
performing loans at December 31, 2009 increased to $2.0 million compared to
$148,000 at December 31, 2008.
Our deposits
increased $314.3 million to $1.87 billion at December 31, 2009 from $1.56
billion at December 31, 2008. The increase was primarily due to
branch expansion, increased market penetration, an increase in public funds
deposits and an increase in brokered CDs issued. During 2009, our
public funds deposits increased $164.1 million. During 2009 brokered
deposits increased $91.2 million. Our deposits, net of brokered
deposits, increased $223.0 million. Due to the increase in securities
and loans and increase in brokered deposits during 2009, FHLB advances decreased
$30.0 million to $854.9 million at December 31, 2009, from $884.9 million at
December 31, 2008. Short-term FHLB advances increased $93.0 million
to $322.4 million at December 31, 2009 from $229.4 million at December 31,
2008. Long-term FHLB advances decreased $123.0 million to $532.5
million at December 31, 2009 from $655.5 million at December 31,
2008. During 2009, we issued long-term brokered CDs for our long-term
funding needs as the overall costs were less than similar FHLB advances at that
time. Other borrowings at December 31, 2009 and 2008 totaled $76.4
million and $72.8 million, respectively, and at December 31, 2009 consisted of
$16.1 million of short-term borrowings and $60.3 million of long-term
debt.
36
Assets
under management in our trust department increased during 2009 and were
approximately $657 million at December 31, 2009 compared to $628 million at
December 31, 2008.
Shareholders’
equity at December 31, 2009 totaled $201.8 million compared to $160.6 million at
December 31, 2008. The increase primarily reflects the net income of
$44.4 million recorded for the year ended December 31, 2009, and the common
stock issued of $2.3 million as a result of our incentive stock option and
dividend reinvestment plans, an increase in the accumulated other comprehensive
income of $5.3 million, all of which were partially offset by the payment of
cash dividends to our shareholders of $11.1 million. The increase in
accumulated other comprehensive income is comprised of an increase of $2.7
million, net of tax, in unrealized gain on securities, net of reclassification
adjustment and an increase of $2.7 million, net of tax, related to the change in
the funded status of our defined benefit plan. See “Note 3 –
Comprehensive Income” to our consolidated financial statements included in this
report.
During
the fourth quarter of 2008 as oil prices declined significantly and consumers
all across the United States were impacted more severely by the economic
slowdown, our market areas began to experience a greater slowdown in economic
activity. During 2009 the economy in our market areas reflected the
effects of the housing led economic slowdown impacting other regions of the
United States. Some economists believe the national recession ended
in the latter part of 2009, however we are well aware any economic recovery
could be uneven. 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.
BALANCE SHEET AND LEVERAGE
STRATEGY
We utilize
wholesale funding and securities to enhance our profitability and balance sheet
composition by determining acceptable levels of credit, interest rate and
liquidity risk consistent with prudent capital management. This
balance sheet strategy consists of borrowing a combination of long and
short-term funds from the FHLB and, when determined appropriate, issuing
brokered certificates of deposit (“CDs”). These funds are invested primarily in
U. S. Agency mortgage-backed securities, and to a lesser extent, long-term
municipal securities. Although U. S. Agency mortgage-backed
securities often carry lower yields than traditional mortgage loans and other
types of loans we make, these securities generally (i) increase the overall
quality of our assets because of either the implicit or explicit guarantees of
the U.S. Government, (ii) are more liquid than individual loans and (iii) may be
used to collateralize our borrowings or other obligations. While the
strategy of investing a substantial portion of our assets in U. S. Agency
mortgage-backed securities and to a lesser extent municipal securities has
historically resulted in lower interest rate spreads and margins, we believe
that the lower operating expenses and reduced credit risk combined with the
managed interest rate risk of this strategy have enhanced our overall
profitability over the last several years. At this time, we utilize
this balance sheet strategy with the goal of enhancing overall profitability by
maximizing the use of our capital.
Risks
associated with the asset structure we maintain include a lower net interest
rate spread and margin when compared to our peers, changes in the slope of the
yield curve, which can reduce our net interest rate spread and margin, increased
interest rate risk, the length of interest rate cycles, changes in volatility
spreads associated with the mortgage-backed securities and municipal securities,
and the unpredictable nature of mortgage-backed securities
prepayments. See “Part I - Item 1A. Risk Factors – Risks
Related to Our Business” for a discussion of risks related to interest
rates. Our asset structure, net interest spread and net interest
margin require us to closely monitor our interest rate risk. An
additional risk is the change in market value of the AFS securities portfolio as
a result of changes in interest rates. Significant increases in
interest rates, especially long-term interest rates, could adversely impact the
market value of the AFS securities portfolio, which could also significantly
impact our equity capital. Due to the unpredictable nature of
mortgage-backed securities prepayments, the length of interest rate cycles, and
the slope of the interest rate yield curve, net interest income could fluctuate
more than simulated under the scenarios modeled by our Asset/Liability Committee
(“ALCO”) and described under “Item 7A. Quantitative and Qualitative
Disclosures about Market Risk” in this report.
37
Determining
the appropriate size of the balance sheet is one of the critical decisions any
bank makes. Our balance sheet is not merely the result of a series of
micro-decisions, but rather the size is controlled based on the economics of
assets compared to the economics of funding. For several quarters up
to and ending June 30, 2007, the size of our balance sheet was in a period of no
growth or actual shrinkage due to the flat to inverted yield curve and tight
volatility spreads during that time period. Beginning with the third
quarter of 2007 we began deliberately increasing the size of our balance sheet
taking advantage of the increasingly attractive economics of financial
intermediation, due to the extraordinary volatility in the capital
markets.
The
management of our securities portfolio as a percentage of earning assets is
guided by changes in our overall loan and deposit levels, combined with changes
in our wholesale funding levels. If adequate quality loan growth is
not available to achieve our goal of enhancing profitability by maximizing the
use of capital, as described above, then we could purchase additional
securities, if appropriate, which could cause securities as a percentage of
earning assets to increase. Should we determine that increasing the
securities portfolio or replacing the current securities maturities and
principal payments is not an efficient use of capital, we could decrease the
level of securities through proceeds from maturities, principal payments on
mortgage-backed securities or sales. Our balance sheet strategy is
designed such that our securities portfolio should help mitigate financial
performance associated with slower loan growth and higher credit
costs. During 2009, as credit and volatility spreads tightened in the
face of a steepening interest rate yield curve, we repositioned a portion of the
mortgage-backed and municipal securities portfolio by selling selected
securities whose market value did not compensate the bank for the potential
funding risk. The net result of the repositioning of these securities
portfolio was an increase in the average coupon of our mortgage-backed
securities at December 31, 2009 of approximately 0.20%, or 20 basis points, when
compared to December 31, 2008. The resulting gains on the sale of
securities may not be repeated in future quarters. During 2009, we
purchased premium mortgage-backed and municipal securities which more than
offset the amount sold or maturing. The net result was an increase of
$284.7 million in our investment and U.S. Agency mortgage-backed securities to
$1.75 billion at December 31, 2009, from $1.46 billion at December 31,
2008. At December 31, 2009, securities as a percentage of assets
increased to 57.8%, when compared to 54.2% at December 31, 2008. Our
balance sheet management strategy is dynamic and requires ongoing management and
will be reevaluated as market conditions warrant. As interest rates,
yield curves, mortgage-backed securities prepayments, funding costs, security
spreads and loan and deposit portfolios change, our determination of the proper
types and maturities of securities to own, proper amount of securities to own
and funding needs and funding sources will continue to be
reevaluated. Should the economics of asset accumulation decrease, we
might allow the balance sheet to shrink through run-off or asset
sales. However, should the economics become more attractive, we will
strategically increase the balance sheet.
With
respect to liabilities, we will continue to utilize a combination of FHLB
advances and deposits to achieve our strategy of minimizing cost while achieving
overall interest rate risk objectives as well as the liability management
objectives of the ALCO. FHLB funding and brokered CDs represent wholesale
funding sources we are currently utilizing. Our FHLB borrowings at
December 31, 2009 decreased 3.4%, or $30.0 million, to $854.9 million from
$884.9 million at December 31, 2008 primarily as a result of an increase in
deposits, including brokered CDs. As of December 31, 2009 we had
$131.2 million in brokered CDs of which approximately $121.3 million are
long-term. All of the long-term brokered CDs have short-term calls that we
control. We utilize long-term callable brokered CDs because the
brokered CDs better match overall ALCO objectives at the time of issuance by
protecting us with fixed rates should interest rates increase, while providing
us options to call the funding should interest rates decrease. Our
wholesale funding policy currently allows maximum brokered CDs of $150 million;
however, this amount could be increased to match changes in ALCO
objectives. The potential higher interest expense and lack of
customer loyalty are risks associated with the use of brokered
CDs. During 2009, a decrease in FHLB borrowings, coupled
with the overall growth in deposits, resulted in a decrease in our total
wholesale funding as a percentage of deposits, not including brokered CDs, to
56.7% at December 31, 2009, from 61.0% at December 31, 2008.
38
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, 2009 COMPARED TO DECEMBER 31,
2008
NET INTEREST INCOME
Net interest
income is one of the principal sources of a financial institution's earnings
stream and represents the difference or spread between interest and fee income
generated from interest earning assets and the interest expense paid on deposits
and borrowed funds. Fluctuations in interest rates or interest rate
yield curves, as well as repricing characteristics and volume and changes in the
mix of interest earning assets and interest bearing liabilities, materially
impact net interest income.
Net interest
income for the year ended December 31, 2009 was $92.5 million, an increase of
$16.7 million, or 22.0%, compared to the same period in 2008. The
overall increase in net interest income was primarily the result of increases in
interest income from tax exempt investment securities and mortgage-backed and
related securities and a decrease in interest expense on deposits and short-term
obligations that was partially offset by a decrease in interest income on loans
and an increase in interest expense on long-term obligations.
During the
year ended December 31, 2009, total interest income increased $9.0 million, or
6.6%, from $136.2 million to $145.2 million. The increase in total
interest income was the result of an increase in average interest earning assets
of $421.9 million, or 19.1%, from $2.21 billion to $2.63 billion, while
partially offset by a decrease in average yield on average interest earning
assets from 6.38% for the year ended December 31, 2008 to 5.82% for the year
ended December 31, 2009. Total interest expense decreased $7.7
million, or 12.7%, to $52.7 million during the year ended December 31, 2009 as
compared to $60.4 million during the same period in 2008. The
decrease was attributable to a decrease in the average yield on interest bearing
liabilities for the year ended December 31, 2009, to 2.39% from 3.30% for the
same period in 2008 while partially offset by an increase in average interest
bearing liabilities of $373.1 million, or 20.4%, from $1.83 billion to $2.20
billion.
Net interest
income increased during 2009 as a result of increases in our average interest
earning assets and net interest margin on average earning assets during 2009
when compared to 2008. This is a result of an increase in the average
balance of our interest earning assets combined with a decrease in the average
yield on the average interest bearing liabilities. The decrease in
the yield on interest earning assets is reflective of a 46 basis point decrease
in the yield on loans and, a 31 basis point decrease in the yield on our
securities portfolio, which is the result of overall lower interest rates and
higher credit and volatility spreads. The decrease in the average
yield on interest bearing liabilities of 91 basis points is a result of an
overall decrease in interest rates. For the year ended December 31,
2009, our net interest spread increased to 3.43% from 3.08%, and our net
interest margin increased to 3.81% from 3.64% when compared to the same period
in 2008.
39
During
the year ended December 31, 2009, average loans increased $38.4 million, or 3.9%
from $983.3 million to $1.02 billion, compared to the same period in
2008. Automobile loans purchased through SFG and municipal loans
represent a large part of this increase. The average yield on loans
decreased from 7.67% for the year ended December 31, 2008 to 7.21% for the year
ended December 31, 2009. The decrease in interest income on loans of
$2.4 million, or 3.3%, to $70.7 million for the year ended December 31, 2009,
when compared to $73.1 million for the same period in 2008 was the result of a
decrease in the average yield which more than offset the increase in the average
balance. The decrease in the yield on loans was due to overall lower
interest rates.
Average
investment and mortgage-backed securities increased $352.8 million, or 29.8%,
from $1.18 billion to $1.54 billion, for the year ended December 31, 2009 when
compared to the same period in 2008. This increase was the result of
securities purchased due primarily to market volatility related to buying
opportunities available throughout most of 2009. At December 31,
2009, virtually all of our mortgage-backed securities were fixed rate securities
with less than one percent variable rate mortgage-backed
securities. The overall yield on average investment and
mortgage-backed securities decreased to 5.12% during the year ended December 31,
2009 from 5.43% during the same period in 2008. The decrease in the
average yield primarily reflects increased prepayments due to lower interest
rates creating refinancing alternatives, tighter spreads on mortgage-backed
securities and overall lower interest rates. Interest income on
investment and mortgage-backed securities increased $12.0 million in 2009, or
19.4%, compared to 2008 due to the increase in the average balance which was
partially offset by the decrease in average yield. A return to lower
long-term interest rate levels combined with lower volatility and credit spreads
similar to those experienced in May and June of 2003 could negatively impact our
net interest margin in the future due to increased prepayments and
repricings.
Average FHLB
stock and other investments increased $8.9 million, or 28.0%, to $40.8 million,
for the year ended December 31, 2009, when compared to $31.9 million for
2008. Interest income from our FHLB stock and other investments
decreased $606,000, or 72.1%, during 2009, when compared to 2008, due to the
decrease in average yield from 2.64% for the year ended December 31, 2008
compared to 0.58% for the same period in 2009 which more than offset the
increase in the average balance. The FHLB stock is a variable
instrument with the rate typically tied to the Federal funds rate. We
are required as a member of FHLB to own a specific amount of stock that changes
as the level of our FHLB advances and asset size change.
Average
federal funds sold and other interest earning assets increased $20.1 million, or
398.9%, to $25.2 million, for the year ended December 31, 2009, when compared to
$5.0 million for 2008. Interest income from federal funds sold and
other interest earning assets increased $42,000, or 37.5%, for the year ended
December 31, 2009, when compared to 2008, as a result of the increase in the
average balance while partially offset by a decrease in the average yield from
2.22% in 2008 to 0.61% in 2009.
During the
year ended December 31, 2009, our average securities increased more than our
average loans. As a result, the mix of our average interest earning
assets reflected an increase in average total securities as a percentage of
total average interest earning assets compared to the prior year as securities
averaged 60.0% during 2009 compared to 55.1% during 2008, a direct result of
securities purchases. Average loans were 39.0% of average total
interest earning assets and other interest earning asset categories averaged
1.0% for December 31, 2009. During 2008, the comparable mix was 44.7%
in loans and 0.2% in the other interest earning asset categories.
Total
interest expense decreased $7.7 million, or 12.7%, to $52.7 million during the
year ended December 31, 2009 as compared to $60.4 million during the same period
in 2008. The decrease was primarily attributable to decreased funding
costs as the average yield on interest bearing liabilities decreased from 3.30%
for 2008 to 2.39% for the year ended December 31, 2009, which more than offset
an increase in average interest bearing liabilities. The increase in
average interest bearing liabilities included an increase in deposits and FHLB
advances of $373.1 million, or 20.4%.
40
The
following table sets forth our deposit averages by category for the years ended
December 31, 2009, 2008 and 2007:
|
COMPOSITION
OF DEPOSITS
|
||||||||||||||||
|
Years
Ended December 31,
|
||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||
|
AVG
BALANCE
|
AVG
YIELD
|
AVG
BALANCE
|
AVG
YIELD
|
AVG
BALANCE
|
AVG
YIELD
|
|||||||||||
|
Noninterest
Bearing Demand Deposits
|
$
|
379,991
|
N/A
|
$
|
372,160
|
N/A
|
$
|
328,711
|
N/A
|
|||||||
|
Interest
Bearing Demand Deposits
|
573,937
|
1.02
|
%
|
500,955
|
2.08
|
%
|
414,293
|
3.17
|
%
|
|||||||
|
Savings
Deposits
|
65,896
|
0.67
|
%
|
57,587
|
1.28
|
%
|
52,106
|
1.30
|
%
|
|||||||
|
Time
Deposits
|
688,854
|
2.37
|
%
|
535,921
|
4.05
|
%
|
564,613
|
4.90
|
%
|
|||||||
|
Total
Deposits
|
$
|
1,708,678
|
1.33
|
%
|
$
|
1,466,623
|
2.24
|
%
|
$
|
1,359,723
|
3.05
|
%
|
||||
Average
interest bearing deposits increased $234.2 million, or 21.4%, from $1.09 billion
to $1.33 billion, while the average rate paid decreased from 3.01% for the year
ended December 31, 2008 to 1.71% for the year ended December 31,
2009. Average time deposits increased $152.9 million, or 28.5%, from
$535.9 million to $688.9 million while the average rate paid decreased 168 basis
points. Average interest bearing demand deposits increased $73.0
million, or 14.6%, while the average rate paid decreased 106 basis
points. Average savings deposits increased $8.3 million, or 14.4%,
while the average rate paid decreased 61 basis points. Interest
expense for interest bearing deposits for the year ended December 31, 2009,
decreased $10.2 million, or 31.0%, when compared to the same period in 2008 due
to the decrease in the average yield which more than offset the increase in the
average balance. Average noninterest bearing demand deposits
increased $7.8 million, or 2.1%, during 2009. The latter three
categories, which are considered the lowest cost deposits, comprised 59.7% of
total average deposits during the year ended December 31, 2009 compared to 63.5%
during 2008. The increase in our average total deposits during 2009
is the result of overall bank growth, branch expansion, an increase in public
funds deposits and an increase in brokered CDs issued.
41
During
the year ended December 31, 2009, we issued $9.9 million of what are now
short-term brokered CDs, and $121.5 million of long-term brokered
CDs. At December 31, 2009, all of our brokered CDs had maturities of
less than 10 years. At December 31, 2009, the long-term brokered CDs
of $121.3 million had calls that we controlled, all of which were twelve months
or less. At December 31, 2009, we had $131.2 million in brokered CDs
that represented 7.0% of deposits compared to $40.0 million, or 2.6% of
deposits, at December 31, 2008. At December 31, 2008, the $40.0
million of brokered CDs had maturities of less than one year. Our
current policy allows for a maximum of $150 million in brokered
CDs. The potential higher interest cost and lack of customer loyalty
are risks associated with the use of brokered CDs.
Average short-term interest bearing
liabilities, consisting primarily of FHLB advances and federal funds purchased
and repurchase agreements, were $209.0 million, a decrease of $81.8 million, or
28.1%, for the year ended December 31, 2009 when compared to the same period in
2008. Interest expense associated with short-term interest bearing
liabilities decreased $4.3 million, or 47.6%, and the average rate paid
decreased 83 basis points to 2.25% for the year ended December 31, 2009, when
compared to 3.08% for the same period in 2008. The decrease in the
interest expense was due to a decrease in the average rate paid and in the
average balance of short-term interest bearing liabilities.
Average
long-term interest bearing liabilities consisting of FHLB advances increased
$220.7 million, or 57.5%, during the year ended December 31, 2009 to $604.4
million as compared to $383.7 million at December 31, 2008. The
increase in the average long-term FHLB advances occurred primarily as a result
of lower long-term rates during 2009, the increase in our securities portfolio
and the need to mitigate the risk associated with any potential increase in
future interest rates. Interest expense associated with long-term
FHLB advances increased $7.4 million, or 51.4%, while the average rate paid
decreased 15 basis points to 3.62% for the year ended December 31, 2009 when
compared to 3.77% for the same period in 2008. The increase in
interest expense was due to the increase in the average balance of long-term
interest bearing liabilities which more than offset the decrease in the average
rate paid. FHLB advances are collateralized by FHLB stock, securities
and nonspecific real estate loans.
Average
long-term debt, consisting of our junior subordinated debentures issued in 2003
and August 2007 and junior subordinated debentures acquired in the purchase of
FWBS, was $60.3 million for both of the years ended December 31, 2009 and
2008. Interest expense decreased $640,000, or 15.8%, to $3.4 million
for the year ended December 31, 2009 when compared to $4.0 million for the same
period in 2008 as a result of the decrease in the average yield of 106 basis
points. The interest rate on the $20.6 million of long-term
debentures issued to Southside Statutory Trust III adjusts quarterly at a rate
equal to three-month LIBOR plus 294 basis points. The $23.2 million
of long-term debentures issued to Southside Statutory Trust IV and the $12.9
million of long-term debentures issued to Southside Statutory Trust V have fixed
rates of 6.518% through October 30, 2012 and 7.48% through December 15, 2012,
respectively, and thereafter, adjusts quarterly. The interest rate on
the $3.6 million of long-term debentures issued to Magnolia Trust Company I,
assumed in the purchase of FWBS, adjusts quarterly at a rate equal to
three-month LIBOR plus 180 basis points.
42
AVERAGE
BALANCES AND YIELDS
The following table
presents average balance sheet amounts and average yields for the years ended
December 31, 2009, 2008 and 2007. 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, 2009
|
December
31, 2008
|
December
31, 2007
|
||||||||||||||||||||||||||||||||||
|
AVG.
BALANCE
|
INTEREST
|
AVG.
YIELD
|
AVG.
BALANCE
|
INTEREST
|
AVG.
YIELD
|
AVG.
BALANCE
|
INTEREST
|
AVG.
YIELD
|
||||||||||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||||||||||||||
|
INTEREST
EARNING ASSETS:
|
||||||||||||||||||||||||||||||||||||
|
Loans(1)
(2)
|
$ | 1,021,770 | $ | 73,654 | 7.21 | % | $ | 983,336 | $ | 75,445 | 7.67 | % | $ | 809,906 | $ | 58,002 | 7.16 | % | ||||||||||||||||||
|
Loans
Held For Sale
|
4,098 | 161 | 3.93 | % | 2,487 | 121 | 4.87 | % | 3,657 | 191 | 5.22 | % | ||||||||||||||||||||||||
|
Securities:
|
||||||||||||||||||||||||||||||||||||
|
Inv.
Sec. (Taxable)(4)
|
42,598 | 1,055 | 2.48 | % | 46,537 | 1,723 | 3.70 | % | 52,171 | 2,580 | 4.95 | % | ||||||||||||||||||||||||
|
Inv.
Sec. (Tax Exempt)(3)(4)
|
174,003 | 12,203 | 7.01 | % | 103,608 | 7,074 | 6.83 | % | 43,486 | 3,065 | 7.05 | % | ||||||||||||||||||||||||
|
Mortgage-backed
and related
Sec.(4)
|
1,320,766 | 65,463 | 4.96 | % | 1,034,406 | 55,470 | 5.36 | % | 852,880 | 43,767 | 5.13 | % | ||||||||||||||||||||||||
|
Total
Securities
|
1,537,367 | 78,721 | 5.12 | % | 1,184,551 | 64,267 | 5.43 | % | 948,537 | 49,412 | 5.21 | % | ||||||||||||||||||||||||
|
FHLB
stock and other
|
||||||||||||||||||||||||||||||||||||
|
investments,
at cost
|
40,786 | 235 | 0.58 | % | 31,875 | 841 | 2.64 | % | 20,179 | 1,193 | 5.91 | % | ||||||||||||||||||||||||
|
Interest
Earning Deposits
|
21,243 | 137 | 0.64 | % | 1,006 | 22 | 2.19 | % | 769 | 41 | 5.33 | % | ||||||||||||||||||||||||
|
Federal
Funds Sold
|
3,925 | 17 | 0.43 | % | 4,039 | 90 | 2.23 | % | 2,933 | 144 | 4.91 | % | ||||||||||||||||||||||||
|
Total
Interest Earning Assets
|
2,629,189 | 152,925 | 5.82 | % | 2,207,294 | 140,786 | 6.38 | % | 1,785,981 | 108,983 | 6.10 | % | ||||||||||||||||||||||||
|
NONINTEREST
EARNING ASSETS:
|
||||||||||||||||||||||||||||||||||||
|
Cash
and Due From Banks
|
43,504 | 45,761 | 42,724 | |||||||||||||||||||||||||||||||||
|
Bank
Premises and Equipment
|
45,231 | 40,449 | 35,746 | |||||||||||||||||||||||||||||||||
|
Other
Assets
|
112,702 | 89,473 | 51,968 | |||||||||||||||||||||||||||||||||
|
Less: Allowance
for Loan Loss
|
(17,622 | ) | (11,318 | ) | (7,697 | ) | ||||||||||||||||||||||||||||||
|
Total
Assets
|
$ | 2,813,004 | $ | 2,371,659 | $ | 1,908,722 | ||||||||||||||||||||||||||||||
|
(1)
|
Interest
on loans includes fees on loans that are not material in
amount.
|
|
(2)
|
Interest
income includes taxable-equivalent adjustments of $3,136, $2,446 and
$2,289 for the years ended December 31, 2009, 2008 and 2007,
respectively.
|
|
(3)
|
Interest
income includes taxable-equivalent adjustments of $4,596, $2,164 and $953
for the years ended December 31, 2009, 2008 and 2007,
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, 2009, 2008 and 2007, loans totaling $18,629, $14,289 and
$2,913, 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.
|
43
|
AVERAGE
BALANCES AND YIELDS
|
||||||||||||||||||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||
|
Years
Ended
|
||||||||||||||||||||||||||||||||||||
|
December
31, 2009
|
December
31, 2008
|
December
31, 2007
|
||||||||||||||||||||||||||||||||||
|
AVG.
BALANCE
|
INTEREST
|
AVG.
YIELD
|
AVG.
BALANCE
|
INTEREST
|
AVG.
YIELD
|
AVG.
BALANCE
|
INTEREST
|
AVG.
YIELD
|
||||||||||||||||||||||||||||
|
LIABILITIES
AND
SHAREHOLDERS’
EQUITY
|
||||||||||||||||||||||||||||||||||||
|
INTEREST
BEARING
LIABILITIES:
|
||||||||||||||||||||||||||||||||||||
|
Savings
Deposits
|
$ | 65,896 | $ | 442 | 0.67 | % | $ | 57,587 | $ | 736 | 1.28 | % | $ | 52,106 | $ | 676 | 1.30 | % | ||||||||||||||||||
|
Time
Deposits
|
688,854 | 16,360 | 2.37 | % | 535,921 | 21,727 | 4.05 | % | 564,613 | 27,666 | 4.90 | % | ||||||||||||||||||||||||
|
Interest
Bearing
|
||||||||||||||||||||||||||||||||||||
|
Demand
Deposits
|
573,937 | 5,880 | 1.02 | % | 500,955 | 10,428 | 2.08 | % | 414,293 | 13,116 | 3.17 | % | ||||||||||||||||||||||||
|
Total
Interest Bearing
Deposits
|
1,328,687 | 22,682 | 1.71 | % | 1,094,463 | 32,891 | 3.01 | % | 1,031,012 | 41,458 | 4.02 | % | ||||||||||||||||||||||||
|
Short-term
Interest
|
||||||||||||||||||||||||||||||||||||
|
Bearing
Liabilities
|
209,048 | 4,696 | 2.25 | % | 290,895 | 8,969 | 3.08 | % | 278,002 | 13,263 | 4.77 | % | ||||||||||||||||||||||||
|
Long-term
Interest Bearing
|
||||||||||||||||||||||||||||||||||||
|
Liabilities-FHLB
Dallas
|
604,425 | 21,885 | 3.62 | % | 383,677 | 14,454 | 3.77 | % | 95,268 | 4,357 | 4.57 | % | ||||||||||||||||||||||||
|
Long-term
Debt (5)
|
60,311 | 3,409 | 5.65 | % | 60,311 | 4,049 | 6.71 | % | 35,802 | 2,785 | 7.78 | % | ||||||||||||||||||||||||
|
Total
Interest Bearing
Liabilities
|
2,202,471 | 52,672 | 2.39 | % | 1,829,346 | 60,363 | 3.30 | % | 1,440,084 | 61,863 | 4.30 | % | ||||||||||||||||||||||||
|
NONINTEREST
BEARINGLIABILITIES:
|
||||||||||||||||||||||||||||||||||||
|
Demand
Deposits
|
379,991 | 372,160 | 328,711 | |||||||||||||||||||||||||||||||||
|
Other
Liabilities
|
42,318 | 26,497 | 20,997 | |||||||||||||||||||||||||||||||||
|
Total
Liabilities
|
2,624,780 | 2,228,003 | 1,789,792 | |||||||||||||||||||||||||||||||||
|
SHAREHOLDERS’
EQUITY (6)
|
188,224 | 143,656 | 118,930 | |||||||||||||||||||||||||||||||||
|
TOTAL
LIABILITIES AND
SHAREHOLDERS’
EQUITY
|
$ | 2,813,004 | $ | 2,371,659 | $ | 1,908,722 | ||||||||||||||||||||||||||||||
|
NET
INTEREST INCOME
|
$ | 100,253 | $ | 80,423 | $ | 47,120 | ||||||||||||||||||||||||||||||
|
NET
INTEREST MARGIN ON AVERAGE EARNING ASSETS
|
3.81 | % | 3.64 | % | 2.64 | % | ||||||||||||||||||||||||||||||
|
NET
INTEREST SPREAD
|
3.43 | % | 3.08 | % | 1.80 | % | ||||||||||||||||||||||||||||||
|
(5)
|
Represents
junior subordinated debentures issued by us to Southside Statutory Trust
III, IV and V in connection with the issuance by Southside Statutory Trust
III of $20 million of trust preferred securities, Southside Statutory
Trust IV of $22.5 million of trust preferred securities, Southside
Statutory Trust V of $12.5 million of trust preferred securities and
junior subordinated debentures issued by FWBS to Magnolia Trust Company I
in connection with the issuance by Magnolia Trust Company I of $3.5
million of trust preferred
securities.
|
|
(6)
|
Includes
average equity of noncontrolling interest of $815, $487 and $151 for the
years ended December 31, 2009, 2008 and 2007,
respectively.
|
44
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,
|
||||||||||||
|
2009
Compared to 2008
|
||||||||||||
|
Average
|
Average
|
Increase
|
||||||||||
|
Volume
|
Yield
|
(Decrease)
|
||||||||||
|
INTEREST
INCOME:
|
||||||||||||
|
Loans
(1)
|
$
|
2,879
|
$
|
(4,670
|
)
|
$
|
(1,791
|
)
|
||||
|
Loans
Held For
Sale
|
67
|
(27
|
)
|
40
|
||||||||
|
Investment
Securities (Taxable)
|
(136
|
)
|
(532
|
)
|
(668
|
)
|
||||||
|
Investment
Securities (Tax Exempt) (1)
|
4,932
|
197
|
5,129
|
|||||||||
|
Mortgage-backed
Securities
|
14,443
|
(4,450
|
)
|
9,993
|
||||||||
|
FHLB
stock and other investments
|
187
|
(793
|
)
|
(606
|
)
|
|||||||
|
Interest
Earning
Deposits
|
141
|
(26
|
)
|
115
|
||||||||
|
Federal
Funds
Sold
|
(3
|
)
|
(70
|
)
|
(73
|
)
|
||||||
|
Total
Interest
Income
|
22,510
|
(10,371
|
)
|
12,139
|
||||||||
|
INTEREST
EXPENSE:
|
||||||||||||
|
Savings
Deposits
|
94
|
(388
|
)
|
(294
|
)
|
|||||||
|
Time
Deposits
|
5,152
|
(10,519
|
)
|
(5,367
|
)
|
|||||||
|
Interest
Bearing Demand Deposits
|
1,347
|
(5,895
|
)
|
(4,548
|
)
|
|||||||
|
Short-term
Interest Bearing Liabilities
|
(2,175
|
)
|
(2,098
|
)
|
(4,273
|
)
|
||||||
|
Long-term
FHLB
Advances
|
8,013
|
(582
|
)
|
7,431
|
||||||||
|
Long-term
Debt
|
–
|
(640
|
)
|
(640
|
)
|
|||||||
|
Total
Interest
Expense
|
12,431
|
(20,122
|
)
|
(7,691
|
)
|
|||||||
|
Net
Interest
Income
|
$
|
10,079
|
$
|
9,751
|
||||||||