form_10q.htm
 
 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q
 

     (Mark One)

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

For the quarterly period ended June 30, 2010

OR

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

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


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

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

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

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

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

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

The number of shares of the issuer's common stock, par value $1.25, outstanding as of July 23, 2010 was 15,842,573 shares.


 
 
 

TABLE OF CONTENTS
 
 
                ITEM 4.  CONTROLS AND PROCEDURES

 
 
 


PART I.   FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share amounts)
   
June 30,
    
December 31,
  
ASSETS
  
2010
    
2009
  
Cash and due from banks
   $ 42,307     $ 50,350  
Interest earning deposits
     3,978       1,816  
Total cash and cash equivalents
     46,285       52,166  
Investment securities:
                
Available for sale, at estimated fair value
     251,504       265,060  
Held to maturity, at amortized cost
     1,494       1,493  
Mortgage-backed and related securities:
                
Available for sale, at estimated fair value
     1,002,478       1,238,182  
Held to maturity, at amortized cost
     459,677       242,665  
FHLB stock, at cost
     36,096       38,629  
Other investments, at cost
     2,065       2,065  
Loans held for sale
     3,538       2,857  
Loans:
                
Loans
     1,017,452       1,033,576  
Less:  allowance for loan loss
     (19,283 )     (19,896 )
      Net Loans
     998,169       1,013,680  
Premises and equipment, net
     48,478       46,477  
Goodwill
     22,034       22,034  
Other intangible assets, net
     929       1,096  
Interest receivable
     17,384       18,482  
Deferred tax asset
     1,587       1,611  
Other assets
     75,033       77,791  
TOTAL ASSETS
   $ 2,966,751     $ 3,024,288  
LIABILITIES AND EQUITY
                
Deposits:
                
Noninterest bearing
   $ 410,959     $ 394,001  
Interest bearing
     1,517,745       1,476,420  
Total Deposits
     1,928,704       1,870,421  
Short-term obligations:
                
Federal funds purchased and repurchase agreements
     3,773       13,325  
FHLB advances
     285,390       322,351  
Other obligations
     2,641       2,760  
Total Short-term obligations
     291,804       338,436  
Long-term obligations:
                
FHLB  advances
     444,082       532,519  
Long-term debt
     60,311       60,311  
Total Long-term obligations
     504,393       592,830  
Other liabilities
     22,286       20,352  
TOTAL LIABILITIES
     2,747,187       2,822,039  
                 
       Off-Balance-Sheet Arrangements, Commitments and Contingencies (Note 12)
                
                 
Shareholders' equity:
                
Common stock - $1.25 par, 40,000,000 shares authorized, 17,603,935 shares
     22,005       20,928  
 issued in 2010 and 16,742,835 shares issued in 2009
                
Paid-in capital
     162,010       146,357  
Retained earnings
     53,955       53,812  
Treasury stock (1,763,362 and 1,762,261 shares at cost)
     (23,569 )     (23,545 )
Accumulated other comprehensive income
     3,956       4,229  
TOTAL SHAREHOLDERS' EQUITY
     218,357       201,781  
Noncontrolling interest
     1,207       468  
TOTAL EQUITY
     219,564       202,249  
TOTAL LIABILITIES AND EQUITY
   $ 2,966,751     $ 3,024,288  

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

 
1
 

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
   
Three Months
    
Six Months
  
   
Ended June 30,
    
Ended June 30,
  
   
2010
    
2009
    
2010
    
2009
  
Interest income
                        
Loans
   $ 17,437     $ 17,882     $ 35,202     $ 36,195  
Investment securities – taxable
     26       289       52       608  
Investment securities – tax-exempt
     3,017       1,379       5,843       2,873  
Mortgage-backed and related securities
     10,282       16,075       24,559       32,479  
FHLB stock and other investments
     59       48       141       152  
Other interest earning assets
     4       54       15       80  
Total interest income
     30,825       35,727       65,812       72,387  
Interest expense
                                
Deposits
     4,733       5,686       9,738       12,058  
Short-term obligations
     1,867       1,170       3,547       2,335  
Long-term obligations
     4,855       6,416       10,081       13,302  
Total interest expense
     11,455       13,272       23,366       27,695  
Net interest income
     19,370       22,455       42,446       44,692  
Provision for loan losses
     2,260       3,417       6,127       7,007  
Net interest income after provision for loan losses
     17,110       19,038       36,319       37,685  
Noninterest income
                                
Deposit services
     4,400       4,417       8,464       8,452  
Gain on sale of securities available for sale
     6,661       5,911       15,016       19,707  
                                 
Total other-than-temporary impairment losses
     –       –       (39 )     (5,627 )
Portion of loss recognized in other comprehensive income (before taxes)
     –       (537 )     (36 )     4,190  
Net impairment losses recognized in earnings
     –       (537 )     (75 )     (1,437 )
                                 
Gain on sale of loans
     399       547       680       882  
Trust income
     561       574       1,091       1,137  
Bank owned life insurance income
     285       736       570       1,037  
Other
     864       745       1,797       1,529  
Total noninterest income
     13,170       12,393       27,543       31,307  
Noninterest expense
                                
Salaries and employee benefits
     11,215       10,460       22,157       20,944  
Occupancy expense
     1,662       1,565       3,305       2,983  
Equipment expense
     472       414       909       789  
Advertising, travel & entertainment
     544       494       1,081       1,003  
ATM and debit card expense
     212       361       379       660  
Director fees
     216       166       393       312  
Supplies
     206       206       476       418  
Professional fees
     539       455       945       1,085  
Postage
     231       192       417       380  
Telephone and communications
     346       363       719       644  
FDIC Insurance
     689       1,925       1,368       2,461  
Other
     1,647       1,687       3,282       3,126  
Total noninterest expense
     17,979       18,288       35,431       34,805  
                                 
Income before income tax expense
     12,301       13,143       28,431       34,187  
Provision for income tax expense
     2,530       3,255       6,485       9,401  
Net income
     9,771       9,888       21,946       24,786  
Less: Net income attributable to the noncontrolling interest
     (519 )     (511 )     (1,049 )     (1,264 )
Net income attributable to Southside Bancshares, Inc.
   $ 9,252     $ 9,377     $ 20,897     $ 23,522  
Earnings per common share – basic
   $ 0.58     $ 0.60     $ 1.32     $ 1.51  
Earnings per common share – diluted
   $ 0.58     $ 0.60     $ 1.32     $ 1.50  
Dividends paid per common share
   $ 0.17     $ 0.14     $ 0.34     $ 0.27  


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

 
2
 

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

   
Six Months Ended
June 30,
  
   
2010
    
2009
  
Common Stock
            
Balance, beginning of period
   $ 20,928     $ 19,695  
Issuance of common stock (106,936 shares in 2010 and 191,440 shares in 2009)
     134       240  
Stock dividend declared
     943       886  
Balance, end of period
     22,005       20,821  
Paid-in capital
                
Balance, beginning of period
     146,357       131,112  
Issuance of common stock (106,936 shares in 2010 and 191,440 shares in 2009)
     767       1,129  
Tax benefit of incentive stock options
     316       419  
Stock dividend declared
     14,570       12,641  
Balance, end of period
     162,010       145,301  
Retained earnings
                
Balance, beginning of period
     53,812       34,021  
Net income attributable to Southside Bancshares, Inc.
     20,897       23,522  
Dividends paid on common stock ($0.34 per share in 2010 and $0.27 per share in 2009)
     (5,241 )     (3,907 )
Stock dividend declared
     (15,513 )     (13,527 )
Balance, end of period
     53,955       40,109  
Treasury Stock
                
Balance, beginning of period
     (23,545 )     (23,115 )
Purchase of common stock (1,101 shares in 2010 and 30,691 shares in 2009)
     (24 )     (430 )
Balance, end of period
     (23,569 )     (23,545 )
Accumulated other comprehensive (loss) income
                
Balance, beginning of period
     4,229       (1,096 )
Net unrealized gains on available for sale securities, net of tax
     9,008       14,859  
Reclassification adjustment for gains on sales of available for sale securities included in net income, net of tax
     (9,760 )     (12,810 )
Non-credit portion of other-than-temporary impairment losses on available for sale
                
securities, net of tax
     23       (2,723 )
Other-than-temporary impairment charges on available for sale securities included in
                
net income, net of tax
     49       934  
Adjustment to net periodic benefit cost, net of tax
     407       444  
Net change in accumulated other comprehensive (loss) income
     (273 )     704  
Balance, end of period
     3,956       (392 )
Total shareholders’ equity
     218,357       182,294  
Noncontrolling interest
                
Balance, beginning of period
     468       472  
Net income attributable to noncontrolling interest shareholders
     1,049       1,264  
Capital distribution to noncontrolling interest shareholders
     (310 )     (1,180 )
Balance, end of period
     1,207       556  
Total equity
   $ 219,564     $ 182,850  
                 
Comprehensive income
                
Net income
   $ 21,946     $ 24,786  
Net change in accumulated other comprehensive (loss) income
     (273 )     704  
Comprehensive income
     21,673       25,490  
Comprehensive income attributable to the noncontrolling interest
     (1,049 )     (1,264 )
Comprehensive income attributable to Southside Bancshares, Inc.
   $ 20,624     $ 24,226  


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

 
3
 

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
   
Six Months Ended
June 30,
  
   
2010
    
2009
  
             
OPERATING ACTIVITIES:
            
Net income
   $ 21,946     $ 24,786  
Adjustments to reconcile net income to net cash provided by operations:
                
Depreciation
     1,568       1,316  
Amortization of premium
     18,038       6,299  
Accretion of discount and loan fees
     (2,545 )     (1,969 )
Provision for loan losses
     6,127       7,007  
Decrease in interest receivable
     1,098       1,782  
Increase in other assets
     (1,513 )     (1,097 )
Net change in deferred taxes
     171       (750 )
Decrease in interest payable
     (548 )     (1,170 )
Increase in other liabilities
     2,799       5,575  
Increase in loans held for sale
     (681 )     (5,558 )
Gain on sale of securities available for sale
     (15,016 )     (19,707 )
Net other-than-temporary impairment losses
     75       1,437  
Gain on sale of assets
     (7 )     –  
Loss on disposal of assets
     –       37  
Impairment on other real estate owned
     20       –  
(Gain) loss on sale of other real estate owned
     (12 )     1  
Net cash provided by operating activities
     31,520       17,989  
                 
INVESTING ACTIVITIES:
                
Proceeds from sales of investment securities available for sale
     40,746       158,151  
Proceeds from sales of mortgage-backed securities available for sale
     758,901       258,456  
Proceeds from maturities of investment securities available for sale
     9,804       50,275  
Proceeds from maturities of mortgage-backed securities available for sale
     199,778       135,738  
Proceeds from maturities of mortgage-backed securities held to maturity
     38,012       26,082  
Proceeds from redemption of FHLB stock
     2,638       –  
Purchases of investment securities available for sale
     (54,317 )     (89,880 )
Purchases of investment securities held to maturity
     –       (1,014 )
Purchases of mortgage-backed securities available for sale
     (721,114 )     (401,173 )
Purchases of mortgage-backed securities held to maturity
     (258,935 )     (110,035 )
Purchases of FHLB stock and other investments
     (105 )     (64 )
Net decrease (increase) in loans
     8,995       (2,036 )
Purchases of premises and equipment
     (3,600 )     (4,693 )
Proceeds from sales of premises and equipment
     38       –  
Proceeds on bank owned life insurance
     –       1,086  
Proceeds from sales of other real estate owned
     722       217  
Proceeds from sales of repossessed assets
     2,740       1,195  
Net cash provided by investing activities
     24,303       22,305  


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


 
4
 

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED)
(in thousands)
   
Six Months Ended
  
   
June 30,
  
   
2010
    
2009
  
FINANCING ACTIVITIES:
            
 Net increase in demand and savings accounts
    
135,317
      
1,371
  
 Net (decrease) increase in certificates of deposit
    
(57,713
)
    
129,081
  
 Net (decrease) increase in federal funds purchased and repurchase agreements
    
(9,552
)
    
9,762
  
 Proceeds from FHLB advances
    
4,261,610
      
3,051,206
  
 Repayment of FHLB advances
    
(4,387,008
)
    
(3,245,730
)
 Net capital distributions to non-controlling interest in consolidated entities
    
(310
)
    
(1,180
)
 Tax benefit of incentive stock options
    
316
      
419
  
 Purchase of common stock
    
(24
)
    
(430
)
 Proceeds from the issuance of common stock
    
901
      
1,369
  
 Dividends paid
    
(5,241
)
    
(3,907
)
      Net cash used in financing activities
    
(61,704
)
    
(58,039
)
                 
Net decrease in cash and cash equivalents
    
(5,881
)
    
(17,745
)
Cash and cash equivalents at beginning of period
    
52,166
      
66,774
  
Cash and cash equivalents at end of period
  
$
46,285
    
$
49,029
  
                 
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
                
 Interest paid
  
$
23,914
    
$
28,865
  
 Income taxes paid
    
4,650
      
7,500
  
                 
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
                
 Acquisition of other repossessed assets and real estate through foreclosure
  
$
3,747
    
$
5,428
  
 5% stock dividend
    
15,513
      
13,527
  
 Adjustment to pension liability
    
(626
)
    
(682
)
 Unsettled trades to purchase securities
    
(2,280
)
    
(61,913
)
 Unsettled trades to sell securities
    
24,396
      
–
  
 Unsettled issuances of brokered CDs
    
–
      
9,900
  

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



 
5
 

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
 
1.     Basis of Presentation

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

The consolidated balance sheet as of June 30, 2010, and the related consolidated statements of income, equity and cash flows and notes to the financial statements for the three and six month periods ended June 30, 2010 and 2009 are unaudited; in the opinion of management, all adjustments necessary for a fair statement of such financial statements have been included.  Such adjustments consisted only of normal recurring items.  All significant intercompany accounts and transactions are eliminated in consolidation.  The preparation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires the use of management’s estimates. These estimates are subjective in nature and involve matters of judgment.  Actual amounts could differ from these estimates.

Interim results are not necessarily indicative of results for a full year.  These financial statements should be read in conjunction with the financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2009.  All share data has been adjusted to give retroactive recognition to stock splits and stock dividends.  For a description of our significant accounting and reporting policies, refer to Note 1 of the Notes to Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2009.

2.     Earnings Per Share

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

   
Three Months
    
Six Months
  
   
Ended June 30,
    
Ended June 30,
  
   
2010
    
2009
    
2010
    
2009
  
Basic and Diluted Earnings:
                        
       Net Income - Southside Bancshares, Inc.
   $ 9,252     $ 9,377     $ 20,897     $ 23,522  
                                 
Basic weighted-average shares outstanding
     15,812       15,611       15,781       15,551  
       Add:   Stock options
     28       139       47       182  
       Diluted weighted-average shares outstanding
     15,840       15,750       15,828       15,733  
                                 
Basic Earnings Per Share:
                                
       Net Income - Southside Bancshares, Inc.
   $ 0.58     $ 0.60     $ 1.32     $ 1.51  
                                 
Diluted Earnings Per Share:
                                
       Net Income - Southside Bancshares, Inc.
   $ 0.58     $ 0.60     $ 1.32     $ 1.50  

For the three and six month periods ended June 30, 2010 and 2009, there were no antidilutive options.

 
6
 
 
3.     Comprehensive (Loss) Income
 
    The components of other comprehensive (loss) income are as follows (in thousands):

   
Six Months Ended June 30, 2010
  
   
Before-Tax
    
Tax (Expense)
    
Net-of-Tax
  
   
Amount
    
Benefit
    
Amount
  
Unrealized losses on securities:
                  
Unrealized holding gains arising during period
   $ 13,859     $ (4,851 )   $ 9,008  
Non credit portion of other-than-temporary
impairment losses on the AFS securities
     36       (13 )     23  
Less:  reclassification adjustment for gains
                        
   included in net income
     15,016       (5,256 )     9,760  
Less:  other-than-temporary impairment charges
 on AFS securities included in net income
     (75 )     26       (49 )
Net unrealized losses on securities
     (1,046 )     366       (680 )
   Change in pension plans
     626       (219 )     407  
Other comprehensive loss
   $ (420 )   $ 147     $ (273 )



   
Three Months Ended June 30, 2010
  
   
Before-Tax
    
Tax (Expense)
    
Net-of-Tax
  
   
Amount
    
Benefit
    
Amount
  
Unrealized gains on securities:
                  
Unrealized holding gains arising during period
   $ 12,998     $ (4,550 )   $ 8,448  
Non credit portion of other-than-temporary
impairment losses on the AFS securities
     –       –       –  
Less:  reclassification adjustment for gains
                        
  included in net income
     6,661       (2,332 )     4,329  
   Less: other-than-temporary impairment charges
             on AFS securities included in net income
     –       –       –  
Net unrealized gains on securities
     6,337       (2,218 )     4,119  
   Change in pension plans
     379       (133 )     246  
Other comprehensive income
   $ 6,716     $ (2,351 )   $ 4,365  


   
Six Months Ended June 30, 2009
  
   
Before-Tax
    
Tax (Expense)
    
Net-of-Tax
  
   
Amount
    
Benefit
    
Amount
  
Unrealized gains on securities:
                  
Unrealized holding gains arising during period
   $ 22,860     $ (8,001 )   $ 14,859  
Non credit portion of other-than-temporary
                        
  impairment losses on the AFS securities
     (4,190 )     1,467       (2,723 )
Less:  reclassification adjustment for gains
                        
  included in net income
     19,707       (6,897 )     12,810  
Less:  other-than-temporary impairment charges
                        
  on AFS securities included in net income
     (1,437 )     503       (934 )
Net unrealized gains on securities
     400       (140 )     260  
   Change in pension plans
     682       (238 )     444  
Other comprehensive income
   $ 1,082     $ (378 )   $ 704  


 
7
 


   
Three Months Ended June 30, 2009
  
   
Before-Tax
    
Tax (Expense)
    
Net-of-Tax
  
   
Amount
    
Benefit
    
Amount
  
Unrealized losses on securities:
                  
Unrealized holding gains arising during period
   $ 1,894     $ (662 )   $ 1,232  
Less:  reclassification adjustment for gains
                        
  included in net income
     5,911       (2,068 )     3,843  
Less:  other-than-temporary impairment charges
                        
  on AFS securities included in net income
     (537 )     188       (349 )
Net unrealized losses on securities
     (3,480 )     1,218       (2,262 )
   Change in pension plans
     361       (126 )     235  
Other comprehensive loss
   $ (3,119 )   $ 1,092     $ (2,027 )
 
4.     Securities

The amortized cost and estimated market value of investment and mortgage-backed securities as of June 30, 2010 and December 31, 2009, are reflected in the tables below (in thousands):

   
June 30, 2010
  
   
Amortized
    
Gross
Unrealized
    
Gross Unrealized Losses
    
Estimated
  
 AVAILABLE FOR SALE:
  
Cost
    
Gains
    
OTTI
    
Other
    
Market Value
  
Investment Securities:
                              
U.S. Treasury
   $ 4,699     $ –     $ –     $ –     $ 4,699  
State and Political Subdivisions
     234,063       12,344       –       154       246,253  
Other Stocks and Bonds
     3,308       1       2,694       63       552  
Mortgage-backed Securities:
                                        
U.S. Government Agencies
     160,323       4,215       –       989       163,549  
Government-Sponsored Enterprises
     827,137       15,836       –       4,044       838,929  
Total
   $ 1,229,530     $ 32,396     $ 2,694     $ 5,250     $ 1,253,982  

   
June 30, 2010
  
   
Amortized
    
Gross
Unrealized
    
Gross Unrealized Losses
    
Estimated
  
 HELD TO MATURITY:
  
Cost
    
Gains
    
OTTI
    
Other
    
Market Value
  
Investment Securities:
                              
State and Political Subdivisions
   $ 1,012     $ 128     $ –     $ –     $ 1,140  
Other Stocks and Bonds
     482       20       –       –       502  
Mortgage-backed Securities:
                                        
U.S. Government Agencies
     25,857       668       –       29       26,496  
Government-Sponsored Enterprises
     433,820       6,560       –       1,623       438,757  
Total
   $ 461,171     $ 7,376     $ –     $ 1,652     $ 466,895  


   
December 31, 2009
  
   
Amortized
    
Gross
Unrealized
    
Gross Unrealized Losses
    
Estimated
  
 AVAILABLE FOR SALE:
  
Cost
    
Gains
    
OTTI
    
Other
    
Market Value
  
Investment Securities:
                              
U.S. Treasury
   $ 4,898     $ 1     $ –     $ –     $ 4,899  
State and Political Subdivisions
     250,391       9,431       –       296       259,526  
Other Stocks and Bonds
     3,383       3       2,730       21       635  
Mortgage-backed Securities:
                                        
U.S. Government Agencies
     126,264       3,725       –       407       129,582  
Government-Sponsored Enterprises
     1,092,659       20,787       –       4,846       1,108,600  
Total
   $ 1,477,595     $ 33,947     $ 2,730     $ 5,570     $ 1,503,242  


 
8
 


   
December 31, 2009
  
   
Amortized
    
Gross
Unrealized
    
Gross Unrealized Losses
    
Estimated
  
 HELD TO MATURITY:
  
Cost
    
Gains
    
OTTI
    
Other
    
Market Value
  
Investment Securities:
                              
State and Political Subdivisions
   $ 1,013     $ 103     $ –     $ –     $ 1,116  
Other Stocks and Bonds
     480       22       –       –       502  
Mortgage-backed Securities:
                                        
U.S. Government Agencies
     16,677       534       –       36       17,175  
Government-Sponsored Enterprises
     225,988       5,248       –       766       230,470  
Total
   $ 244,158     $ 5,907     $ –     $ 802     $ 249,263  

The following table represents the unrealized loss on securities for the six months ended June 30, 2010 and year ended December 31, 2009 (in thousands):

 
Less Than 12 Months
  
More Than 12 Months
  
Total
  
 
Fair Value
  
Unrealized Loss
  
Fair Value
  
Unrealized Loss
  
Fair Value
  
Unrealized Loss
  
As of June 30, 2010:
                        
                         
Available for Sale
                        
State and Political Subdivisions
   $ 5,269     $ 37     $ 3,197     $ 117     $ 8,466     $ 154  
Other Stocks and Bonds
     –       –       359       2,757       359       2,757  
Mortgage-Backed Securities
     404,819       5,033       34       –       404,853       5,033  
Total
   $ 410,088     $ 5,070     $ 3,590     $ 2,874     $ 413,678     $ 7,944  
                                                 
Held to Maturity
                                                
Mortgage-Backed Securities
   $ 126,888     $ 1,652     $ 92     $ –     $ 126,980     $ 1,652  
Total
   $ 126,888     $ 1,652     $ 92     $ –     $ 126,980     $ 1,652  

As of December 31, 2009:
                                    
                                     
Available for Sale
                                    
State and Political Subdivisions
   $ 14,520     $ 160     $ 2,953     $ 136     $ 17,473     $ 296  
Other Stocks and Bonds
     –       –       441       2,751       441       2,751  
Mortgage-Backed Securities
     391,889       5,250       1,065       3       392,954       5,253  
Total
   $ 406,409     $ 5,410     $ 4,459     $ 2,890     $ 410,868     $ 8,300  
                                                 
Held to Maturity
                                                
Mortgage-Backed Securities
   $ 19,705     $ 802     $ –     $ –     $ 19,705     $ 802  
Total
   $ 19,705     $ 802     $ –     $ –     $ 19,705     $ 802  
                                                 

When it is determined that a decline in fair value of Held to Maturity (“HTM”) and Available for Sale (“AFS”) securities 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.  In estimating other-than-temporary impairment losses, management considers, among other things, the length of time and the extent to which the fair value has been less than cost and the financial condition and near-term prospects of the issuer.  Additionally, we do not currently intend to sell the securities and it is not more likely than not that we will be required to sell the securities before the anticipated recovery of its amortized cost basis.

The turmoil in the capital markets had a significant impact on our estimate of fair value for certain of our securities.  We believe the market values are reflective of illiquidity and credit impairment.  At June 30, 2010, we have in AFS Other Stocks and Bonds, $2.9 million amortized cost basis in pooled trust preferred securities (“TRUPs”).  Those securities are structured products with cash flows dependent upon securities issued by U.S. financial institutions, including banks and insurance companies.  Our estimate of fair value at June 30, 2010 for the TRUPs is approximately $187,000 and reflects the market illiquidity.  With the exception of the TRUPs, to the best of management’s knowledge and based on our consideration of the qualitative factors associated with each security, there were no securities in our investment and mortgage-backed securities portfolio at June 30, 2010 with an other-than-temporary impairment.


 
9
 

Given the facts and circumstances associated with the TRUPs we performed detailed cash flow modeling for each TRUP using an industry-accepted cash flow model. Prior to loading the required assumptions into the model we reviewed the financial condition of each of the underlying issuing banks within the TRUP collateral pool that had not deferred or defaulted as of June 30, 2010.  Management’s best estimate of a deferral assumption was assigned to each issuing bank based on the category in which it fell.  Our analysis of the underlying cash flows contemplated various default, deferral and recovery scenarios to arrive at our best estimate of cash flows.  Based on that detailed analysis, we have concluded that the other-than-temporary impairment, which captures the credit component in compliance with FASB ASC Topic 320, “Investments – Debt and Equity Securities,” was estimated at $3.1 million and $3.0 million at June 30, 2010 and December 31, 2009, respectively. The non credit charge to other comprehensive income was estimated at $2.7 million at June 30, 2010 and December 31, 2009.  Therefore, the carrying amount of the TRUPs was written down with $75,000 recognized in earnings for the six months ended June 30, 2010 and $3.0 million recognized in earnings for the year ended 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, the severity and duration of the mark-to-market loss, and the structural nuances of each TRUP.  Management believes that the detailed review of the collateral and cash flow modeling support the conclusion that the TRUPs had an other-than-temporary impairment at June 30, 2010.  We will continue to update our assumptions and the resulting analysis each reporting period to reflect changing market conditions.  Additionally, we do not currently intend to sell the TRUPs and it is not more likely than not that we will be required to sell the TRUPs before the anticipated recovery of their amortized cost basis.

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


 
TRUP
    
 
Par
    
 
Credit Loss
    
 
Amortized Cost
    
 
Fair Value
    
 
Tranche
    
 
Credit Rating
                                     
1
  
$
2,000
  
$
1,075
  
$
   925
  
$
124
    
C1
    
Ca
2
    
2,000
    
  550
    
1,450
    
  36
    
B1
    
Ca
3
    
2,000
    
1,450
    
   550
    
  27
    
B2
    
C
   
$
6,000
  
$
3,075
  
$
2,925
  
$
187
            

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

 
 
Six Months Ended June 30,2010
  
 
Impairment Related to Credit Loss
  
Impairment Related to All Other Factors
  
Total Impairment
  
 
 
                   
Balance, beginning of the period
   $ 3,000     $ 2,730     $ 5,730  
Charges on securities for which other-than-temporary impairment charges were not previously recognized
     –       –       –  
Additional charges on securities for which other-than-temporary impairment charges were previously recognized
     75       (36 )     39  
Balance, end of the period
   $ 3,075     $ 2,694     $ 5,769  

 
Three Months Ended June 30,2010
  
 
Impairment Related to Credit Loss
  
Impairment Related to All Other Factors
  
Total Impairment
  
 
 
                   
Balance, beginning of the period
   $ 3,075     $ 2,694     $ 5,769  
Charges on securities for which other-than-temporary impairment charges were not previously recognized
     –       –       –  
Additional charges on securities for which other-than-temporary impairment charges were previously recognized
     –       –       –  
Balance, end of the period
   $ 3,075     $ 2,694     $ 5,769  

Management has the ability and intent to hold the securities classified as HTM until they mature, at which time we will receive full value for the securities. Furthermore, as of June 30, 2010, management also had the ability and intent to hold the securities classified as AFS for a period of time sufficient for a recovery of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality.


 
10
 

Interest income recognized on AFS and HTM securities for the period presented (in thousands):

   
Six Months Ended
  
   
June 30, 2010
      
June 30, 2009
  
U.S. Treasury
  
$
4
    
$
25
  
U.S. Government Agencies
    
–
      
307
  
State and Political Subdivisions
    
5,864
      
3,034
  
Other Stocks and Bonds
    
27
      
115
  
Mortgage-backed Securities
    
24,559
      
32,479
  
                 
Total interest income on securities
  
$
30,454
    
$
35,960
  

   
Three Months Ended
  
   
June 30, 2010
      
June 30, 2009
  
U.S. Treasury
  
$
2
    
$
12
  
U.S. Government Agencies
    
–
      
167
  
State and Political Subdivisions
    
3,028
      
1,441
  
Other Stocks and Bonds
    
13
      
48
  
Mortgage-backed Securities
    
10,282
      
16,075
  
                 
Total interest income on securities
  
$
13,325
    
$
17,743
  

There were no securities transferred from AFS to HTM during the six months ended June 30, 2010 and 2009.  There were no sales from the HTM portfolio during the six months ended June 30, 2010 or 2009.  There were $461.2 million of securities classified as HTM for the six months ended June 30, 2010 compared to $244.2 million of securities classified as HTM for the year ended December 31, 2009.

Of the $15.0 million in net securities gains from the AFS portfolio for the six months ended June 30, 2010, there were $17.2 million in realized gains and $2.2 million in realized losses.  Of the $19.7 million in net securities gains from the AFS portfolio for the six months ended June 30, 2009, there were $19.8 million in realized gains and $99,000 in realized losses.

The amortized cost and fair value of securities at June 30, 2010, are presented below by contractual maturity.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.  Mortgage-backed securities are presented in total by category due to the fact that mortgage-backed securities typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with varying maturities.  The characteristics of the underlying pool of mortgages, such as fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the certificate holder.  The term of a mortgage-backed pass-through security thus approximates the term of the underlying mortgages and can vary significantly due to prepayments.

 
   
June 30, 2010
  
   
Amortized Cost
    
Fair Value
  
   
(in thousands)
  
             
Available for sale securities:
            
             
Investment Securities
            
Due in one year or less
   $ 9,028     $ 9,085  
Due after one year through five years
     7,729       7,973  
Due after five years through ten years
     21,534       22,441  
Due after ten years
     203,779       212,005  
      242,070       251,504  
Mortgage-backed securities
     987,460       1,002,478  
Total
   $ 1,229,530     $ 1,253,982  

 

 
11
 


 
   
June 30, 2010
  
   
Amortized Cost
    
Fair Value
  
             
Held to maturity securities:
            
             
Investment Securities
            
Due in one year or less
   $ –     $ –  
Due after one year through five years
     –       –  
Due after five years through ten years
     482       502  
Due after ten years
     1,012       1,140  
      1,494       1,642  
Mortgage-backed securities
     459,677       465,253  
Total
   $ 461,171     $ 466,895  

Investment and mortgage-backed securities with book values of $989.1 million at June 30, 2010 and $1.06 billion at December 31, 2009 were pledged to collateralize Federal Home Loan Bank (“FHLB”) advances, repurchase agreements, public funds and trust deposits or for other purposes as required by law.

Securities with limited marketability, such as FHLB stock and other investments, are carried at cost, which approximates its fair value and assessed for other-than-temporary impairment.  These securities have no maturity date.

5.     Loans and Allowance for Probable Loan Losses

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

 
At
    
At
  
 
June 30,
    
December 31,
  
 
2010
    
2009
  
Real Estate Loans:
          
   Construction
   $ 86,686     $ 88,566  
   1-4 Family Residential
     235,311       234,379  
   Other
     204,837       212,731  
Commercial Loans
     156,032       159,529  
Municipal Loans
     155,283       150,111  
Loans to Individuals
     179,303       188,260  
Total Loans
   $ 1,017,452     $ 1,033,576  


 
12
 

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

   
Three Months
    
Six Months
  
   
Ended June 30,
    
Ended June 30,
  
                         
   
2010
    
2009
    
2010
    
2009
  
Allowance for Loan Losses:
                        
                         
Balance at beginning of period
   $ 19,468     $ 17,432     $ 19,896     $ 16,112  
Provision for loan losses
     2,260       3,417       6,127       7,007  
Loans charged off
     (3,549 )     (2,465 )     (8,475 )     (5,169 )
Recoveries of loans charged off
     1,104       420       1,735       854  
Balance at end of period
   $ 19,283     $ 18,804     $ 19,283     $ 18,804  
                                 
Reserve for Unfunded Loan Commitments:
                                
                                 
Balance at beginning of period
   $ 20     $ 7     $ 5     $ 7  
Provision for losses on unfunded loan
      commitments
     20       2       35       2  
Balance at end of period
   $ 40     $ 9     $ 40     $ 9  

6.     Goodwill and Core Deposit Intangible Assets

Goodwill.  Goodwill totaled $22.0 million at both June 30, 2010 and December 31, 2009.

We measured our goodwill for impairment at December 31, 2009.  We have identified Southside Bank as the sole operating segment and reporting unit for our impairment assessment.

Step one of the impairment test involves comparing the fair value of the reporting unit which, in our case, is the entire entity, to the carrying value of the reporting unit.  If the fair value of the reporting unit is greater than the carrying value of the reporting unit, no additional testing is required. If the fair value of the reporting unit is less than the carrying value of the reporting unit, step two of the impairment test must be performed.  At December 31, 2009, the fair value of the reporting unit was greater than the carrying value of the reporting unit.  As a result, we did not record any goodwill impairment for the year ended December 31, 2009.  As of June 30, 2010, there were no trigger events to warrant an updated impairment analysis.

During the fourth quarter of 2007, we recorded core deposit intangibles totaling $2.0 million in connection with the acquisition of FWBS.  Core deposit intangibles are amortized on an accelerated basis over their estimated lives, which range from four to ten years.

Core Deposit Intangibles.  Core deposit intangible assets were as follows (in thousands):

   
Gross Intangible Assets
    
Accumulated Amortization
    
Net Intangible Assets
  
       
                     
June 30, 2010
                    
   Core deposits
  
$
2,047
    
$
(1,118
)
  
$
929
  
   
$
2,047
    
$
(1,118
)
  
$
929
  
                     
December 31, 2009
                    
   Core deposits
  
$
2,047
    
$
(951
)
  
$
1,096
  
   
$
2,047
    
$
(951
)
  
$
1,096
  
                         


 
13
 

For the three and six months ended June 30, 2010, amortization expense related to intangible assets totaled $81,000 and $167,000, respectively, compared to $97,000 and $199,000 for the comparable periods in 2009.  The estimated aggregate future amortization expense for intangible assets remaining as of June 30, 2010 is as follows (in thousands):

Remainder of 2010
   $ 152  
2011
     255  
2012
     198  
2013
     146  
2014
     99  
Thereafter
     79  
    $ 929  

7.     Long-term Obligations

Long-term obligations are summarized as follows (in thousands):

   
June 30,
    
December 31,
  
   
2010
    
2009
  
FHLB Advances (1)