UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
(Mark
One)
|
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the fiscal year ended December 31, 2006
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
of incorporation)
|
(I.R.S.
Employer Identification No.)
|
|
1201
S. Beckham Avenue, Tyler, Texas
|
75701
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
Registrant's
telephone number, including area code: (903) 531-7111
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of each class
|
Name
of each exchange on which registered
|
|
|
COMMON
STOCK, $1.25 PAR VALUE
|
NASDAQ
Global Select Market
|
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 o
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 o
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
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check
one):
|
Large
accelerated filer o
|
Accelerated
filer x
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
YES o
NO
x
The
aggregate market value of the common stock held by non-affiliates of the
registrant as of June 30, 2006 was $224,153,130.
As
of
February 15, 2007, 12,357,516 shares of common stock of Southside Bancshares,
Inc. were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Registrant's Proxy Statement to be filed for the Annual Meeting of
Shareholders to be held April 19, 2007 are incorporated by reference into
Part
III of this Annual Report on Form 10-K.
TABLE
OF CONTENTS
|
Subsidiaries
of the Registrant
|
|
|
Consent
of Independent Registered Public Accounting Firm
|
|
|
Certification
Pursuant to Section 302
|
|
|
Certification
Pursuant to Section 302
|
|
|
Certification
Pursuant to Section 906
|
|
PART
I
|
ITEM
1.
|
BUSINESS
|
FORWARD-LOOKING
INFORMATION
The
disclosures set forth in this item are qualified by the section captioned
“Forward-Looking Information” in “Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations” of this Annual Report on Form
10-K and other cautionary statements set forth elsewhere in this
report.
GENERAL
Southside
Bancshares, Inc., incorporated in Texas in 1982, is a bank holding company
for
Southside Bank, a Texas state bank headquartered in Tyler, Texas. Tyler has
a
metropolitan area population of approximately 191,000 and is located
approximately 90 miles east of Dallas, Texas and 90 miles west of Shreveport,
Louisiana. We have the largest deposit base in the Tyler metropolitan area
and
are the largest bank based on asset size headquartered in East Texas.
At
December 31, 2006, our total assets were $1.89 billion, total loans were
$759.1
million, deposits were $1.28 billion, and shareholders’ equity was $110.6
million. Our net income was $15.0 million and $14.6 million and fully diluted
earnings per common share were $1.18 and $1.15 for the years ended December
31,
2006 and 2005, respectively. We have paid a cash dividend every year since
1970.
We
are a
community-focused financial institution that offers a full range of financial
services to individuals, businesses, municipal entities, and non-profit
organizations in the communities we serve. These services include consumer
and
commercial loans, deposit accounts, trust services, safe deposit services
and
brokerage services.
Our
consumer loan services include 1-4 family residential mortgage loans, home
equity loans, home improvement loans, automobile loans and other installment
loans. Commercial loan services include short-term working capital loans
for
inventory and accounts receivable, short and medium-term loans for equipment
or
other business capital expansion, commercial real estate loans and municipal
loans. We also offer construction loans for 1-4 family residential and
commercial real estate.
During
the second quarter ended June 30, 2005, we embarked upon a new regional lending
initiative. The goal of this initiative is to expand the regions in which
we
lend. During 2006, we made progress identifying market areas and relationship
managers were hired. Management is continuing to identify market areas to
target
and relationship managers to service those regions.
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, 2006, our trust department managed approximately $564 million of trust
assets. During the first six months of 2006, we sold our interest in BSC
Securities, LC. After the sale, we began offering full retail investment
services to our customers utilizing the services of Raymond James Financial
Services, Inc.
We
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.
Our
administrative offices are located at 1201 S. Beckham Avenue, Tyler, Texas
75701, and our telephone number is 903-531-7111. Our website can be found
at
www.southside.com.
Our
public filings with the Securities and Exchange Commission (the “SEC”) may be
obtained free of charge at either our website or the SEC’s website, www.sec.gov,
as
soon
as reasonably practicable after filing with the SEC.
MARKET
AREA
We
consider
our primary market area to be all of Smith, Gregg, Cherokee, Anderson, Kaufman
and Henderson Counties in East Texas, and to a lesser extent, portions of
adjoining counties. During 2006, we opened a traditional branch in Gun Barrel
City and a full service grocery store branch in Athens, both in Henderson
County, as well as a loan production office in Forney, in Kaufman County
approximately 20 miles east of Dallas. During the second quarter of 2007,
we
will open our sixth full service grocery store branch in our largest market
area, the city of Tyler, in Smith County. Our expectation is that our presence
in the Gregg, Cherokee, Anderson, Kaufman, and Henderson County market areas
will continue to grow in the future. In addition, we continue to explore
new
markets in which we believe we can expand successfully.
The
principal economic activities in our market area 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 and Longview
are
home to several nationally recognized health care systems that represent
all
major specialties.
We
serve
our markets through 27 branch locations, 16 of which are located in grocery
stores. The branches are located in and around Tyler, Longview, Lindale,
Gresham, Jacksonville, Bullard, Chandler, Seven Points, Palestine, Forney,
Gun
Barrel City, Athens and Whitehouse. Our television and radio advertising
has
extended into most of these market areas for several years, providing us
name
recognition throughout Smith, Gregg, and Cherokee counties along with portions
of Anderson and Henderson counties. We anticipate that continued advertising
combined with strategically placed branches should expand our name
recognition.
We
also
maintain seven motor bank facilities. Our customers may also access various
banking services through our 40 Automatic Teller Machines (“ATMs”) and ATMs
owned by others, through debit cards, and through our automated telephone,
internet and electronic banking products. These products allow our customers
to
apply for loans from their computers, access account information and conduct
various other transactions from their telephones and computers.
THE
BANKING INDUSTRY IN TEXAS
The
banking industry is affected by general economic conditions such as interest
rates, inflation, recession, unemployment and other factors beyond our control.
During the last ten to fifteen years the East 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
East
Texas economy. During 2006, the economy in our market appeared to reflect
continued stable growth. 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 2006, the number of financial institutions
in
our market area increased, a trend that we expect will continue. Brokerage
and
insurance companies continue to become more competitive in the financial
services arena and pose an ever increasing challenge to banks. Legislative
changes also greatly affect the level of competition we face. Federal
legislation allows credit unions to use their expanded membership capabilities,
combined with tax-free status, to compete more fiercely for traditional bank
business. The tax-free status granted to credit unions provides them a
significant competitive advantage. Additionally, we must compete against
several
institutions located in Texas and elsewhere in our market area which have
capital resources 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 we are unwilling
to
offer due to interest rate risk and overall profitability concerns. We expect
the level of competition to increase.
EMPLOYEES
At
February 15, 2007, we employed approximately 460 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, 2006, were as follows:
B.
G.
Hartley (Age 77), 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 59), President, Secretary and Director of Southside Bancshares,
Inc.
since 1998. He also serves 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 74), 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 55), Executive Vice President of Southside Bancshares, Inc. since
2000, and Senior Executive Vice President - Loan Administration, Senior Lending
Officer and Director of Southside Bank, since 1996. He joined Southside Bank
in
1979 as an officer in Loan Documentation.
Lee
R.
Gibson (Age 50), Executive Vice President and Chief Financial Officer of
Southside Bancshares, Inc. and of Southside Bank since 2000. He is also a
Director of Southside Bank. He became an officer of Southside Bancshares,
Inc.
in 1985 and of Southside Bank in 1984.
All
the
individuals named above serve in their capacity as officers of Southside
Bancshares, Inc. and Southside Bank and are appointed annually by the board
of
directors of each entity.
SUPERVISION
AND REGULATION
General
Banking
is a complex, highly regulated industry. Consequently, our growth and earnings
performance can be affected not only by decisions of management and national
and
local economic conditions, but also by the statutes administered by, and
the
regulations and policies of, various governmental authorities. For bank holding
companies and Texas state-chartered banks, these authorities include, but
are
not limited to, the Federal Reserve, the FDIC, the TDB, United States Department
of Treasury (the “Treasury Department”), the Internal Revenue Service and state
taxing authorities.
The
primary goals of the bank regulatory scheme are to maintain a safe and sound
banking system and to facilitate the conduct of sound monetary policy. In
furtherance of these goals, Congress has created several largely autonomous
regulatory agencies and enacted numerous laws that govern banks, bank holding
companies and the banking industry. The system of supervision and regulation
applicable to us establishes a comprehensive framework for our operations
and is
intended primarily for the protection of the FDIC’s deposit insurance funds, our
depositors and the public, rather than our shareholders and creditors. The
following summarizes some of the relevant laws, rules and regulations governing
banks and bank holding companies, but does not purport to be a complete summary
of all applicable laws, rules and regulations governing banks and bank holding
companies. The descriptions are qualified in their entirety by reference
to the
specific statutes and regulations discussed.
Holding
Company Regulation
The
Bank Holding Company Act.
As bank
holding companies under the Bank Holding Company Act of 1956 (“BHCA”), as
amended, Southside Bancshares, Inc. and its wholly-owned subsidiary, Southside
Delaware Financial Corporation (collectively, the “Holding Companies”) are
registered with and subject to regulation by the Federal Reserve. The Holding
Companies are both required to file quarterly and other reports with, and
furnish information to, the Federal Reserve, which makes periodic inspections
of
the Holding Companies.
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. The BHCA
also
provides that, with certain exceptions, a bank holding company may not engage
in
any activities other than those of banking or managing or controlling banks
and
other authorized subsidiaries engaged in businesses that are closely related
to
banking or own or control more than five percent of the voting shares of
any
company that is not a bank or otherwise engaged in businesses that are closely
related to banking. The Federal Reserve has deemed limited activities (such
as
leasing, consumer and commercial finance, certain financial consulting
activities and certain securities brokerage activities) to be closely related
to
banking and therefore permissible for a bank holding company.
The
BHCA
restricts the extension of credit to any bank holding company or non-banking
subsidiary by a subsidiary bank. A bank holding company and its subsidiaries
are
also prohibited from engaging in certain tying arrangements in connection
with
any extension of credit, lease or sale of property or furnishing of services.
Bank anti-tying regulations are discussed in greater detail below.
Traditionally,
the activities of bank holding companies had been limited to the business
of
banking and activities closely related or incidental to banking. The
Gramm-Leach-Bliley Act of 1999 (“GLBA”), which became effective on March 11,
2000, amended the BHCA and removed certain legal barriers separating the
conduct
of various types of financial services businesses. In addition, GLBA
substantially revamped the regulatory scheme within which financial institutions
operate.
Under
GLBA, bank holding companies meeting certain eligibility requirements may
elect
to become a “financial holding company.” A financial holding company may engage
in activities that are “financial in nature,” as well as additional activities
that the Federal Reserve or Treasury Department determine are financial in
nature or incidental or complimentary to financial activities. Under GLBA,
“financial activities” specifically include insurance brokerage and
underwriting, securities underwriting and dealing, merchant banking, investment
advisory and lending activities.
A
bank
holding company may become a financial holding company under GLBA if each
of its
subsidiary banks is “well capitalized” under the FDIC Improvement Act prompt
corrective action provisions, is “well managed” and has at least a
“satisfactory” rating under the Community Reinvestment Act. In addition, the
bank holding company must file a declaration with the Federal Reserve that
the
bank holding company elects to become a financial holding company. A bank
holding company that falls out of compliance with these requirements may
be
required to cease engaging in some of its activities.
Under
GLBA, the Federal Reserve serves as the primary regulator of financial holding
companies, with supervisory authority over the parent company and limited
authority over its subsidiaries. Expanded financial activities of financial
holding companies generally will be regulated according to the type of such
financial activity: banking activities by banking regulators, securities
activities by securities regulators and insurance activities by insurance
regulators. Neither Southside Bancshares, Inc. nor Southside Delaware Financial
Corporation have elected to become a financial holding company. However,
there
can be no assurance that we will not make such an election in the
future.
Interstate
Banking.
Federal
banking law generally provides that a bank holding company may acquire or
establish banks in any state of the United States, subject to certain age
and
deposit concentration limits. In approving acquisitions by bank holding
companies of banks and companies engaged in banking-related activities under
Sections 3 and 4 of the BHCA, the Federal Reserve considers a number of factors,
including expected benefits to the public such as greater convenience, increased
competition, or gains in efficiency, as weighed against the risks of possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest, or unsound banking practices. In addition,
Texas banking laws permit a bank holding company that owns stock of a bank
located outside the State of Texas to acquire a bank or bank holding company
located in Texas. This type of acquisition may occur only if the Texas bank
to
be directly or indirectly controlled by the out-of-state bank holding company
has existed and continuously operated as a bank for a period of at least
five
years. In any event, a bank holding company may not own or control banks
in
Texas the deposits of which would exceed 20% of the total deposits of all
federally-insured deposits in Texas. We have no present plans to acquire
or
establish banks outside the State of Texas but have not eliminated the
possibility of doing so.
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 banking organizations they supervise, including bank holding
companies and banks. Under the 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 (including certain off-balance
sheet activities, such as standby letters of credit) of 8%. At least half
of the
total capital must be composed of common shareholders’ equity excluding
unrealized gains or losses on debt securities available for sale, unrealized
gains on equity securities available for sale and unrealized gains or losses
on
cash flow hedges, net of deferred income taxes; plus certain mandatorily
redeemable capital securities; less nonqualifying intangible assets net of
applicable deferred income taxes and certain nonfinancial equity investments.
This is called “Tier 1 capital.” The remainder may consist of qualifying
subordinated debt, certain hybrid capital instruments, qualifying preferred
stock and a limited amount of the allowance for credit losses. This is called
“Tier 2 capital.” Tier 1 capital and Tier 2 capital combined are referred to as
total regulatory capital.
The
Federal Reserve requires bank holding companies that engage in trading
activities to adjust their risk-based capital ratios to take into consideration
market risks that may result from movements in market prices of covered trading
positions in trading accounts, or from foreign exchange or commodity positions,
whether or not in trading accounts, including changes in interest rates,
equity
prices, foreign exchange rates or commodity prices. Any capital required
to be
maintained under these provisions may consist of a new “Tier 3 capital”
consisting of forms of short-term subordinated debt.
Each
of
the federal bank regulatory agencies, including the Federal Reserve, also
has
established minimum leverage capital requirements for banking organizations.
These requirements provide that banking organizations that meet certain
criteria, including excellent asset quality, high liquidity, low interest
rate
exposure and good earnings, and that have received the highest regulatory
rating
must maintain a ratio of Tier 1 capital to total adjusted average assets
of at
least 3%. Institutions not meeting these criteria, as well as institutions
with
supervisory, financial or operational weaknesses, are expected to maintain
a
minimum Tier 1 capital to total adjusted average assets ratio equal to 100
to
200 basis points above that stated minimum. Holding companies experiencing
internal growth or making acquisitions are expected to maintain strong capital
positions substantially above the minimum supervisory levels without significant
reliance on intangible assets. The Federal Reserve also continues to consider
a
“tangible Tier 1 capital leverage ratio” (deducting all intangibles) and other
indicators of capital strength in evaluating proposals for expansion or new
activity.
In
addition, both the Federal Reserve and the FDIC have adopted risk-based capital
standards that explicitly identify concentrations of credit risk and the
risk
arising from non-traditional activities, as well as an institution’s ability to
manage these risks, as important factors to be taken into account by each
agency
in assessing an institution’s overall capital adequacy. The capital guidelines
provide that an institution’s exposure to a decline in the economic value of its
capital due to changes in interest rates be considered by the agency as a
factor
in evaluating a banking organization’s capital adequacy. The agencies also
require banks and bank holding companies to adjust their regulatory capital
to
take into consideration the risk associated with certain recourse obligations,
direct credit subsidies, residual interest and other positions in securitized
transactions that expose banking organizations to credit risk.
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, 2006, are
shown in the following table.
|
Capital
Adequacy Ratios of Southside Bancshares, Inc. and Southside
Bank
|
|||||||||||||
|
Regulatory
|
|||||||||||||
|
Minimums
|
|||||||||||||
|
Regulatory
|
to
be Well-
|
Southside
|
Southside
|
||||||||||
|
Minimums
|
Capitalized
|
Bancshares,
Inc.
|
Bank
|
||||||||||
|
Risk-based
capital ratios:
|
|
||||||||||||
|
Tier
1 Capital (1)
|
4.0
|
%
|
6.0
|
%
|
16.93
|
%
|
16.26
|
%
|
|||||
|
Total
risk-based capital (2)
|
8.0
|
10.0
|
17.76
|
17.09
|
|||||||||
|
Tier
1 leverage ratio (3)
|
4.0
|
5.0
|
7.68
|
7.37
|
|||||||||
|
(1)
|
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.
|
|
(2)
|
The
sum of Tier 1 capital, a qualifying portion of the allowance for
loan
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.
|
|
(3)
|
Tier
1 capital computed as a percentage of fourth quarter average assets
less
nonqualifying intangibles and certain nonfinancial equity
investments.
|
The
federal banking agencies, including the Federal Reserve and the FDIC, are
required to take “prompt corrective action” in respect of depository
institutions and their bank holding companies that do not meet minimum capital
requirements. The law establishes five capital categories for insured depository
institutions for this purpose: “well-capitalized,” “adequately capitalized,”
“undercapitalized,” “significantly undercapitalized” and “critically
undercapitalized.” To be considered “well-capitalized” under these standards, an
institution must maintain a total risk-based capital ratio of 10% or greater;
a
Tier 1 risk-based capital ratio of 6% or greater; a leverage capital ratio
of 5%
or greater; and must not be subject to any order or written directive to
meet
and maintain a specific capital level for any capital measure. Southside
Bancshares, Inc. and Southside Bank are classified as “well-capitalized.”
Federal law also requires the bank regulatory agencies to implement systems
for
“prompt corrective action” for institutions that fail to meet minimum capital
requirements within the five capital categories, with progressively more
severe
restrictions on operations, management and capital distributions according
to
the category in which an institution is placed. Failure to meet capital
requirements may also cause an institution to be directed to raise additional
capital. Federal law also mandates that the agencies adopt safety and soundness
standards relating generally to operations and management, asset quality
and
executive compensation, and authorizes administrative action against an
institution that fails to meet such standards.
In
addition to the “prompt corrective action” directives, failure to meet capital
guidelines may subject a banking organization to a variety of other enforcement
remedies, including additional substantial restrictions on its operations
and
activities, termination of deposit insurance by the FDIC and, under certain
conditions, the appointment of a conservator or receiver.
The
regulations also establish procedures for “downgrading” an institution to a
lower capital category based on supervisory factors other than capital.
Specifically, a federal banking agency may, after notice and an opportunity
for
a hearing, reclassify a well-capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next
lower
category if the institution is operating in an unsafe or unsound condition
or
engaging in an unsafe or unsound practice. (The FDIC may not, however,
reclassify a significantly undercapitalized institution as critically
undercapitalized).
Federal
Reserve policy requires a bank holding company to act as a source of financial
strength and to take measures to preserve and protect bank subsidiaries in
situations where additional investments in a troubled bank may not otherwise
be
warranted. In addition, where a bank holding company has more than one bank
or
thrift subsidiary, each of the bank holding company’s subsidiary depository
institutions are responsible for any losses to the FDIC as a result of an
affiliated depository institution’s failure. As a result, a bank holding company
may be required to loan money to its subsidiaries in the form of capital
notes
or other instruments which qualify as capital under regulatory rules. Any
such
loans from the holding company to its subsidiary banks likely will be unsecured
and subordinated to the bank’s depositors and perhaps to other creditors of the
bank.
The
regulators are considering modifications to the current regulatory capital
guidelines. It is unclear when or if such modifications will be adopted or
what
the impact on us of such modifications might be.
Dividends.
As bank
holding companies that do not, as entities, currently engage in separate
business activities of a material nature, the Holding Companies’ ability to pay
cash dividends depends upon the cash dividends received from Southside Bank.
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.
In
general, the Federal Reserve discourages bank holding companies from paying
dividends except out of operating earnings, and the prospective rate of earnings
retention appears consistent with the bank holding company’s capital needs,
asset quality and overall financial condition. We are also subject to certain
restrictions on the payment of dividends as a result of the requirement that
we
maintain an adequate level of capital as described above and serve as a source
of strength for our subsidiaries.
Change
in Bank Control Act.
Under
the Change in Bank Control Act (“CBCA”), persons who intend to acquire control
of a bank holding company, either directly or indirectly, must give 60 days
prior notice to the Federal Reserve. “Control” would exist when an acquiring
party directly or indirectly controls at least 25% of the voting securities
or
the power to direct management or policies of the bank holding company. Under
Federal Reserve regulations, a rebuttable presumption of control would arise
with respect to an acquisition where, after the transaction, the acquiring
party
has ownership control or the power to vote at least 10% (but less than 25%)
of
the voting securities.
The
Attorney General of the United States may, within 15 days after approval
by the
Federal Reserve Board of an acquisition under Section 3 of the BHCA, bring
an
action challenging such acquisition under the federal antitrust laws, in
which
case the effectiveness of such approval is stayed pending a final ruling
by the
courts. Failure of the Attorney General to challenge a Section 3 acquisition
and
the absence of a specific right of action to challenge Section 4 or CBCA
acquisitions do not, however, exempt the holding company from complying with
both state and federal antitrust laws after the acquisition is consummated
or
immunize the acquisition from future challenge under the anti-monopolization
provisions of the Sherman Act.
The
Federal Reserve has broad authority to prohibit activities of bank holding
companies and their non-bank subsidiaries which represent unsafe and unsound
banking practices or which constitute knowing or reckless violations of laws
or
regulations, if those activities caused a substantial loss to a depository
institution. These penalties can be as high as $1.0 million for each day
the
activity continues.
Bank
Regulation
Southside
Bank is chartered under the laws of the State of Texas, is an “insured
institution” and a member of the FDIC’s Deposit Insurance Fund. It is not a
member of the Federal Reserve System. As such, it is subject to various
requirements and restrictions under the laws of the United States and the
State
of Texas, and to regulation, supervision and regular examination by the TDB
and
the FDIC. The TDB and the FDIC have the power to enforce compliance with
applicable banking statutes and regulations. These requirements and restrictions
include requirements to maintain reserves against deposits, restrictions
on the
nature and amount of loans that may be made and the interest that may be
charged
thereon and restrictions relating to investments and other activities of
Southside Bank.
Deposit
Insurance.
Our
deposits are insured up to $100,000 per depositor by the FDIC’s Deposit
Insurance Fund. As insurer, the FDIC imposes deposit premiums and is authorized
to conduct examinations and to require reporting. The FDIC assesses insurance
premiums on a bank’s deposits at a variable rate depending on the probability
that the deposit insurance fund will incur a loss with respect to the bank.
The
FDIC determines the deposit insurance assessment rates on the basis of the
bank’s capital classification and supervisory evaluations. For 2007, the minimum
assessment rate is 5 basis points on an annualized basis per $100 in assessable
deposits for the institutions the FDIC perceives to pose the least threat
to the
Deposit Insurance Fund, and 43 basis points for the highest risk institutions.
In 2006, the range was from 0 basis points to 27 basis points. In addition
to
the insurance assessment, each insured bank is subject to an assessment on
deposits to service debt issued by the Financing Corporation, a federal agency
established to finance the recapitalization of the former Federal Savings
and
Loan Insurance Corporation. Our deposit insurance assessments may increase
or
decrease depending upon the risk assessment classification to which we are
assigned by the FDIC. Any increase in insurance assessments could have an
adverse effect on our earnings.
FDIC
Regulation.
In
addition to its role as insurer, the FDIC is the primary federal regulator
of
state-chartered banks, including Southside Bank, that are not members of
a
Federal Reserve Bank. The FDIC issues regulations, conducts examinations,
requires the filing of reports and generally supervises and regulates the
operations of state-chartered nonmember banks. FDIC approval is required
prior
to any merger or consolidation involving state, nonmember banks, or the
establishment or relocation of a branch office facility thereof. FDIC
supervision and regulation is intended primarily for the protection of
depositors and the FDIC insurance funds.
Under
the
Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”),
a depository institution insured by the FDIC can be held liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC after August
9,
1989 in connection with (i) the default of a commonly controlled FDIC insured
depository institution or (ii) any assistance provided by the FDIC to a commonly
controlled FDIC insured depository institution in danger of default. FIRREA
provides that certain types of persons affiliated with financial institutions
can be fined by the federal regulatory agency having jurisdiction over a
depository institution with federal deposit insurance (such as Southside
Bank)
up to $1 million per day for each violation of certain regulations related
(primarily) to lending to and transactions with executive officers, directors,
and principal shareholders, including the interests of these individuals.
Other
violations may result in civil money penalties of $5,000 to $25,000 per day
or
in criminal fines and penalties. In addition, the FDIC has been granted enhanced
authority to withdraw or to suspend deposit insurance in certain
cases.
Activities
and Investments of Insured State-Chartered Banks.
The
FDIC generally limits the activities and equity investments of state nonmember
banks to those that are permissible for national banks. Under regulations
dealing with equity investments, an insured state bank generally may not
directly or indirectly acquire or retain any equity investment of a type,
or in
an amount, that is not permissible for a national bank. A state nonmember
bank
may seek FDIC approval to engage in activities that are not permissible for
a
national bank.
Loans-to-One-Borrower.
The
aggregate amount of loans that Southside Bank will be permitted to make under
applicable FDIC regulations to any one borrower, including related entities,
is
the greater of 25% of unimpaired capital and certified surplus or $500,000.
Southside
Bank's unimpaired capital and certified surplus at December 31, 2006 was
$100
million and the aggregate amount of loans that Southside Bank is permitted
to
make to any one borrower, including related entities, is $25
million.
Regulation
of Lending Activities.
Our
loans are subject to numerous federal and state laws and regulations, including
the Truth in Lending Act, the Federal Consumer Credit Protection Act, the
Texas
Finance Code, the Texas Deceptive Trade Practices Act, the Equal Credit
Opportunity Act, the Real Estate Settlement Procedures Act, the Home Mortgage
Disclosure Act, the Fair Credit Reporting Act, and the Flood Disaster Protection
Act. Remedies to the borrower or consumer and penalties to us are provided
if we
fail to comply with these laws and regulations. The scope and requirements
of
these laws and regulations have expanded significantly in recent years. The
Fair
and Accurate Credit Transactions Act of 2003 (“FACTA”) substantially amended the
Fair Credit Reporting Act to impose new duties on institutions such as Southside
Bank that furnish or receive information from consumer reporting agencies.
The
new duties relate primarily to situations in which a consumer could become
the
victim of an identity theft. The Federal Trade Commission, the Federal Reserve,
the FDIC and other federal agencies are still in the process of developing
regulations implementing the FACTA provisions.
Brokered
Deposits.
Banks
also may be restricted in their ability to accept brokered deposits, depending
on their capital classification. “Well capitalized” banks are permitted to
accept brokered deposits, but all banks that are not well capitalized are
not
permitted to accept such deposits. The FDIC may, on a case-by-case basis,
permit
banks that are adequately capitalized to accept brokered deposits if the
FDIC
determines that acceptance of such deposits would not constitute an unsafe
or
unsound banking practice with respect to the bank.
Anti-Tying
Regulations.
Under
the BHCA and Federal Reserve regulations, a bank is prohibited from engaging
in
certain tying or reciprocity arrangements with its customers. In general,
a bank
may not extend credit, lease, sell property, or furnish any services or fix
or
vary the consideration for these on the condition that (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 may
not
obtain some other credit, property, or services from a competitor, except
to the
extent reasonable conditions are imposed to assure the soundness of the credit
extended. Certain arrangements are permissible: a bank may offer
combined-balance products and may otherwise offer more favorable terms if
a
customer obtains two or more traditional bank products; and certain foreign
transactions are exempt from the general rule. A bank holding company or
any
bank affiliate also is subject to anti-tying requirements in connection with
electronic benefit transfer services.
Dividends.
All
dividends paid by Southside Bank are paid to Southside Bancshares, Inc.,
the
sole indirect shareholder of Southside Bank, through Southside Delaware
Financial Corporation. Our general dividend policy is to pay dividends at
levels
consistent with maintaining liquidity and preserving applicable capital ratios
and servicing obligations. The dividend policy of Southside Bank is subject
to
the discretion of the board of directors of Southside Bank and will depend
upon
such factors as future earnings, financial conditions, cash needs, capital
adequacy, compliance with applicable statutory and regulatory requirements
and
general business conditions.
The
ability of Southside Bank, as a Texas banking association, to pay dividends
is
restricted under applicable law and regulations. 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. The FDIC has the right to prohibit the payment of dividends by Southside
Bank where the payment is deemed to be an unsafe and unsound banking practice.
Southside Bank is also prohibited from paying dividends that will
reduce its capital below the “well-capitalized” level as defined by the
FDIC, and as a general matter, it prefers to maintain a strong capital position
which necessarily limits the amount of dividends it is prepared to
declare and pay.
The
exact
amount of future dividends on the stock of Southside Bank will be a function
of
the profitability of Southside Bank in general (which cannot be accurately
estimated or assured), applicable tax rates in effect from year to year and
the
discretion of the board of directors of Southside Bank.
In
addition, FDIC regulations generally prohibits an FDIC-insured depository
institution from making any capital distribution (including payment of
dividends) or paying any management fee to its holding company if the depository
institution would thereafter be undercapitalized. Undercapitalized depository
institutions are subject to restrictions on borrowing from the Federal Reserve,
as well as to potentially onerous conditions under the prompt corrective
action
regime, described above.
Various
other legislation, including proposals to revise the bank regulatory system
and
to limit or expand the investments that a depository institution may make
with
insured funds, is from time to time introduced in Congress. The TDB and the
FDIC
will examine Southside Bank periodically for compliance with various regulatory
requirements. Such examinations, however, are for the protection of
the Deposit Insurance Fund and for depositors and not for the
protection of investors and shareholders.
Transactions
with Affiliates.
The
Holding Companies are legal entities separate and distinct from Southside
Bank
and its other subsidiaries. Various legal limitations restrict Southside
Bank
from lending or otherwise supplying funds to the Holding Companies or their
non-bank subsidiaries. The Holding Companies and Southside Bank are subject
to
Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation
W. Generally, Sections 23A and 23B (i) limit the extent to which a bank or
its
subsidiaries may engage in "covered transactions" with any one affiliate
to an
amount equal to 10% of such institution's capital stock and surplus; (ii)
limit
such transactions with all affiliates to an aggregate amount equal to 20%
of
such capital stock and surplus; and (iii) require that all such transactions
be
on terms that are consistent with safe and sound banking practices. The term
"covered transaction" includes the making of loans to an affiliate, the purchase
of or investment in securities issued by an affiliate, the purchase of assets
from an affiliate, the issuance of a guarantee for the benefit of an affiliate,
and similar transactions. Most loans by a bank to any of its affiliates must
be
secured by collateral in amounts ranging from 100 to 130 percent of the loan
amount, depending on the nature of the collateral. In addition, any covered
transaction by a bank with an affiliate and any sale of assets or provision
of
services to an affiliate must be on terms that are substantially the same,
or at
least as favorable, to the bank as those prevailing at the time for comparable
transactions with nonaffiliated companies. Section 23B also prohibits a bank
from purchasing low-quality assets from the bank’s affiliates, and requires that
all of a bank’s extensions of credit to an affiliate be appropriately secured by
acceptable collateral, generally United States government or agency
securities.
Under
Sections 23A and 23B of the Federal Reserve Act, an affiliate of a bank is
any
company or entity that controls, is controlled by or is under common control
with the bank. A subsidiary of a bank that is not also a depository institution
is not treated as an affiliate of a bank for purposes of Sections 23A and
23B
unless it engages in activities not permissible for a national bank to engage
in
directly.
Insider
Loans.
Under
Regulation O of the Federal Reserve, Southside Bank is restricted in the
loans
that it may make to its executive officers and directors, the executive officers
and directors of Southside Bancshares, Inc., any owner of 10% or more of
its
stock or the stock of Southside Bancshares, Inc., and certain entities
affiliated with any such person.
Standards
for Safety and Soundness.
The
federal banking agencies have adopted regulations and Interagency Guidelines
Prescribing Standards for Safety and Soundness (“Guidelines”) that set forth
standards for internal controls and information systems, internal audit,
loan
documentation, credit underwriting, interest exposure, asset growth, asset
quality, earnings, and compensation, fees, and benefits. 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
a
bank fails to meet any standards prescribed by the Guidelines, the agency
may
require the bank to submit to the agency an acceptable plan to achieve
compliance with the standard, as required by the FDIC. The final regulations
establish deadlines for the submission and review of such safety and soundness
compliance plans.
Community
Reinvestment Act.
Under
the Community Reinvestment Act (“CRA”),
we have a
continuing and affirmative obligation consistent with safe and sound banking
practices to help meet the needs of our entire community, including low-
and
moderate-income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions, nor does it limit our
discretion to develop the types of products and services that we believe
are
best suited to our particular community. Current CRA regulations require
that a
bank be rated based on its actual performance in meeting community credit
needs.
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. Our regulatory agencies will take that record into account in their
evaluation of any application made by us for, among other things, approval
of
the acquisition or establishment of a branch or other deposit facility, an
office relocation, a merger or the acquisition of shares of capital stock
of
another financial institution. An “unsatisfactory” CRA rating may be used as the
basis to deny an application to conduct certain business activities or to
engage
in transactions with other financial institutions. 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. We
were
last examined for compliance with the CRA on April 26, 2004 and received
a
rating of “outstanding.”
USA
PATRIOT Act.
Following the events of September 11, 2001, President Bush, on October 26,
2001,
signed into law the United and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001. Also known
as
the “USA PATRIOT Act,” the law enhances the powers of the federal government and
law enforcement organizations to combat terrorism, organized crime and money
laundering. The USA PATRIOT Act significantly amends and expands the application
of the Bank Secrecy Act, including enhanced measures regarding customer
identity, new suspicious activity reporting rules and enhanced anti-money
laundering programs. Under the Act, each financial institution is required
to
establish and maintain anti-money laundering compliance and due diligence
programs, which include, at a minimum, the development of internal policies,
procedures, and controls; the designation of a compliance officer; an ongoing
employee training program; and an independent audit function to test programs.
In addition, the Act requires the bank regulatory agencies to consider the
record of a bank or bank holding company in combating money laundering
activities in their evaluation of bank and bank holding company merger or
acquisition transactions.
Privacy.
The
Gramm-Leach Bliley Act imposed new requirements on financial institutions
with
respect to consumer privacy. The GLB Act generally prohibits disclosure of
consumer information to non-affiliated third parties unless the consumer
has
been given the opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their privacy policies
to consumers annually. Financial institutions, however, will be required
to
comply with state law if it is more protective of consumer privacy than the
GLB
Act. The GLB Act also directed federal regulators, including the FDIC, to
prescribe standards for the security of consumer information. Southside Bank
is
subject to such standards, as well as standards for notifying consumers in
the
event of a security breach.
Branch
Banking.
Pursuant to the Texas Finance Code, all banks located in Texas are authorized
to
branch statewide. Accordingly, a bank located anywhere in Texas has the ability,
subject to regulatory approval, to establish branch facilities near any of
our
facilities and within our market area. If other banks were to establish branch
facilities near our facilities, it is uncertain whether these branch facilities
would have a material adverse effect on our business.
In
1994,
Congress adopted the Reigle-Neal Interstate Banking and Branching Efficiency
Act
of 1994. That statute provides for nationwide interstate banking and branching,
subject to certain aging and deposit concentration limits that may be imposed
under applicable state laws. Texas law permits interstate branching in two
manners, with certain exceptions. First, a financial institution with its
main
office outside of Texas may establish a branch in the State of Texas by
acquiring a financial institution located in Texas that is at least five
years
old, so long as the resulting institution and its affiliates would not hold
more
than 20% of the total deposits in the state after the acquisition. In addition,
a financial institution with its main office outside of Texas generally may
establish a branch in the State of Texas on a de novo basis if the financial
institution’s main office is located in a state that would permit Texas
institutions to establish a branch on a de novo basis in that
state.
The
FDIC
has adopted regulations under the Reigle-Neal Act to prohibit an out-of-state
bank from using the interstate branching authority primarily for the purpose
of
deposit production. These regulations include guidelines to insure that
interstate branches operated by an out-of-state bank in a host state are
reasonably helping to meet the credit needs of the communities served by
the
out-of-state bank.
Enforcement
Authority.
The
federal banking laws also contain civil and criminal penalties available
for use
by the appropriate regulatory agency against certain “institution-affiliated
parties” primarily including management, employees and agents of a financial
institution, as well as independent contractors such as attorneys and
accountants and others who participate in the conduct of the financial
institution’s affairs and who caused or are likely to cause more than minimum
financial loss to or a significant adverse affect on the institution, who
knowingly or recklessly violate a law or regulation, breach a fiduciary duty
or
engage in unsafe or unsound practices. These practices can include the failure
of an institution to timely file required reports or the submission of
inaccurate reports. These laws authorize the appropriate banking agency to
issue
cease and desist orders that may, among other things, require affirmative
action
to correct any harm resulting from a violation or practice, including
restitution, reimbursement, indemnification or guarantees against loss. A
financial institution may also be ordered to restrict its growth, dispose
of
certain assets or take other action as determined by the ordering agency
to be
appropriate. The FDIC is the appropriate regulatory agency for Southside
Bank;
the Federal Reserve is the appropriate regulatory agency for the Holding
Companies.
Governmental
Monetary Policies.
The
commercial banking business is affected not only by general economic conditions
but also by the monetary policies of the Federal Reserve. Changes in the
discount rate on member bank borrowings, control of borrowings, open market
operations, the imposition of and changes in reserve requirements against
member
banks, deposits and assets of foreign branches, the imposition of and changes
in
reserve requirements against certain borrowings by banks and their affiliates
and the placing of limits on interest rates which member banks may pay on
time
and savings deposits are some of the instruments of monetary policy available
to
the Federal Reserve. Those monetary policies influence to a significant extent
the overall growth of all bank loans, investments and deposits and the interest
rates charged on loans or paid on time and savings deposits. The nature of
future monetary policies and the effect of such policies on our future business
and earnings, therefore, cannot be predicted accurately.
Annual
Audits.
Every
bank with total assets in excess of $500 million, such as us, must have an
annual independent audit made of the bank’s financial statements by a certified
public accountant to verify that the financial statements of the bank are
presented in accordance with United States generally accepted accounting
principles (“GAAP”) and comply with such other disclosure requirements as
prescribed by the FDIC.
Usury
Laws.
Texas
usury laws limit the rate of interest that may be charged by state banks.
Certain federal laws provide a limited preemption of Texas usury laws. The
maximum rate of interest that we may charge on direct business loans under
Texas
law varies between 18% per annum and (i) 28% per annum for business and
agricultural loans above $250,000 or (ii) 24% per annum for other direct
loans.
Texas floating usury ceilings are tied to the 26-week United States Treasury
Bill Auction rate. Other ceilings apply to open-end credit card loans and
dealer
paper we purchase. A federal statute removes interest ceilings under usury
laws
for our loans that are secured by first liens on residential real property.
Economic
Environment.
The
monetary policies of regulatory authorities, including the Federal Reserve,
have
a significant effect on the operating results of bank holding companies and
their subsidiaries. The Federal Reserve regulates the national supply of
bank
credit. Among the means available to the Federal Reserve are open market
operations in United States Government Securities, changes in the discount
rate
on member bank borrowings, changes in reserve requirements against member
and
nonmember bank deposits, and loans and limitations on interest rates which
member banks may pay on time or demand deposits. These methods are used in
varying combinations to influence overall growth and distribution of bank
loans,
investments and deposits. Their use may affect interest rates charged on
loans
or paid for deposits.
Also
see
discussion of "The Banking Industry in Texas" above.
|
ITEM
1A.
|
RISK
FACTORS
|
An
investment in our common stock is subject to risks inherent to our business.
The
material risks and uncertainties that management believes affect us are
described below. Before making an investment decision, you should carefully
consider the risks and uncertainties described below together with all of
the
other information included or incorporated by reference in this report. The
risks and uncertainties described below are not the only ones facing us.
Additional risks and uncertainties that management is not aware of or focused
on
or that management currently deems immaterial may also impair our business
operations. This report is qualified in its entirety by these risk factors.
If
any of
the following risks actually occur, our financial condition and results of
operations could be materially and adversely affected. If this were to happen,
the value of our common stock could decline significantly, and you could
lose
all or part of your investment.
RISKS
RELATED TO OUR BUSINESS
We
are subject to interest rate risk.
Our
earnings and cash flows are largely dependent upon our net interest income.
Net
interest income is the difference between interest income earned on
interest-earning assets such as loans and securities and interest expense
paid
on interest-bearing liabilities such as deposits and borrowed funds. Interest
rates are highly sensitive to many factors that are beyond our control,
including general economic conditions and policies of various governmental
and
regulatory agencies and, in particular, the Board of Governors of the Federal
Reserve System. Changes in monetary policy, changes in interest rates, changes
in the yield curve, changes in market risk spreads, and a prolonged inverted
yield curve could influence not only the interest we receive on loans and
securities and the amount of interest we pay on deposits and borrowings,
but
such changes could also affect:
|
·
|
our
ability to originate loans and obtain deposits;
|
|
·
|
net
interest rate spreads and net interest rate
margins;
|
|
·
|
our
ability to enter into instruments to hedge against interest rate
risk;
|
|
·
|
the
fair value of our financial assets and liabilities; and
|
|
·
|
the
average duration of our loan and mortgage-backed securities portfolio.
|
If
the
interest rates paid on deposits and other borrowings increase at a faster
rate
than the interest rates received on loans and other investments, our net
interest income, and therefore earnings, could be adversely affected. Earnings
could also be adversely affected if the interest rates received on loans
and
other investments fall more quickly than the interest rates paid on deposits
and
other borrowings.
Although
management believes we have implemented effective asset and liability management
strategies to reduce the potential effects of changes in interest rates on
our
results of operations, any substantial, unexpected, prolonged change in market
interest rates could have a material adverse effect on our financial condition
and results of operations. See the section captioned “Net Interest Income” in
“Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations” for further discussion related to our management of
interest rate risk.
Our
interest rate risk, liquidity, market value of securities and profitability
are
subject to risks associated with the performance of the leverage
strategy.
We
implemented a leverage strategy in 1998 for the purpose of enhancing overall
profitability by maximizing the use of our capital. Risks to our leverage
strategy include reduced net interest margin and spread, adverse market value
changes to the investment and mortgage-backed and related securities, incorrect
modeling results due to the unpredictable nature of mortgage-backed securities
prepayments, the length of interest rate cycles, and the slope of the interest
rate yield curve. In addition, we may not be able to obtain wholesale funding
to
profitably and properly fund the leverage program. If our leverage strategy
is
flawed or poorly implemented, we may incur significant losses. See the section
captioned “Leverage Strategy” in “Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.”
We
have a high concentration of loans secured by real estate and a downturn
in the
real estate market, for any reason, could result in losses and materially
and
adversely affect our business, financial condition, results of operations
and
future prospects.
A
significant portion of our loan portfolio is dependent on real estate. In
addition to the financial strength and cash flow characteristics of the borrower
in each case, often loans are secured with real estate collateral. At December
31, 2006, approximately 59.0% 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. 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
ability to sell the collateral upon foreclosure. Furthermore, it is likely
that,
in a decreasing real estate market, we would be required to increase our
allowance for loan losses. If we are required to liquidate the collateral
securing a loan to satisfy the debt during a period of reduced real estate
values or to increase our allowance for loan losses, our profitability and
financial condition could be adversely impacted.
We
have a high concentration of loans directly related to the medical community
in
our market area, primarily in Smith and Gregg counties. A negative change
adversely impacting the medical community, for any reason, could result in
losses and materially and adversely affect our business, financial condition,
results of operations and future prospects.
A
significant portion of our loan portfolio is dependent on the medical community.
The primary source of repayment for loans in the medical community is cash
flow
from continuing operations.
However,
changes in the amount the government pays the medical community through the
various government health insurance programs could adversely impact the medical
community, which in turn could result in higher default rates by borrowers
in
the medical industry. Increased regulation of the medical community 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 could also be adversely
impacted.
Our
allowance for probable loan losses may be insufficient.
We
maintain an allowance for probable loan losses, which is a reserve established
through a provision for probable loan losses charged to expense. This allowance
represents management’s best estimate of probable losses that have been incurred
within the existing portfolio of loans. The allowance, in the judgment of
management, is necessary to reserve for estimated loan losses and risks inherent
in the loan portfolio. The level of the allowance reflects management’s
continuing evaluation of industry concentrations; specific credit risks;
loan
loss experience; current loan portfolio quality; present economic, political
and
regulatory conditions and unidentified losses inherent in the current loan
portfolio. The determination of the appropriate level of the allowance for
probable loan losses inherently involves a high degree of subjectivity and
requires us to make significant estimates and assumptions regarding current
credit risks and future trends, all of which may undergo material changes.
Changes in economic conditions affecting borrowers, new information regarding
existing loans, identification of additional problem loans and other factors,
both within and outside our control, may require an increase in the allowance
for probable loan losses. In addition, bank regulatory agencies periodically
review our allowance for loan losses and may require an increase in the
provision for probable loan losses or the recognition of further loan
charge-offs, based on judgments different than those of management. In addition,
if charge-offs in future periods exceed the allowance for probable loan losses,
we will need additional provisions to increase the allowance for probable
loan
losses. Any increases in the allowance for probable loan losses will result
in a
decrease in net income and, possibly, capital, and may have a material adverse
effect on our financial condition and results of operations. See the section
captioned “Loan Loss Experience and Allowance for Loan Losses” in “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations” for further discussion related to our process for determining the
appropriate level of the allowance for probable loan losses.
We
are subject to environmental liability risk associated with lending
activities.
A
significant portion of our loan portfolio is secured by real property. During
the ordinary course of business, we may foreclose on and take title to
properties securing certain loans. In doing so, there is a risk that hazardous
or toxic substances could be found on these properties. If hazardous or toxic
substances are found, we may be liable for remediation costs, as well as
for
personal injury and property damage. Environmental laws may require us to
incur
substantial expenses and may materially reduce the affected property’s value or
limit our ability to use or sell the affected property. In addition, future
laws
or more stringent interpretations or enforcement policies with respect to
existing laws may increase our exposure to environmental liability. Although
we
have policies and procedures to perform an environmental review before
initiating any foreclosure action on nonresidential real property, these
reviews
may not be sufficient to detect all potential environmental hazards. The
remediation costs and any other financial liabilities associated with an
environmental hazard could have a material adverse effect on our financial
condition and results of operations.
Our
profitability depends significantly on economic conditions in the State of
Texas.
Our
success depends primarily on the general economic conditions of the State
of
Texas and the specific local markets in which we operate. Unlike larger national
or other regional banks that are more geographically diversified, we provide
banking and financial services to customers primarily in the Texas areas
of
Tyler, Longview, Lindale, Whitehouse, Chandler, Gresham, Athens, Palestine,
Jacksonville, Bullard, Forney, Seven Points and Gun Barrel City. 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 and continued consolidation. Banks, securities firms and insurance
companies can merge under the umbrella of a financial holding company, which
can
offer virtually any type of financial service, including banking, securities
underwriting, insurance (both agency and underwriting) and merchant banking.
Also, technology has lowered barriers to entry and made it possible for
non-banks to offer products and services traditionally provided by banks,
such
as automatic transfer and automatic payment systems. Many of our competitors
have fewer regulatory constraints and may have lower cost structures.
Additionally, due to their size, many competitors may be able to achieve
economies of scale and, as a result, may offer a broader range of products
and
services as well as better pricing for those products and services than we
can.
Our
ability to compete successfully depends on a number of factors, including,
among
other things:
|
·
|
The
ability to develop, maintain and build upon long-term customer
relationships based on top quality service, high ethical standards
and
safe, sound assets.
|
|
·
|
The
ability to expand our market
position.
|
|
·
|
The
scope, relevance and pricing of products and services offered to
meet
customer needs and demands.
|
|
·
|
The
rate at which we introduce new products and services relative to
our
competitors.
|
|
·
|
Customer
satisfaction with our level of
service.
|
|
·
|
Industry
and general economic trends.
|
Failure
to perform in any of these areas could significantly weaken our competitive
position, which could adversely affect our growth and profitability, which,
in
turn, could have a material adverse effect on our financial condition and
results of operations.
We
are subject to extensive government regulation and
supervision.
Southside
Bancshares, Inc., primarily through Southside Bank and certain non-bank
subsidiaries, is subject to extensive federal and state regulation and
supervision. Banking regulations are primarily intended to protect depositors’
funds, federal deposit insurance funds and the banking system as a whole,
not
shareholders. These regulations affect our lending practices, capital structure,
investment practices and dividend policy and growth, among other things.
Congress and federal and state regulatory agencies continually review banking
laws, regulations and policies for possible changes. Changes to statutes,
regulations or regulatory policies, including changes in interpretation or
implementation of statutes, regulations or policies, could affect us in
substantial and unpredictable ways. Such changes could subject us to additional
costs, limit the types of financial services and products we may offer and/or
increase the ability of non-banks to offer competing financial services and
products, among other things. Failure to comply with laws, regulations or
policies could result in sanctions by regulatory agencies, civil money penalties
and/or reputation damage, which could have a material adverse effect on our
business, financial condition and results of operations. While our 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 13
-
Shareholders’ Equity” in the notes to consolidated financial statements included
in “Item 8. Financial Statements and Supplementary Data,” which are located
elsewhere in this report.
Our
controls and procedures may fail or be circumvented.
Management
regularly reviews and updates our internal controls, disclosure controls
and
procedures, and corporate governance policies and procedures. Any system
of
controls, however well designed and operated, is based in part on certain
assumptions and can provide only reasonable, not absolute, assurances that
the
objectives of the system are met. Any failure or circumvention of our controls
and procedures or failure to comply with regulations related to controls
and
procedures could have a material adverse effect on our business, results
of
operations and financial condition.
New
lines of business or new products and services may subject us to additional
risks.
From
time
to time, we may implement new delivery systems or offer new products and
services within existing lines of business. There are substantial risks and
uncertainties associated with these efforts, particularly in instances where
the
markets are not fully developed. In developing and marketing new delivery
systems and/or new products and services, we may invest significant time
and
resources. Initial timetables for the introduction and development of new
lines
of business and/or new products or services may not be achieved and price
and
profitability targets may not prove feasible. External factors, such as
compliance with regulations, competitive alternatives, and shifting market
preferences, may also impact the successful implementation of a new line
of
business or a new product or service. Furthermore, any new line of business
and/or new product or service could have a significant impact on the
effectiveness of our system of internal controls. Failure to successfully
manage
these risks in the development and implementation of new lines of business
or
new products or services could have a material adverse effect on our business,
results of operations and financial condition.
We
rely on dividends from our subsidiaries for most of our
revenue.
Southside
Bancshares, Inc. is a separate and distinct legal entity from our subsidiaries.
We receive substantially all of our revenue from dividends from our
subsidiaries. These dividends are the principal source of funds to pay dividends
on our common stock and interest and principal on our debt. Various federal
and/or state laws and regulations limit the amount of dividends that Southside
Bank and certain non-bank subsidiaries may pay to Southside Bancshares, Inc.
Also, Southside Bancshares, Inc.’s right to participate in a distribution of
assets upon a subsidiary’s liquidation or reorganization is subject to the prior
claims of the subsidiary’s creditors. In the event Southside Bank 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 13 -
Shareholders’ Equity” in the notes to consolidated financial statements included
in “Item 8. Financial Statements and Supplementary Data,” which are located
elsewhere in this report.
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. Our junior
subordinated debentures mature in September 2033.
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.
Potential
acquisitions may disrupt our business and dilute stockholder
value.
While
we
have never made an 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:
|
·
|
potential
exposure to unknown or contingent liabilities of the target
company;
|
|
·
|
exposure
to potential asset quality issues of the target
company;
|
|
·
|
difficulty
and expense of integrating the operations and personnel of the
target
company;
|
|
·
|
potential
disruption to our business;
|
|
·
|
potential
diversion of our management’s time and
attention;
|
|
·
|
the
possible loss of key employees and customers of the target
company;
|
|
·
|
difficulty
in estimating the value of the target company;
and
|
|
·
|
potential
changes in banking or tax laws or regulations that may affect the
target
company.
|
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. We do not
currently have employment agreements or non-competition agreements with any
of
our senior officers.
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, 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.
Severe
weather, natural disasters, acts of war or terrorism and other external events
could significantly impact our business.
Severe
weather, natural disasters, acts of war or terrorism and other adverse external
events could have a significant impact on our ability to conduct business.
Such
events could affect the stability of our deposit base, impair the ability
of
borrowers to repay outstanding loans, impair the value of collateral securing
loans, cause significant property damage, result in loss of revenue and/or
cause
us to incur additional expenses. For example, during 2005, hurricanes Katrina
and Rita caused extensive flooding and destruction along the coastal areas
of
the Gulf of Mexico. While the impact of these hurricanes did not significantly
affect us, other severe weather or natural disasters, acts of war or terrorism
or other adverse external events may occur in the future. Although management
has established disaster recovery policies and procedures, there can be no
assurance of the effectiveness of such policies and procedures, and the
occurrence of any such event could have a material adverse effect on our
business, financial condition and results of operations.
RISKS
ASSOCIATED WITH SOUTHSIDE BANCSHARES, INC. 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 such that you are not assured liquidity with respect to
transactions in our common stock. A public trading market having the desired
characteristics of depth, liquidity and orderliness depends on the presence
in
the marketplace of willing buyers and sellers of our common stock at any
given
time. This presence depends on the individual decisions of investors and
general
economic and market conditions over which we have no control. Given the lower
trading volume of our common stock, significant sales of our common stock,
or
the expectation of these sales, could cause our stock price to fall.
An
investment in our common stock is not an insured deposit.
Our
common stock is not a bank deposit and, therefore, is not insured against
loss
by the FDIC, any other deposit insurance fund or by any other public or private
entity. Investment in our common stock is inherently risky for the reasons
described in this “Risk Factors” section and elsewhere in this report and is
subject to the same market forces that affect the price of common stock in
any
company. As a result, if you acquire our common stock, you may lose some
or all
of your investment.
Provisions
of our amended and restated articles of incorporation and amended and restated
bylaws, as well as state and federal banking regulations, could delay or
prevent
a takeover of us by a third party.
Our
amended and restated articles of incorporation and amended and restated bylaws
could delay, defer or prevent a third party from acquiring us, despite the
possible benefit to our shareholders, or otherwise adversely affect the price
of
our common stock. These provisions include, among others, requiring advance
notice for raising business matters or nominating directors at shareholders’
meetings and staggered board elections.
Any
individual, acting alone or with other individuals, who is seeking to acquire,
directly or indirectly, 10.0% or more of our outstanding common stock must
comply with the Change in Bank Control Act, which requires prior notice to
the
Federal Reserve Board for any acquisition. Additionally, any entity that
wants
to acquire 5.0% or more of our outstanding common stock, or otherwise control
us, may need to obtain the prior approval of the Federal Reserve under the
Bank
Holding Company Act of 1956, as amended. As a result, prospective investors
in
our common stock need to be aware of and comply with those requirements,
to the
extent applicable.
RISKS
ASSOCIATED WITH SOUTHSIDE BANCSHARES, INC.’S INDUSTRY
The
earnings of financial services companies are significantly affected by general
business and economic conditions.
Our
operations and profitability are impacted by general business and economic
conditions in the United States and abroad. These conditions include short-term
and long-term interest rates, inflation, money supply, political issues,
legislative and regulatory changes, fluctuations in both debt and equity
capital
markets, broad trends in industry and finance, and the strength of the
U.S. economy and the local economies in which we operate, all of which are
beyond our control. A deterioration in economic conditions could result in
an
increase in loan delinquencies and non-performing assets, decreases in loan
collateral values and a decrease in demand for our products and services,
among
other things, any of which could have a material adverse impact on our financial
condition and results of operations.
Financial
services companies depend on the accuracy and completeness of information
about
customers and counterparties.
In
deciding whether to extend credit or enter into other transactions, we may
rely
on information furnished by or on behalf of customers and counterparties,
including financial statements, credit reports and other financial information.
We may also rely on representations of those customers, counterparties or
other
third parties, such as independent auditors, as to the accuracy and completeness
of that information. Reliance on inaccurate or misleading financial statements,
credit reports or other financial information could have a material adverse
impact on our business, financial condition and results of operations.
Consumers
may decide not to use banks to complete their financial
transactions.
Technology
and other changes are allowing parties to complete financial transactions
that
historically have involved banks through alternative methods. For example,
consumers can now maintain funds that would have historically been held as
bank
deposits in brokerage accounts or mutual funds. Consumers can also complete
transactions such as paying bills and/or transferring funds directly without
the
assistance of banks. The process of eliminating banks as intermediaries could
result in the loss of fee income, as well as the loss of customer deposits
and
the related income generated from those deposits. The loss of these revenue
streams and the lower cost deposits as a source of funds could have a material
adverse effect on our financial condition and results of operations.
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None
|
ITEM
2.
|
PROPERTIES
|
Southside
Bank owns and operates the following properties:
|
·
|
Southside
Bank main branch at 1201 South Beckham Avenue, Tyler, Texas. The
executive
offices of Southside Bancshares, Inc. are located at this
location;
|
|
·
|
Southside
Bank Annex at 1211 South Beckham Avenue, Tyler, Texas. The Southside
Bank
Annex is directly adjacent to the main bank building. Human Resources,
the
Trust Department and other support areas are located in this
building;
|
|
·
|
Operations
Annex at 1221 South Beckham Avenue, Tyler, Texas. Various back
office
lending, training facilities and other support areas are located
in this
building;
|
|
·
|
Southside
main branch motor bank facility at 1010 East First Street, Tyler,
Texas;
|
|
·
|
South
Broadway branch at 6201 South Broadway, Tyler,
Texas;
|
|
·
|
South
Broadway branch motor bank facility at 6019 South Broadway, Tyler,
Texas;
|
|
·
|
Downtown
branch at 113 West Ferguson Street, Tyler,
Texas;
|
|
·
|
Gentry
Parkway branch and motor bank facility at 2121 West Gentry Parkway,
Tyler,
Texas;
|
|
·
|
Longview
main branch and motor bank facility at 2001 Judson Road, Longview,
Texas;
|
|
·
|
Lindale
main branch and motor bank facility at 2510 South Main Street,
Lindale,
Texas;
|
|
·
|
Whitehouse
main branch and motor bank facility at 901 Highway 110 North, Whitehouse,
Texas;
|
|
·
|
Jacksonville
main branch and motor bank facility at 1015 South Jackson Street,
Jacksonville, Texas;
|
|
·
|
Gun
Barrel City main branch at 901 West Main, Gun Barrel City, Texas;
and
|
|
·
|
40
ATM’s located throughout Smith, Gregg, Cherokee, Anderson and Henderson
Counties.
|
Southside
Bank currently operates full service banks in leased space in 16 grocery
stores
and two lending centers in leased office space in the following
locations:
|
·
|
one
in Bullard, Texas;
|
|
·
|
one
in Lindale, Texas;
|
|
·
|
one
in Flint, Texas;
|
|
·
|
one
in Whitehouse, Texas;
|
|
·
|
one
in Chandler, Texas;
|
|
·
|
one
in Seven Points, Texas;
|
|
·
|
one
in Palestine, Texas;
|
|
·
|
one
in Athens, Texas;
|
|
·
|
three
in Longview, Texas;
|
|
·
|
five
in Tyler, Texas;
|
|
·
|
Gresham
loan production office at 16637 FM 2493, Tyler, Texas;
and
|
|
·
|
Forney
loan production office at 413 North McGraw, Forney,
Texas.
|
All
of
the properties detailed above are suitable and adequate to provide the banking
services intended based on the type of property described. In addition, the
properties for the most part are fully utilized but designed with productivity
in mind and can handle the additional business volume we anticipate they
will
generate. As additional potential needs are identified, individual property
enhancements or the need to add properties will be evaluated.
|
ITEM
3.
|
LEGAL
PROCEEDINGS
|
We
are
party to legal proceedings arising in the normal conduct of business. Management
believes that such litigation is not material to our financial position or
results of operations.
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
During
the three months ended December 31, 2006, there were no meetings, annual
or
special, of our shareholders. No matters were submitted to a vote of the
shareholders, nor were proxies solicited by management or any other
person.
PART
II
|
ITEM
5.
|
MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER
PURCHASES OF EQUITY SECURITIES
|
MARKET
INFORMATION
Our
common stock trades on the NASDAQ Global Select Market (formerly the NASDAQ
National Market) under the symbol "SBSI." The high/low prices shown below
represent the daily weighted average prices on the NASDAQ Global Select Market
for the period from January 1, 2005 to December 31, 2006. During the first
quarter of 2005 and 2006, we declared and paid a 5% stock dividend. Stock
prices
listed below have been adjusted to give retroactive recognition to stock
splits
and stock dividends.
|
Year
Ended
|
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
|||||||||
|
December
31, 2006
|
$
|
20.75
- 19.13
|
$
|
22.57
- 19.03
|
$
|
26.82
- 22.67
|
$
|
27.49
- 24.61
|
|||||
|
December
31, 2005
|
$
|
21.12
- 19.03
|
$
|
20.00
- 17.97
|
$
|
20.69
- 18.12
|
$
|
20.04
- 16.81
|
|||||
See
"Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Capital Resources" for a discussion of our common stock repurchase
program.
SHAREHOLDERS
There
were approximately 1,100 holders of record of our common stock, the only
class
of equity securities currently issued and outstanding, as of February 15,
2007.
DIVIDENDS
Cash
dividends declared and paid were $0.47 and $0.46 per share for the years
ended
December 31, 2006 and 2005, respectively. Stock dividends of 5% were also
declared and paid during each of the years ended December 31, 2006, 2005
and
2004. We have paid a cash dividend at least once every year since 1970. Future
dividends will depend on our earnings, financial condition and other factors
that our board of directors considers to be relevant. In addition, we must
make
payments on our junior subordinated debentures before any dividends can be
paid
on the common stock. For additional discussion relating to restrictions that
limit our ability to pay dividends refer to “Supervision and Regulation” in
“Item 1. Business” and in “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations -Capital Resources.” The cash
dividends were paid quarterly each year as listed below.
Quarterly
Cash Dividends Paid
|
Year
Ended
|
1st
Quarter
|
|
2nd
Quarter
|
|
3rd
Quarter
|
|
4th
Quarter
|
||||||
|
December
31, 2006
|
$
|
0.11
|
$
|
0.11
|
$
|
0.11
|
$
|
0.14
|
|||||
|
December
31, 2005
|
$
|
0.11
|
$
|
0.11
|
$
|
0.11
|
$
|
0.13
|
|||||
STOCK-BASED
COMPENSATION PLANS
Information
regarding stock-based compensation awards outstanding and available for future
grants as of December 31, 2006, 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 12 — Employee
Benefits in the notes to consolidated financial statements located elsewhere
in
this report.
UNREGISTERED
SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER SECURITY
REPURCHASES
During
2006, we did not approve any additional funding for our stock repurchase
plan.
No common stock was purchased during the fourth quarter or twelve months
ended
December 31, 2006.
FINANCIAL
PERFORMANCE
The
following performance graph does not constitute soliciting material and should
not be deemed filed 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 Company specifically incorporates the performance graph by reference
therein.
Southside
Bancshares, Inc.
|
|
Period
Ending
|
||||||||||||||||||
|
Index
|
12/31/01
|
12/31/02
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
|||||||||||||
|
Southside
Bancshares, Inc.
|
100.00
|
126.66
|
169.59
|
224.65
|
213.21
|
291.16
|
|||||||||||||
|
Russell
2000
|
100.00
|
79.52
|
117.09
|
138.55
|
144.86
|
171.47
|
|||||||||||||
|
Southside
Bancshares Peer Group*
|
100.00
|
114.30
|
157.02
|
183.04
|
192.93
|
213.66
|
|||||||||||||
*Southside
Bancshares Peer Group contains the following Texas banks: Cullen/Frost
Bancshares, Inc., First Financial Bankshares,
Inc., Guaranty Bancshares, Inc., International Bancshares Corporation,
MetroCorp
Bancshares, Inc., Prosperity
Bancshares, Inc., Sterling Bancshares, Inc., Texas Capital Bancshares,
Inc. and
Franklin Bank Corp.
|
Source
: SNL Financial LC, Charlottesville, VA
|
|
(434)
977-1600
|
||||
|
©
2007
|
www.snl.com
|
|||||
|
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, 2006. This information should
be read in conjunction with "Item 7. Management's Discussion and Analysis
of
Financial Condition and Results of Operations" and “Item 8. Financial Statements
and Supplementary Data,” as set forth in this report.
|
As
of and For the Years Ended December 31,
|
||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||
|
Investment
Securities
|
$
|
100,303
|
$
|
121,240
|
$
|
133,535
|
$
|
144,876
|
$
|
151,509
|
||||||
|
Mortgage-backed
and Related Securities
|
$
|
869,326
|
$
|
821,756
|
$
|
720,533
|
$
|
590,963
|
$
|
489,015
|
||||||
|
Loans,
Net of Allowance for Loan Losses
|
$
|
751,954
|
$
|
673,274
|
$
|
617,077
|
$
|
582,721
|
$
|
564,265
|
||||||
|
Total
Assets
|
$
|
1,890,976
|
$
|
1,783,462
|
$
|
1,619,643
|
$
|
1,454,952
|
$
|
1,349,186
|
||||||
|
Deposits
|
$
|
1,282,475
|
$
|
1,110,813
|
$
|
940,986
|
$
|
872,529
|
$
|
814,486
|
||||||
|
Long-term
Obligations
|
$
|
149,998
|
$
|
229,032
|
$
|
351,287
|
$
|
272,694
|
$
|
265,365
|
||||||
|
Income
Statement Data:
|
||||||||||||||||
|
Interest
& Deposit Service Income
|
$
|
112,434
|
$
|
94,275
|
$
|
80,793
|
$
|
73,958
|
$
|
79,959
|
||||||
|
Net
Income
|
$
|
15,002
|
$
|
14,592
|
$
|
16,099
|
$
|
13,564
|
$
|
13,325
|
||||||
|
Per
Share Data:
|
||||||||||||||||
|
Net
Income Per Common Share:
|
||||||||||||||||
|
Basic
|
$
|
1.22
|
$
|
1.21
|
$
|
1.33
|
$
|
1.30
|
$
|
1.32
|
||||||
|
Diluted
|
$
|
1.18
|
$
|
1.15
|
$
|
1.26
|
$
|
1.10
|
$
|
1.10
|
||||||
|
Cash
Dividends Paid Per Common Share
|
$
|
0.47
|
$
|
0.46
|
$
|
0.42
|
$
|
0.36
|
$
|
0.33
|
||||||
|
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, 2006, 2005, and 2004 and financial
condition as of December 31, 2006 and 2005. 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 declared and paid.
CAUTIONARY
NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain
statements of other than historical fact that are contained in this document
and
in written material, press releases and oral statements issued by or on behalf
of Southside Bancshares, Inc., a bank holding company, may be considered
to be
“forward-looking statements” within the meaning of and subject to the
protections of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are not guarantees of future performance, nor
should
they be relied upon as representing management’s views as of any subsequent
date. These statements may include words such as "expect," "estimate,"
"project," "anticipate," "appear," "believe," "could," "should," "may,"
"intend," "probability," "risk," "target," "objective," "plans," "potential,"
and similar expressions. Forward-looking statements are statements with respect
to our beliefs, plans, expectations, objectives, goals, anticipations,
assumptions, estimates, intentions and future performance, and are subject
to
significant known and unknown risks and uncertainties, which could cause
our
actual results to differ materially from the results discussed in the
forward-looking statements. For example, discussions of the effect of our
expansion, trends in asset quality and earnings from growth, and certain
market
risk disclosures are based upon information presently available to management
and are dependent on choices about key model characteristics and assumptions
and
are subject to various limitations. See “Item 1. Business” and “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.” By their nature, certain of the market risk disclosures are only
estimates and could be materially different from what actually occurs in
the
future. As a result, actual income gains and losses could materially differ
from
those that have been estimated. Other factors that could cause actual results
to
differ materially from forward-looking statements include, but are not limited
to, the following:
|
·
|
general
economic conditions, either globally, nationally, in the State
of Texas,
or in the specific markets in which we
operate;
|
|
·
|
legislation
or regulatory changes that adversely affect the businesses in which
we are
engaged;
|
|
·
|
adverse
changes in Government Sponsored Enterprises (the “GSE”) status or
financial condition impacting the GSE guarantees or ability to
pay or
issue debt;
|
|
·
|
economic
or other disruptions caused by acts of terrorism in the United
States,
Europe or other areas;
|
|
·
|
changes
in the interest rate yield curve such as flat, inverted or steep
yield
curves, or changes in the interest rate environment which impact
interest
margins and may impact prepayments on the mortgage-backed securities
portfolio;
|
|
·
|
unexpected
outcomes of existing or new litigation involving
us;
|
|
·
|
changes
impacting the leverage strategy;
|
|
·
|
significant
increases in competition in the banking and financial services
industry;
|
|
·
|
changes
in consumer spending, borrowing and saving
habits;
|
|
·
|
technological
changes;
|
|
·
|
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; and
|
|
·
|
the
costs and effects of unanticipated
litigation.
|
Additional
information concerning us and our business, including additional factors
that
could materially affect our financial results, is included in our filings
with
the SEC. All written or oral forward-looking statements made by us or
attributable to us are expressly qualified by this cautionary notice. We
disclaim any obligation to update any factors or to announce publicly the
result
of revisions to any of the forward-looking statements included herein to
reflect
future events or developments.
CRITICAL
ACCOUNTING ESTIMATES
Our
accounting and reporting estimates conform with accounting principles generally
accepted in the United States and general practices within the financial
services industry. The preparation of financial statements in conformity
with
GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates. We consider our critical accounting
policies to include the following:
Allowance
for Losses on Loans.
The
allowance for losses on loans represents our best estimate of probable losses
inherent in the existing loan portfolio. The allowance for losses on loans
is
increased by the provision for losses on loans charged to expense and reduced
by
loans charged-off, net of recoveries. The provision for losses on loans is
determined based on our assessment of several factors: reviews and evaluations
of specific loans, changes in the nature and volume of the loan portfolio,
and
current economic conditions and the related impact on specific borrowers
and
industry groups, historical loan loss experience, the level of classified
and
nonperforming loans and the results of regulatory examinations.
The
loan
loss allowance is based on the most current review of the loan portfolio.
The
servicing officer has the primary responsibility for updating significant
changes in a customer's financial position. Each officer prepares status
updates
on any credit deemed to be experiencing repayment difficulties which, in
the
officer's opinion, would place the collection of principal or interest in
doubt.
Our internal loan review department is responsible for an ongoing review
of our
loan portfolio with specific goals set for the loans to be reviewed on an
annual
basis.
At
each
review, a subjective analysis methodology is used to grade the respective
loan.
Categories of grading vary in severity from loans that do not appear to have
a
significant probability of loss at the time of review to loans that indicate
a
probability that the entire balance of the loan will be uncollectible. If
full
collection of the loan balance appears unlikely at the time of review, estimates
or appraisals of the collateral securing the debt are used to allocate the
necessary allowances. The internal loan review department maintains a list
of
all loans or loan relationships that are graded as having more than the normal
degree of risk associated with them. This list for 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, 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, 2006, our review of the loan portfolio indicated that a loan
loss
allowance of $7.2 million was adequate to cover probable losses in the
portfolio.
Refer
to
“Loan Loss Experience and Allowance for Loan Losses” and “Note 1 - Summary of
Significant Accounting and Reporting Policies” to our consolidated financial
statements for a detailed description of our estimation process and methodology
related to the allowance for loan losses.
Estimation
of Fair Value.
The
estimation of fair value is significant to a number of our assets and
liabilities. GAAP requires disclosure of the fair value of financial instruments
as a part of the notes to the consolidated financial statements. Fair values
are
volatile and may be influenced by a number of factors, including market interest
rates, prepayment speeds, discount rates and the shape of yield curves.
Fair
values for most investment and mortgage-backed securities are based on quoted
market prices, where available. If quoted market prices are not available,
fair
values are based on the quoted prices of similar instruments. The fair value
of
fixed rate loans is estimated by discounting the future cash flows using
the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities. Nonperforming loans
are
estimated using discounted cash flow analyses or underlying value of the
collateral where applicable. Fair values for fixed rate CDs are estimated
using
a discounted cash flow calculation that applies interest rates currently
being
offered for deposits of similar remaining maturities. The fair value of Federal
Home Loan Bank (“FHLB”) advances is estimated by discounting the future cash
flows using rates at which advances would be made to borrowers with similar
credit ratings and for the same remaining maturities. The fair values of
other
real estate owned (“OREO”) are typically determined based on appraisals by third
parties, less estimated costs to sell and recorded at the lower of cost or
fair
value.
Defined
Benefit Pension Plan.
The
plan obligations and related assets of the defined benefit pension plan (the
“Plan”) are presented in “Note 12 - Employee Benefits” to our consolidated
financial statements. Plan assets, which consist primarily of marketable
equity
and debt instruments, are valued using market quotations. Plan obligations
and
the annual pension expense are determined by independent actuaries and through
the use of a number of assumptions. Key assumptions in measuring the plan
obligations include the discount rate, the rate of salary increases and the
estimated future return on plan assets. In determining the discount rate,
we
utilized a cash flow matching analysis to determine a range of appropriate
discount rates for our defined benefit pension and restoration plans. In
developing the cash flow matching analysis, we constructed a portfolio of
high
quality non-callable bonds (rated AA- or better) to match as close as possible
the timing of future benefit payments of the plans at December 31, 2006.
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, 2006, the weighted-average actuarial
assumptions of the Plan were: a discount rate of 6.05%; a long-term rate
of
return on plan assets of 7.875%; and assumed salary increases of 4.50%. Material
changes in pension benefit costs may occur in the future due to changes in
these
assumptions. Future annual amounts could be impacted by changes in the number
of
plan participants, changes in the level of benefits provided, changes in
the
discount rates, changes in the expected long-term rate of return, changes
in the
level of contributions to the Plan and other factors.
Impairment
of Investment Securities and Mortgage-backed Securities.
Investment and mortgage-backed securities classified as available for sale
(“AFS”) are carried at fair value and the impact of changes in fair value are
recorded on our consolidated balance sheet as an unrealized gain or loss
in
“Accumulated other comprehensive income (loss),” a separate component of
shareholders’ equity. Securities classified as AFS or held to maturity (“HTM”)
are subject to our review to identify when a decline in value is other than
temporary. Factors considered in determining whether a decline in value is
other
than temporary include: whether the decline is substantial; the duration
of the
decline; the reasons for the decline in value; whether the decline is related
to
a credit event or to a change in interest rate; our ability and intent to
hold
the investment for a period of time that will allow for a recovery of value;
and
the financial condition and near-term prospects of the issuer. When it is
determined that a decline in value is other than temporary, the carrying
value
of the security is reduced to its estimated fair value, with a corresponding
charge to earnings.
OVERVIEW
OPERATING
RESULTS
During
the year ended December 31, 2006, our net income increased $410,000, or 2.8%,
to
$15.0 million, from $14.6 million for the same period in 2005. The increase
in
net income was primarily attributable to the increase in noninterest income
and
decrease in the provision for loan losses. This increase in noninterest income
was offset by noninterest expense due primarily to increases in salaries
and
employee benefits due to normal payroll increases and staff increases due
to
branch expansion and the new regional lending initiative. Earnings per fully
diluted share increased $0.03, or 2.6% to $1.18, for the year ended December
31,
2006, from $1.15 for the same period in 2005.
During
the year ended December 31, 2005, our net income decreased $1.5 million,
or
9.4%, to $14.6 million, from $16.1 million for the same period in 2004. The
decrease in net income was primarily attributable to the decrease in gains
on
sale of AFS securities. Noninterest expense also increased due primarily
to
increases in salaries and employee benefits due to normal payroll increases,
staff increases due to branch expansion and the new regional lending initiative,
and higher benefit costs. Earnings per fully diluted share were $1.15 and
$1.26,
respectively, for the years ended December 31, 2005 and 2004.
FINANCIAL
CONDITION
Our
total
assets increased $107.5 million, or 6.0%, to $1.89 billion at December 31,
2006
from $1.78 billion at December 31, 2005. The increase was primarily attributable
to a $78.7 million increase in our net loans and a $23.5 million increase
in our
securities portfolio. At December 31, 2006, net loans were $752.0 million
compared to $673.3 million at December 31, 2005. The securities portfolio
totaled $996.1 million at December 31, 2006 compared to $972.6 million at
December 31, 2005. Our increase in loans and securities was funded by increases
in deposits.
Our
nonperforming assets at December 31, 2006 decreased to $2.1 million, and
represented 0.11% of total assets, compared to $3.1 million, or 0.17%, of
total
assets at December 31, 2005. Nonaccruing loans decreased to $1.3 million
and the
ratio of nonaccruing loans to total loans decreased to 0.18% at December
31,
2006 as compared to $1.7 million and 0.25% at December 31, 2005. Approximately
$560,000 of the nonaccrual loans at December 31, 2006, are loans that have
an
average SBA guarantee of 75% to 85%. OREO increased to $351,000 at December
31,
2006 from $145,000 at December 31, 2005. Loans 90 days past due at December
31,
2006 decreased to $128,000 compared to $945,000 at December 31, 2005.
Repossessed assets increased to $78,000 at December 31, 2006 from $10,000
at
December 31, 2005. Restructured loans at December 31, 2006 decreased slightly
to
$220,000 compared to $226,000 at December 31, 2005.
Our
deposits increased $171.7 million to $1.28 billion at December 31, 2006 from
$1.11 billion at December 31, 2005. During 2006, we issued additional callable
brokered CDs, where we control the call, which represented approximately
$104
million of the increase in our deposits. The remaining $67.8 million increase
was primarily due to branch expansion and increased market penetration. Due
to
the increase in deposits during 2006, FHLB advances decreased $69.1 million
to
$451.6 million at December 31, 2006, from $520.7 million at December 31,
2005.
Short-term FHLB advances increased $10.0 million to $322.2 million at December
31, 2006 from $312.3 million at December 31, 2005. Long-term FHLB advances
decreased $79.0 million to $129.4 million at December 31, 2006 from $208.4
million at December 31, 2005. Other borrowings at December 31, 2006 and 2005
totaled $27.9 million and $25.2 million, respectively, and at December 31,
2006
consisted of $7.3 million of short-term borrowings and $20.6 million of
long-term debt.
Shareholders'
equity at December 31, 2006 totaled $110.6 million compared to $109.3 million
at
December 31, 2005. The increase primarily reflects the net income recorded
for
the year ended December 31, 2006, and the increase in the common stock issued
of
$1.8 million as a result of our incentive stock option and dividend reinvestment
plans. These increases more than offset an increase in the accumulated other
comprehensive loss of $10.0 million and the payment of cash dividends to
our
shareholders of $5.7 million. The increase in accumulated other comprehensive
loss is composed of an increase of $8.1 million, net of tax, related to the
change in the unfunded status of our defined benefit plan and a $1.9 million,
net of tax, unrealized loss on securities, net of reclassification adjustment.
See “Note 3 - Comprehensive Income (Loss)” to our consolidated financial
statements.
During
2006 the economy in our market area appeared to reflect continued stable
growth.
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.
LEVERAGE
STRATEGY
We
utilize wholesale funding and securities to enhance our profitability and
balance sheet composition by determining acceptable levels of credit, interest
rate and liquidity risk consistent with prudent capital management. The leverage
strategy consists of borrowing a combination of long and short-term funds
from
the FHLB and, when determined appropriate, issuing brokered CDs. These funds
are
invested primarily in mortgage-backed securities, and to a lesser extent,
long-term municipal securities. Although mortgage-backed securities often
carry
lower yields than traditional mortgage loans and other types of loans we
make,
these securities generally increase the overall quality of our assets because
of
underlying insurance or guarantees, are more liquid than individual loans
and
may be used to collateralize our borrowings or other obligations. While the
strategy of investing a substantial portion of our assets in mortgage-backed
and
municipal securities has resulted in lower interest rate spreads and margins,
we
believe that the lower operating expenses and reduced credit risk combined
with
the managed interest rate risk of this strategy have enhanced our overall
profitability over the last several years. At this time, we utilize the leverage
strategy with the goal of enhancing overall profitability by maximizing the
use
of our capital.
Risks
associated with the asset structure we maintain include a lower net interest
rate spread and margin when compared to our peers, changes in the slope of
the
yield curve, which can reduce our net interest rate spread and margin, increased
interest rate risk, the length of interest rate cycles, and the unpredictable
nature of mortgage-backed securities prepayments. See “Item 1A. Risk Factors -
Risks Related to Our Business.” During 2005, the overnight Fed Funds rate
increased significantly while interest rates on long-term, two to ten year
U.S.
Treasury notes increased less, creating a relatively flat yield curve at
the end
of 2005. During 2006, the interest rate yield curve inverted. An inverted
yield
curve is defined as shorter term interest rates at a higher level than longer
term interest rates. The Federal Reserve increased the overnight Fed Funds
rate
by 100 basis points during 2006. Despite that increase, during 2006, the
yield
on the two year treasury notes only increased 41 basis points and the yield
on
the 10 year treasury notes only increased 31 basis points. During the second
half of 2006, the inversion in the yield curve became more pronounced as
the
overnight Fed Funds rate did not change while the yield on the two year treasury
notes decreased 34 basis points and the yield on the ten year treasury notes
decreased 43 basis points. Should the inverted yield curve continue or should
the yield curve invert more, our net interest margin and spread could continue
to decrease. Our asset structure, net interest spread and net interest margin
requires an increase in the need to monitor our interest rate risk. An
additional risk is the change in market value of the AFS securities portfolio
as
a result of changes in interest rates. Significant increases in interest
rates,
especially long-term interest rates, could adversely impact the market value
of
the AFS securities portfolio which could also significantly impact our equity
capital. Due to the unpredictable nature of mortgage-backed securities
prepayments, the length of interest rate cycles, and the slope of the interest
rate yield curve, net interest income could fluctuate more than simulated
under
the scenarios modeled by our Asset/Liability Committee (“ALCO”) and described
under “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in
this report.
In
conjunction with the leverage strategy, we will attempt to manage the securities
portfolio as a percentage of earning assets in combination with adequate
quality
loan growth. 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 adjust the level of securities through proceeds from maturities,
principal payments on mortgage-backed securities or sales. During the year
ended
December 31, 2006, our loan growth was sufficient to allow the securities
portfolio as a percentage of total assets to decrease. At December 31, 2006,
the
securities portfolio as a percentage of total assets decreased to 52.7% from
54.5% at December 31, 2005. Due to the current interest rate environment,
we
anticipate we will continue to reduce the securities portfolio during the
first
quarter of 2007, by reinvesting only a portion of cash flows received. Should
the interest rate environment cause the overall economics associated with
reinvesting to deteriorate, we might accelerate the pace at which we reduce
the
securities portfolio and thereby the leverage. During the fourth quarter
of
2006, we reduced our investment and mortgage-backed securities approximately
$8.9 million as investment and mortgage-backed securities not including the
net
unrealized loss on available securities decreased from $985.2 million at
September 30, 2006 to $976.3 million at December 31, 2006. The $976.3 million
at
December 31, 2006 included $13.9 million of short-term U. S. Treasury securities
and GSE debentures we were required to purchase to collateralize year-end
public
funds deposits. We do not consider this to be a part of our core securities
portfolio as this increase is temporary and will last less than three months.
Subtracting the $13.9 million temporary increase in securities from the December
31, 2006 total of $976.3 million, during the fourth quarter our core investment
and mortgage-backed securities portfolio decreased approximately $22.8 million.
Our treasury strategy will be reevaluated as market conditions warrant. The
leverage strategy is dynamic and requires ongoing management. As interest
rates,
yield curves, mortgage-backed securities prepayments, funding costs and security
spreads 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.
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 objectives of the ALCO.
Our
FHLB borrowings at December 31, 2006, decreased 13.3%, or $69.1 million,
to
$451.6 million from $520.7 million at December 31, 2005. During the year
ended
December 31, 2006, we issued an additional $104 million of callable brokered
CDs, net of discount, where we control numerous options to call the CDs before
the final maturity date. At December 31, 2006, our total callable brokered
CDs
were $123.5 million. These brokered CDs have maturities from 1.7 to 5.0 years
and have calls that we control, all of which are currently six months or
less.
We are currently utilizing long-term brokered CDs to a greater extent than
long-term FHLB funding because the brokered CDs better match overall ALCO
objectives by utilizing a long-term funding vehicle that assists in protecting
Southside Bank should interest rates increase, but provides Southside Bank
options to call the funding should interest rates decrease. Our wholesale
funding policy currently allows maximum brokered CDs of $150 million; however,
this amount could be increased to match changes in ALCO objectives. The
potential higher interest expense and lack of customer loyalty are risks
associated with the use of brokered CDs. The FHLB funding and the brokered
CDs
represent our wholesale funding sources. Due to the dollar amount of brokered
CDs issued during the year ended December 31, 2006 and the fact that the
increase in brokered CDs exceeded non-brokered deposit growth, our total
wholesale funding as a percentage of deposits, not including brokered CDs,
increased slightly to 49.6% at December 31, 2006, from 49.5% at December
31,
2005.
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, 2006 COMPARED TO
DECEMBER 31, 2005
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 mix changes
in
interest earning assets and interest bearing liabilities, materially impact
net
interest income.
Net
interest income for the year ended December 31, 2006 was $41.7 million, an
increase of $409,000, or 1.0%, compared to the same period in 2005. The overall
increase in net interest income was primarily the result of increases in
interest income from loans, mortgage-backed and related securities and taxable
investment securities and a decrease in interest expense on long-term
obligations which was partially offset by an increase in interest expense
on
deposits and short-term obligations. During the year ended December 31, 2006,
total interest income increased $17.3 million, or 21.7%, as a result of an
increase in average
interest
earning assets of $162.3 million, or 10.2%, and the increase in average yield
on
average interest earning assets from 5.27% for the year ended December 31,
2005
to 5.74% for the year ended December 31, 2006. Total interest expense increased
$16.9 million, or 43.9%, to $55.3 million during the year ended December
31,
2006 as compared to $38.4 million during the same period in 2005. The increase
was attributable to an increase in the average yield on interest bearing
liabilities for the year ended December 31, 2006, to 3.89% from 2.96% for
the
same period in 2005 and an increase in average interest bearing liabilities
of
$123.4 million, or 9.5%.
Net
interest income increased during 2006 as a result of increases in our average
interest earning assets during 2006 when compared to 2005, which more than
offset the decrease in our net interest margin and spread during the year
ended
December 31, 2006 to 2.57% and 1.85%, respectively, when compared to 2.85%
and
2.31%, respectively, for the same period in 2005. The decreases in our net
interest margin and spread were due primarily to the changing interest rate
environment that began in mid-2004. Since mid-2004, short-term interest rates
have increased significantly while long-term interest rates have increased
less.
This has caused our yield on our interest bearing liabilities to increase
faster
than the yield on our earning assets. During 2006, our net interest income
trend
continued to gradually decline due to the net interest spread and margin
decreases which more than offset the increase in average interest earning
assets
by the end of 2006, and resulted in a slight decrease in net interest income
during the fourth quarter ended December 31, 2006, of $81,000, or 0.8%, when
compared to the same period in 2005. Future changes in the interest rate
environment or yield curve could also influence our net interest margin and
spread during future quarters. Future changes in interest rates could impact
prepayment speeds on our mortgage-backed securities, which could influence
our
net interest margin and spread during the coming quarters.
During
the year ended December 31, 2006, average loans, funded by the growth in
average
deposits, increased $64.3 million, or 9.8%, compared to the same period in
2005.
The average yield on loans increased from 6.22% at December 31, 2005 to 6.70%
at
December 31, 2006. The increase in the yield on loans was due to the overall
increase in interest rates. The rate at which loan yields are increasing
has
been partially impacted by repricing characteristics of the loans, interest
rates at the time the loans repriced, and the competitive loan pricing
environment. Due to the competitive loan pricing environment, we anticipate
that
we may be required to continue to offer lower interest rate loans that compete
with those offered by other financial institutions in order to retain quality
loan relationships. Offering lower interest rate loans could impact the overall
loan yield and, therefore profitability. The increase in interest income
on
loans of $7.6 million, or 19.5%, was the result of an increase in average
loans
and the average yield on loans.
Average
investment and mortgage-backed securities increased $97.7 million, or 11.0%,
for
the year ended December 31, 2006 when compared to the same period in 2005.
This
increase was funded by the increase in average deposits which included brokered
CDs we issued. The overall yield on average investment and mortgage-backed
securities increased to 5.06% during the year ended December 31, 2006 from
4.63%
during the same period in 2005. Interest
income on investment and mortgage-backed securities increased $9.3 million
in
2006, or 23.4%, compared to 2005 due to the increase in the overall yield
and
average balances. The
increase in the average yield primarily reflects decreased prepayment rates
on
mortgage-backed securities, which led to decreased amortization expense,
combined with the reinvestment of proceeds from lower-yielding matured
securities into higher yielding securities due to the overall higher interest
rate environment. The higher overall interest rate environment during 2006
when
compared to 2005, contributed to a decrease in residential mortgage refinancing
nationwide and in our market area. The decrease in prepayments on mortgage
loans
combined with a previous restructuring of the securities portfolio reduced
overall amortization expense which contributed to the increase in interest
income. A return to a lower long-term interest rate level similar to that
experienced during 2003 could impact our net interest margin in the future
due
to increased prepayments and repricings.
Average
FHLB stock and other investments decreased $130,000, or 0.5%, to $28.0 million,
for the year ended December 31, 2006, when compared to $28.1 million for
2005.
Interest income from our FHLB stock and other investments increased $377,000,
or
36.5%, during 2006, when compared to 2005, due to the increase in average
yield
from 3.67% for the year ended December 31, 2005 compared to 5.04% for the
same
period in 2006. Average federal funds sold and other interest earning assets
increased $201,000, or 12.3%, to $1.8 million, for the year ended December
31,
2006, when compared to $1.6 million for 2005. Interest income from federal
funds
sold and other interest earning assets increased $38,000, or 70.4%, for the
year
ended December 31, 2006, when compared to 2005, as a result of the increase
in
the average balance and the average yield from 3.29% in 2005 to 5.00% in
2006,
which was due to the higher average short-term interest rates.
During
the year ended December 31, 2006, average securities increased more than
average
loans. As a result, the mix of our average interest earning assets reflected
a
slight decrease in average total loans as a percentage of total average interest
earning assets compared to the prior year as loans averaged 41.6% during
2006
compared to 41.8% during 2005, a direct result of less loan growth when compared
to the growth in securities. Average securities were 58.3% of average total
interest earning assets and other interest earning asset categories averaged
0.1% for December 31, 2006. During 2005, the comparable mix was 58.1% in
securities and 0.1% in the other interest earning asset categories.
Total
interest expense increased $16.9 million, or 43.9%, to $55.3 million during
the
year ended December 31, 2006 as compared to $38.4 million during the same
period
in 2005. The increase was primarily attributable to increased funding costs
associated with an increase in average interest bearing liabilities, including
deposits, brokered CDs and FHLB advances of $123.4 million, or 9.5%, and
an
increase in the average yield on interest bearing liabilities from 2.96%
for
2005 to 3.89% for the year ended December 31, 2006.
Average
interest bearing deposits increased $148.6 million, or 20.7%, and the average
rate paid increased from 2.40% for the year ended December 31, 2005 compared
to
3.54% for the year ended December 31, 2006. Average
time deposits increased $112.8 million, or 31.8%, and the average rate paid
increased 122 basis points. The largest increase in average time deposits
resulted from the issuance of callable brokered CDs. Average interest bearing
demand deposits increased $35.6 million, or 11.3%, and the average rate paid
increased 99 basis points. Average savings deposits increased $262,000, or
0.5%,
and the average rate paid increased 23 basis points. Interest expense for
interest bearing deposits for the year ended December 31, 2006, increased
$13.5
million, or 78.2%, when compared to the same period in 2005 due to the increase
in the average balance and yield. Average noninterest bearing demand deposits
increased $34.2 million, or 12.2%, during 2006. The latter three categories,
which are considered the lowest cost deposits, comprised 60.5% of total average
deposits during the year ended December 31, 2006 compared to 64.5% during
2005.
The increase in our average total deposits is the result of issuing callable
brokered CDs, overall bank growth and branch expansion.
During
the year ended December 31, 2006, we issued approximately $104 million of
callable brokered CDs, net of discount, where we control numerous options
to
call the CDs before the final maturity date. At December 31, 2006, these
brokered CDs had maturities from 1.7 to five years and had calls that we
control, all of which are currently six months or less. At December 31, 2006,
we
had $123.5 million in brokered CDs that represented 9.6% of deposits compared
to
$19.8 million, or 1.8% of deposits, at December 31, 2005. During 2006, we
utilized long-term brokered CDs to a greater extent than long-term FHLB funding
as the brokered CDs better match overall ALCO objectives due to the calls
we
control. 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.
The
following table sets forth our deposit averages by category for the years
ended
December 31, 2006, 2005 and 2004:
|
COMPOSITION
OF DEPOSITS
|
|||||||||||||||||||
|
Years
Ended December 31,
|
|||||||||||||||||||
|
2006
|
2005
|
2004
|
|||||||||||||||||
|
(dollars
in thousands)
|
|||||||||||||||||||
|
AVG.
|
AVG.
|
AVG.
|
AVG.
|
AVG.
|
AVG.
|
||||||||||||||
|
BALANCE
|
YIELD
|
BALANCE
|
YIELD
|
BALANCE
|
YIELD
|
||||||||||||||
|
Noninterest
Bearing Demand Deposits
|
$
|
314,241
|
N/A
|
$
|
280,036
|
N/A
|
$
|
246,477
|
N/A
|
||||||||||
|
Interest
Bearing Demand Deposits
|
349,375
|
2.73
|
%
|
313,815
|
1.74
|
%
|
281,452
|
0.72
|
%
|
||||||||||
|
Savings
Deposits
|
50,764
|
1.27
|
%
|
50,502
|
1.04
|
%
|
48,456
|
0.48
|
%
|
||||||||||
|
Time
Deposits
|
467,174
|
4.39
|
%
|
354,360
|
3.17
|
%
|
319,083
|
2.46
|
%
|
||||||||||
|
Total
Deposits
|
$
|
1,181,554
|
2.60
|
%
|
$
|
998,713
|
1.72
|
%
|
$
|
895,468
|
1.13
|
%
|
|||||||
Average
short-term interest bearing liabilities, consisting primarily of FHLB advances
and federal funds purchased, were $376.7 million, an increase of $94.4 million,
or 33.4%, for the year ended December 31, 2006 when compared to the same
period
in 2005. Interest expense associated with short-term interest bearing
liabilities increased $6.6 million, or 67.1%, and the average rate paid
increased 89 basis points to 4.39% for the year ended December 31, 2006,
when
compared to 3.50% for the same period in 2005. The increase in the interest
expense was due to an increase in the average balance and the average yield
for
short-term interest bearing liabilities.
Average
long-term interest bearing liabilities consisting of FHLB advances decreased
$119.7 million, or 43.6%, during the year ended December 31, 2006 to $155.0
million as compared to $274.7 million at December 31, 2005. Interest expense
associated with long-term FHLB advances decreased $3.6 million, or 36.2%,
while
the average rate paid increased 48 basis points to 4.12% for the year ended
December 31, 2006 when compared to 3.64% for the same period in 2005. The
decrease in interest expense was due to the fact the decrease in the average
balance of long-term interest bearing liabilities more than offset the increase
in the average rate paid. FHLB advances are collateralized by FHLB stock,
securities and nonspecific real estate loans.
Average
long-term debt, consisting entirely of our junior subordinated debentures
issued
in 2003 in connection with the issuance of trust preferred securities by
our
subsidiary Southside Statutory Trust III, was $20,619,000 for the years ended
December 31, 2005 and 2006. Interest expense increased $376,000, or 28.8%,
to
$1.7 million for the year ended December 31, 2006 when compared to $1.3 million
for the same period in 2005 as a result of the increase in three-month LIBOR
due
to higher short-term interest rates during 2006 when compared to 2005. The
long-term debt adjusts quarterly at a rate equal to three-month LIBOR plus
294
basis points.
AVERAGE
BALANCES AND YIELDS
The
following table presents average balance sheet amounts and average yields
for
the years ended December 31, 2006, 2005 and 2004. 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, 2006
|
December
31, 2005
|
December
31, 2004
|
||||||||||||||||||||||||||
|
AVG.
|
AVG.
|
AVG.
|
AVG.
|
AVG.
|
AVG.
|
|||||||||||||||||||||||
|
BALANCE
|
INTEREST
|
YIELD
|
BALANCE
|
INTEREST
|
YIELD
|
BALANCE
|
INTEREST
|
YIELD
|
||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||||||
|
INTEREST
EARNING ASSETS:
|
||||||||||||||||||||||||||||
|
Loans(1)
(2)
|
$
|
722,252
|
$
|
48,397
|
6.70
|
%
|
$
|
657,938
|
$
|
40,927
|
6.22
|
%
|
$
|
604,658
|
$
|
36,921
|
6.11
|
%
|
||||||||||
|
Loans
Held For Sale
|
4,651
|
246
|
5.29
|
%
|
4,469
|
212
|
4.74
|
%
|
3,570
|
180
|
5.04
|
%
|
||||||||||||||||
|
Securities:
|
||||||||||||||||||||||||||||
|
Inv.
Sec. (Taxable)(4)
|
54,171
|
2,498
|
4.61
|
%
|
51,431
|
1,978
|
3.85
|
%
|
45,400
|
1,072
|
2.36
|
%
|
||||||||||||||||
|
Inv.
Sec. (Tax-Exempt)(3)(4)
|
43,931
|
3,134
|
7.13
|
%
|
66,023
|
4,696
|
7.11
|
%
|
75,048
|
5,333
|
7.11
|
%
|
||||||||||||||||
|
Mortgage-backed
Sec.(4)
|
891,015
|
44,401
|
4.98
|
%
|
773,973
|
34,584
|
4.47
|
%
|
643,323
|
26,845
|
4.17
|
%
|
||||||||||||||||
|
Total
Securities
|
989,117
|
50,033
|
5.06
|
%
|
891,427
|
41,258
|
4.63
|
%
|
763,771
|
33,250
|
4.35
|
%
|
||||||||||||||||
|
FHLB
stock and other investments, at cost
|
27,969
|
1,409
|
5.04
|
%
|
28,099
|
1,032
|
3.67
|
%
|
24,309
|
477
|
1.96
|
%
|
||||||||||||||||
|
Interest
Earning Deposits
|
692
|
35
|
5.06
|
%
|
644
|
24
|
3.73
|
%
|
634
|
8
|
1.26
|
%
|
||||||||||||||||
|
Federal
Funds Sold
|
1,148
|
57
|
4.97
|
%
|
995
|
30
|
3.02
|
%
|
6,886
|
67
|
0.97
|
%
|
||||||||||||||||
|
Total
Interest Earning Assets
|
1,745,829
|
100,177
|
5.74
|
%
|
1,583,572
|
83,483
|
5.27
|
%
|
1,403,828
|
70,903
|
5.05
|
%
|
||||||||||||||||
|
NONINTEREST
EARNING ASSETS:
|
||||||||||||||||||||||||||||
|
Cash
and Due From Banks
|
42,906
|
42,280
|
37,881
|
|||||||||||||||||||||||||
|
Bank
Premises and Equipment
|
33,298
|
31,504
|
30,576
|
|||||||||||||||||||||||||
|
Other
Assets
|
42,716
|
45,625
|
40,376
|
|||||||||||||||||||||||||
|
Less:
Allowance for Loan Losses
|
(7,231
|
)
|
(6,945
|
)
|
(6,597
|
)
|
||||||||||||||||||||||
|
Total
Assets
|
$
|
1,857,518
|
$
|
1,696,036
|
$
|
1,506,064
|
||||||||||||||||||||||
|
(1)
|
Interest
on loans includes fees on loans which are not material in
amount.
|
|
(2)
|
Interest
income includes taxable-equivalent adjustments of $2,230, $2,287
and
$2,216 for the years ended December 31, 2006, 2005 and 2004,
respectively.
|
|
(3)
|
Interest
income includes taxable-equivalent adjustments of $995, $1,515
and $1,687
for the years ended December 31, 2006, 2005 and 2004,
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, 2006, 2005 and 2004, loans totaling $1,333, $1,731
and
$2,248, respectively, were on nonaccrual status. The policy is
to reverse
previously accrued but unpaid interest on nonaccrual loans; thereafter,
interest income is recorded to the extent received when
appropriate.
|
|
AVERAGE
BALANCES AND YIELDS
|
||||||||||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||||||
|
Years
Ended
|
||||||||||||||||||||||||||||
|
December
31, 2006
|
December
31, 2005
|
December
31, 2004
|
||||||||||||||||||||||||||
|
AVG.
|
AVG.
|
AVG.
|
AVG.
|
AVG.
|
AVG.
|
|||||||||||||||||||||||
|
|
BALANCE
|
INTEREST
|
YIELD
|
BALANCE
|
INTEREST
|
YIELD
|
BALANCE
|
INTEREST
|
YIELD
|
|||||||||||||||||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||||||||
|
INTEREST
BEARING LIABILITIES:
|
||||||||||||||||||||||||||||
|
Savings
Deposits
|
$
|
50,764
|
645
|
1.27
|
%
|
$
|
50,502
|
524
|
1.04
|
%
|
$
|
48,456
|
234
|
0.48
|
%
|
|||||||||||||
|
Time
Deposits
|
467,174
|
20,516
|
4.39
|
%
|
354,360
|
11,221
|
3.17
|
%
|
319,083
|
7,847
|
2.46
|
%
|
||||||||||||||||
|
Interest
Bearing
|
||||||||||||||||||||||||||||
|
Demand
Deposits
|
349,375
|
9,529
|
2.73
|
%
|
313,815
|
5,476
|
1.74
|
%
|
281,452
|
2,027
|
0.72
|
%
|
||||||||||||||||
|
Total
Interest Bearing Deposits
|
867,313
|
30,690
|
3.54
|
%
|
718,677
|
17,221
|
2.40
|
%
|
648,991
|
10,108
|
1.56
|
%
|
||||||||||||||||
|
Short-term
Interest
|
||||||||||||||||||||||||||||
|
Bearing
Liabilities
|
376,696
|
16,534
|
4.39
|
%
|
282,283
|
9,892
|
3.50
|
%
|
181,779
|
6,499
|
3.58
|
%
|
||||||||||||||||
|
Long-term
Interest Bearing
|
||||||||||||||||||||||||||||
|
Liabilities-FHLB
|
154,983
|
6,379
|
4.12
|
%
|
274,673
|
10,004
|
3.64
|
%
|
293,499
|
10,076
|
3.43
|
%
|
||||||||||||||||
|
Long-term
Debt (5)
|
20,619
|
1,681
|
8.04
|
%
|
20,619
|
1,305
|
6.24
|
%
|
20,619
|
923
|
4.40
|
%
|
||||||||||||||||
|
Total
Interest Bearing Liabilities
|
1,419,611
|
55,284
|
3.89
|
%
|
1,296,252
|
38,422
|
2.96
|
%
|
1,144,888
|
27,606
|
2.41
|
%
|
||||||||||||||||
|
NONINTEREST
BEARING LIABILITIES:
|
||||||||||||||||||||||||||||
|
Demand
Deposits
|
314,241
|
280,036
|
246,477
|
|||||||||||||||||||||||||
|
Other
Liabilities
|
12,403
|
14,649
|
9,534
|
|||||||||||||||||||||||||
|
Total
Liabilities
|
1,746,255
|
1,590,937
|
1,400,899
|
|||||||||||||||||||||||||
|
SHAREHOLDERS'
EQUITY
|
111,263
|
105,099
|
105,165
|
|||||||||||||||||||||||||
|
TOTAL
LIABILITIES AND HAREHOLDERS' EQUITY
|
$
|
1,857,518
|
$
|
1,696,036
|
$
|
1,506,064
|
||||||||||||||||||||||
|
NET
INTEREST INCOME
|
$
|
44,893
|
$
|
45,061
|
$
|
43,297
|
||||||||||||||||||||||
|
NET
YIELD ON AVERAGE EARNING ASSETS
|
2.57
|
%
|
2.85
|
%
|
3.08
|
%
|
||||||||||||||||||||||
|
NET
INTEREST SPREAD
|
1.85
|
%
|
2.31
|
%
|
2.64
|
%
|
||||||||||||||||||||||
|
(5)
|
Represents
junior subordinated debentures issued by us to Southside Statutory
Trust
III in connection with the issuance of Southside Statutory Trust
III of
$20 million of trust preferred
securities.
|
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,
|
||||||||||
|
2006
Compared to 2005
|
||||||||||
|
Average
|
Average
|
Increase
|
||||||||
|
Volume
|
Yield
|
(Decrease)
|
||||||||
|
INTEREST
INCOME:
|
||||||||||
|
Loans
(1)
|
$
|
4,173
|
$
|
3,297
|
$
|
7,470
|
||||
|
Loans
Held For Sale
|
9
|
25
|
34
|
|||||||
|
Investment
Securities (Taxable)
|
110
|
410
|
520
|
|||||||
|
Investment
Securities (Tax Exempt) (1)
|
(1,576
|
)
|
14
|
(1,562
|
)
|
|||||
|
Mortgage-backed
Securities
|
5,572
|
4,245
|
9,817
|
|||||||
|
FHLB
stock and other investments
|
(5
|
)
|
382
|
377
|
||||||
|
Interest
Earning Deposits
|
2
|
9
|
11
|
|||||||
|
Federal
Funds Sold
|
5
|
22
|
27
|
|||||||
|
Total
Interest Income
|
8,290
|
8,404
|
16,694
|
|||||||
|
INTEREST
EXPENSE:
|
||||||||||
|
Savings
Deposits
|
3
|
118
|
121
|
|||||||
|
Time
Deposits
|
4,196
|
5,099
|
9,295
|
|||||||
|
Interest
Bearing Demand Deposits
|
679
|
3,374
|
4,053
|
|||||||
|
Short-term
Interest Bearing Liabilities
|
3,785
|
2,857
|
6,642
|
|||||||
|
Long-term
FHLB Advances
|
(4,796
|
)
|
1,171
|
(3,625
|
)
|
|||||
|
Long-term
Debt
|
-
|
376
|
376
|
|||||||
|
Total
Interest Expense
|
3,867
|
12,995
|
16,862
|
|||||||
|
Net
Interest Income
|
$
|
4,423
|
$
|
(4,591
|
)
|
$
|
(168
|
)
|
||
|
Years
Ended December 31,
|
||||||||||
|
2005
Compared to 2004
|
||||||||||
|
Average
|
Average
|
Increase
|
||||||||
|
Volume
|
Yield
|
(Decrease)
|
||||||||
|
INTEREST
INCOME:
|
||||||||||
|
Loans
(1)
|
$
|
3,304
|
$
|
702
|
$
|
4,006
|
||||
|
Loans
Held For Sale
|
43
|
(11
|
)
|
32
|
||||||
|
Investment
Securities (Taxable)
|
158
|
748
|
906
|
|||||||
|
Investment
Securities (Tax Exempt) (1)
|
(642
|
)
|
5
|
(637
|
)
|
|||||
|
Mortgage-backed
Securities
|
5,738
|
2,001
|
7,739
|
|||||||
|
FHLB
stock and other investments
|
84
|
471
|
555
|
|||||||
|
Interest
Earning Deposits
|
-
|
16
|
16
|
|||||||
|
Federal
Funds Sold
|
(92
|
)
|
55
|
(37
|
)
|
|||||
|
Total
Interest Income
|
8,593
|
3,987
|
12,580
|
|||||||
|
INTEREST
EXPENSE:
|
||||||||||
|
Savings
Deposits
|
10
|
280
|
290
|
|||||||
|
Time
Deposits
|
937
|
2,437
|
3,374
|
|||||||
|
Interest
Bearing Demand Deposits
|
258
|
3,191
|
3,449
|
|||||||
|
Short-term
Interest Bearing Liabilities
|
3,524
|
(131
|
)
|
3,393
|
||||||
|
Long-term
FHLB Advances
|
(666
|
)
|
594
|
(72
|
)
|
|||||
|
Long-term
Debt
|
-
|
382
|
382
|
|||||||
|
Total
Interest Expense
|
4,063
|
6,753
|
10,816
|
|||||||
|
Net
Interest Income
|
$
|
4,530
|
$
|
(2,766
|
)
|
$
|
1,764
|
|||
|
(1)
|
Interest
yields on loans and securities which are nontaxable for Federal
Income Tax
purposes are presented on a taxable equivalent basis.
|
NOTE:
Volume/Yield variances (change in volume times change in yield) have been
allocated to amounts attributable to changes in volumes and to changes in
yields
in proportion to the amounts directly attributable to those
changes.
PROVISION
FOR LOAN LOSSES
The
provision for loan losses for the year ended December 31, 2006 was $1.1 million
compared to $1.5 million for December 31, 2005. For the year ended December
31,
2006, net charge-offs of loans decreased $338,000, or 25.7%, to $977,000
when
compared to $1.3 million for the same period in 2005.
The
decrease in net charge-offs for 2006 was due to a combination of an increase
in
total recoveries of $314,000 and a slight decrease in total charge-offs of
$24,000. Net charge-offs for commercial loans decreased $226,000 from 2005
primarily as a result of an overall decrease in charge-offs. Net charge-offs
for
loans to individuals decreased $113,000 during 2006 due to an overall increase
in recoveries which more than offset the increase in charge-offs when compared
to 2005.
As
of
December 31, 2006, our review of the loan portfolio indicated that a loan
loss
allowance of $7.2 million was adequate to cover probable losses in the
portfolio.
NONINTEREST
INCOME
Noninterest
income consists of revenues generated from a broad range of financial services
and activities including fee based services. The following schedule lists
the
accounts from which noninterest income was derived, gives totals for these
accounts for the year ended December 31, 2006 and the comparable year ended
December 31, 2005 and indicates the percentage changes:
|
Years
Ended
|
||||||||||
|
December
31,
|
Percent
|
|||||||||
|
2006
|
2005
|
Change
|
||||||||
|
(dollars
in thousands)
|
||||||||||
|
Deposit
services
|
$
|
15,482
|
$
|
14,594
|
6.1
|
%
|
||||
|
Gain
on sale of securities available for sale
|
743
|
228
|
225.9
|
%
|
||||||
|
Gain
on sale of loans
|
1,817
|
1,807
|
0.6
|
%
|
||||||
|
Trust
income
|
1,711
|
1,422
|
20.3
|
%
|
||||||
|
Bank
owned life insurance income
|
1,067
|
951
|
12.2
|
%
|
||||||
|
Other
|
2,661
|
2,246
|
18.5
|
%
|
||||||
|
Total
noninterest income
|
$
|
23,481
|
$
|
21,248
|
10.5
|
%
|
||||
Total
noninterest income for the year ended December 31, 2006 increased 10.5%, or
$2.2 million, compared to 2005. During the year ended December 31, 2006,
we had
a gain on the sale of AFS securities of $743,000 compared to $228,000 for
the
same period in 2005. The market value of the AFS securities portfolio at
December 31, 2006 was $742.1 million with a net unrealized loss on that date
of
$6.7 million. The net unrealized loss is comprised of $9.9 million in unrealized
losses and $3.2 million in unrealized gains. We sold securities out of our
AFS
portfolio to accomplish ALCO and investment portfolio objectives aimed at
repositioning a portion of the securities portfolio in an attempt to maximize
the total return of the securities portfolio and reduce alternative minimum
tax.
During 2006, we primarily sold tax-free municipal securities to reduce
alternative minimum tax and selected mortgage-backed securities where the
risk
reward profile had changed.
Deposit
services income increased $888,000, or 6.1%, for the year ended December
31,
2006, when compared to the same period in 2005, primarily as a result of
increases in overdraft income and an increase in debit card income, which
were
offset by decreases in deposit account service charges due to increases in
earnings credit rates.
Trust
income increased $289,000, or 20.3%, for the year ended December 31, 2006,
when
compared to the same period in 2005 due to growth experienced in our trust
department. Assets under management in our trust department exceeded $500
million for the first time during 2006 and were approximately $564 million
at
December 31, 2006.
Gain
on
sale of loans increased $10,000, or 0.6%, for the year ended December 31,
2006,
when compared to the same period in 2005. The slight increase was primarily
due
to an increase in residential mortgage loans sold during 2006 when compared
to
2005. The increase was offset by a gain of $248,000 from the sale of $6.2
million in student loans during 2005.
Bank
owned life insurance (“BOLI”) income increased $116,000, or 12.2%, for the year
ended December 31, 2006, when compared to the same period in 2005 primarily
as a
result of an increase in the average balance of cash surrender value associated
with our BOLI.
Other
noninterest income increased $415,000, or 18.5%, for the year ended December
31,
2006, when compared to the same period in 2005. The increase was primarily
a
result of increases in brokerage services income, credit card fee income,
Mastercard income and Travelers Express income, and a recovery of $150,000
received during the second quarter of 2006 that was related to a loss on
a check
during 2005. The increases were partially offset by a special distribution
of
$286,000 received during 2005 as a result of the merger of the Pulse EFT
Association with Discover Financial Services.
NONINTEREST
EXPENSE
The
following schedule lists the accounts which comprise noninterest expense,
gives
totals for these accounts for the years ended December 31, 2006 and 2005
and indicates the percentage changes:
|
Years
Ended
|
||||||||||
|
December
31,
|
Percent
|
|||||||||
|
2006
|
2005
|
Change
|
||||||||
|
(dollars
in thousands)
|
||||||||||
|
Salaries
and employee benefits
|
$
|
28,275
|
$
|
27,479
|
2.9
|
%
|
||||
|
Occupancy
expense
|
4,777
|
4,257
|
12.2
|
%
|
||||||
|
Equipment
expense
|
899
|
847
|
6.1
|
%
|
||||||
|
Advertising,
travel and entertainment
|
1,742
|
1,967
|
(11.4
|
%)
|
||||||
|
ATM
and debit card expense
|
955
|
648
|
47.4
|
%
|
||||||
|
Director
fees
|
587
|
677
|
(13.3
|
%)
|
||||||
|
Supplies
|
637
|
628
|
1.4
|
%
|
||||||
|
Professional
fees
|
1,386
|
1,339
|
3.5
|
%
|
||||||
|
Postage
|
618
|
572
|
8.0
|
%
|
||||||
|
Telephone
and communications
|
723
|
593
|
21.9
|
%
|
||||||
|
Other
|
4,368
|
4,152
|
5.2
|
%
|
||||||
|
Total
noninterest expense
|
$
|
44,967
|
$
|
43,159
|
4.2
|
%
|
||||
Noninterest
expense for the year ended December 31, 2006 increased $1.8 million, or 4.2%,
when compared to the year ended December 31, 2005. Salaries and employee
benefits expense increased $796,000, or 2.9%, during the year ended December
31,
2006, when compared to the same period in 2005. Direct salary expense and
payroll taxes increased $1.6 million, or 7.4%, for the year ended December
31,
2006, when compared to the same period in 2005. These increases were the
result
of normal salary increases and higher staffing levels associated with both
the
opening of four de novo branch locations since September 30, 2005, and our
regional lending initiative. While continued expansion has and will continue
to
impact short-term earnings, we believe the potential long-term benefits should
outweigh the short-term expense.
During
the third quarter of 2006, department managers completed an evaluation of
work
flow in their respective departments, with the primary objective of identifying
any opportunities to increase productivity primarily through the use of
technology investments with less personnel expense. In certain departments
the
evaluations identified the ability to utilize part-time employees to better
staff for peak customer transaction times in lieu of full-time employees.
In
addition, management is utilizing productivity gains to not fill certain
vacancies created by normal attrition. The combination of these initiatives
resulted in salary and employee benefit expense savings and improved
productivity gains.
Retirement
expense decreased $825,000, or 25.2%, for the year ended December 31, 2006,
when
compared to the same period in 2005, primarily as a result of the amendments
to
the Plan in the fourth quarter of 2005 that became effective in 2006. Our
actuarial assumptions used to determine net periodic pension costs were reduced
for 2006 when compared to 2005. Specifically, the assumed long-term rate
of
return was 7.875% and the assumed discount rate was 5.625%. We will continue
to
evaluate the assumed long-term rate of return and the discount rate to determine
if either should be changed in the future. If either of these assumptions
were
decreased, the cost and funding required for the retirement plan could increase.
On November 3, 2005, our board of directors approved amendments to the Plan
which affected future participation in the Plan and reduced the accrual of
future benefits. A summary of the amendments to the Plan are
presented in “Note
12- Employee
Benefits” to
our consolidated financial statements
Health
and life insurance expense increased $19,000, or 0.7%, for the year ended
December 31, 2006, when compared to the same period in 2005 due to increased
health claims expense in the last quarter of 2006. We have a self-insured
health
plan which is supplemented with stop loss insurance policies. Health insurance
costs are rising nationwide and these costs may increase during
2007.
Occupancy
expense increased $520,000, or 12.2%, for the year ended December 31, 2006,
compared to the same period in 2005 due primarily to the opening of four
de novo
branch locations since September 30, 2005, combined with higher utility costs
incurred during 2006 at existing locations.
Advertising,
travel and entertainment decreased $225,000, or 11.4%, for the year ended
December 31, 2006, compared to the same period in 2005, due to a coordinated
effort to reduce costs in this area.
ATM
and
debit card expense increased $307,000, or 47.4%, for the year ended December
31,
2006, compared to the same period in 2005. The increase was primarily due
to an
increase in combined use of ATM and debit cards, point of sale activity and
a
new billing system from our service provider.
Director
fees decreased $90,000, or 13.3%, for the year ended December 31, 2006, compared
to the same period in 2005 due to a decrease in the number of directors and
a
decrease in the amount paid to holding company directors during
2006.
Telephone
and communications expense increased $130,000, or 21.9%, for the year ended
December 31, 2006, compared to the same period in 2005 primarily due to the
opening of four de novo branch locations since September 30, 2005 and the
addition of disaster recovery communication capabilities at a separate branch
facility.
Other
expense increased $216,000, or 5.2%, for the year ended December 31, 2006,
compared to the same period in 2005. The increase occurred primarily due
to
increases in computer fees, taxes other than real estate, losses on OREO,
bank
analysis fees, student loan origination and lender fee expense, and stored
value
card expense that were partially offset by decreases in other losses and
liability insurance expense.
INCOME
TAXES
Pre-tax
income for the year ended December 31, 2006 was $19.1 million compared to
$17.9
million and $20.1 million for the years ended December 31, 2005 and 2004,
respectively.
Income
tax expense was $4.1 million for the year ended December 31, 2006 and
represented an $807,000, or 24.5%, increase from the year ended December
31,
2005. The effective tax rate as a percentage of pre-tax income was 21.5%
in
2006, 18.4% in 2005 and 19.7% in 2004. The increase in the effective tax
rate
and income tax expense for 2006 was due to the decrease in our tax-exempt
income
as a percentage of pre-tax income for the year ended December 31, 2006 when
compared to December 31, 2005.
We
decreased our municipal securities portfolio during 2006 to balance the overall
level of tax-free income from the municipal investment securities and municipal
loan portfolios. We continue to review the appropriate level of tax-free
income
so as to minimize any alternative minimum tax position in the future. We
believe
the remaining alternative minimum tax position is realizable in the future
and
no valuation allowance against the related deferred tax asset is deemed
necessary at this time.
COMPARISON
OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2005 COMPARED TO DECEMBER
31, 2004
NET
INTEREST INCOME
Net
interest income for the year ended December 31, 2005 was $41.3 million, an
increase of $1.9 million, or 4.7%, compared to the same period in 2004. The
overall increase in net interest income was primarily the result of increases
in
interest income from loans, mortgage-backed and related securities and taxable
investment securities which more than offset the increase in interest expense
on
deposits and long and short-term obligations. During the year ended December
31,
2005, total interest income increased $12.7 million, or 18.9%, as a result
of an
increase in average
interest
earning assets of $179.7 million, or 12.8%, and the increase in average yield
on
average interest earning assets from 5.05% at December 31, 2004 to 5.27%
at
December 31, 2005. Total interest expense increased $10.8 million, or 39.2%,
to
$38.4 million during the year ended December 31, 2005 as compared to $27.6
million during the same period in 2004. The increase was attributable to
an
increase in the average yield on interest bearing liabilities at December
31,
2005, to 2.96% from 2.41% for the same period in 2004 and an increase in
average
interest bearing liabilities of $151.4 million, or 13.2%.
Net
interest income increased during 2005 as a result of increases in our average
interest earning assets during 2005 when compared to 2004, which more than
offset the decrease in our net interest margin and spread during the year
ended
December 31, 2005 to 2.85% and 2.31%, respectively, when compared to 3.08%
and
2.64%, respectively, for the same period in 2004. The decreases in our net
interest margin and spread were due primarily to the changing interest rate
environment that began in mid 2004. Since mid 2004, short-term interest rates
increased significantly while long-term interest rates increased less. This
caused our yield on our interest bearing liabilities to increase faster than
the
yield on our earning assets.
During
the year ended December 31, 2005, average loans, funded by the growth in
average
deposits, increased $53.3 million, or 8.8%, compared to the same period in
2004.
The average yield on loans increased from 6.11% during the year ended December
31, 2004 to 6.22% during the year ended December 31, 2005. The increase in
the
yield on loans was due to the overall increase in interest rates. The rate
at
which loan yields were increasing was partially impacted by repricing
characteristics of the loans, interest rates at the time the loans repriced,
and
the competitive loan pricing environment. The increase in interest income
on
loans of $4.0 million, or 11.4%, was the result of an increase in the average
yield on loans and an increase in average loans.
Average
investment and mortgage-backed securities increased $127.7 million, or 16.7%,
for the year ended December 31, 2005 when compared to the same period in
2004.
This increase was primarily funded by an increase in average deposits. The
overall yield on average investment and mortgage-backed securities increased
to
4.63% during the year ended December 31, 2005 from 4.35% during the same
period
in 2004, due to decreased prepayment rates on mortgage-backed securities
which
led to decreased amortization expense. The higher overall interest rate
environment during 2005 when compared to 2004, contributed to a decrease
in
residential mortgage refinancing nationwide and in our market area. This
decrease in prepayments on mortgage loans combined with a restructuring of
the
securities portfolio reduced overall amortization expense which contributed
to
the increase in interest income. In addition, securities purchased during
2005
were at overall higher yields. Interest
income on investment and mortgage-backed securities increased $8.2 million
in
2005, or 25.9%, compared to 2004 due to an increase in both the average yield
and the average balance on securities during 2005.
Interest
income from FHLB stock and other investments, federal funds sold and other
interest earning assets increased $534,000, or 96.7%, for the year ended
December 31, 2005 when compared to 2004, primarily as a result of higher
average
dividends paid on FHLB stock during 2005.
During
the year ended December 31, 2005, average securities increased more than
average
loans. As a result, the mix of our average interest earning assets reflected
a
decrease in average total loans as a percentage of total average interest
earning assets compared to the prior year as loans averaged 41.8% during
2005
compared to 43.3% during 2004, a direct result of less loan growth when compared
to the growth in securities. Securities averaged 58.1% of average total interest
earning assets and other interest earning asset categories averaged 0.1%
for
December 31, 2005. During 2004, the comparable mix was 56.1% in securities
and
0.6% in the other interest earning asset categories.
Total
interest expense increased $10.8 million, or 39.2%, to $38.4 million during
the
year ended December 31, 2005 as compared to $27.6 million during the same
period
in 2004. The increase was attributable to an increase in the average yield
on
interest bearing liabilities and an increase in average interest bearing
liabilities of $151.4 million, or 13.2%. Average interest bearing deposits
increased $69.7 million, or 10.7%, and the average rate paid increased from
1.56% during the year ended December 31, 2004 to 2.40% during the year ended
December 31, 2005. Average
time deposits increased $35.3 million, or 11.1%, and the average rate paid
increased 71 basis points. Average interest bearing demand deposits increased
$32.4 million, or 11.5%, and the average rate paid increased 102 basis points.
Average savings deposits increased $2.0 million, or 4.2%, and the average
rate
paid increased 56 basis points. Average noninterest bearing demand deposits
increased $33.6 million, or 13.6%, during 2005. The latter three categories,
which are considered the lowest cost deposits, comprised 64.5% of total average
deposits during the year ended December 31, 2005 compared to 64.4% during
2004
and 60.2% during 2003. The increase in average total deposits is reflective
of
overall bank growth and branch expansion.
During
the fourth quarter ended December 31, 2005, we issued $19.8 million of callable
brokered CDs, where we retained the right to call the CDs before the final
maturity date, to replace a portion of the FHLB short-term funding. These
brokered CDs had maturities from three to five years and calls from three
months
to one year. At December 31, 2005, we had $19.8 million in brokered CDs that
represented 1.8% of deposits. We utilized long-term brokered CDs in place
of
long-term FHLB funding as the brokered CDs better matched overall ALCO
objectives. At December 31, 2004, we had no 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, were $282.3 million, an increase of $100.5 million,
or 55.3%, for the year ended December 31, 2005 when compared to the same
period
in 2004. Interest expense associated with short-term interest bearing
liabilities increased $3.4 million, or 52.2%, while the average rate paid
decreased 8 basis points for the year ended December 31, 2005 when compared
to
the same period in 2004 due primarily to long-term FHLB advances becoming
short-term during 2005. The decrease in the average rate paid was due primarily
to lower interest rate long-term FHLB advances being reclassified to short-term.
Average long-term interest bearing liabilities consisting of FHLB advances
decreased $18.8 million, or 6.4%, during the year ended December 31, 2005
to
$274.7 million as compared to $293.5 million at December 31, 2004. Interest
expense associated with long-term FHLB advances decreased $72,000, or 0.7%,
while the average rate paid increased 21 basis points for the year ended
December 31, 2005 when compared to the same period in 2004. The long-term
advances were obtained from the FHLB primarily to fund long-term securities
and
loans. FHLB advances are collateralized by FHLB stock, securities and
nonspecific loans.
PROVISION
FOR LOAN LOSSES
The
provision for loan losses for the year ended December 31, 2005 was $1.5 million
compared to $925,000 for December 31, 2004. For the year ended December 31,
2005, we had net charge-offs of loans of $1.3 million, an increase of 231.2%
compared to December 31, 2004. For the year ended December 31, 2004, net
charge-offs of loans were $397,000.
The
increase in net charge-offs for 2005 was due to an increase in total charge-offs
that exceeded the increase in total recoveries. Net charge-offs for commercial
loans increased $332,000 from December 31, 2004 primarily as a result of
a large
recovery on one loan during the third quarter of 2004. Net charge-offs for
loans
to individuals increased $635,000 due primarily to an increase in net
charge-offs of overdraft accounts from December 31, 2004. These increases
in net
charge-offs were partially offset by a decrease in net charge-offs of real
estate loans of $49,000.
As
of
December 31, 2005, our review of the loan portfolio indicated that a loan
loss
allowance of $7.1 million was adequate to cover probable losses in the
portfolio.
NONINTEREST
INCOME
Noninterest
income consists of revenues generated from a broad range of financial services
and activities including fee based services. The following schedule lists
the
accounts from which noninterest income was derived, gives totals for these
accounts for the year ended December 31, 2005 and the comparable year ended
December 31, 2004 and indicates the percentage changes:
|
Years
Ended
|
||||||||||
|
December
31,
|
Percent
|
|||||||||
|
2005
|
2004
|
Change
|
||||||||
|
(dollars
in thousands)
|
||||||||||
|
Deposit
services
|
$
|
14,594
|
$
|
13,793
|
5.8
|
%
|
||||
|
Gain
on sale of securities available for sale
|
228
|
2,759
|
(91.7
|
%)
|
||||||
|
Gain
on sale of loans
|
1,807
|
1,644
|
9.9
|
%
|
||||||
|
Trust
income
|
1,422
|
1,248
|
13.9
|
%
|
||||||
|
Bank
owned life insurance income
|
951
|
812
|
17.1
|
%
|
||||||
|
Other
|
2,246
|
1,647
|
36.4
|
%
|
||||||
|
Total
noninterest income
|
$
|
21,248
|
$
|
21,903
|
(3.0
|
%)
|
||||
Total
noninterest income for the year ended December 31, 2005 decreased 3.0%, or
$655,000, compared to 2004. Securities gains decreased $2.5 million, or 91.7%,
from 2004. We had fewer securities we wanted to sell during 2005 due to the
repositioning of the securities portfolio during 2003 and 2004. In addition
the
higher overall interest rate environment during 2005 caused prepayments on
premium mortgage-backed securities to slow, which reduced the number of these
securities sold. Of the $0.2 million in net securities gains from the AFS
portfolio in 2005, there were $1.4 million in realized losses and $1.6 million
in realized gains. We sold securities out of our AFS portfolio to accomplish
ALCO and investment portfolio objectives aimed at repositioning a portion
of the
securities portfolio in an attempt to reduce the overall duration of the
securities portfolio, maximize the total return of the securities portfolio,
reduce alternative minimum tax and minimize our exposure to prepayments on
mortgage-backed securities. Sales of AFS securities were the result of changes
in economic conditions and a change in the desired mix of the securities
portfolio. During 2005, the yield curve flattened as short-term interest
rates
increased significantly and long-term interest rates increased less. Higher
coupon premium mortgage-backed securities were replaced as they prepaid with
mortgage-backed securities that had characteristics which potentially might
reduce the prepayment exposure. Specific low selling yield and, or long duration
municipal securities were sold and, in some circumstances, partially replaced
with municipal loans or better call protected municipal securities.
Gain
on
sale of loans increased $163,000, or 9.9%, due to the premium earned of $248,000
from the sale of $6.2 million in student loans during the second quarter
ended
June 30, 2005, which more than offset the decrease in gains from mortgage
loans
sold during 2005 as compared to 2004. Trust income increased $174,000, or
13.9%,
as a result of growth in managed assets experienced in the Trust department.
BOLI increased $139,000, or 17.1%, as a result of an increase in average
BOLI
assets and an increase in the average rate paid on BOLI during 2005 when
compared to 2004. Other noninterest income increased $599,000, or 36.4%,
during
2005 as compared to 2004. The largest single factor for the increase in other
noninterest income was the result of a $286,000 special distribution as a
result
of the merger of the Pulse EFT Association with Discover Financial Services
received during the first six months of 2005. Other increases in other income
included increases in Southside Select fee income, Home Banking fee income,
stored value card fees, credit card fee income, Traveler’s Express income and
gains on sale of assets.
NONINTEREST
EXPENSE
The
following schedule lists the accounts which comprise noninterest expense,
gives
totals for these accounts for the year ended December 31, 2005 and the
comparable year ended December 31, 2004 and indicates the percentage
changes:
|
Years
Ended
|
||||||||||
|
December
31,
|
Percent
|
|||||||||
|
2005
|
2004
|
Change
|
||||||||
|
(dollars
in thousands)
|
||||||||||
|
Salaries
and employee benefits
|
$
|
27,479
|
$
|
25,395
|
8.2
|
%
|
||||
|
Occupancy
expense
|
4,257
|
4,120
|
3.3
|
%
|
||||||
|
Equipment
expense
|
847
|
759
|
11.6
|
%
|
||||||
|
Advertising,
travel and entertainment
|
1,967
|
1,852
|
6.2
|
%
|
||||||
|
ATM
and debit card expense
|
648
|
628
|
3.2
|
%
|
||||||
|
Director
fees
|
677
|
646
|
4.8
|
%
|
||||||
|
Supplies
|
628
|
608
|
3.3
|
%
|
||||||
|
Professional
fees (1)
|
1,339
|
1,239
|
8.1
|
%
|
||||||
|
Postage
|
572
|
561
|
2.0
|
%
|
||||||
|
Telephone
and communications
|
593
|
522
|
13.6
|
%
|
||||||
|
Other
|
4,152
|
3,991
|
4.0
|
%
|
||||||
|
Total
noninterest expense
|
$
|
43,159
|
$
|
40,321
|
7.0
|
%
|
||||
(1)
Historically we included legal fees as “other” noninterest expense, but believe
that it is more appropriate to include legal fees with “Professional
Fees.”
Noninterest
expense for the year ended December 31, 2005 increased $2.8 million, or 7.0%,
when compared to the year ended December 31, 2004. Salaries and employee
benefits increased $2.1 million, or 8.2%, when compared to the same period
in
2004. Direct salary expense and payroll taxes increased $2.3 million, or
12.1%,
as a result of overall bank growth, new branches opened since second quarter
2004, hiring associated with plans to expand the regions in which we lend,
and
normal payroll increases. Retirement expense increased $682,000, or 26.3%,
for
the year ended December 31, 2005 primarily as a result of the increase in
the number of participants, level of performance of retirement plan assets
and
actuarial assumptions. Our actuarial assumption used to determine net periodic
pension costs were reduced for 2005 when compared to 2004 and the assumed
long-term rate of return for 2005 was 8.5% and the assumed discount rate
for
2005 was 5.75%.
On
November 3, 2005, our board of directors approved amendments to the Plan
which
affected future participation in the Plan and reduced the accrual of future
benefits.
Health
and life insurance expense decreased $925,000, or 26.2%, for the year ended
December 31, 2005 due to decreased health claims expense and reinsurance
costs.
We have a self-insured health plan which is supplemented with stop loss
insurance policies.
Equipment
expense increased $88,000, or 11.6%, for the year ended December 31, 2005
due to
increases in various maintenance contracts and branch expansions.
Professional
fees increased $100,000, or 8.1%, due to legal fees associated with litigation
resulting from the normal course of business.
Telephone
and communications expense increased $71,000, or 13.6%, for the year ended
December 31, 2005 primarily due to the addition of three new locations during
2005 and an increase in communication costs.
Other
expense increased $161,000, or 4.0%, during the year ended December 31, 2005
compared to 2004. The increase was primarily due to increases in bank
examination fees and other losses.
INCOME
TAXES
Income
tax expense was $3.3 million for the year ended December 31, 2005 and
represented a $659,000, or 16.7%, decrease from the year ended December 31,
2004. The effective tax rate as a percentage of pre-tax income was 18.4%
in
2005, 19.7% in 2004 and 16.0% in 2003. The decrease in the effective tax
rate
and income tax expense for 2005 was due to the increase in tax-exempt income
as
a percentage of pre-tax income for the year ended December 31, 2005 when
compared to December 31, 2004. During 2005, we were in an alternative minimum
tax position due to a large contribution to our defined benefit plan. During
2004, we had the ability to address the appropriate level of tax free income
to
avoid an alternative minimum tax position for 2004.
We
decreased our municipal securities portfolio during 2005 to reduce the overall
level of tax-free income from the securities portfolio and to allow us the
opportunity to grow our municipal loan portfolio. We have the ability to
and are
addressing the appropriate level of tax-free income so as to minimize any
alternative minimum tax position in the future.
On
October 22, 2004, President Bush signed the American Jobs Creation Act of
2004
(the “Act”), which includes numerous provisions that may affect business
practices and accounting for income taxes. The Act did not impact our income
tax
expense during 2005.
LENDING
ACTIVITIES
One
of
our main objectives is to seek attractive lending opportunities in Texas,
primarily in the counties in which we operate. Substantially all of our loans
are made to borrowers who live in and conduct business in the counties in
Texas
in which we operate, with the exception of municipal loans. Municipal loans
are
made to municipalities, school districts, and colleges throughout the state
of
Texas. We look forward to the possibility that our loan growth will continue
to
accelerate in the future as we work to identify and develop additional markets
and strategies that will allow us to expand our lending territory. Total
loans
as of December 31, 2006 increased $78.8 million, or 11.6%, and the average
loan
balance was up $64.3 million, or 9.8%, when compared to 2005.
Our
real
estate loans increased $50.3 million, or 12.6%, from December 31, 2005 to
December 31, 2006. Commercial loans increased $27.5 million, or 30.1%, from
December 31, 2005. Loans to individuals increased $3.9 million, or 4.7%,
from
December 31, 2005. Municipal loans as of December 31, 2006 decreased $2.8
million, or 2.6%, from December 31, 2005.
The
increase in real estate loans was due to our expanding markets and economic
growth in our market area, the continued strong commitment to real estate
lending and less refinancing of real estate loans on our books during 2006
when
compared to 2005. The increase in our commercial loans is reflective of our
expanding markets and economic growth in our market area. The increase in
loans
to individuals reflects success in penetrating this competitive market. In
our
loan portfolio, loans dependent upon private household income represent a
significant concentration. Due to the number of customers involved who work
in
all sectors of the numerous local economies, we believe the risk in this
portion
of the portfolio is adequately spread throughout the economic community,
which
assists in mitigating this concentration.
The
aggregate amount of loans that we are permitted to make under applicable
bank
regulations to any one borrower, including related entities, is 25% of
unimpaired certified capital and surplus. Our legal lending limit at December
31, 2006, was $25 million. Our largest loan relationship at December 31,
2006,
was approximately $13 million.
The
average yield on loans for the year ended December 31, 2006, increased to
6.70%
from 6.22% for the year ended December 31, 2005. This increase was reflective
of
the repricing characteristics of the loans, interest rates at the time loans
repriced, and the overall higher interest rate environment during 2006, when
compared to 2005.
LOAN
PORTFOLIO COMPOSITION AND ASSOCIATED RISK
The
following table sets forth loan totals by category for the years
presented:
|
December
31,
|
||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Real
Estate Loans:
|
||||||||||||||||
|
Construction
|
$
|
39,588
|
$
|
35,765
|
$
|
32,877
|
$
|
35,306
|
$
|
33,286
|
||||||
|
1-4
Family Residential
|
227,354
|
199,812
|
168,784
|
143,460
|
145,159
|
|||||||||||
|
Other
|
181,047
|
162,147
|
153,998
|
144,668
|
145,299
|
|||||||||||
|
Commercial
Loans
|
118,962
|
91,456
|
80,808
|
76,432
|
77,629
|
|||||||||||
|
Municipal
Loans
|
106,155
|
109,003
|
103,963
|
96,135
|
76,918
|
|||||||||||
|
Loans
to Individuals
|
86,041
|
82,181
|
83,589
|
93,134
|
92,169
|
|||||||||||
|
Total
Loans
|
$
|
759,147
|
$
|
680,364
|
$
|
624,019
|
$
|
589,135
|
$
|
570,460
|
||||||
For
purposes of this discussion, our loans are divided into four categories:
Real
Estate Loans, Commercial Loans, Municipal Loans and Loans to
Individuals.
REAL
ESTATE LOANS
Real
estate loans represent our greatest concentration of loans. However, the
amount
of risk associated with this group of loans is mitigated in part due to the
type
of loans involved. At December 31, 2006, the majority of our real estate
loans were collateralized by properties located in Smith and Gregg Counties.
Of
the $448.0 million in real estate loans, $227.4 million, or 50.7%, represent
loans collateralized by residential dwellings that are primarily owner occupied.
Historically, the amount of losses suffered on this type of loan has been
significantly less than those on other properties. Our loan policy requires
an
appraisal or evaluation on the property, based on the size and complexity
of the
transaction, prior to funding any real estate loan and also outlines the
requirements for appraisals on renewals.
We
pursue
an aggressive policy of reappraisal on any real estate loan that is in the
process of foreclosure and potential exposures are recognized and reserved
for
or charged off as soon as they are identified. Our ability to liquidate certain
types of properties that may be obtained through foreclosure could adversely
affect the volume of our nonperforming real estate loans.
Real
estate loans are divided into three categories: 1-4 Family Residential Mortgage
Loans, Construction Loans and Other. The Other category consists of $177.5
million of commercial real estate loans, $2.3 million of loans secured by
multifamily properties and $1.2 million of loans secured by farm land. The
Commercial Real Estate portion of Other will be discussed in more detail
below.
1-4
Family Residential Mortgage Loans
Residential
loan originations are generated by our loan officers, in-house origination
staff, marketing efforts, present customers, walk-in customers and referrals
from real estate agents, and builders. We focus our lending efforts primarily
on
the origination of loans secured by first mortgages on owner-occupied, 1-4
family residences. Substantially all of our 1-4 family residential mortgage
originations are secured by properties located in our market area. Historically,
we have originated a portion of our residential mortgage loans for sale into
the
secondary market. These loans are reflected on the balance sheet as loans
held
for sale. These secondary market investors typically pay us a service release
premium in addition to a predetermined price based on the interest rate of
the
loan originated. We retain liabilities related to early prepayments, defaults,
failure to adhere to origination and processing guidelines and other issues.
We
have internal controls in place to mitigate many of these liabilities and
historically our realized liability has been extremely low. In addition,
many of
the retained liabilities expire inside of one year from the date a loan is
sold.
We warehouse these loans until they are transferred to the secondary market
investor, which usually occurs within 45 days.
Our
1-4
family residential mortgage loans generally have maturities ranging from
five to
30 years. These loans are typically fully amortizing with monthly payments
sufficient to repay the total amount of the loan or amortizing with a balloon
feature, typically due in fifteen years or less. Our 1-4 family residential
mortgage loans are made at both fixed and adjustable interest
rates.
We
review
information concerning the income, financial condition, employment and credit
history when evaluating the creditworthiness of the applicant.
We
also
make home equity loans, which are included as part of the 1-4 Family Residential
Mortgage Loans, and at December 31, 2006, these loans totaled $64.8
million.
Construction
Loans
Our
commercial construction loans and construction loans to individuals are
collateralized by property located primarily in the market areas we serve.
A
majority of our construction loans are directed toward properties that will
be
owner occupied. Construction loans for projects built on speculation are
financed, but these typically have secondary sources of repayment. Our
construction loans have both adjustable and fixed interest rates during the
construction period. Construction loans to individuals are typically priced
and
made with the intention of granting the permanent loan on the property.
Commercial
Real Estate Loans
Commercial
real estate loans primarily include commercial office buildings, retail,
medical
facilities and offices, warehouse facilities, hotels and churches. In
determining whether to originate commercial real estate loans, we generally
consider such factors as the financial condition of the borrower and the
debt
service coverage of the property. Commercial real estate loans are made at
both
fixed and adjustable interest rates for terms generally up to 20 years.
COMMERCIAL
LOANS
Our
commercial loans are diversified to meet most business needs. Loan types
include
short-term working capital loans for inventory and accounts receivable and
short
and medium-term loans for equipment or other business capital expansion.
Management does not consider there to be any material concentration of risk
in
any one industry type, other than medical, in this loan category. Medical
loan
types include all loan types listed above for commercial loans. Collateral
for
these loans varies depending on the type of loan and financial strength of
the
borrower. The primary source of repayment for loans in the medical community
is
cash flow from continuing operations. The medical community represents a
concentration of risk in our Commercial loan and Commercial Real Estate loan
portfolio. See “Item 1. Business - Market Area.” We believe that risk in the
medical community is mitigated because it is spread among multiple practice
types and multiple specialties. Should the government change the amount it
pays
the medical community through the various government health insurance programs
or if new government regulation impacts the profitability of the medical
community, the medical community could be adversely impacted which in turn
could
result in higher default rates by borrowers in the medical industry.
In
our
commercial loan underwriting, we assess the creditworthiness, ability to
repay,
and the value and liquidity of the collateral being offered. Terms are generally
granted commensurate with the useful life of the collateral offered.
MUNICIPAL
LOANS
We
have a
specific lending department that makes loans to municipalities and school
districts throughout the state of Texas. The majority of the loans to
municipalities and school districts have tax or revenue pledges and in some
cases, are additionally supported by collateral. Municipal loans made without
a
direct pledge of taxes or revenues are usually made based on some type of
collateral that represents an essential service. Lending money directly to
these
municipalities allows us to earn a higher yield for similar durations than
we
could if we purchased municipal securities. Total loans to municipalities
and
school districts as of December 31, 2006 decreased $2.8 million when compared
to
2005. At December 31, 2006, we had total loans to municipalities and school
districts of $106.2 million.
LOANS
TO
INDIVIDUALS
Substantially
all of our consumer loans are made to consumers in our market area. The majority
of consumer loans outstanding are collateralized by titled equipment, primarily
vehicles, which accounted for approximately $49.7 million, or 57.8%, of total
loans to individuals at December 31, 2006. Home equity loans have replaced
some
of the traditional loans to individuals. In addition, we make loans for a
full
range of other consumer purposes, which may be secured or unsecured depending
on
the credit quality and purpose of the loan.
Management
believes that the economy in our market area appears to reflect continued
stable
growth. Most of our loans to individuals are collateralized, which management
believes should assist in limiting our exposure.
Consumer
loan terms vary according to the type and value of collateral, length of
contract and creditworthiness of the borrower. The underwriting standards
we
employ for consumer loans include an application, a determination of the
applicant's payment history on other debts, with the greatest weight being
given
to payment history with us, and an assessment of the borrower's ability to
meet
existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is a primary consideration, the underwriting
process also includes a comparison of the value of the collateral, if any,
in
relation to the proposed loan amount.
LOAN
MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
The
following table represents loan maturities and sensitivity to changes in
interest rates. The amounts of total loans outstanding at December 31, 2006,
which, based on remaining scheduled repayments of principal, are due in (1)
one
year or less, (2) more than one year but less than five years, and (3) more
than
five years, are shown in the following table. The amounts due after one year
are
classified according to the sensitivity to changes in interest
rates.
|
Due
in One Year
or Less*
|
After
One but within
Five
Years
|
After
Five Years*
|
||||||||
|
(in
thousands)
|
||||||||||
|
Real
Estate Loans - Construction
|
$
|
19,578
|
$
|
12,373
|
$
|
7,637
|
||||
|
Real
Estate Loans - 1-4 Family Residential
|
61,598
|
71,104
|
94,652
|
|||||||
|
Real
Estate Loans - Other
|
48,929
|
56,182
|
75,936
|
|||||||
|
Commercial
Loans
|
73,433
|
33,690
|
11,839
|
|||||||
|
Municipal
Loans
|
7,986
|
20,879
|
77,290
|
|||||||
|
Loans
to Individuals
|
54,207
|
28,785
|
3,049
|
|||||||
|
Total
Loans
|
$
|
265,731
|
$
|
223,013
|
$
|
270,403
|
||||
|
Loans
with Maturities After
|
||
|
One
Year for Which:
|
Interest
Rates are Fixed or Predetermined
|
$ 300,326
|
|
Interest
Rates are Floating or Adjustable
|
$ 193,090
|
|
*
|
The
volume of commercial loans due within one year reflects our general
policy
of attempting to limit a majority of these loans to a short-term
maturity.
Nonaccrual loans totaling $1.3 million are reflected in the due
after five
years column.
|
LOANS
TO
AFFILIATED PARTIES
In
the
normal course of business, we make loans to certain of our own executive
officers and directors and their related interests. As of December 31, 2006
and
2005, these loans totaled $2.6 million and $3.7 million, or 2.3% and 3.4%
of
Shareholders' Equity, respectively. Such loans are made in the normal course
of
business at normal credit terms, including interest rate and collateral
requirements and do not represent more than normal credit risks contained
in the
rest of the loan portfolio for loans of similar types.
LOAN
LOSS
EXPERIENCE AND ALLOWANCE FOR LOAN LOSSES
The
loan
loss allowance is based on the most current review of the loan portfolio.
Several methods are used to maintain the review in the most current manner.
First, the servicing officer has the primary responsibility for updating
significant changes in a customer's financial position. Accordingly, each
officer prepares status updates on any credit deemed to be experiencing
repayment difficulties which, in the officer's opinion, would place the
collection of principal or interest in doubt. Second, our internal loan review
department is responsible for an ongoing review of our loan portfolio with
specific goals set for the loans to be reviewed on an annual basis.
At
each
review, a subjective analysis methodology is used to grade the respective
loan.
Categories of grading vary in severity from loans that do not appear to have
a
significant probability of loss at the time of review to loans that indicate
a
probability that the entire balance of the loan will be uncollectible. If
full
collection of the loan balance appears unlikely at the time of review, estimates
or appraisals of the collateral securing the debt are used to allocate the
necessary allowances. The internal loan review department maintains a list
of
all loans or loan relationships that are graded as having more than the normal
degree of risk associated with them. This list is for loan and loan
relationships of $50,000 or more and is updated on a periodic basis in order
to
properly allocate necessary allowances and keep management informed on the
status of attempts to correct the deficiencies noted with respect to the
loan.
Industry
experience indicates that a portion of our loans will become delinquent and
a
portion of the loans will require partial or entire charge-off. Regardless
of
the underwriting criteria utilized, losses may be experienced as a result
of
various factors beyond our control, including, among other things, changes
in
market conditions affecting the value of properties used as collateral for
loans
and problems affecting the credit of the borrower and the ability of the
borrower to make payments on the loan. Our determination of the adequacy
of
allowance for loan losses is based on various considerations, including an
analysis of the risk characteristics of various classifications of loans,
previous loan loss experience, specific loans which would have loan loss
potential, delinquency trends, estimated fair value of the underlying
collateral, current economic conditions, the views of the bank regulators
(who
have the authority to require additional allowances), and geographic and
industry loan concentration.
As
of
December 31, 2006, our review of the loan portfolio indicated that a loan
loss
allowance of $7.2 million was adequate to cover probable losses in the
portfolio.
The
following table presents information regarding the average amount of net
loans
outstanding, changes in the allowance for loan losses, the ratio of net loans
charged-off to average net loans outstanding and an allocation of the allowance
for loan losses.
|
LOAN
LOSS EXPERIENCE AND ALLOWANCE FOR LOAN LOSSES
|
||||||||||||||||
|
Years
Ended December 31,
|
||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||
|
Average
Net Loans Outstanding
|
$
|
722,252
|
$
|
657,938
|
$
|
604,658
|
$
|
570,122
|
$
|
547,829
|
||||||
|
Balance
of Allowance for Loan Losses at Beginning of Period
|
$
|
7,090
|
$
|
6,942
|
$
|
6,414
|
$
|
6,195
|
$
|
5,926
|
||||||
|
Loan
Charge-Offs:
|
||||||||||||||||
|
Real
Estate-Construction
|
-
|
-
|
-
|
(17
|
)
|
(215
|
)
|
|||||||||
|
Real
Estate-1-4 Family Residential
|
(59
|
)
|
(36
|
)
|
(142
|
)
|
(63
|
)
|
(170
|
)
|
||||||
|
Real
Estate-Other
|
(18
|
)
|
(53
|
)
|
(3
|
)
|
-
|
-
|
||||||||
|
Commercial
Loans
|
(245
|
)
|
(438
|
)
|
(375
|
)
|
(693
|
)
|
(610
|
)
|
||||||
|
Loans
to Individuals
|
(2,650
|
)
|
(2,469
|
)
|
(523
|
)
|
(703
|
)
|
(1,144
|
)
|
||||||
|
Total
Loan Charge-Offs
|
(2,972
|
)
|
(2,996
|
)
|
(1,043
|
)
|
(1,476
|
)
|
(2,139
|
)
|
||||||
|
Recovery
of Loans Previously Charged-off:
|
||||||||||||||||
|
Real
Estate-Construction
|
-
|
-
|
-
|
-
|
4
|
|||||||||||
|
Real
Estate-1-4 Family Residential
|
7
|
20
|
-
|
-
|
13
|
|||||||||||
|
Real
Estate-Other
|
-
|
-
|
27
|
3
|
6
|
|||||||||||
|
Commercial
Loans
|
87
|
54
|
323
|
179
|
43
|
|||||||||||
|
Loans
to Individuals
|
1,901
|
1,607
|
296
|
304
|
224
|
|||||||||||
|
Total
Recovery of Loans Previously Charged-Off
|
1,995
|
1,681
|
646
|
486
|
290
|
|||||||||||
|
Net
Loan Charge-Offs
|
(977
|
)
|
(1,315
|
)
|
(397
|
)
|
(990
|
)
|
(1,849
|
)
|
||||||
|
Provision
for Loan Losses
|
1,080
|
1,463
|
925
|
1,209
|
2,118
|
|||||||||||
|
Balance
of Allowance for Loan Losses at End of Period
|
$
|
7,193
|
$
|
7,090
|
$
|
6,942
|
$
|
6,414
|
$
|
6,195
|
||||||
|
Ratio
of Net Charge-Offs to Average Net Loans Outstanding
|
0.14
|
%
|
0.20
|
%
|
0.07
|
%
|
0.17
|
%
|
0.34
|
%
|
||||||
Allocation
of Allowance for Loan Losses (dollars in thousands):
|
Years
Ended December 31,
|
|||||||||||||||||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||||||||||||||||||
|
Amount
|
Percent
of Loans to Total Loans
|
Amount
|
Percent
of Loans to Total Loans
|
Amount
|
Percent
of Loans to Total Loans
|
Amount
|
Percent
of Loans to Total Loans
|
Amount
|
Percent
of Loans to Total Loans
|
||||||||||||||||||||||
|
Real
Estate
|
|||||||||||||||||||||||||||||||
|
Construction
|
$
|
366
|
5.2
|
%
|
$
|
329
|
5.3
|
%
|
$
|
518
|
5.3
|
%
|
$
|
510
|
6.0
|
%
|
$
|
451
|
5.8
|
%
|
|||||||||||
|
1-4
Family Residential
|
1,221
|
30.0
|
%
|
1,101
|
29.4
|
%
|
909
|
27.0
|
%
|
906
|
24.3
|
%
|
872
|
25.4
|
%
|
||||||||||||||||
|
Other
|
2,327
|
23.8
|
%
|
2,397
|
23.8
|
%
|
2,186
|
24.6
|
%
|
1,798
|
24.6
|
%
|
1,642
|
25.5
|
%
|
||||||||||||||||
|
Commercial
Loans
|
1,536
|
15.7
|
%
|
1,482
|
13.4
|
%
|
1,485
|
13.0
|
%
|
1,339
|
13.0
|
%
|
1,447
|
13.6
|
%
|
||||||||||||||||
|
Municipal
Loans
|
262
|
14.0
|
%
|
269
|
16.0
|
%
|
318
|
16.7
|
%
|
238
|
16.3
|
%
|
193
|
13.5
|
%
|
||||||||||||||||
|
Loans
to Individuals
|
1,394
|
11.3
|
%
|
1,498
|
12.1
|
%
|
1,516
|
13.4
|
%
|
1,622
|
15.8
|
%
|
1,547
|
16.2
|
%
|
||||||||||||||||
|
Unallocated
|
87
|
0.0
|
%
|
14
|
0.0
|
%
|
10
|
0.0
|
%
|
1
|
0.0
|
%
|
43
|
0.0
|
%
|
||||||||||||||||
|
Ending
Balance
|
$
|
7,193
|
100.0
|
%
|
$
|
7,090
|
100.0
|
%
|
$
|
6,942
|
100.0
|
%
|
$
|
6,414
|
100.0
|
%
|
$
|
6,195
|
100.0
|
%
|
|||||||||||
See
"Consolidated Financial Statements - Note 6. Loans and Allowance for Probable
Loan Losses."
NONPERFORMING
ASSETS
Nonperforming
assets consist of delinquent loans 90 days or more past due, nonaccrual loans,
OREO, repossessed assets and restructured loans. Nonaccrual loans are those
loans which are 90 days or more delinquent and collection in full of both
the
principal and interest is in doubt. Additionally, some loans that are not
delinquent may be placed on nonaccrual status due to doubts about full
collection of principal or interest. When a loan is categorized as nonaccrual,
the accrual of interest is discontinued and the accrued balance is reversed
for
financial statement purposes. Restructured loans represent loans that have
been
renegotiated to provide a reduction or deferral of interest or principal
because
of deterioration in the financial position of the borrowers. Categorization
of a
loan as nonperforming is not in itself a reliable indicator of potential
loan
loss. Other factors, such as the value of collateral securing the loan and
the
financial condition of the borrower must be considered in judgments as to
potential loan loss. OREO represents real estate taken in full or partial
satisfaction of debts previously contracted. The dollar amount of OREO is
based
on a current evaluation of the OREO at the time it is recorded on our books,
net
of estimated selling costs. Updated valuations are obtained as needed and
any
additional impairments are recognized.
Total
nonperforming assets at December 31, 2006 were $2.1 million, representing
a
decrease of $947,000, or 31.0%, from $3.1 million at December 31, 2005. OREO
increased $206,000, or 142.1%, to $351,000 from December 31, 2005 to December
31, 2006. The primary increase in OREO resulted from foreclosure on one
residential dwelling that represented 88.8% of total OREO. At December 31,
2006,
this dwelling was under contract to sell and closed in January 2007. We are
actively marketing all properties and none are being held for investment
purposes. From December 31, 2005 to December 31, 2006, nonaccrual loans
decreased $398,000, or 23.0%, to $1.3 million. Of this total, 14.9% are
residential real estate loans, 47.9% are commercial real estate loans, 7.2%
are
commercial loans, 19.7% are loans to individuals and 10.3% are construction
loans. Approximately $560,000 of the nonaccrual loans at December 31, 2006,
are
loans that have an average SBA guarantee of 75% to 85%. The reduction in
commercial nonaccrual loans during December 31, 2006 was primarily the result
of
the charge-off of two SBA guaranteed relationships. The charge-offs related
to
the non SBA guaranteed portion of these loans is reflected in commercial
loan
charge-offs. Restructured loans decreased $6,000, or 2.7%, to $220,000. Loans
90
days past due or more decreased $817,000, or 86.5%, to $128,000 and include
residential mortgage loans and loans to individuals. Repossessed assets
increased $68,000, or 680.0%, to $78,000.
The
following table presents information on nonperforming assets:
|
NONPERFORMING
ASSETS
|
||||||||||||||||
|
Years
Ended December 31,
|
||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||
|
Loans
90 Days Past Due:
|
||||||||||||||||
|
Real
Estate
|
$
|
64
|
$
|
912
|
$
|
785
|
$
|
248
|
$
|
125
|
||||||
|
Loans
to Individuals
|
64
|
33
|
22
|
20
|
95
|
|||||||||||
|
Commercial
|
-
|
-
|
20
|
4
|
67
|
|||||||||||
|
128
|
945
|
827
|
272
|
287
|
||||||||||||
|
Loans
on Nonaccrual:
|
||||||||||||||||
|
Real
Estate
|
975
|
970
|
753
|
775
|
1,083
|
|||||||||||
|
Loans
to Individuals
|
262
|
381
|
432
|
354
|
481
|
|||||||||||
|
Commercial
|
96
|
380
|
1,063
|
418
|
674
|
|||||||||||
|
1,333
|
1,731
|
2,248
|
1,547
|
2,238
|
||||||||||||
|
Restructured
Loans:
|
||||||||||||||||
|
Real
Estate
|
97
|
99
|
102
|
109
|
115
|
|||||||||||
|
Loans
to Individuals
|
105
|
127
|
85
|
97
|
113
|
|||||||||||
|
Commercial
|
18
|
-
|
6
|
13
|
97
|
|||||||||||
|
220
|
226
|
193
|
219
|
325
|
||||||||||||
|
Total
Nonperforming Loans
|
1,681
|
2,902
|
3,268
|
2,038
|
2,850
|
|||||||||||
|
Other
Real Estate Owned
|
351
|
145
|
214
|
195
|
524
|
|||||||||||
|
Repossessed
Assets
|
78
|
10
|
41
|
48
|
11
|
|||||||||||
|
Total
Nonperforming Assets
|
$
|
2,110
|
$
|
3,057
|
$
|
3,523
|
$
|
2,281
|
$
|
3,385
|
||||||
|
Percentage
of Total Assets
|
0.11
|
%
|
0.17
|
%
|
0.22
|
%
|
0.16
|
%
|
0.25
|
%
|
||||||
|
Percentage
of Loans and Leases, Net of Unearned Discount
|
0.28
|
%
|
0.45
|
%
|
0.56
|
%
|
0.39
|
%
|
0.59
|
%
|
||||||
Nonperforming
assets at December 31, 2006, as a percentage of total assets decreased to
0.11%
from the previous year and as a percentage of loans decreased to 0.28%.
Nonperforming assets hinder our ability to earn money. Decreases in earnings
can
result from both the loss of interest income and the costs associated with
maintaining the OREO, for taxes, insurance and other operating expenses.
In
addition to the nonperforming assets, at December 31, 2006 in the opinion
of
management, we had $246,000 of loans identified as potential problem loans.
A
potential problem loan is a loan where information about possible credit
problems of the borrower is known, causing management to have serious doubts
about the ability of the borrower to comply with the present loan repayment
terms and which may result in a future classification of the loan in one
of the
nonperforming asset categories.
The
following is a summary of our recorded investment in loans (primarily nonaccrual
loans) for which impairment has been recognized in accordance with SFAS
114:
|
Total
|
Valuation
Allowance
|
Carrying
Value
|
||||||||
|
(in
thousands)
|
||||||||||
|
Real
Estate Loans
|
$
|
975
|
$
|
102
|
$
|
873
|
||||
|
Loans
to Individuals
|
262
|
105
|
157
|
|||||||
|
Commercial
Loans
|
96
|
12
|
84
|
|||||||
|
Balance
at December 31, 2006
|
$
|
1,333
|
$
|
219
|
$
|
1,114
|
||||
|
Total
|
Valuation
Allowance
|
Carrying
Value
|
||||||||
|
(in
thousands)
|
||||||||||
|
Real
Estate Loans
|
$
|
970
|
$
|
58
|
$
|
912
|
||||
|
Loans
to Individuals
|
381
|
141
|
240
|
|||||||
|
Commercial
Loans
|
380
|
145
|
235
|
|||||||
|
Balance
at December 31, 2005
|
$
|
1,731
|
$
|
344
|
$
|
1,387
|
||||
All
of
the impaired loans included above at December 31, 2006, had a valuation
allowance. The balance of impaired loans included above with no valuation
allowance was $3,000 at December 31, 2005.
For
the
years ended December 31, 2006 and 2005, the average recorded investment in
impaired loans was approximately $1,388,000 and $1,773,000, respectively.
The
amount of interest recognized on loans that were nonaccruing or restructured
during the year was $113,000, $80,000 and $125,000 for the years ended December
31, 2006, 2005 and 2004, respectively. If these loans had been accruing interest
at their original contracted rates, related income would have been $142,000,
$177,000 and $186,000 for the years ended December 31, 2006, 2005 and 2004,
respectively.
For
the
years ended December 31, 2006, 2005 and 2004 we did not have an allowance
for
losses on OREO.
SECURITIES
ACTIVITY
Our
securities portfolio plays a primary role in management of our interest rate
sensitivity and, therefore, is managed in the context of the overall balance
sheet. The securities portfolio generates a substantial percentage of our
interest income and serves as a necessary source of liquidity.
We
account for debt and equity securities as follows:
|
·
|
Held
to Maturity (“HTM”). Debt securities that management has the current
intent and ability to hold until maturity are classified as HTM
and are
carried at their remaining unpaid principal balance, net of unamortized
premiums or unaccreted discounts. Premiums are amortized and discounts
are
accreted using the level interest yield method over the estimated
remaining term of the underlying security.
|
|
·
|
Available
for Sale (“AFS”). Debt and equity securities that will be held for
indefinite periods of time, including securities that may be sold
in
response to changes in market interest or prepayment rates, needs
for
liquidity and changes in the availability of and the yield of alternative
investments are classified as AFS. These assets are carried at
market
value. Market value is determined using quoted market prices, where
available. If quoted market prices are not available, fair values
are
based on quoted market prices for similar securities or estimates
from
independent pricing services. Unrealized gains and losses on AFS
securities are excluded from earnings and reported net of tax as
a
separate component of shareholders' equity until
realized.
|
Purchase
of premiums and discounts are recognized in interest income using the interest
method over the terms of the securities. Declines in the fair value of HTM
and
AFS securities below their cost that are deemed to be other-than-temporary
are
reflected in earnings as realized losses. In estimating other-than-temporary
impairment losses, management considers (1) the length of time and the extent
to
which the fair value has been less than cost, (2) the financial condition
and
near-term prospects of the issuer, and (3) our intent and ability to retain
our
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. Gains and losses on the sale of securities
are recorded on the trade date and are determined using the specific
identification method.
Securities
with limited marketability, such as FHLB stock and other investments, are
carried at cost, which approximates its fair value.
Management
attempts to deploy investable funds into instruments that are expected to
provide a reasonable overall return on the portfolio given the current
assessment of economic and financial conditions, while maintaining acceptable
levels of capital, interest rate and liquidity risk. At December 31, 2006,
the
securities portfolio as a percentage of total assets was 52.7% and was larger
than loans, which were 40.1% of total assets. For a discussion of our strategy
in relation to the securities portfolio, see “Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations - Leverage
Strategy.”
The
following table sets forth the carrying amount of investment securities and
mortgage-backed securities at December 31, 2006, 2005 and 2004:
|
December
31,
|
||||||||||
|
Available
for Sale:
|
2006
|
2005
|
2004
|
|||||||
|
(in
thousands)
|
||||||||||
|
Investment
Securities:
|
||||||||||
|
U.S.
Treasury
|
$
|
26,383
|
$
|
23,770
|
$
|
3,988
|
||||
|
Government
Sponsored Enterprise Debentures
|
9,923
|
21,525
|
39,881
|
|||||||
|
State
and Political Subdivisions
|
55,135
|
68,339
|
84,172
|
|||||||
|
Other
Stocks and Bonds
|
7,511
|
7,606
|
5,494
|
|||||||
|
Mortgage-backed
Securities:
|
||||||||||
|
U.S.
Government Agencies
|
71,399
|
69,732
|
85,674
|
|||||||
|
Government
Sponsored Enterprises
|
564,650
|
519,396
|
393,566
|
|||||||
|
Other
Private Issues
|
7,115
|
3,307
|
235
|
|||||||
|
Total
|
$
|
742,116
|
$
|
713,675
|
$
|
613,010
|
||||
|
December
31,
|
||||||||||
|
Held
to Maturity:
|
2006
|
2005
|
2004
|
|||||||
|
(in
thousands)
|
||||||||||
|
Investment
Securities:
|
||||||||||
|
Other
Stocks and Bonds
|
$
|
1,351
|
$
|
-
|
$
|
-
|
||||
|
Mortgage-backed
Securities:
|
||||||||||
|
U.S.
Government Agencies
|
30,788
|
35,400
|
41,766
|
|||||||
|
Government
Sponsored Enterprises
|
195,374
|
193,921
|
199,292
|
|||||||
|
Total
|
$
|
227,513
|
$
|
229,321
|
$
|
241,058
|
||||
We
invest
in mortgage-backed and related securities, including mortgage participation
certificates, which are insured or guaranteed by U.S. Government agencies
and
GSEs, and collateralized mortgage obligations (“CMOs”) and real estate mortgage
investment conduits (“REMICs”). Mortgage-backed securities (which also are known
as mortgage participation certificates or pass-through certificates) represent
a
participation interest in a pool of single-family or multi-family mortgages,
the
principal and interest payments on which are passed from the mortgage
originators, through intermediaries (generally U.S. Government agencies,
GSEs,
and direct whole loans) that pool and repackage the participation interests
in
the form of securities, to investors such as us. U.S. Government agencies,
primarily Government National Mortgage Association (“GNMA”) and GSEs, primarily
Freddie Mac, and Federal National Mortgage Association (“FNMA”) guarantee the
payment of principal and interest to investors. GSEs are not backed by the
full
faith and credit of the United States government. Freddie Mac, FNMA and FHLB
are
the primary GSEs with which we purchase securities. The whole loans we purchase
are all AAA rated CMO and REMIC tranches that are rated AAA due to credit
support and/or insurance coverage.
Mortgage-backed
securities typically are issued with stated principal amounts, and the
securities are backed by pools of mortgages that have loans with varying
maturities. The characteristics of the underlying pool of mortgages, such
as
fixed-rate or adjustable-rate, as well as prepayment risk, are passed on
to the
certificate holder. The term of a mortgage-backed pass-through security thus
approximates the term of the underlying mortgages and can vary significantly
due
to prepayments.
Our
mortgage-backed securities include CMOs, which include securities issued
by
entities that have qualified under the Internal Revenue Code of 1986, as
amended, as REMICs. CMOs and REMICs (collectively CMOs) were developed in
response to investor concerns regarding the uncertainty of cash flows associated
with the prepayment option of the underlying mortgagor and are typically
issued
by governmental agencies, GSEs and special purpose entities, such as trusts,
corporations or partnerships, established by financial institutions or other
similar institutions. A CMO can be collateralized by loans or securities
which
are insured or guaranteed by FNMA, Freddie Mac, GNMA, or whole loans which,
in
our case, are all currently rated AAA. In contrast to pass-through
mortgage-backed securities, in which cash flow is received pro rata by all
security holders, the cash flow from the mortgages underlying a CMO is segmented
and paid in accordance with a predetermined priority to investors holding
various CMO classes. By allocating the principal and interest cash flows
from
the underlying collateral among the separate CMO classes, different classes
of
bonds are created, each with its own stated maturity, estimated average life,
coupon rate and prepayment characteristics.
Like
most
fixed-income securities, mortgage-backed and related securities are subject
to
interest rate risk. However, unlike most fixed-income securities, the mortgage
loans underlying a mortgage-backed or related security generally may be prepaid
at any time without penalty. The ability to prepay a mortgage loan generally
results in significantly increased price and yield volatility (with respect
to
mortgage-backed and related securities) than is the case with non-callable
fixed
income securities. Furthermore, mortgage-backed derivative securities often
are
more sensitive to changes in interest rates and prepayments than traditional
mortgage-backed securities and are, therefore, even more volatile.
The
combined investment securities, mortgage-backed securities, and FHLB stock
and
other investments portfolio increased to $996.1 million at December 31,
2006, compared to $972.6 million at December 31, 2005, an increase of $23.5
million, or 2.4%. This is a result of an increase in mortgage-backed securities
of $47.6 million, or 5.8%, during 2006 when compared to 2005. Another change
in
our securities portfolio during 2006 included a $13.2 million, or 19.3%,
decrease in our ownership of securities issued by State and Political
Subdivisions to allow for additional municipal loans. FHLB stock decreased
$3.1
million, or 10.8%, due to stock buybacks by FHLB as our FHLB advances decreased.
The changes in U. S. Treasury and U. S. Government agency securities were
related to collateral needs for public fund deposits.
During
2006, short-term interest rates increased while long-term interest rates
increased less, creating an inverted yield curve. We used this interest rate
environment to reposition a portion of the securities portfolio in an attempt
to
slightly reduce the overall duration and minimize prepayment of premium
mortgage-backed securities. Higher coupon premium mortgage-backed securities
were replaced as they prepaid with mortgage-backed securities that had
characteristics which potentially might reduce the prepayment exposure. Specific
low selling yield or long duration municipal securities were sold due to
the
anticipated growth of our municipal loan portfolio and the amount of tax
free
income we can support without being subject to alternative minimum tax
long-term.
The
market value of the securities portfolio at December 31, 2006 was $992.7
million, which represented a net unrealized loss as of that date of $10.1
million. The net unrealized loss was comprised of $13.4 million in unrealized
losses and $3.3 million of unrealized gains. To the best of management’s
knowledge, none of the securities at December 31, 2006 had an
other-than-temporary impairment. Net unrealized gains and losses on AFS
securities, which is a component of shareholders’ equity on the consolidated
balance sheet, can fluctuate significantly as a result of changes in interest
rates. Because management cannot predict the future direction of interest
rates,
the effect on shareholders’ equity in the future cannot be determined; however,
this risk is monitored closely through the use of shock tests on the AFS
securities portfolio using an array of interest rate
assumptions.
During
2004, we transferred mortgage-backed securities totaling $241.4 million from
AFS
to HTM due to overall balance sheet strategies and potential changes in market
conditions. The unrealized loss on the securities transferred from AFS to
HTM
was $2.9 million, net of tax, at the date of transfer based on the fair value
of
the securities on the transfer date. When we transferred the securities from
AFS
to HTM, we had a significant amount of long-term FHLB fixed rate liabilities
and
determined it was appropriate that a portion of our securities portfolio
should
be designated HTM. There were no securities transferred from AFS to HTM during
2005 and 2006. There were no sales from the HTM portfolio during the years
ended
December 31, 2006, 2005 or 2004. There were $227.5 million and $229.3 million
of
securities classified as HTM for the years ended December 31, 2006 and 2005,
respectively.
The
maturities classified according to the sensitivity to changes in interest
rates
of the December 31, 2006 securities portfolio and the weighted yields are
presented below. Tax-exempt obligations are shown on a taxable equivalent
basis.
Mortgage-backed securities are included in maturity categories based on their
stated maturity date. Expected maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations.
|
MATURING
|
|||||||||||||||||||||||||
|
After
1 But
|
After
5 But
|
||||||||||||||||||||||||
|
Within
1 Yr.
|
Within
5 Yrs.
|
Within
10 Yrs.
|
After
10 Yrs.
|
||||||||||||||||||||||
|
Available
For Sale:
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
|||||||||||||||||
|
(dollars
in thousands)
|
|||||||||||||||||||||||||
|
Investment
Securities:
|
|||||||||||||||||||||||||
|
U.S.
Treasury
|
$
|
8,936
|
4.87
|
%
|
$
|
-
|
-
|
$
|
17,447
|
4.30
|
%
|
$
|
-
|
-
|
|||||||||||
|
Government
Sponsored Enterprise Debentures
|
9,923
|
5.22
|
%
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||
|
State
and Political Subdivisions
|
1,115
|
5.95
|
%
|
12,798
|
5.86
|
%
|
15,935
|
6.11
|
%
|
25,287
|
6.88
|
%
|
|||||||||||||
|
Other
Stocks and Bonds
|
-
|
-
|
-
|
-
|
-
|
-
|
7,511
|
7.16
|
%
|
||||||||||||||||
|
Mortgage-backed
Securities:
|
|||||||||||||||||||||||||
|
U.S.
Government Agencies
|
8
|
7.72
|
%
|
-
|
-
|
7,769
|
4.81
|
%
|
63,622
|
5.49
|
%
|
||||||||||||||
|
Government
Sponsored Enterprises
|
334
|
6.63
|
%
|
14,024
|
4.57
|
%
|
87,741
|
4.88
|
%
|
462,551
|
5.28
|
%
|
|||||||||||||
|
Other
Private Issues
|
-
|
-
|
-
|
-
|
-
|
-
|
7,115
|
5.78
|
%
|
||||||||||||||||
|
Total
|
$
|
20,316
|
5.13
|
%
|
$
|
26,822
|
5.19
|
%
|
$
|
128,892
|
4.95
|
%
|
$
|
566,086
|
5.41
|
%
|
|||||||||
|
MATURING
|
|||||||||||||||||||||||||
|
After
1 But
|
After
5 But
|
||||||||||||||||||||||||
|
Within
1 Yr.
|
Within
5 Yrs.
|
Within
10 Yrs.
|
After
10 Yrs.
|
||||||||||||||||||||||
|
Held
to Maturity:
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
|||||||||||||||||
|
(dollars
in thousands)
|
|||||||||||||||||||||||||
|
Investment
Securities:
|
|||||||||||||||||||||||||
|
Other
Stocks and Bonds
|
$
|
-
|
-
|
$
|
-
|
-
|
$
|
878
|
6.21
|
%
|
$
|
473
|
6.26
|
%
|
|||||||||||
|
Mortgage-backed
Securities:
|
|||||||||||||||||||||||||
|
U.S.
Government Agencies
|
-
|
-
|
-
|
-
|
1,458
|
4.53
|
%
|
29,330
|
4.74
|
%
|
|||||||||||||||
|
Government
Sponsored Enterprises
|
-
|
-
|
2,297
|
3.92
|
%
|
127,653
|
4.47
|
%
|
65,424
|
4.91
|
%
|
||||||||||||||
|
Total
|
$
|
-
|
-
|
$
|
2,297
|
3.92
|
%
|
$
|
129,989
|
4.48
|
%
|
$
|
95,227
|
4.86
|
%
|
||||||||||
At
December 31, 2006, there were no holders of any one issuer, other than the
U. S.
government and its agencies in an amount greater than 10% of our shareholders’
equity.
DEPOSITS
AND BORROWED FUNDS
Deposits
provide us with our primary source of funds. The increase of $171.7 million,
or
15.5%, in total deposits during 2006 provided us with funds for the growth
in
loans and for the increase in the securities portfolio. Deposits increased
during 2006 primarily due to the issuance of additional brokered CDs, branch
expansion and increased market penetration. Time deposits increased a total
of
$132.8 million, or 33.9%, during 2006 when compared to 2005 of which callable
brokered CDs represented approximately $104 million of the increase. Noninterest
bearing demand deposits increased $15.2 million, or 4.9%, during 2006. Interest
bearing demand deposits increased $22.0 million, or 6.1%, and saving deposits
increased $1.6 million, or 3.3%, during 2006. The latter three categories,
which
are considered the lowest cost deposits, comprised 59.1% of total deposits
at
December 31, 2006 compared to 64.8% at December 31, 2005. The issuance of
the
callable brokered CDs during 2006 was the cause for the decrease in the
percentage of three categories that are our lowest cost deposits.
The
following table sets forth deposits by category at December 31, 2006, 2005,
and
2004:
|
Years
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(in
thousands)
|
||||||||||
|
Noninterest
Bearing Demand Deposits
|
$
|
325,771
|
$
|
310,541
|
$
|
263,898
|
||||
|
Interest
Bearing Demand Deposits
|
382,265
|
360,250
|
307,436
|
|||||||
|
Savings
Deposits
|
50,454
|
48,835
|
49,745
|
|||||||
|
Time
Deposits
|
523,985
|
391,187
|
319,907
|
|||||||
|
Total
Deposits
|
$
|
1,282,475
|
$
|
1,110,813
|
$
|
940,986
|
||||
During
the year ended December 31, 2006, total time deposits of $100,000 or more
increased $25.3 million, or 14.3% from December 31, 2005.
The
table
below sets forth the maturity distribution of time deposits of $100,000 or
more
at December 31, 2006 and 2005:
|
December
31, 2006
|
December
31, 2005
|
||||||||||||||||||
|
Time
Certificates
of
Deposit
|
Other
Time
Deposits
|
Total
|
Time
Certificates
of
Deposit
|
Other
Time
Deposits
|
Total
|
||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||
|
Three
months or less
|
$
|
48,529
|
$
|
28,000
|
$
|
76,529
|
$
|
47,756
|
$
|
28,000
|
$
|
75,756
|
|||||||
|
Over
three to six months
|
35,770
|
21,000
|
56,770
|
23,853
|
18,000
|
41,853
|
|||||||||||||
|
Over
six to twelve months
|
38,534
|
7,000
|
45,534
|
25,235
|
7,000
|
32,235
|
|||||||||||||
|
Over
twelve months
|
22,973
|
-
|
22,973
|
26,662
|
-
|
26,662
|
|||||||||||||
|
Total
|
$
|
145,806
|
$
|
56,000
|
$
|
201,806
|
$
|
123,506
|
$
|
53,000
|
$
|
176,506
|
|||||||
During
the year ended December 31, 2006, we issued approximately $104 million of
callable brokered CDs, net of discount, where we control numerous options
to
call the CDs before the final maturity date. These brokered CDs have maturities
from 1.7 to five years and calls from three to six months. At December 31,
2006,
we had a total of $123.5 million in brokered CDs that represented 9.6% of
our
deposits. We are currently utilizing long-term brokered CDs more than long-term
FHLB funding as the brokered CDs better match overall ALCO objectives due
to the
calls we control. At December 31, 2005, we had $19.8 million in brokered
CDs
while at December 31, 2004, we had no brokered CDs. Our current policy allows
for a maximum of $150 million in brokered CDs. The potential higher interest
cost and lack of customer loyalty are risks associated with the use of brokered
CDs.
Short-term
obligations, consisting primarily of FHLB advances and federal funds purchased,
increased $12.7 million, or 4.0%, during 2006 when compared to 2005. FHLB
advances are collateralized by FHLB stock, nonspecified loans and
securities.
|
Years
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(dollars
in thousands)
|
||||||||||
|
Federal
funds purchased
|
||||||||||
|
Balance
at end of period
|
$
|
5,675
|
$
|
2,400
|
$
|
8,500
|
||||
|
Average
amount outstanding during the period (1)
|
8,727
|
6,485
|
2,042
|
|||||||
|
Maximum
amount outstanding during the period (3)
|
13,775
|
9,875
|
8,500
|
|||||||
|
Weighted
average interest rate during the period (2)
|
5.2
|
%
|
3.6
|
%
|
1.8
|
%
|
||||
|
Interest
rate at end of period
|
5.5
|
%
|
4.3
|
%
|
2.5
|
%
|
||||
|
FHLB
advances
|
||||||||||
|
Balance
at end of period
|
$
|
322,241
|
$
|
312,271
|
$
|
198,901
|
||||
|
Average
amount outstanding during the period (1)
|
367,068
|
274,689
|
178,581
|
|||||||
|
Maximum
amount outstanding during the period (3)
|
396,416
|
337,808
|
198,901
|
|||||||
|
Weighted
average interest rate during the period (2)
|
4.4
|
%
|
3.5
|
%
|
3.6
|
%
|
||||
|
Interest
rate at end of period
|
4.7
|
%
|
3.7
|
%
|
3.3
|
%
|
||||
|
Other
obligations
|
||||||||||
|
Balance
at end of period
|
$
|
1,605
|
$
|
2,174
|
$
|
2,500
|
||||
|
Average
amount outstanding during the period (1)
|
901
|
1,109
|
1,156
|
|||||||
|
Maximum
amount outstanding during the period (3)
|
2,500
|
2,500
|
2,500
|
|||||||
|
Weighted
average interest rate during the period (2)
|
4.8
|
%
|
3.0
|
%
|
1.2
|
%
|
||||
|
Interest
rate at end of period
|
5.0
|
%
|
4.0
|
%
|
1.9
|
%
|
||||
|
(1)
|
The
average amount outstanding during the period was computed by dividing
the
total daily outstanding principal balances by the number of days
in the
period.
|
|
(2)
|
The
weighted average interest rate during the period was computed by
dividing
the actual interest expense by the average balance outstanding
during the
period.
|
|
(3)
|
The
maximum amount outstanding at any month-end during the
period.
|
Long-term
FHLB advances decreased $79.0 million, or 37.9%, during 2006 to $129.4 million
when compared to $208.4 million in 2005. The decrease was the result of a
decrease in long-term FHLB advances purchased and long-term advances rolling
into the short-term category.
Long-term
debt consisting entirely of our junior subordinated debentures issued in
2003 in
connection with the issuance of trust preferred securities by Southside
Statutory Trust III was $20,619,000 for the years ended December 31, 2005
and
2006. The interest on our long-term debt adjusts quarterly at a rate equal
to
three month LIBOR plus 294 basis points.
CAPITAL
RESOURCES
Our
total
shareholders' equity at December 31, 2006 of $110.6 million increased 1.2%,
or
$1.3 million, from December 31, 2005 and represented 5.8% of total assets
at
December 31, 2006 compared to 6.1% at December 31, 2005.
Net
income for 2006 of $15.0 million was the major contributor to the increase
in
shareholders' equity at December 31, 2006 along with the issuance of $1.8
million in common stock (186,658 shares) through our incentive stock option
and
dividend reinvestment plans. Decreases to shareholders' equity consisted
of an
increase of $10.0 million in accumulated other comprehensive loss and $5.7
million in cash dividends paid. The increase in accumulated other comprehensive
loss is composed of a $1.9 million, net of tax, unrealized loss on securities,
net of reclassification adjustment (see “Note 3 -
Comprehensive Income (Loss)”) and an increase of $8.1 million, net of tax,
related to the change in the unfunded status of our defined benefit plans.
During the first quarter of 2006, we issued a 5% stock dividend, which had
no
net effect on shareholders' equity. Our dividend policy requires that any
cash
dividend payments made not exceed consolidated earnings for that year.
Shareholders should not anticipate a continuation of the cash dividend simply
because of the existence of a dividend reinvestment program. The payment
of
dividends will depend upon future earnings, our financial condition, and
other
related factors including the discretion of the board of directors.
We
are
subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on our financial
statements. Under capital adequacy guidelines and the regulatory framework
for
prompt corrective action, we must meet specific capital guidelines that involve
quantitative measures of our assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. Our capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require us
to
maintain minimum amounts and ratios (set forth in the table below) of Total
and
Tier 1 capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier 1 capital (as defined) to average assets (as defined).
Tier 1 Capital is defined as the sum of shareholders’ equity and qualifying
subordinated debt, excluding unrealized gains or losses on debt securities
available for sale, unrealized gains on equity securities available for sale
and
unrealized gains or losses on cash flow hedges, net of deferred income taxes;
plus certain mandatorily redeemable capital securities, less nonqualifying
intangible assets net of applicable deferred income taxes, and certain
nonfinancial equity investments. Total capital is defined as the sum of Tier
1
Capital, a qualifying portion of the allowance for loan losses, and qualifying
subordinated debt. Management believes, as of December 31, 2006, that we
meet
all capital adequacy requirements to which we are subject.
To
be
categorized as well capitalized, we must maintain minimum Total risk-based,
Tier
1 risk-based, and Tier 1 leverage ratios as set forth in the following
table:
|
Actual
|
For
Capital Adequacy
Purposes
|
To
Be Well Capitalized Under Prompt Corrective Action
Provisions
|
|||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||
|
As
of December 31, 2006:
|
(dollars
in thousands)
|
||||||||||||||||||
|
Total
Capital (to Risk Weighted Assets)
|
|||||||||||||||||||
|
Consolidated
|
$
|
152,198
|
17.76
|
%
|
$
|
68,540
|
8.00
|
%
|
N/A
|
N/A
|
|||||||||
|
Bank
Only
|
$
|
146,458
|
17.09
|
%
|
$
|
68,540
|
8.00
|
%
|
$
|
85,675
|
10.00
|
%
|
|||||||
|
Tier
1 Capital (to Risk Weighted Assets)
|
|||||||||||||||||||
|
Consolidated
|
$
|
145,005
|
16.93
|
%
|
$
|
34,270
|
4.00
|
%
|
N/A
|
N/A
|
|||||||||
|
Bank
Only
|
$
|
139,265
|
16.26
|
%
|
$
|
34,270
|
4.00
|
%
|
$
|
51,405
|
6.00
|
%
|
|||||||
|
Tier
1 Capital (to Average Assets) (1)
|
|||||||||||||||||||
|
Consolidated
|
$
|
145,005
|
7.68
|
%
|
$
|
75,570
|
4.00
|
%
|
N/A
|
N/A
|
|||||||||
|
Bank
Only
|
$
|
139,265
|
7.37
|
%
|
$
|
75,542
|
4.00
|
%
|
$
|
94,427
|
5.00
|
%
|
|||||||
|
As
of December 31, 2005:
|
|||||||||||||||||||
|
Total
Capital (to Risk Weighted Assets)
|
|||||||||||||||||||
|
Consolidated
|
$
|
140,158
|
18.04
|
%
|
$
|
62,158
|
8.00
|
%
|
N/A
|
N/A
|
|||||||||
|
Bank
Only
|
$
|
136,396
|
17.57
|
%
|
$
|
62,107
|
8.00
|
%
|
$
|
77,634
|
10.00
|
%
|
|||||||
|
Tier
1 Capital (to Risk Weighted Assets)
|
|||||||||||||||||||
|
Consolidated
|
$
|
133,068
|
17.13
|
%
|
$
|
31,079
|
4.00
|
%
|
N/A
|
N/A
|
|||||||||
|
Bank
Only
|
$
|
129,306
|
16.66
|
%
|
$
|
31,054
|
4.00
|
%
|
$
|
46,580
|
6.00
|
%
|
|||||||
|
Tier
1 Capital (to Average Assets) (1)
|
|||||||||||||||||||
|
Consolidated
|
$
|
133,068
|
7.62
|
%
|
$
|
69,852
|
4.00
|
%
|
N/A
|
N/A
|
|||||||||
|
Bank
Only
|
$
|
129,306
|
7.41
|
%
|
$
|
69,824
|
4.00
|
%
|
$
|
87,281
|
5.00
|
%
|
|||||||
(1) Refers
to
quarterly average assets as calculated by bank regulatory agencies.
The
table
below summarizes our key equity ratios for the years ended December 31,
2006, 2005 and 2004:
|
Years
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Return
on Average Assets
|
0.81
|
%
|
0.86
|
%
|
1.07
|
%
|
||||
|
Return
on Average Shareholders' Equity
|
13.48
|
%
|
13.88
|
%
|
15.31
|
%
|
||||
|
Dividend
Payout Ratio - Basic
|
38.52
|
%
|
38.02
|
%
|
31.58
|
%
|
||||
|
Dividend
Payout Ratio - Diluted
|
39.83
|
%
|
40.00
|
%
|
33.33
|
%
|
||||
|
Average
Shareholders' Equity to Average Total Assets
|
5.99
|
%
|
6.20
|
%
|
6.98
|
%
|
||||
ACCOUNTING
PRONOUNCEMENTS
See
“Note
1 - Summary of Significant Accounting and Reporting Policies” in the
accompanying notes to our consolidated financial statements in this
report.
EFFECTS
OF INFLATION
Our
consolidated financial statements, and their related notes, have been prepared
in accordance with GAAP that require the measurement of financial position
and
operating results in terms of historical dollars, without considering the
change
in the relative purchasing power of money over time and due to inflation.
The
impact of inflation is reflected in the increased cost of our operations.
Unlike
many industrial companies, nearly all of our assets and liabilities are
monetary. As a result, interest rates have a greater impact on our performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the price
of
goods and services. Inflation can affect the amount of money customers have
for
deposits, as well as ability to repay loans.
MANAGEMENT
OF LIQUIDITY
Liquidity
management involves our ability to convert assets to cash with a minimum
of loss
to enable us to meet our obligations to our customers at any time. This means
addressing (1) the immediate cash withdrawal requirements of depositors and
other funds providers; (2) the funding requirements of all lines and letters
of
credit; and (3) the short-term credit needs of customers. Liquidity is provided
by short-term investments that can be readily liquidated with a minimum risk
of
loss. Cash, interest earning deposits, federal funds sold and short-term
investments with maturities or repricing characteristics of one year or less
continue to be a substantial percentage of total assets. At December 31,
2006,
these investments were 16.1% of total assets, as compared with 17.6% for
December 31, 2005, and 20.7% for December 31, 2004. Liquidity is further
provided through the matching, by time period, of rate sensitive interest
earning assets with rate sensitive interest bearing liabilities. We have
three
lines of credit for the purchase of overnight federal funds at prevailing
rates.
Two $15.0 million and one $10.0 million unsecured lines of credit have been
established with Bank of America, Frost Bank and TIB -The Independent Bankers
Bank, respectively. At December 31, 2006, the amount of additional funding
we
could obtain from FHLB using our unpledged securities at FHLB was approximately
$400 million, net of FHLB stock purchases required. We have obtained a $12.0
million letter of credit from FHLB as collateral for a portion of our public
fund deposits.
Interest
rate sensitivity management seeks to avoid fluctuating net interest margins
and
to enhance consistent growth of new interest income through periods of changing
interest rates. The ALCO closely monitors various liquidity ratios, interest
rate spreads and margins, interest rate simulation tests utilizing various
interest rate scenarios including immediate shocks and market value of portfolio
equity (“MVPE”) with interest rates immediately shocked plus and minus 200 basis
points to assist in determining our overall interest rate risk and adequacy
of
the liquidity position. In addition, the ALCO utilizes a simulation model
to
determine the impact of net interest income of several different interest
rate
scenarios. By utilizing this technology, we can determine changes that need
to
be made to the asset and liability mixes to minimize the change in net interest
income under these various interest rate scenarios.
OFF-BALANCE-SHEET
ARRANGEMENTS
Financial
Instruments with Off-Balance-Sheet Risk.
In the
normal course of business, we are a party to certain financial instruments,
with
off-balance-sheet risk, to meet the financing needs of our customers. These
off-balance-sheet instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements
of
credit and interest rate risk in excess of the amount reflected in the financial
statements. The contract or notional amounts of these instruments reflect
the
extent of involvement and exposure to credit loss we have in these particular
classes of financial instruments.
Commitments
to extend credit are agreements to lend to a customer provided that the terms
established in the contract are met. Commitments generally have fixed expiration
dates and may require payment of fees. Since some commitments are expected
to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Standby letters of credit are conditional
commitments issued to guarantee the performance of a customer to a third
party.
These guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan commitments to
customers.
We
had
outstanding unused commitments to extend credit of $105.2 million and $84.2
million at December 31, 2006 and 2005, respectively. Each commitment has
a
maturity date and the commitment expires on that date with the exception
of
credit card and ready reserve commitments, which have no stated maturity
date.
Unused commitments for credit card and ready reserve at December 31, 2006
and
2005 were $8.2 million and $7.3 million, respectively, and are reflected
in the
due after one year category. We had outstanding standby letters of credit
of
$3.5 million and $3.6 million at December 31, 2006 and 2005, respectively.
The
scheduled maturities of unused commitments as of December 31, 2006 and 2005
were
as follows (in thousands):
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Unused
commitments:
|
|||||||
|
Due
in one year or less
|
$
|
61,821
|
$
|
54,649
|
|||
|
Due
after one year
|
43,333
|
29,507
|
|||||
|
Total
|
$
|
105,154
|
$
|
84,156
|
|||
We
apply
the same credit policies in making commitments and standby letters of credit
as
we do for on-balance-sheet instruments. We evaluate each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed
necessary, upon extension of credit is based on management's credit evaluation
of the borrower. Collateral held varies but may include cash or cash
equivalents, negotiable instruments, real estate, accounts receivable,
inventory, property, plant, and equipment.
COMMITMENTS
AND CONTRACTUAL OBLIGATIONS
The
following summarizes our contractual cash obligations and commercial commitments
at December 31, 2006, and the effect such obligations are expected to have
on
liquidity and cash flow in future periods. Payments for borrowings do not
include interest.
|
Payments
Due By Period
|
||||||||||||||||
|
Less
than 1 Year
|
1-3
Years
|
3-5
Years
|
More
than 5 Years
|
Total
|
||||||||||||
|
Contractual
obligations:
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Long-term
debt, including current maturities (1)
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
20,619
|
$
|
20,619
|
||||||
|
FHLB
advances (2)
|
287,315
|
134,038
|
27,727
|
2,540
|
451,620
|
|||||||||||
|
Operating
leases (3)
|
781
|
1,071
|
554
|
9
|
2,415
|
|||||||||||
|
Deferred
compensation agreements (4)
|
641
|
348
|
348
|
2,506
|
3,843
|
|||||||||||
|
Time
deposits (5)
|
342,833
|
90,935
|
84,897
|
5,320
|
523,985
|
|||||||||||
|
Securities
purchased not paid for
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Capital
lease obligations
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Purchase
obligations
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Total
contractual obligations
|
$
|
631,570
|
$
|
226,392
|
$
|
113,526
|
$
|
30,994
|
$
|
1,002,482
|
||||||
(1)
We
had
long-term floating rate debt that was indexed to 3 month LIBOR and adjusts
on a
quarterly basis. The total balance of debt was $20.6 million at December
31,
2006 with a scheduled maturity date of 2033. The rate of interest for the
first
quarter of 2007 associated with this debt is 8.30%.
(2)
We
had FHLB advances with maturity dates ranging from 2007 through 2015, with
a
total balance of $451,620 at December 31, 2006. Callable FHLB advances are
presented based on contractual maturity.
(3)
We
had various operating leases for our office machines that total $269,000
and
expire on or before the end of 2011. In addition, we have operating leases
totaling $2.1 million on our retail branch locations and mortgage lending
center
which have future commitments of up to five years and additional options,
we
control, beyond the commitment period.
(4)
We
have deferred compensation agreements (the “agreements”) with seven officers
totaling $3.8 million. Payments from the agreements are to commence at the
time
of retirement. As of December 31, 2006, $50,000 in payments had been made
from
such agreements. Of the seven officers included in the agreements, two were
eligible for retirement at December 31, 2006 and one retired officer is
currently receiving benefits. The remaining four officers are eligible at
various dates after five years. The totals reflected under five years assume
the
two eligible officers retired at December 31, 2006. Additional information
regarding executive compensation is incorporated into “Item 11. Executive
Compensation” of this Annual Report on Form 10-K.
(5)
We
had callable brokered CDs with maturity dates ranging from 2009-2012, with
a
total balance of $123.5 million at December 31, 2006. Callable brokered CDs
are
presented based on contractual maturity.
We
expect
to contribute $3.0 million to our defined benefit plan during 2007. We also
expect to contribute to our defined benefit plan in future years, however,
those
amounts are indeterminable at this time. See the table in “Item 7A. Quantitative
and Qualitative Disclosures about Market Risk,” that shows the expected
maturities for interest earning assets and interest bearing liabilities as
of
December 31, 2006.
|
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
In
the
banking industry, a major risk exposure is changing interest rates. The primary
objective of monitoring our interest rate sensitivity, or risk, is to provide
management the tools necessary to manage the balance sheet to minimize adverse
changes in net interest income as a result of changes in the direction and
level
of interest rates. Federal Reserve Board monetary control efforts, the effects
of deregulation and legislative changes have been significant factors affecting
the task of managing interest rate sensitivity positions in recent
years.
The
interest rate risk inherent in assets and liabilities may be determined by
analyzing the extent to which such assets and liabilities are "interest rate
sensitive" and by measuring an institution's interest rate sensitivity "gap."
An
asset or liability is said to be interest rate sensitive within a defined
time
period if it matures or reprices within that period. The difference or mismatch
between the amount of interest earning assets maturing or repricing within
a
defined period and the amount of interest bearing liabilities maturing or
repricing within the same period is defined as the interest rate sensitivity
gap. An institution is considered to have a negative gap if the amount of
interest bearing liabilities maturing or repricing within a specified time
period exceeds the amount of interest earning assets maturing or repricing
within the same period. If more interest earning assets than interest bearing
liabilities mature or reprice within a specified period, then the institution
is
considered to have a positive gap. Accordingly, in a rising interest rate
environment in an institution with a negative gap, the cost of its rate
sensitive liabilities would theoretically rise at a faster pace than the
yield
on its rate sensitive assets, thereby diminishing future net interest income.
In
a falling interest rate environment, a negative gap would indicate that the
cost
of rate sensitive liabilities would decline at a faster pace than the yield
on
rate sensitive assets and improve net interest income. For an institution
with a
positive gap, the reverse would be expected. A table is presented in this
item
that reflects interest sensitivity gaps for four different intervals as of
December 31, 2006.
In
an
attempt to manage our exposure to changes in interest rates, management closely
monitors our exposure to interest rate risk through our ALCO. Our ALCO meets
regularly and reviews our interest rate risk position and makes recommendations
to our board for adjusting this position. In addition, our board reviews
our
asset/liability position on a monthly basis. We primarily use two methods
for
measuring and analyzing interest rate risk: Net income simulation analysis
and
market value of portfolio equity modeling. Through these simulations we attempt
to estimate the impact on net interest income of a 200 basis point parallel
shift in the yield curve. Our policy guidelines seek to limit the estimated
change in net interest income to 10 percent of forecasted net interest income
over the succeeding 12 months and 200 basis point parallel rate shock. Our
policy guidelines limit the change in market value of equity in a 200 basis
point parallel rate shock to 20 percent of the base case. The results of
the
valuation analysis as of December 31, 2006, were within policy guidelines
for
all scenarios except for the immediate down 200 basis point shock scenario,
which reflected net interest income would increase approximately 11%. Due
to the
level of our interest bearing demand and savings deposit rates at December
31,
2006, some of these rates cannot move down 200 basis points. As part of the
overall assumptions, certain assets and liabilities have been given reasonable
floors. This type of simulation analysis requires numerous assumptions including
but not limited to changes in balance sheet mix, prepayment rates on
mortgage-related assets and fixed rate loans, cash flows and repricings of
all
financial instruments, changes in volumes and pricing, future shapes of the
yield curve, relationship of market interest rates to each other (basis risk),
credit spread and deposit sensitivity. Assumptions are based on management’s
best estimates but may not accurately reflect actual results under certain
changes in interest rates.
The
following table provides information about our financial instruments that
are
sensitive to changes in interest rates. Except for the effects of prepayments
and scheduled principal amortization on fixed rate loans and mortgage-backed
securities, the table presents principal cash flows and related weighted
average
interest rates by the contractual term to maturity. Adjustable rate student
loans totaling $6.4 million are classified in the one year category. Callable
FHLB Advances are presented based on contractual maturity. Callable brokered
CDs
are presented based on contractual maturity. Loans held for sale totaling
$3.9
million are classified in the one year category. Nonaccrual loans totaling
$1.3
million are not included in total loans. All instruments are classified as
other
than trading.
|
EXPECTED
MATURITY DATE
|
|||||||||||||||||||||||||
|
(dollars
in thousands)
|
|||||||||||||||||||||||||
|
Years
Ending December 31,
|
|||||||||||||||||||||||||
|
Fair
|
|||||||||||||||||||||||||
|
2007
|
2008
|
2009
|
2010
|
2011
|
Thereafter
|
Total
|
Value
|
||||||||||||||||||
|
Loans:
|
|||||||||||||||||||||||||
|
Fixed
Rate
|
$
|
198,762
|
$
|
96,069
|
$
|
48,344
|
$
|
29,926
|
$
|
19,581
|
$
|
105,073
|
$
|
497,755
|
$
|
494,274
|
|||||||||
|
6.70
|
%
|
6.63
|
%
|
6.59
|
%
|
6.47
|
%
|
6.44
|
%
|
5.58
|
%
|
6.42
|
%
|
||||||||||||
|
Adjustable
Rate
|
70,878
|
11,386
|
8,428
|
2,932
|
6,347
|
163,997
|
263,968
|
263,968
|
|||||||||||||||||
|
8.36
|
%
|
7.66
|
%
|
8.69
|
%
|
8.03
|
%
|
8.35
|
%
|
6.69
|
%
|
7.30
|
%
|
||||||||||||
|
Mortgage-backed
Securities:
|
|||||||||||||||||||||||||
|
Fixed
Rate
|
203,747
|
189,714
|
160,585
|
119,324
|
87,941
|
108,015
|
869,326
|
865,912
|
|||||||||||||||||
|
5.27
|
%
|
5.14
|
%
|
5.09
|
%
|
5.02
|
%
|
4.97
|
%
|
4.68
|
%
|
5.07
|
%
|
||||||||||||
|
Investments
and Other Interest Earning Assets:
|
|||||||||||||||||||||||||
|
Fixed
Rate
|
48,063
|
4,262
|
1,986
|
3,805
|
2,745
|
62,513
|
123,374
|
123,365
|
|||||||||||||||||
|
5.18
|
%
|
4.86
|
%
|
5.79
|
%
|
7.00
|
%
|
5.85
|
%
|
5.97
|
%
|
5.65
|
%
|
||||||||||||
|
Adjustable
Rate
|
-
|
-
|
-
|
-
|
-
|
5,900
|
5,900
|
5,900
|
|||||||||||||||||
|
|
-
|
-
|
-
|
-
|
-
|
7.13
|
%
|
7.13
|
%
|
||||||||||||||||
|
Total
Interest Earning Assets
|
$
|
521,450
|
$
|
301,431
|
$
|
219,343
|
$
|
155,987
|
$
|
116,614
|
$
|
445,498
|
$
|
1,760,323
|
$
|
1,753,419
|
|||||||||
|
6.23
|
%
|
5.71
|
%
|
5.57
|
%
|
5.40
|
%
|
5.42
|
%
|
5.85
|
%
|
5.83
|
%
|
||||||||||||
|
Savings
Deposits
|
$
|
5,045
|
$
|
2,523
|
$
|
2,523
|
$
|
2,523
|
$
|
2,523
|
$
|
35,317
|
$
|
50,454
|
$
|
50,454
|
|||||||||
|
1.30
|
%
|
1.30
|
%
|
1.30
|
%
|
1.30
|
%
|
1.30
|
%
|
1.30
|
%
|
1.30
|
%
|
||||||||||||
|
NOW
Deposits
|
95,478
|
5,550
|
5,550
|
5,550
|
5,550
|
77,702
|
195,380
|
195,380
|
|||||||||||||||||
|
4.61
|
%
|
0.82
|
%
|
0.82
|
%
|
0.82
|
%
|
0.82
|
%
|
0.82
|
%
|
2.67
|
%
|
||||||||||||
|
Money
Market Deposits
|
24,153
|
8,051
|
8,051
|
8,051
|
8,051
|
24,153
|
80,510
|
80,510
|
|||||||||||||||||
|
3.25
|
%
|
3.25
|
%
|
3.25
|
%
|
3.25
|
%
|
3.25
|
%
|
3.25
|
%
|
3.25
|
%
|
||||||||||||
|
Platinum
Money Market
|
59,570
|
9,042
|
9,042
|
9,042
|
9,042
|
10,637
|
106,375
|
106,375
|
|||||||||||||||||
|
3.70
|
%
|
3.70
|
%
|
3.70
|
%
|
3.70
|
%
|
3.70
|
%
|
3.70
|
%
|
3.70
|
%
|
||||||||||||
|
Certificates
of Deposit
|
342,833
|
35,800
|
55,135
|
11,462
|
73,435
|
5,320
|
523,985
|
522,815
|
|||||||||||||||||
|
4.68
|
%
|
4.44
|
%
|
5.01
|
%
|
4.71
|
%
|
5.39
|
%
|
6.01
|
%
|
4.81
|
%
|
||||||||||||
|
FHLB
Advances
|
287,315
|
80,060
|
53,978
|
14,514
|
13,213
|
2,540
|
451,620
|
448,383
|
|||||||||||||||||
|
4.57
|
%
|
4.47
|
%
|
4.82
|
%
|
4.48
|
%
|
5.70
|
%
|
5.17
|
%
|
4.62
|
%
|
||||||||||||
|
Other
Borrowings
|
7,280
|
-
|
-
|
-
|
-
|
20,619
|
27,899
|
27,899
|
|||||||||||||||||
|
5.36
|
%
|
-
|
-
|
-
|
-
|
8.30
|
%
|
7.53
|
%
|
||||||||||||||||
|
Total
Interest Bearing Liabilities
|
$
|
821,674
|
$
|
141,026
|
$
|
134,279
|
$
|
51,142
|
$
|
111,814
|
$
|
176,288
|
$
|
1,436,223
|
$
|
1,431,816
|
|||||||||
|
4.51
|
%
|
4.14
|
%
|
4.50
|
%
|
3.65
|
%
|
4.82
|
%
|
2.52
|
%
|
4.22
|
%
|
||||||||||||
Residential
fixed rate loans are assumed to have annual prepayment rates between 7% and
35%
of the portfolio. Residential adjustable rate loans are assumed to have annual
prepayment rates between 12% and 50%. Commercial and multi-family real estate
loans are assumed to prepay at an annualized rate between 8% and 40%. Consumer
loans are assumed to prepay at an annualized rate between 8% and 30%. Commercial
loans are assumed to prepay at an annual rate between 8% and 45%. Municipal
loans are assumed to prepay at an annual rate between 6% and 18%. Fixed and
adjustable rate mortgage-backed securities, including CMOs and REMICs, have
annual payment assumptions ranging from 6% to 50%. At
December 31, 2006, the contractual maturity of substantially all of our
mortgage-backed or related securities was in excess of ten years. The actual
maturity of a mortgage-backed or related security is less than its stated
maturity due to regular principal payments and prepayments of the underlying
mortgages. Prepayments that are faster than anticipated may shorten the life
of
the security and affect its yield to maturity. The yield to maturity is based
upon the interest income and the amortization of any premium or accretion
of any
discount related to the security. In accordance with GAAP, premiums and
discounts are amortized or accreted over the estimated lives of the loans,
which
decrease and increase interest income, respectively. The prepayment assumptions
used to determine the amortization period for premiums and discounts can
significantly affect the yield of the mortgage-backed or related security,
and
these assumptions are reviewed periodically to reflect actual prepayments.
Although prepayments of underlying mortgages depend on many factors, including
the type of mortgages, the coupon rate, the age of mortgages, the geographical
location of the underlying real estate collateralizing the mortgages and
general
levels of market interest rates, the difference between the interest rates
on
the underlying mortgages and the prevailing mortgage interest rates generally
is
the most significant determinant of the rate of prepayments. During periods
of
falling mortgage interest rates, if the coupon rate of the underlying mortgages
exceeds the prevailing market interest rates offered for mortgage loans,
refinancing may increase and accelerate the prepayment of the underlying
mortgages and the related security. At December 31, 2006, of the $869.3 million
of mortgage-backed and related securities we held, all were secured by
fixed-rate mortgage loans.
We
assume
70% of savings accounts and non public fund transaction accounts at December
31,
2006, are core deposits and are, therefore, expected to mature after five
years.
All public fund transaction accounts are assumed to mature within one year.
We
assume 30% of money market accounts at December 31, 2006, are core deposits
and
are, therefore, expected to mature after five years. We assume 10% of our
platinum money market accounts are core deposits and are, therefore, expected
to
mature after five years. Fixed maturity deposits reprice at
maturity.
In
evaluating our exposure to interest rate risk, certain limitations inherent
in
the method of analysis presented in the foregoing table must be considered.
For
example, although certain assets and liabilities may have similar maturities
or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates,
while
interest rates on other types may lag behind changes in market rates. Certain
assets, such as adjustable rate mortgages, have features which restrict changes
in interest rates. Prepayment and early withdrawal levels associated with
mortgage-backed securities may deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service
their
debt may decrease in the event of an interest rate increase. We consider
all of
these factors in monitoring our exposure to interest rate risk.
The
following table sets forth certain information as of December 31, 2006 with
respect to rate sensitive assets and liabilities and interest sensitivity
gap
(dollars in thousands):
|
Rate
Sensitive Assets (RSA)
|
1-3
Mos.
|
4-12
Mos.
|
1-5
Yrs.
|
Over
5 Yrs.
|
Total
|
|||||||||||
|
Loans(1)
|
$
|
233,122
|
$
|
167,645
|
$
|
249,732
|
$
|
111,224
|
$
|
761,723
|
||||||
|
Securities
|
104,082
|
151,153
|
570,362
|
170,528
|
996,125
|
|||||||||||
|
Other
Interest Earning Assets
|
2,475
|
-
|
-
|
-
|
2,475
|
|||||||||||
|
Total
Rate Sensitive Assets
|
$
|
339,679
|
$
|
318,798
|
$
|
820,094
|
$
|
281,752
|
$
|
1,760,323
|
||||||
|
Rate
Sensitive Liabilities (RSL)
|
||||||||||||||||
|
Interest
Bearing Deposits
|
$
|
240,018
|
$
|
287,061
|
$
|
276,496
|
$
|
153,129
|
$
|
956,704
|
||||||
|
Other
Interest Bearing Liabilities
|
221,593
|
73,002
|
161,765
|
23,159
|
479,519
|
|||||||||||
|
Total
Rate Sensitive Liabilities
|
$
|
461,611
|
$
|
360,063
|
$
|
438,261
|
$
|
176,288
|
$
|
1,436,223
|
||||||
|
Gap
(2)
|
(121,932
|
)
|
(41,265
|
)
|
381,833
|
105,464
|
324,100
|
|||||||||
|
Cumulative
Gap
|
(121,932
|
)
|
(163,197
|
)
|
218,636
|
324,100
|
||||||||||
|
Cumulative
Ratio of RSA to RSL
|
0.74
|
0.80
|
1.17
|
1.23
|
1.23
|
|||||||||||
|
Gap/Total
Earning Assets
|
(6.9
|
%)
|
(2.3
|
%)
|
21.7
|
%
|
6.0
|
%
|
18.4
|
%
|
||||||
(1)
Amount is equal to total loans less nonaccrual loans at December 31,
2006.
(2)
Gap
equals Total RSA minus Total RSL.
The
ALCO
monitors the desired gap along with various liquidity ratios to ensure a
satisfactory liquidity position for us. Management continually evaluates
the
condition of the economy, the pattern of market interest rates and other
economic data to determine the types of investments that should be made and
at
what maturities. Using this analysis, management from time to time assumes
calculated interest sensitivity gap positions to maximize net interest income
based upon anticipated movements in the general level of interest rates.
Regulatory authorities also monitor our gap position along with other liquidity
ratios. In addition, we utilize a simulation model to determine the impact
of
net interest income under several different interest rate scenarios. By
utilizing this technology, we can determine changes that need to be made
to the
asset and liability mixes to minimize the change in net interest income under
these various interest rate scenarios.
|
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY
DATA
|
The
information required by this item is set forth in Part IV.
|
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
|
ITEM
9A.
|
CONTROLS
AND PROCEDURES
|
|
Evaluation
of Disclosure Controls and Procedures and Changes in Internal Control
Over
Financial Reporting
|
Our
Chief
Executive Officer and our Chief Financial Officer undertook an evaluation
of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Exchange Act of 1934) as of the end of the period covered by this
report
and concluded that our disclosure controls and procedures were effective
as of
the end of the period covered by this report. No changes were made to our
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act of 1934) during the last fiscal quarter that materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Management’s
Report on Internal Control Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control
over
financial reporting. Internal control over financial reporting is defined
in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934,
as
amended, as a process designed by, or under the supervision of, our Chief
Executive Officer and Chief Financial Officer and effected by our board of
directors, management and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures
that:
|
·
|
pertain
to the maintenance of records that in reasonable detail accurately
and
fairly reflect the transactions and dispositions of our
assets;
|
|
·
|
provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with generally
accepted
accounting principles, and that our receipts and expenditures are
being
made only in accordance with authorizations of our management and
directors; and
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that
could have
a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management
assessed the effectiveness of our internal control over financial reporting
as
of December 31, 2006. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) in Internal Control-Integrated Framework.
Based
on
the assessment, management determined that we maintained effective internal
control over financial reporting as of December 31, 2006.
Our
independent registered public accounting firm, PricewaterhouseCoopers LLP,
has
audited management’s assessment of the effectiveness of our internal control
over financial reporting as of December 31, 2006 as stated in this report
which
is included herein.
|
ITEM
9B.
|
OTHER
INFORMATION
|
None.
PART
III
|
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
The
information required by this Item is incorporated herein by reference to
our
Proxy Statement (Schedule 14A) for our 2007 Annual Meeting of shareholders
to be
filed with the SEC within 120 days of our fiscal year-end.
|
ITEM
11.
|
EXECUTIVE
COMPENSATION
|
The
information required by this Item is incorporated herein by reference to
our
Proxy Statement (Schedule 14A) for our 2007 Annual Meeting of shareholders
to be
filed with the SEC within 120 days of our fiscal year-end.
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
other
information required by this Item is incorporated herein by reference to
our
Proxy Statement (Schedule 14A) for our 2007 Annual Meeting of shareholders
to be
filed with the SEC within 120 days of our fiscal year-end.
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The
information required by this Item is incorporated herein by reference to
our
Proxy Statement (Schedule 14A) for our 2007 Annual Meeting of shareholders
to be
filed with the SEC within 120 days of our fiscal year-end.
|
ITEM
14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The
information required by this Item is incorporated herein by reference to
our
Proxy Statement (Schedule 14A) for our 2007 Annual Meeting of shareholders
to be
filed with the SEC within 120 days of our fiscal year-end.
PART
IV
|
ITEM
15.
|
EXHIBITS
AND FINANCIAL STATEMENT
SCHEDULES
|
(a)
|
1.
|
Financial
Statements
|
The
following consolidated financial statements of Southside Bancshares, Inc.
and
its subsidiaries are filed as part of this report.
Consolidated
Balance Sheets as of December 31, 2006 and 2005.
Consolidated
Statements of Income for the years ended December 31, 2006, 2005 and
2004.
Consolidated
Statements of Shareholders' Equity for the years ended December 31, 2006,
2005
and 2004.
Consolidated
Statements of Cash Flow for the years ended December 31, 2006, 2005 and
2004.
Notes
to
Consolidated Financial Statements.
|
2.
|
Financial
Statement Schedules
|
All
schedules are omitted because they are not applicable or not required, or
because the required information is included in the consolidated financial
statements or notes thereto.
|
3.
|
Exhibits
|
|
Exhibit
No.
|
|||
|
3
(a)(i)
|
-
|
Articles
of Incorporation as amended and in effect on December 31, 1992,
of SoBank,
Inc. (now named Southside Bancshares, Inc.)(filed as Exhibit
3 to the
Registrant's Form 10-K for the year ended December 31, 1992,
(commission
file number 000-12247) and incorporated herein by
reference).
|
|
|
3
(a)(ii)
|
-
|
Articles
of Amendment effective May 9, 1994 to Articles of Incorporation
of SoBank,
Inc. (now named Southside Bancshares, Inc.) (filed as Exhibit
3(a)(ii) to
the Registrant’s Form 10-K for the year ended December 31, 1994,
(commission file number 000-12247) and incorporated herein
by
reference).
|
|
|
3
(b)
|
-
|
Bylaws
as amended and restated and in effect on December 16, 2004,
of Southside
Bancshares, Inc. (filed as Exhibit 3(b) to the Registrant’s Form 8-K,
filed June 28, 2006, and incorporated herein by
reference).
|
|
4
|
-
|
Management
agrees to furnish to the Securities and Exchange Commission,
upon request,
a copy of any other agreements or instruments of Southside
Bancshares,
Inc. and its subsidiaries defining the rights of holders of
any long-term
debt whose authorization does not exceed 10% of total
assets.
|
|
|
**
|
10
(a)(i)
|
-
|
Deferred
Compensation Plan for B. G. Hartley effective February 13, 1984, as
amended June 28, 1990, December 15, 1994, November 20, 1995,
December 21,
1999 and June 29, 2001 (filed as Exhibit 10(a)(i) to the Registrant’s Form
10-Q for the quarter ended June 30, 2001, (commission file
number
000-12247) and incorporated herein by reference).
|
|
**
|
10
(a)(ii)
|
-
|
Deferred
Compensation Plan for Robbie N. Edmonson effective February 13, 1984,
as amended June 28, 1990 and March 16, 1995 (filed as Exhibit
10(a)(ii) to
the Registrant's Form 10-K for the year ended December 31,
1995,
(commission file number 000-12247) and incorporated herein
by
reference).
|
|
**
|
10
(b)
|
-
|
Officers
Long-term Disability Income Plan effective June 25, 1990 (filed
as Exhibit
10(b) to the Registrant's Form 10-K for the year ended June 30, 1990,
(commission file number 000-12247) and incorporated herein
by
reference).
|
|
**
|
10
(c)
|
-
|
Retirement
Plan Restoration Plan for the subsidiaries of SoBank, Inc.
(now named
Southside Bancshares, Inc.)(filed as Exhibit 10(c) to the Registrant's
Form 10-K for the year ended December 31, 1992, (commission file
number 000-12247) and incorporated herein by
reference).
|
|
**
|
10
(e)
|
-
|
Form
of Deferred Compensation Agreement dated June 30, 1994 with
Andy Wall as
amended November 13, 1995. (filed as Exhibit 10(e) to the Registrant's
Form 10-K for the year ended December 31, 1995, (commission
file number
000-12247) and incorporated herein by reference).
|
|
**
|
10
(f)
|
-
|
Form
of Deferred Compensation Agreements dated June 30, 1994 with
each of Sam
Dawson, Lee Gibson and Jeryl Story as amended October 15, 1997
and Form of
Deferred Compensation Agreement dated October 15, 1997 with
Lonny Uzzell
(filed as Exhibit 10(f) to the Registrant’s Form 10-K for the year ended
December 31, 1997, (commission file number 000-12247) and incorporated
herein by reference).
|
|
**
|
10
(g)
|
-
|
Postretirement
Agreement for B. G. Hartley effective June 20, 2001 (filed
as Exhibit
10(g) to the Registrant’s Form 10-Q for the quarter ended June 30, 2001,
(commission file number 000-12247) and incorporated herein
by
reference).
|
|
**
|
10
(h)
|
-
|
Split
dollar compensation plan dated August 27, 2004, with B. G.
Hartley, (filed
as exhibit 10 (j) to the Registrant’s Form 8-K, filed October 19, 2004,
and incorporated herein by reference).
|
|
**
|
10
(i)
|
-
|
Split
dollar compensation plan dated August 31, 2004, with Charles
E. Dawson
(filed as exhibit 10(k) to the Registrant’s Form 8-K, filed October 19,
2004, and incorporated herein by
reference).
|
|
**
|
10
(j)
|
-
|
Split
dollar compensation plan dated September 7, 2004, with Lee
R. Gibson, III
(filed as exhibit 10(i) to the Registrant’s Form 8-K, filed October 19,
2004, and incorporated herein by reference).
|
|
**
|
10
(k)
|
-
|
Split
dollar compensation plan dated October 13, 2004, with Jeryl
Wayne Story
(filed as exhibit 10(h) to the Registrant’s Form 8-K, filed October 19,
2004, and incorporated herein by reference).
|
|
*
|
21
|
-
|
Subsidiaries
of the Registrant.
|
|
*
|
23
|
-
|
Consent
of Independent Registered Public Accounting Firm.
|
|
*
|
31.1
|
-
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
*
|
31.2
|
-
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
*
|
32
|
-
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
_____________
* Filed
herewith.
** Compensation
plan, benefit plan or employment contract or arrangement
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
SOUTHSIDE
BANCSHARES, INC.
|
|||
|
BY:
|
/s/
|
B.
G. HARTLEY
|
|
|
B.
G. Hartley, Chairman of the Board
|
|||
|
and
Chief Executive Officer (Principal Executive Officer)
|
|||
|
BY:
|
/s/
|
LEE
R. GIBSON
|
|
|
Lee
R. Gibson, CPA, Executive Vice President
|
|||
|
and
Chief Financial Officer (Principal Financial and
|
|||
|
DATED:
March 2, 2007
|
Accounting
Officer)
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in
the
capacities and on the date indicated.
|
Signature
|
Title
|
Date
|
|||
| /s/ |
B.
G. HARTLEY
|
Chairman
of the Board
|
March
2, 2007
|
||
|
(B.
G. Hartley)
|
and
Director
|
||||
| /s/ |
ROBBIE
N. EDMONSON
|
Vice
Chairman of the Board
|
March
2, 2007
|
||
|
(Robbie
N. Edmonson)
|
and
Director
|
||||
| /s/ |
SAM
DAWSON
|
President
and Secretary
|
March
2, 2007
|
||
|
(Sam
Dawson)
|
and
Director
|
||||
| /s/ |
HERBERT
C. BUIE
|
Director
|
March
2, 2007
|
||
|
(Herbert
C. Buie)
|
|||||
| /s/ |
ALTON
CADE
|
Director
|
March
2, 2007
|
||
|
(Alton
Cade)
|
|||||
| /s/ |
MICHAEL
D. GOLLOB
|
Director
|
March
2, 2007
|
||
|
(Michael
D. Gollob)
|
|||||
| /s/ |
MELVIN
B. LOVELADY
|
Director
|
March
2, 2007
|
||
|
(Melvin
B. Lovelady)
|
|||||
| /s/ |
JOE
NORTON
|
Director
|
March
2, 2007
|
||
|
(Joe
Norton)
|
|||||
| /s/ |
PAUL
W. POWELL
|
Director
|
March
2, 2007
|
||
|
(Paul
W. Powell)
|
|||||
| /s/ |
WILLIAM
SHEEHY
|
Director
|
March
2, 2007
|
||
|
(William
Sheehy)
|
Report
of Independent Registered Public Accounting
Firm
To
the
Board of Directors and Shareholders of
Southside
Bancshares, Inc.:
We
have
completed integrated audits of Southside Bancshares, Inc.’s consolidated
financial statements and of its internal control over financial reporting
as of
December 31, 2006, in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated
financial statements
In
our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flow present
fairly, in all material respects, the financial position of Southside
Bancshares, Inc. and its subsidiaries at December 31, 2006 and 2005, and
the
results of their operations and their cash flow for each of the three years
in
the period ended December 31, 2006 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the standards
of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about
whether the financial statements are free of material misstatement. An audit
of
financial statements includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management,
and
evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
As
discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards
No. 158, Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans, as of December 31, 2006.
Internal
control over financial reporting
Also,
in
our opinion, management’s assessment, included in the accompanying Management's
Report on Internal Control Over Financial Reporting, that the Company maintained
effective internal control over financial reporting as of December 31, 2006
based on criteria established in Internal Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control - Integrated Framework
issued
by the COSO. The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on management’s assessment and on the effectiveness of
the Company’s internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. An audit of internal control
over financial reporting includes obtaining an understanding of internal
control
over financial reporting, evaluating management’s assessment, testing and
evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures
of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use,
or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/
PRICEWATERHOUSECOOPERS LLP
Dallas,
Texas
March
2,
2007
|
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
|
|||||||
|
CONSOLIDATED
BALANCE SHEETS
|
|||||||
|
(in
thousands, except share amounts)
|
December
31,
|
December
31,
|
|||||
|
2006
|
2005
|
||||||
|
ASSETS
|
|||||||
|
Cash
and due from banks
|
$
|
52,537
|
$
|
51,279
|
|||
|
Interest
earning deposits
|
550
|
550
|
|||||
|
Federal
funds sold
|
1,925
|
-
|
|||||
|
Total
cash and cash equivalents
|
55,012
|
51,829
|
|||||
|
Investment
securities:
|
|||||||
|
Available
for sale, at estimated fair value
|
98,952
|
121,240
|
|||||
|
Held
to maturity, at cost
|
1,351
|
-
|
|||||
|
Mortgage-backed
and related securities:
|
|||||||
|
Available
for sale, at estimated fair value
|
643,164
|
592,435
|
|||||
|
Held
to maturity, at cost
|
226,162
|
229,321
|
|||||
|
Federal
Home Loan Bank stock, at cost
|
25,614
|
28,729
|
|||||
|
Other
investments, at cost
|
882
|
878
|
|||||
|
Loans
held for sale
|
3,909
|
4,281
|
|||||
|
Loans:
|
|||||||
|
Loans
|
759,147
|
680,364
|
|||||
|
Less:
allowance for loan losses
|
(7,193
|
)
|
(7,090
|
)
|
|||
|
Net
Loans
|
751,954
|
673,274
|
|||||
|
Premises
and equipment, net
|
32,641
|
33,610
|
|||||
|
Interest
receivable
|
10,110
|
9,304
|
|||||
|
Deferred
tax asset
|
8,678
|
3,226
|
|||||
|
Other
assets
|
32,547
|
35,335
|
|||||
|
TOTAL
ASSETS
|
$
|
1,890,976
|
$
|
1,783,462
|
|||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||
|
Deposits:
|
|||||||
|
Noninterest
bearing
|
$
|
325,771
|
$
|
310,541
|
|||
|
Interest
bearing
|
956,704
|
800,272
|
|||||
|
Total
Deposits
|
1,282,475
|
1,110,813
|
|||||
|
Short-term
obligations:
|
|||||||
|
Federal
funds purchased
|
5,675
|
2,400
|
|||||
|
FHLB
advances
|
322,241
|
312,271
|
|||||
|
Other
obligations
|
1,605
|
2,174
|
|||||
|
Total
Short-term obligations
|
329,521
|
316,845
|
|||||
|
Long-term
obligations:
|
|||||||
|
FHLB
advances
|
129,379
|
208,413
|
|||||
|
Long-term
debt
|
20,619
|
20,619
|
|||||
|
Total
Long-term obligations
|
149,998
|
229,032
|
|||||
|
Other
liabilities
|
18,378
|
17,482
|
|||||
|
TOTAL
LIABILITIES
|
1,780,372
|
1,674,172
|
|||||
|
Off-Balance-Sheet
Arrangements, Commitments and Contingencies (Note 16)
|
|||||||
|
Shareholders'
equity:
|
|||||||
|
Common
stock: ($1.25 par, 20,000,000 shares authorized, 14,075,653 and
13,306,241
shares issued)
|
17,594
|
16,633
|
|||||
|
Paid-in
capital
|
100,736
|
87,962
|
|||||
|
Retained
earnings
|
29,648
|
32,054
|
|||||
|
Treasury
stock (1,718,737 shares at cost)
|
(22,850
|
)
|
(22,850
|
)
|
|||
|
Accumulated
other comprehensive loss
|
(14,524
|
)
|
(4,509
|
)
|
|||
|
TOTAL
SHAREHOLDERS' EQUITY
|
110,604
|
109,290
|
|||||
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
$
|
1,890,976
|
$
|
1,783,462
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
|
||||||||||
|
CONSOLIDATED
STATEMENTS OF INCOME
|
||||||||||
|
(in
thousands, except per share data)
|
Years
Ended December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Interest
income
|
||||||||||
|
Loans
|
$
|
46,413
|
$
|
38,852
|
$
|
34,885
|
||||
|
Investment
securities - taxable
|
2,498
|
1,978
|
1,072
|
|||||||
|
Investment
securities - tax exempt
|
2,139
|
3,181
|
3,646
|
|||||||
|
Mortgage-backed
and related securities
|
44,401
|
34,584
|
26,845
|
|||||||
|
Federal
Home Loan Bank stock and other investments
|
1,409
|
1,032
|
477
|
|||||||
|
Other
interest earning assets
|
92
|
54
|
75
|
|||||||
|
Total
interest income
|
96,952
|
79,681
|
67,000
|
|||||||
|
Interest
expense
|
||||||||||
|
Deposits
|
30,690
|
17,221
|
10,108
|
|||||||
|
Short-term
obligations
|
16,534
|
9,892
|
6,499
|
|||||||
|
Long-term
obligations
|
8,060
|
11,309
|
10,999
|
|||||||
|
Total
interest expense
|
55,284
|
38,422
|
27,606
|
|||||||
|
Net
interest income
|
41,668
|
41,259
|
39,394
|
|||||||
|
Provision
for loan losses
|
1,080
|
1,463
|
925
|
|||||||
|
Net
interest income after provision for loan losses
|
40,588
|
39,796
|
38,469
|
|||||||
|
Noninterest
income
|
||||||||||
|
Deposit
services
|
15,482
|
14,594
|
13,793
|
|||||||
|
Gain
on sale of securities available for sale
|
743
|
228
|
2,759
|
|||||||
|
Gain
on sale of loans
|
1,817
|
1,807
|
1,644
|
|||||||
|
Trust
income
|
1,711
|
1,422
|
1,248
|
|||||||
|
Bank
owned life insurance income
|
1,067
|
951
|
812
|
|||||||
|
Other
|
2,661
|
2,246
|
1,647
|
|||||||
|
Total
noninterest income
|
23,481
|
21,248
|
21,903
|
|||||||
|
Noninterest
expense
|
||||||||||
|
Salaries
and employee benefits
|
28,275
|
27,479
|
25,395
|
|||||||
|
Occupancy
expense
|
4,777
|
4,257
|
4,120
|
|||||||
|
Equipment
expense
|
899
|
847
|
759
|
|||||||
|
Advertising,
travel and entertainment
|
1,742
|
1,967
|
1,852
|
|||||||
|
ATM
and debit card expense
|
955
|
648
|
628
|
|||||||
|
Director
fees
|
587
|
677
|
646
|
|||||||
|
Supplies
|
637
|
628
|
608
|
|||||||
|
Professional
fees
|
1,386
|
1,339
|
1,239
|
|||||||
|
Postage
|
618
|
572
|
561
|
|||||||
|
Telephone
and communications
|
723
|
593
|
522
|
|||||||
|
Other
|
4,368
|
4,152
|
3,991
|
|||||||
|
Total
noninterest expense
|
44,967
|
43,159
|
40,321
|
|||||||
|
Income
before Federal income tax expense
|
19,102
|
17,885
|
20,051
|
|||||||
|
Provision
(benefit) for Federal income tax expense
|
||||||||||
|
Current
|
8,582
|
1,569
|
5,118
|
|||||||
|
Deferred
|
(4,482
|
)
|
1,724
|
(1,166
|
)
|
|||||
|
Total
income taxes
|
4,100
|
3,293
|
3,952
|
|||||||
|
Net
Income
|
$
|
15,002
|
$
|
14,592
|
$
|
16,099
|
||||
|
Earnings
per common share - basic
|
$
|
1.22
|
$
|
1.21
|
$
|
1.33
|
||||
|
Earnings
per common share - diluted
|
$
|
1.18
|
$
|
1.15
|
$
|
1.26
|
||||
|
Dividends
declared per common share
|
$
|
0.47
|
$
|
0.46
|
$
|
0.42
|
||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||
|
(in
thousands, except share amounts)
|
||||||||||||||||||||||
|
Comprehensive
Income
|
Common
Stock
|
Paid
in
Capital
|
Retained
Earnings
|
Treasury
Stock
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
Total
Shareholder's
Equity
|
||||||||||||||||
|
Balance
at December 31, 2003
|
$
|
14,724
|
$
|
63,144
|
$
|
32,979
|
$
|
(16,544
|
)
|
$
|
6,083
|
$
|
100,386
|
|||||||||
|
Net
Income
|
$
|
16,099
|
16,099
|
16,099
|
||||||||||||||||||
|
Other
comprehensive loss, net of tax
|
||||||||||||||||||||||
|
Unrealized
losses on securities, net of reclassification adjustment
|
(5,323
|
)
|
(5,323
|
)
|
(5,323
|
)
|
||||||||||||||||
|
Minimum
pension liability adjustment
|
(2,804
|
)
|
(2,804
|
)
|
(2,804
|
)
|
||||||||||||||||
|
Comprehensive
income
|
$
|
7,972
|
||||||||||||||||||||
|
Common
stock issued (184,369 shares)
|
230
|
1,372
|
1,602
|
|||||||||||||||||||
|
Tax
benefit of incentive stock options
|
489
|
489
|
||||||||||||||||||||
|
Dividends
paid on common stock
|
(4,443
|
)
|
(4,443
|
)
|
||||||||||||||||||
|
Purchase
of 64,600 shares of common stock
|
(1,309
|
)
|
(1,309
|
)
|
||||||||||||||||||
|
Stock
dividend
|
654
|
10,263
|
(10,917
|
)
|
-
|
|||||||||||||||||
|
Balance
at December 31, 2004
|
15,608
|
75,268
|
33,718
|
(17,853
|
)
|
(2,044
|
)
|
104,697
|
||||||||||||||
|
Net
Income
|
$
|
14,592
|
14,592
|
14,592
|
||||||||||||||||||
|
Other
comprehensive loss, net of tax
|
||||||||||||||||||||||
|
Unrealized
losses on securities, net of reclassification adjustment
|
(5,034
|
)
|
(5,034
|
)
|
(5,034
|
)
|
||||||||||||||||
|
Minimum
pension liability adjustment
|
2,569
|
2,569
|
2,569
|
|||||||||||||||||||
|
Comprehensive
income
|
$
|
12,127
|
||||||||||||||||||||
|
Common
stock issued (275,667 shares)
|
345
|
1,703
|
2,048
|
|||||||||||||||||||
|
Tax
benefit of incentive stock options
|
629
|
629
|
||||||||||||||||||||
|
Dividends
paid on common stock
|
(5,214
|
)
|
(5,214
|
)
|
||||||||||||||||||
|
Purchase
of 233,550 shares of common stock
|
(4,997
|
)
|
(4,997
|
)
|
||||||||||||||||||
|
Stock
dividend
|
680
|
10,362
|
(11,042
|
)
|
-
|
|||||||||||||||||
|
Balance
at December 31, 2005
|
16,633
|
87,962
|
32,054
|
(22,850
|
)
|
(4,509
|
)
|
109,290
|
||||||||||||||
|
Net
Income
|
$
|
15,002
|
15,002
|
15,002
|
||||||||||||||||||
|
Other
comprehensive loss, net of tax
|
||||||||||||||||||||||
|
Unrealized
losses on securities, net of reclassification adjustment
|
(1,883
|
)
|
(1,883
|
)
|
(1,883
|
)
|
||||||||||||||||
|
Minimum
pension liability adjustment
|
298
|
298
|
298
|
|||||||||||||||||||
|
Comprehensive
income
|
$
|
13,417
|
||||||||||||||||||||
|
Adjustment
to initially apply SFAS 158, net of tax
|
(8,430
|
)
|
(8,430
|
)
|
||||||||||||||||||
|
Common
stock issued (186,658 shares)
|
233
|
1,517
|
1,750
|
|||||||||||||||||||
|
Stock
compensation expense
|
27
|
27
|
||||||||||||||||||||
|
Tax
benefit of incentive stock options
|
252
|
252
|
||||||||||||||||||||
|
Dividends
paid on common stock
|
(5,702
|
)
|
(5,702
|
)
|
||||||||||||||||||
|
Stock
dividend
|
728
|
10,978
|
(11,706
|
)
|
-
|
|||||||||||||||||
|
Balance
at December 31, 2006
|
$
|
17,594
|
$
|
100,736
|
$
|
29,648
|
$
|
(22,850
|
)
|
$
|
(14,524
|
)
|
$
|
110,604
|
||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
|
||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOW
|
||||||||||
|
(in
thousands)
|
||||||||||
|
|
Years
Ended December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
||||||||
|
OPERATING
ACTIVITIES:
|
||||||||||
|
Net
income
|
$
|
15,002
|
$
|
14,592
|
$
|
16,099
|
||||
|
Adjustments
to reconcile net income to net cash provided by
operations:
|
||||||||||
|
Depreciation
|
2,275
|
2,171
|
2,288
|
|||||||
|
Amortization
of premium
|
5,741
|
8,741
|
10,578
|
|||||||
|
Accretion
of discount and loan fees
|
(2,089
|
)
|
(1,120
|
)
|
(730
|
)
|
||||
|
Provision
for loan losses
|
1,080
|
1,463
|
925
|
|||||||
|
Stock
compensation expense
|
27
|
-
|
-
|
|||||||
|
Increase
in interest receivable
|
(806
|
)
|
(754
|
)
|
(117
|
)
|
||||
|
Increase
in other assets
|
(3,436
|
)
|
(8,593
|
)
|
(3,711
|
)
|
||||
|
Net
change in deferred taxes
|
(292
|
)
|
400
|
279
|
||||||
|
Increase
in interest payable
|
931
|
1,056
|
332
|
|||||||
|
(Decrease)
increase in other liabilities
|
(6,429
|
)
|
7,230
|
(978
|
)
|
|||||
|
Decrease
(increase) in loans held for sale
|
372
|
(517
|
)
|
(445
|
)
|
|||||
|
Gain
on sale of securities available for sale
|
(743
|
)
|
(228
|
)
|
(2,759
|
)
|
||||
|
Gain
on sale of assets
|
(1
|
)
|
(66
|
)
|
(49
|
)
|
||||
|
Loss
(gain) on sale of other real estate owned
|
6
|
(12
|
)
|
30
|
||||||
|
Net
cash provided by operating activities
|
11,638
|
24,363
|
21,742
|
|||||||
|
INVESTING
ACTIVITIES:
|
||||||||||
|
Proceeds
from sales of investment securities available for sale
|
52,640
|
93,351
|
82,722
|
|||||||
|
Proceeds
from sales of mortgage-backed securities available for
sale
|
75,354
|
106,400
|
111,533
|
|||||||
|
Proceeds
from maturities of investment securities available for
sale
|
24,460
|
70,923
|
61,458
|
|||||||
|
Proceeds
from maturities of mortgage-backed securities available for
sale
|
107,029
|
125,720
|
138,446
|
|||||||
|
Proceeds
from maturities of mortgage-backed securities held to
maturity
|
35,806
|
27,266
|
14,335
|
|||||||
|
Proceeds
from redemption of FHLB stock
|
4,457
|
-
|
-
|
|||||||
|
Purchases
of investment securities available for sale
|
(55,155
|
)
|
(151,280
|
)
|
(131,198
|
)
|
||||
|
Purchases
of investment securities held to maturity
|
(1,348
|
)
|
-
|
-
|
||||||
|
Purchases
of mortgage-backed securities available for sale
|
(237,001
|
)
|
(359,007
|
)
|
(401,588
|
)
|
||||
|
Purchases
of mortgage-backed securities held to maturity
|
(33,749
|
)
|
(17,071
|
)
|
(8,864
|
)
|
||||
|
Purchases
of FHLB stock and other investments
|
(1,346
|
)
|
(2,788
|
)
|
(3,149
|
)
|
||||
|
Net
increase in loans
|
(81,248
|
)
|
(58,944
|
)
|
(36,248
|
)
|
||||
|
Purchases
of premises and equipment
|
(1,306
|
)
|
(5,456
|
)
|
(1,994
|
)
|
||||
|
Proceeds
from sales of premises and equipment
|
1
|
66
|
59
|
|||||||
|
Proceeds
from sales of repossessed assets
|
426
|
924
|
301
|
|||||||
|
Proceeds
from sales of other real estate owned
|
514
|
225
|
397
|
|||||||
|
Net
cash used in investing activities
|
(110,466
|
)
|
(169,671
|
)
|
(173,790
|
)
|
||||
(continued)
|
SOUTHSIDE
BANCSHARES, INC. AND SUBSIDIARIES
|
||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOW (continued)
|
||||||||||
|
(in
thousands)
|
||||||||||
|
|
Years
Ended December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
||||||||
|
FINANCING
ACTIVITIES:
|
||||||||||
|
Net
increase in demand and savings accounts
|
38,864
|
98,547
|
70,697
|
|||||||
|
Net
increase (decrease) in certificates of deposit
|
132,636
|
71,277
|
(2,240
|
)
|
||||||
|
Net
increase (decrease) in federal funds purchased
|
3,275
|
(6,100
|
)
|
4,975
|
||||||
|
Proceeds
from FHLB advances
|
7,456,291
|
3,995,852
|
1,498,631
|
|||||||
|
Repayment
of FHLB advances
|
(7,525,355
|
)
|
(4,004,737
|
)
|
(1,413,745
|
)
|
||||
|
Tax
benefit of incentive stock options
|
252
|
629
|
489
|
|||||||
|
Proceeds
from the issuance of common stock
|
1,750
|
2,048
|
1,602
|
|||||||
|
Purchase
of common stock
|
-
|
(4,997
|
)
|
(1,309
|
)
|
|||||
|
Dividends
paid
|
(5,702
|
)
|
(5,214
|
)
|
(4,443
|
)
|
||||
|
Net
cash provided by financing activities
|
102,011
|
147,305
|
154,657
|
|||||||
|
Net
increase in cash and cash equivalents
|
3,183
|
1,997
|
2,609
|
|||||||
|
Cash
and cash equivalents at beginning of year
|
51,829
|
49,832
|
47,223
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
55,012
|
$
|
51,829
|
$
|
49,832
|
||||
|
SUPPLEMENTAL
DISCLOSURES FOR CASH FLOW INFORMATION:
|
||||||||||
|
Interest
paid
|
$
|
54,353
|
$
|
37,365
|
$
|
27,275
|
||||
|
Income
taxes paid
|
$
|
3,450
|
$
|
2,700
|
$
|
3,400
|
||||
|
SUPPLEMENTAL
DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
|
||||||||||
|
Acquisition
of other repossessed assets and real estate through
foreclosure
|
$
|
1,220
|
$
|
1,037
|
$
|
739
|
||||
|
Transfer
of available for sale securities to held to maturity
securities
|
$
|
-
|
$
|
-
|
$
|
241,417
|
||||
|
Adjustment
to initially apply SFAS 158
|
$
|
6,276
|
$
|
-
|
$
|
-
|
||||
|
Minimum
pension plan liability adjustment
|
$
|
(451
|
)
|
$
|
(3,892
|
)
|
$
|
4,249
|
||
|
Payment
of 5% stock dividend
|
$
|
11,706
|
$
|
11,042
|
$
|
10,917
|
||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
NOTES
TO FINANCIAL STATEMENTS
|
Southside
Bancshares, Inc. and Subsidiaries
|
|
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES
|
The
significant accounting and reporting policies of Southside Bancshares, Inc.
(the
"Company"), and its wholly owned subsidiaries, Southside Delaware Financial
Corporation, Southside Bank (the "Bank" or “Southside Bank”) and the nonbank
subsidiary, are summarized below.
Organization
and Basis of Presentation.
The
consolidated financial statements include the accounts of Southside Bancshares,
Inc., Southside Delaware Financial Corporation, Southside Bank and the nonbank
subsidiary. We offer a full range of financial services to commercial,
industrial, financial and individual customers. All significant intercompany
accounts and transactions are eliminated in consolidation. The preparation
of
these consolidated financial statements in conformity with United States
generally accepted accounting principles (“GAAP”) requires the use of
management’s estimates. These estimates are subjective in nature and involve
matters of judgment. Actual amounts could differ from these
estimates.
Cash
Equivalents.
Cash
equivalents, for purposes of reporting cash flow, include cash, amounts due
from
banks and federal funds sold.
Basic
and Diluted Earnings per Common Share.
Basic
earnings per common share is based on net income divided by the weighted-average
number of common shares outstanding during the period. Diluted earnings per
common share include the dilutive effect of stock options granted using the
treasury stock method. A reconciliation of the weighted-average shares used
in
calculating basic earnings per common share and the weighted average common
shares used in calculating diluted earnings per common share for the reported
periods is provided in “Note 2 - Earnings Per Share.”
Comprehensive
Income.
Comprehensive income includes all changes in shareholders’ equity during a
period, except those resulting from transactions with shareholders. Besides
net
income, other components of comprehensive income include the after tax effect
of
changes in the fair value of securities available for sale and changes in
the
funded status of defined benefit retirement plans. Comprehensive income is
reported in the accompanying consolidated statements of changes in shareholders’
equity and in “Note 3 - Comprehensive Income (Loss).”
Loans.
All
loans are stated at principal outstanding net of unearned discount. Interest
income on loans is recognized using the level yield method. Loans receivable
that management has the intent and ability to hold for the foreseeable future
or
until maturity or pay-off are reported at their outstanding principal adjusted
for any charge-offs, the allowance for loan losses, and any unamortized deferred
fees or costs on originated loans and unamortized premiums or discounts on
purchased loans. A loan is considered impaired, based on current information
and
events, if it is probable that we will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
of
the loan agreement. Substantially all of our impaired loans are
collateral-dependent, and as such, are measured for impairment based on the
fair
value of the collateral.
Loans
Held For Sale.
Loans
originated and intended for sale in the secondary market are carried at the
lower of aggregate cost or fair value, as determined by aggregate outstanding
commitments from investors or current investor yield requirements. Net
unrealized losses are recognized through a valuation allowance by charges
to
income.
Gains
or
losses on sales of mortgage loans are recognized based on the difference
between
the selling price and the carrying value of the related mortgage loans
sold.
Loan
Fees.
We
treat loan fees, net of direct costs, as an adjustment to the yield of the
related loan over its term.
Allowance
for Loan Losses.
An
allowance for loan losses is provided through charges to income in the form
of a
provision for loan losses. Loans which management believes are uncollectible
are
charged against this account with subsequent recoveries, if any, credited
to the
account. The amount of the allowance for loan losses is determined by
management's evaluation of the quality and inherent risks in the loan portfolio,
economic conditions and other factors which warrant current
recognition.
Nonaccrual
Loans.
A loan
is placed on nonaccrual when principal or interest is contractually past
due 90
days or more unless, in the determination of management, the principal and
interest on the loan are well collateralized and in the process of collection.
In addition, a loan is placed on nonaccrual when, in the opinion of management,
the future collectibility of interest and principal is in serious doubt.
When
classified as nonaccrual, accrued interest receivable on the loan is reversed
and the future accrual of interest is suspended. Payments of contractual
interest are recognized as income only to the extent that full recovery of
the
principal balance of the loan is reasonably certain.
Other
Real Estate Owned.
Other
Real Estate Owned (“OREO”) includes real estate acquired in full or partial
settlement of loan obligations. OREO is carried at the lower of (1) the recorded
amount of the loan for which the foreclosed property previously served as
collateral or (2) the fair market value of the property net of estimated
selling
costs. Prior to foreclosure, the recorded amount of the loan is written down,
if
necessary, to the appraised fair market value of the real estate to be acquired,
less selling costs, by charging the allowance for loan losses. Any subsequent
reduction in fair market value is charged to results of operations through
the
Allowance for Losses on OREO account. Costs of maintaining and operating
foreclosed properties are expensed as incurred. Expenditures to complete
or
improve foreclosed properties are capitalized only if expected to be recovered;
otherwise, they are expensed.
Securities.
We use
the specific identification method to determine the basis for computing realized
gain or loss. We account for debt and equity securities as follows:
Held
to
Maturity (“HTM”). Debt securities that management has the positive intent and
ability to hold until maturity are classified as HTM and are carried at their
remaining unpaid principal balance, net of unamortized premiums or unaccreted
discounts. Premiums are amortized and discounts are accreted using the level
interest yield method over the estimated remaining term of the underlying
security.
Available
for Sale (“AFS”). Debt and equity securities that will be held for indefinite
periods of time, including securities that may be sold in response to changes
in
market interest or prepayment rates, needs for liquidity and changes in the
availability of and the yield of alternative investments are classified as
AFS.
These assets are carried at market value. Market value is determined using
published quotes as of the close of business. If quoted market prices are
not
available, fair values are based on quoted market prices for similar securities
or estimates from independent pricing services. Unrealized gains and losses
on
AFS securities are excluded from earnings and reported net of tax in Accumulated
Other Comprehensive Income until realized.
Purchase
premiums and discounts are recognized in interest income using the interest
method over the terms of the securities. Declines in the fair value of HTM
and
AFS securities below their cost that are deemed to be other-than-temporary
are
reflected in earnings as realized losses. In estimating other than temporary
impairment losses, management considers (1) the length of time and the extent
to
which the fair value has been less than cost, (2) the financial condition
and
near-term prospects of the issuer, and (3) our intent and ability to retain
our
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. Gains and losses on the sale of securities
are recorded on the trade date and are determined using the specific
identification method.
Securities
with limited marketability, such as stock in the FHLB, are carried at cost,
which approximates its fair value.
Premises
and Equipment.
Bank
premises and equipment are stated at cost, net of accumulated depreciation.
Depreciation is computed on a straight line basis over the estimated useful
lives of the related assets. Useful lives are estimated to be fifteen to
forty
years for premises and three to ten years for equipment. Leasehold improvements
are generally depreciated over the lesser of the term of the respective leases
or the estimated useful lives of the improvements. Maintenance and repairs
are
charged to income as incurred while major improvements and replacements are
capitalized.
Income
Taxes.
We file
a consolidated federal income tax return. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income
in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of changes in
tax
rates is recognized in income in the period the change occurs.
Use
of
Estimates.
In
preparing consolidated financial statements in conformity with GAAP, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the balance sheet and reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the determination
of the allowance for loan losses, assumptions used in the defined benefit
plan,
the fair values of financial instruments, and the status of contingencies
are
particularly subject to change.
Fair
Value of Financial Instruments.
Fair
values of financial instruments are estimated using relevant market information
and other assumptions. Fair value estimates involve uncertainties and matters
of
significant judgment. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other estimation
techniques. Those techniques are significantly affected by the assumptions
used,
including the discount rate and estimates of future cash flows.
Stock
Options.
Prior
to January 1, 2006, we applied the provisions of Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to Employees” and related
interpretations, in accounting for our stock-based compensation plans. Under
Opinion 25, compensation cost is measured as the excess, if any, of the quoted
market price of our stock at the date of the grant above the amount an employee
must pay to acquire the stock. The Financial Accounting Standards Board (“FASB”)
published Statement of Financial Accounting Standard No. 123, “Accounting for
Stock-Based Compensation” (“SFAS 123”) on January 1, 1996, which encourages, but
does not require, companies to recognize compensation expense for grants
of
stock, stock options and other equity instruments to employees based on new
fair
value accounting rules. Companies that choose not to adopt the new rules
will
continue to apply existing rules, but will be required to disclose pro forma
net
income and earnings per share under the new method. We elected to provide
the
pro forma disclosures for 2004 and 2005.
We
adopted the provisions of SFAS 123R, “Share-Based Payment (Revised 2004),” on
January 1, 2006 using a modified version of prospective application in
accordance with SFAS 123R. Among other things, SFAS 123R eliminates the ability
to account for stock-based compensation using APB 25 and requires that such
transactions be recognized as compensation cost in the income statement based
on
their fair values on the date of the grant.
Pro
Forma
Net Income and Net Income Per Common Share
Had
the
compensation cost for our stock-based compensation plans been determined
consistent with the requirements of SFAS 123R, our net income and net income
per
common share for 2005 and 2004, would approximate the pro forma amounts below
(in thousands, except per share amounts, net of taxes):
|
Years
Ended December 31
|
|||||||||||||
|
As
Reported
2005
|
Pro
Forma
2005
|
As
Reported
2004
|
Pro
Forma
2004
|
||||||||||
|
FAS123
Charge
|
$
|
-
|
$
|
60
|
$
|
-
|
$
|
101
|
|||||
|
Net
Income
|
$
|
14,592
|
$
|
14,532
|
$
|
16,099
|
$
|
15,998
|
|||||
|
Net
Income per Common Share-Basic
|
$
|
1.21
|
$
|
1.21
|
$
|
1.33
|
$
|
1.32
|
|||||
|
|
|||||||||||||
|
Net
Income per Common Share-Diluted
|
$
|
1.15
|
$
|
1.15
|
$
|
1.26
|
$
|
1.25
|
|||||
The
effects of applying SFAS 123R in this pro forma disclosure are not indicative
of
future amounts.
Loss
Contingencies.
Loss
contingencies, including claims and legal actions arising in the ordinary
course
of business are recorded as liabilities when the likelihood of loss is probable
and an amount or range of loss can be reasonably estimated.
Trust
Assets.
Assets
of our trust department, other than cash on deposit at Southside Bank, are
not
included in the accompanying financial statements because they are not our
assets.
General.
Certain
prior period amounts have been reclassified to conform to current year
presentation and had no impact on net income or equity.
Accounting
Pronouncements.
Statements
of Financial Accounting Standards
SFAS
No.
159. In February 2007, the FASB issued SFAS 159,
“The Fair Value Option for Financial Assets and Financial Liabilities, including
an amendment of FASB Statement No. 115.”
SFAS 159
allows entities to irrevocably elect fair value as the initial and subsequent
measurement attribute for certain financial assets and financial liabilities
that are not otherwise required to be measured at fair value, with changes
in
fair value recognized in earnings as they occur. SFAS 159 also requires entities
to report those financial assets and financial liabilities measured at fair
value in a manner that separates those reported fair values from the carrying
amounts of similar assets and liabilities measured using another measurement
attribute on the face of the statement of financial position. Lastly, SFAS
159
establishes presentation and disclosure requirements designed to improve
comparability between entities that elect different measurement attributes
for
similar assets and liabilities. SFAS 159 is effective for fiscal years beginning
after November 15, 2007, with early adoption permitted if an entity also
early
adopts the provisions of SFAS 157. We intend to adopt SFAS 159 on January
1,
2008. We have not yet determined if, or to what extent, we will elect to
use the
fair value option to value our financial assets and liabilities or the impact
that the implementation of SFAS 159 will have on our consolidated financial
statements.
SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88 106, and 132(R).” SFAS
158 requires an employer to recognize the overfunded or underfunded status
of
defined benefit post-retirement benefit plans as an asset or a liability
in its
statement of financial position. The funded status is measured as the difference
between plan assets at fair value and the benefit obligation (the projected
benefit obligation for pension plans or the accumulated benefit obligation
for
other post-retirement benefit plans). An employer is also required to measure
the funded status of a plan as of the date of its year-end statement of
financial position with changes in the funded status recognized through
comprehensive income. SFAS 158 also requires certain disclosures regarding
the
effects on net periodic benefit cost for the next fiscal year that arise
from
delayed recognition of gains or losses, prior service costs or credits, and
the
transition asset or obligation. We were required to recognize the funded
status
of our defined benefit plans in our financial statements for the year ended
December 31, 2006. See “Note 12 - Employee Benefits” for additional
information related to these plans. The requirement to measure plan assets
and
benefit obligations as of the date of the year-end statement of financial
position is effective for our consolidated financial statements beginning
with
the year ended after December 31, 2008. We currently use December 31 as the
measurement date for our defined benefit plans.
SFAS No. 157,
“Fair Value Measurements.” SFAS 157 defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures about
fair
value measurements. SFAS 157 is effective for us on January 1, 2008
and is not expected to have a significant impact on our consolidated financial
statements.
SFAS No. 155,
“Accounting for Certain Hybrid Financial Instruments — an amendment of FASB
Statements No. 133 and 140.” SFAS 155 amends SFAS 133,
“Accounting for Derivative Instruments and Hedging Activities” and
SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities.” SFAS 155 permits, but does not require,
fair value accounting for hybrid financial instruments that contain an embedded
derivative that would otherwise require bifurcation in accordance with
SFAS 133. SFAS 155 also eliminated the temporary exemption for
interests in securitized financial assets provided for by SFAS 133,
Derivatives Implementation Group (“DIG”) Issue D1, “Application of Statement 133
to Beneficial Interests in Securitized Financial Assets.” However, in
January 2007, the FASB issued interpretive guidance in SFAS 133, DIG
Issue B40, “Application of Paragraph 13(b) to Securitized Interests in
Prepayable Financial Assets.” In DIG Issue B40, the FASB concluded that a
securitized interest in prepayable financial assets was not subject to the
bifurcation requirements of SFAS 155 provided that the interest met both
the following criteria: (1) the right to accelerate the settlement of the
securitized interest cannot be controlled by the investor; and (2) the
securitized interest itself does not contain an embedded derivative for which
bifurcation would be required other than an embedded derivative that results
solely from the embedded call options in the underlying financial assets.
The
guidance in DIG Issue B40 is effective upon the adoption of SFAS 155.
SFAS 155 is effective for all financial instruments acquired or issued
after December 31, 2006 as well as to those hybrid financial instruments
that had been previously bifurcated under SFAS 133. As of December 31,
2006, we did not have any hybrid financial instruments that were previously
bifurcated under SFAS 133. As a result, the adoption of SFAS 155 did not
have a
material impact on our consolidated financial statements.
SFAS No. 154,
“Accounting Changes and Error Corrections, a Replacement of APB Opinion
No. 20 and FASB Statement No. 3.” SFAS 154 establishes, unless
impracticable, retrospective application as the required method for reporting
a
change in accounting principle in the absence of explicit transition
requirements specific to a newly adopted accounting principle. Previously,
most
changes in accounting principle were recognized by including the cumulative
effect of changing to the new accounting principle in net income of the period
of the change. SFAS 154 carries forward the guidance in APB Opinion 20
“Accounting Changes,” requiring justification of a change in accounting
principle on the basis of preferability. SFAS 154 also carries forward
without change the guidance contained in APB Opinion 20, for reporting the
correction of an error in previously issued financial statements and for
a
change in an accounting estimate. The adoption of SFAS 154 on
January 1, 2006 did not significantly impact our consolidated financial
statements.
Emerging
Issues Task Force Concensuses
In
September 2006, the Emerging Issues Task Force (“EITF”) reached a final
consensus on Issue 06-4, “Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements.” EITF 06-4 requires that for a split-dollar life insurance
arrangement, an employer should recognize a liability for future benefits
in
accordance with SFAS 106, “Employers' Accounting for Postretirement Benefits
Other Than Pensions.” Under the guidance, the purchase of an endorsement type
policy does not constitute a settlement since the policy does not qualify
as
nonparticipating because the policyholders are subject to the favorable and
unfavorable experience of the insurance company. EITF 06-4 is effective for
fiscal years beginning after December 15, 2006. We do not currently expect
the
adoption of EITF 06-4 to have a material impact on our consolidated financial
statements.
In
September 2006, the EITF reached a final consensus on Issue 06-5, “Accounting
for Purchases of Life Insurance.” EITF 06-5 provides guidance on FASB Technical
Bulletin No. 85-4, “Accounting for Purchases of Life Insurance.” Under the
guidance, the policyholder should consider any additional amounts included
in
the contractual terms of the policy in determining the amount that could
be
realized under the insurance contract. In addition, the policyholder should
also
determine the amount that could be realized under the life insurance contract
assuming the surrender of an individual-life by individual-life policy. EITF
06-5 is effective for fiscal years beginning after December 15, 2006. We
do not
currently expect the adoption of EITF 06-5 to have a material impact on our
consolidated financial statements.
Financial
Accounting Standards Board Staff Positions and Interpretations
FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement 109.” Interpretation 48 prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. Benefits from tax positions should be recognized in the financial
statements only when it is more likely than not that the tax position will
be
sustained upon examination by the appropriate taxing authority that would
have
full knowledge of all relevant information. A tax position that meets the
more-likely-than-not recognition threshold is measured at the largest amount
of
benefit that is greater than fifty percent likely of being realized upon
ultimate settlement. Tax positions that previously failed to meet the
more-likely-than-not recognition threshold should be recognized in the first
subsequent financial reporting period in which that threshold is met. Previously
recognized tax positions that no longer meet the more-likely-than-not
recognition threshold should be derecognized in the first subsequent financial
reporting period in which that threshold is no longer met. Interpretation
48
also provides guidance on the accounting for and disclosure of unrecognized
tax
benefits, interest and penalties. Interpretation 48 is effective for us on
January 1, 2007 and did not have a significant impact on our consolidated
financial statements.
SEC
Staff
Accounting Bulletins
Staff
Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of a Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements.” SAB 108 addresses how the effects of prior year uncorrected
errors must be considered in quantifying misstatements in the current year
financial statements. The effects of prior year uncorrected errors include
the
potential accumulation of improper amounts that may result in a material
misstatement on the balance sheet or the reversal of prior period errors
in the
current period that result in a material misstatement of the current period
income statement amounts. Adjustments to current or prior period financial
statements would be required in the event that after application of various
approaches for assessing materiality of a misstatement in current period
financial statements and consideration of all relevant quantitative and
qualitative factors, a misstatement is determined to be material. SAB 108
is applicable to all our consolidated financial statements issued after
November 15, 2006 and did not have a significant impact on our financial
statements.
| 2. |
EARNINGS
PER SHARE
|
Earnings
per share on a basic and diluted basis as required by Statement of Financial
Accounting Standard No. 128, "Earnings Per Share" (“SFAS 128”), has been
adjusted to give retroactive recognition to stock splits and stock dividends
and
is calculated as follows (in thousands, except per share amounts):
|
Years
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Basic
Earnings and Shares:
|
||||||||||
|
Net
Income
|
$
|
15,002
|
$
|
14,592
|
$
|
16,099
|
||||
|
Weighted-average
basic shares outstanding
|
12,260
|
12,046
|
12,072
|
|||||||
|
Basic
Earnings Per Share:
|
||||||||||
|
Net
Income
|
$
|
1.22
|
$
|
1.21
|
$
|
1.33
|
||||
|
Diluted
Earnings and Shares:
|
||||||||||
|
Net
Income
|
$
|
15,002
|
$
|
14,592
|
$
|
16,099
|
||||
|
Weighted-average
basic shares outstanding
|
12,260
|
12,046
|
12,072
|
|||||||
|
Add:
Stock options
|
472
|
592
|
712
|
|||||||
|
Weighted-average
diluted shares outstanding
|
12,732
|
12,638
|
12,784
|
|||||||
|
Diluted
Earnings Per Share:
|
||||||||||
|
Net
Income
|
$
|
1.18
|
$
|
1.15
|
$
|
1.26
|
||||
For
the
years ended December 31, 2006, 2005 and 2004, there were no antidilutive
options.
|
3.
|
COMPREHENSIVE
INCOME (LOSS)
|
The
components of other comprehensive income (loss) as required by Statement
of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income” (“SFAS
130”) are as follows (in thousands):
|
Year
Ended December 31, 2006
|
||||||||||
|
Before-Tax
Amount
|
Tax
(Expense)
Benefit
|
Net-of-Tax
Amount
|
||||||||
|
Unrealized
losses on securities:
|
||||||||||
|
Unrealized
holding losses arising during period
|
$
|
(2,110
|
)
|
$
|
717
|
$
|
(1,393
|
)
|
||
|
Less:
reclassification adjustment for gains realized in net
income
|
743
|
(253
|
)
|
490
|
||||||
|
Net
unrealized losses
|
(2,853
|
)
|
970
|
(1,883
|
)
|
|||||
|
Minimum
pension liability adjustment
|
451
|
(153
|
)
|
298
|
||||||
|
Other
comprehensive loss
|
$
|
(2,402
|
)
|
$
|
817
|
$
|
(1,585
|
)
|
||
|
Year
Ended December 31, 2005
|
||||||||||
|
Before-Tax
Amount
|
Tax
(Expense)
Benefit
|
Net-of-Tax
Amount
|
||||||||
|
Unrealized
losses on securities:
|
||||||||||
|
Unrealized
holding losses arising during period
|
$
|
(7,399
|
)
|
$
|
2,515
|
$
|
(4,884
|
)
|
||
|
Less:
reclassification adjustment for gains realized in net
income
|
228
|
(78
|
)
|
150
|
||||||
|
Net
unrealized losses
|
(7,627
|
)
|
2,593
|
(5,034
|
)
|
|||||
|
Minimum
pension liability adjustment
|
3,892
|
(1,323
|
)
|
2,569
|
||||||
|
Other
comprehensive loss
|
$
|
(3,735
|
)
|
$
|
1,270
|
$
|
(2,465
|
)
|
||
|
Year
Ended December 31, 2004
|
||||||||||
|
Before-Tax
Amount
|
Tax
(Expense)
Benefit
|
Net-of-Tax
Amount
|
||||||||
|
Unrealized
losses on securities:
|
||||||||||
|
Unrealized
holding losses arising during period
|
$
|
(5,306
|
)
|
$
|
1,804
|
$
|
(3,502
|
)
|
||
|
Less:
reclassification adjustment for gains realized in net
income
|
2,759
|
(938
|
)
|
1,821
|
||||||
|
Net
unrealized losses
|
(8,065
|
)
|
2,742
|
(5,323
|
)
|
|||||
|
Minimum
pension liability adjustment
|
(4,249
|
)
|
1,445
|
(2,804
|
)
|
|||||
|
Other
comprehensive loss
|
$
|
(12,314
|
)
|
$
|
4,187
|
$
|
(8,127
|
)
|
||
The
components of accumulated other comprehensive loss as of December 31, 2006
and
2005, are reflected in the table below (in thousands):
|
Years
Ended December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
|
|||||||
|
Unrealized
losses on AFS securities
|
$
|
(5,855
|
)
|
$
|
(3,972
|
)
|
|
|
Net
unfunded liability for defined benefit plans
|
(8,669
|
)
|
(537
|
)
|
|||
|
Total
|
$
|
(14,524
|
)
|
$
|
(4,509
|
)
|
|
|
4.
|
CASH
AND DUE FROM BANKS
|
We
are
required to maintain cash reserve balances with the Federal Reserve Bank.
The
reserve balances were $250,000 as of December 31, 2006 and 2005.
|
5.
|
SECURITIES
|
The
amortized cost and estimated market value of investment and mortgage-backed
securities as of December 31, 2006 and 2005, are reflected in the tables
below
(in thousands):
|
AVAILABLE
FOR SALE
|
|||||||||||||
|
December
31, 2006
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Market
Value
|
|||||||||
|
Investment
Securities:
|
|||||||||||||
|
U.S.
Treasury
|
$
|
27,104
|
$
|
-
|
$
|
721
|
$
|
26,383
|
|||||
|
Government
Sponsored Enterprise Debentures
|
9,923
|
-
|
-
|
9,923
|
|||||||||
|
State
and Political Subdivisions
|
54,037
|
1,488
|
390
|
55,135
|
|||||||||
|
Other
Stocks and Bonds
|
7,611
|
12
|
112
|
7,511
|
|||||||||
|
Mortgage-backed
Securities:
|
|||||||||||||
|
U.S.
Government Agencies
|
72,183
|
425
|
1,209
|
71,399
|
|||||||||
|
Government
Sponsored Enterprises
|
570,777
|
1,250
|
7,377
|
564,650
|
|||||||||
|
Other
Private Issues
|
7,190
|
20
|
95
|
7,115
|
|||||||||
|
Total
|
$
|
748,825
|
$
|
3,195
|
$
|
9,904
|
$
|
742,116
|
|||||
|
HELD
TO MATURITY
|
|||||||||||||
|
December
31, 2006
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Market
Value
|
|||||||||
|
Investment
Securities:
|
|||||||||||||
|
Other
Stocks and Bonds
|
$
|
1,351
|
$
|
7
|
$
|
16
|
$
|
1,342
|
|||||
|
Mortgage-backed
Securities:
|
|||||||||||||
|
U.S.
Government Agencies
|
30,788
|
-
|
407
|
30,381
|
|||||||||
|
Government
Sponsored Enterprises
|
195,374
|
97
|
3,104
|
192,367
|
|||||||||
|
Total
|
$
|
227,513
|
$
|
104
|
$
|
3,527
|
$
|
224,090
|
|||||
|
AVAILABLE
FOR SALE
|
|||||||||||||
|
December
31, 2005
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Market
Value
|
|||||||||
|
Investment
Securities:
|
|||||||||||||
|
U.S.
Treasury
|
$
|
24,090
|
$
|
37
|
$
|
357
|
$
|
23,770
|
|||||
|
Government
Sponsored Enterprise Debentures
|
21,697
|
-
|
172
|
21,525
|
|||||||||
|
State
and Political Subdivisions
|
65,705
|
2,910
|
276
|
68,339
|
|||||||||
|
Other
Stocks and Bonds
|
7,658
|
12
|
64
|
7,606
|
|||||||||
|
Mortgage-backed
Securities:
|
|||||||||||||
|
U.S.
Government Agencies
|
70,122
|
547
|
937
|
69,732
|
|||||||||
|
Government
Sponsored Enterprises
|
524,234
|
1,382
|
6,220
|
519,396
|
|||||||||
|
Other
Private Issues
|
3,328
|
10
|
31
|
3,307
|
|||||||||
|
Total
|
$
|
716,834
|
$
|
4,898
|
$
|
8,057
|
$
|
713,675
|
|||||
|
HELD
TO MATURITY
|
|||||||||||||
|
December
31, 2005
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Market
Value
|
|||||||||
|
Mortgage-backed
Securities:
|
|||||||||||||
|
U.S.
Government Agencies
|
$
|
35,400
|
$
|
83
|
$
|
225
|
$
|
35,258
|
|||||
|
Government
Sponsored Enterprises
|
193,921
|
32
|
2,325
|
191,628
|
|||||||||
|
Total
|
$
|
229,321
|
$
|
115
|
$
|
2,550
|
$
|
226,886
|
|||||
The
following table represents the unrealized loss on securities for the years
ended
December 31, 2006 and 2005 (in thousands):
|
Less
Than 12 Months
|
More
Than 12 Months
|
Total
|
|||||||||||||||||
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
||||||||||||||
|
As
of December 31, 2006:
|
|||||||||||||||||||
|
Available
for Sale
|
|||||||||||||||||||
|
U.S.
Treasury
|
$
|
13,859
|
$
|
135
|
$
|
12,524
|
$
|
586
|
$
|
26,383
|
$
|
721
|
|||||||
|
State
and Political Subdivisions
|
1,626
|
13
|
12,524
|
377
|
14,150
|
390
|
|||||||||||||
|
Other
Stocks and Bonds
|
2,632
|
65
|
3,956
|
47
|
6,588
|
112
|
|||||||||||||
|
Mortgage-Backed
Securities
|
199,263
|
1,623
|
317,464
|
7,058
|
516,727
|
8,681
|
|||||||||||||
|
Total
|
$
|
217,380
|
$
|
1,836
|
$
|
346,468
|
$
|
8,068
|
$
|
563,848
|
$
|
9,904
|
|||||||
|
Held
to Maturity
|
|||||||||||||||||||
|
Other
Stocks and Bonds
|
$
|
862
|
$
|
16
|
$
|
-
|
$
|
-
|
$
|
862
|
$
|
16
|
|||||||
|
Mortgage-Backed
Securities
|
27,912
|
138
|
175,750
|
3,373
|
203,662
|
3,511
|
|||||||||||||
|
Total
|
$
|
28,774
|
$
|
154
|
$
|
175,750
|
$
|
3,373
|
$
|
204,524
|
$
|
3,527
|
|||||||
|
As
of December 31, 2005:
|
|||||||||||||||||||
|
Available
for Sale
|
|||||||||||||||||||
|
U.S.
Treasury
|
$
|
12,765
|
$
|
357
|
$
|
-
|
$
|
-
|
$
|
12,765
|
$
|
357
|
|||||||
|
Government
Sponsored Enterprise Debentures
|
14,912
|
6
|
6,613
|
166
|
21,525
|
172
|
|||||||||||||
|
State
and Political Subdivisions
|
11,625
|
190
|
2,223
|
86
|
13,848
|
276
|
|||||||||||||
|
Other
Stocks and Bonds
|
358
|
10
|
4,499
|
54
|
4,857
|
64
|
|||||||||||||
|
Mortgage-Backed
Securities
|
316,450
|
3,413
|
147,945
|
3,775
|
464,395
|
7,188
|
|||||||||||||
|
Total
|
$
|
356,110
|
$
|
3,976
|
$
|
161,280
|
$
|
4,081
|
$
|
517,390
|
$
|
8,057
|
|||||||
|
Held
to Maturity
|
|||||||||||||||||||
|
Mortgage-Backed
Securities
|
$
|
165,133
|
$
|
1,917
|
$
|
40,751
|
$
|
633
|
$
|
205,884
|
$
|
2,550
|
|||||||
|
Total
|
$
|
165,133
|
$
|
1,917
|
$
|
40,751
|
$
|
633
|
$
|
205,884
|
$
|
2,550
|
|||||||
Declines
in the fair value of HTM and AFS securities below their cost that are deemed
to
be other-than-temporary are reflected in earnings as realized losses. In
estimating other-than-temporary impairment losses, management considers,
among
other things, (i) the length of time and the extent to which the fair value
has
been less than cost, (ii) the financial condition and near-term prospects
of the
issuer, and (iii) our intent and ability to retain our investment in the
issuer
for a period of time sufficient to allow for any anticipated recovery in
fair
value.
Management
has the ability and intent to hold the securities classified as HTM until
they
mature, at which time we will receive full value for the securities.
Furthermore, as of December 31, 2006, 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. Accordingly, as of December 31, 2006, management
believes the impairments detailed in the table above are temporary and no
impairment loss has been realized in our consolidated income
statement.
Interest
income recognized on AFS and HTM securities for the years
presented:
|
Years
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(in
thousands)
|
||||||||||
|
U.S.
Treasury
|
$
|
1,042
|
$
|
508
|
$
|
129
|
||||
|
U.S.
Government Agencies
|
337
|
723
|
580
|
|||||||
|
State
and Political Subdivisions
|
2,727
|
3,564
|
3,853
|
|||||||
|
Other
Stocks and Bonds
|
531
|
364
|
156
|
|||||||
|
Mortgage-backed
Securities
|
44,401
|
34,584
|
26,845
|
|||||||
|
Total
interest income on securities
|
$
|
49,038
|
$
|
39,743
|
$
|
31,563
|
||||
During
2004, we transferred mortgage-backed securities totaling $241.4 million from
AFS
to HTM due to overall balance sheet strategies and potential changes in market
conditions. The unrealized loss on the securities transferred from AFS to
HTM
was $2.9 million, net of tax, at the date of transfer based on the fair value
of
the securities on the transfer date. When we transferred the securities from
AFS
to HTM, we had a significant amount of long-term FHLB fixed rate liabilities
and
determined it was appropriate that a portion of our securities portfolio
should
be designated HTM. There were no securities transferred from AFS to HTM during
2005 and 2006. There were no sales from the HTM portfolio during the years
ended
December 31, 2006, 2005 or 2004. There were $227.5 million and $229.3 million
of
securities classified as HTM for the years ended December 31, 2006 and 2005,
respectively.
Of
the
$0.7 million in net securities gains from the AFS portfolio in 2006, there
were
$1.6 million in realized gains and $0.9 million in realized losses. Of the
$0.2
million in net securities gains from the AFS portfolio in 2005, there were
$1.6
million in realized gains and $1.4 million in realized losses. Of the $2.8
million in net securities gains on sales from the AFS portfolio in 2004,
there
were $3.3 million in realized gains and $0.5 million in realized
losses.
The
amortized cost and fair value of securities at December 31, 2006, are presented
below by contractual maturity. Expected maturities may differ from contractual
maturities because issuers may have the right to call or prepay obligations.
Mortgage-backed securities are presented in total by category due to the
fact
that mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with varying maturities. The characteristics of the underlying pool of
mortgages, such as fixed-rate or adjustable-rate, as well as prepayment risk,
are passed on to the certificate holder. The term of a mortgage-backed
pass-through security thus approximates the term of the underlying mortgages
and
can vary significantly due to prepayments.
|
Amortized
Cost
|
Fair
Value
|
||||||
|
(in
thousands)
|
|||||||
|
Available
for sale securities:
|
|||||||
|
Investment
Securities
|
|||||||
|
Due
in one year or less
|
$
|
19,975
|
$
|
19,974
|
|||
|
Due
after one year through five years
|
12,811
|
12,798
|
|||||
|
Due
after five years through ten years
|
34,125
|
33,382
|
|||||
|
Due
after ten years
|
31,764
|
32,798
|
|||||
|
98,675
|
98,952
|
||||||
|
Mortgage-backed
securities
|
650,150
|
643,164
|
|||||
|
Total
|
$
|
748,825
|
$
|
742,116
|
|||
|
Amortized
Cost
|
Aggregate
Fair
Value
|
||||||
|
(in
thousands)
|
|||||||
|
Held
to maturity securities:
|
|||||||
|
Investment
Securities
|
|||||||
|
Due
in one year or less
|
$
|
-
|
$
|
-
|
|||
|
Due
after one year through five years
|
-
|
-
|
|||||
|
Due
after five years through ten years
|
878
|
862
|
|||||
|
Due
after ten years
|
473
|
480
|
|||||
|
1,351
|
1,342
|
||||||
|
Mortgage-backed
securities
|
226,162
|
222,748
|
|||||
|
Total
|
$
|
227,513
|
$
|
224,090
|
|||
Investment
and mortgage-backed securities with book values of $454.6 million and $528.9
million were pledged as of December 31, 2006 and 2005, respectively, to
collateralize FHLB advances, public fund and trust deposits or for other
purposes as required by law.
Securities
with limited marketability, such FHLB stock and other investments, are carried
at cost, which approximates its fair value. These securities have no maturity
date.
|
6.
|
LOANS
AND ALLOWANCE FOR PROBABLE LOAN
LOSSES
|
Loans
in
the accompanying consolidated balance sheets are classified as
follows:
|
December
31,
2006
|
December
31,
2005
|
||||||
|
Real
Estate Loans:
|
(in
thousands)
|
||||||
|
Construction
|
$
|
39,588
|
$
|
35,765
|
|||
|
1-4
family residential
|
227,354
|
199,812
|
|||||
|
Other
|
181,047
|
162,147
|
|||||
|
Commercial
loans
|
118,962
|
91,456
|
|||||
|
Municipal
loans
|
106,155
|
109,003
|
|||||
|
Loans
to individuals
|
86,041
|
82,181
|
|||||
|
Total
loans
|
759,147
|
680,364
|
|||||
|
Less:
Allowance for loan losses
|
7,193
|
7,090
|
|||||
|
Net
loans
|
$
|
751,954
|
$
|
673,274
|
|||
The
following is a summary of the Allowance for Loan Losses for the years ended
December 31, 2006, 2005 and 2004:
|
Years
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(in
thousands)
|
||||||||||
|
Balance
at beginning of year
|
$
|
7,090
|
$
|
6,942
|
$
|
6,414
|
||||
|
Provision
for loan losses
|
1,080
|
1,463
|
925
|
|||||||
|
Loans
charged off
|
(2,972
|
)
|
(2,996
|
)
|
(1,043
|
)
|
||||
|
Recoveries
of loans charged off
|
1,995
|
1,681
|
646
|
|||||||
|
Balance
at end of year
|
$
|
7,193
|
$
|
7,090
|
$
|
6,942
|
||||
Nonaccrual
loans at December 31, 2006 and 2005 were $1.3 million and $1.7 million,
respectively. Loans with terms modified in troubled debt restructuring at
December 31, 2006 and 2005 were $220,000 and $226,000, respectively.
For
the
years ended December 31, 2006 and 2005, the average recorded investment in
impaired loans was approximately $1,388,000 and $1,773,000, respectively.
The
amount of interest recognized on nonaccrual or restructured loans was $113,000,
$80,000 and $125,000 for the years ended December 31, 2006, 2005 and 2004,
respectively. If these loans had been accruing interest at their original
contracted rates, related income would have been $142,000, $177,000 and $186,000
for the years ended December 31, 2006, 2005 and 2004,
respectively.
The
following is a summary of our recorded investment in loans (primarily nonaccrual
loans) for which impairment has been recognized in accordance with
SFAS114:
|
Total
|
Valuation
Allowance
|
Carrying
Value
|
||||||||
|
(in
thousands)
|
||||||||||
|
Real
Estate Loans
|
$
|
975
|
$
|
102
|
$
|
873
|
||||
|
Loans
to Individuals
|
262
|
105
|
157
|
|||||||
|
Commercial
Loans
|
96
|
12
|
84
|
|||||||
|
Balance
at December 31, 2006
|
$
|
1,333
|
$
|
219
|
$
|
1,114
|
||||
|
Total
|
Valuation
Allowance
|
Carrying
Value
|
||||||||
|
(in
thousands)
|
||||||||||
|
Real
Estate Loans
|
$
|
970
|
$
|
58
|
$
|
912
|
||||
|
Loans
to Individuals
|
381
|
141
|
240
|
|||||||
|
Commercial
Loans
|
380
|
145
|
235
|
|||||||
|
Balance
at December 31, 2005
|
$
|
1,731
|
$
|
344
|
$
|
1,387
|
||||
All
of
the impaired loans included above at December 31, 2006, had a valuation
allowance. The balance of impaired loans included above with no valuation
allowance was $3,000 at December 31, 2005.
| 7. |
BANK
PREMISES AND EQUIPMENT
|
|
December
31,
2006
|
December
31,
2005
|
||||||
|
(in
thousands)
|
|||||||
|
Bank
premises
|
$
|
40,323
|
$
|
39,887
|
|||
|
Furniture
and equipment
|
15,998
|
15,165
|
|||||
|
56,321
|
55,052
|
||||||
|
Less:
accumulated depreciation
|
23,680
|
21,442
|
|||||
|
Total
|
$
|
32,641
|
$
|
33,610
|
|||
Depreciation
expense was $2.3 million, $2.2 million and $2.3 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
| 8. |
OTHER
REAL ESTATE OWNED
|
For
the
years ended December 31, 2006, 2005 and 2004, we did not have an allowance
for
losses on OREO.
For
the
years ended December 31, 2006 and 2005, the total of OREO was $351,000
and
$145,000, respectively. OREO is reflected in other assets in our consolidated
balance sheets.
For
the
years ended December 31, 2006, 2005 and 2004, OREO properties expense exceeded
income by $143,000, $24,000 and $68,000, respectively.
| 9. |
INTEREST
BEARING DEPOSITS
|
|
December
31,
2006
|
December
31,
2005
|
||||||
|
(in
thousands)
|
|||||||
|
Savings
deposits
|
$
|
50,454
|
$
|
48,835
|
|||
|
Money
market demand deposits
|
80,510
|
75,741
|
|||||
|
Platinum
money market deposits
|
106,375
|
94,417
|
|||||
|
NOW
demand deposits
|
195,380
|
190,092
|
|||||
|
Certificates
and other time deposits of $100,000 or more
|
201,806
|
176,506
|
|||||
|
Certificates
and other time deposits under $100,000
|
322,179
|
214,681
|
|||||
|
Total
|
$
|
956,704
|
$
|
800,272
|
|||
For
the
years ended December 31, 2006, 2005 and 2004, interest expense on time
deposits
of $100,000 or more was $7.8 million, $5.0 million and $2.9 million,
respectively.
At
December 31, 2006, the scheduled maturities of certificates and other time
deposits are as follows (in thousands):
|
2007
|
$
|
342,833
|
||
|
2008
|
35,800
|
|||
|
2009
|
55,135
|
|||
|
2010
|
11,462
|
|||
|
2011
and thereafter
|
78,755
|
|||
|
$
|
523,985
|
At
December 31, 2006, we had a total of $123.5 million in brokered CDs that
represented 9.6% of our deposits. We are currently utilizing long-term
brokered
CDs more than long-term FHLB funding as the brokered CDs better match overall
ALCO objectives due to the calls we control. These brokered CDs have maturities
from 1.7 to five years and calls from three to six months and are reflected
in
the CDs under $100,000 category. At December 31, 2005, we had $19.8 million
in
brokered CDs. Our current policy allows for a maximum of $150 million in
brokered CDs.
The
aggregate amount of demand deposit overdrafts that have been reclassified
as
loans were $1.6 million and $1.4 million for December 31, 2006 and 2005,
respectively.
| 10. |
SHORT-TERM
BORROWINGS
|
Information
related to short-term borrowings is provided in the table below:
|
Years
Ended December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
(dollars
in thousands)
|
|||||||
|
Federal
funds purchased
|
|||||||
|
Balance
at end of period
|
$
|
5,675
|
$
|
2,400
|
|||
|
Average
amount outstanding during the period (1)
|
8,727
|
6,485
|
|||||
|
Maximum
amount outstanding during the period (3)
|
13,775
|
9,875
|
|||||
|
Weighted
average interest rate during the period (2)
|
5.2
|
%
|
3.6
|
%
|
|||
|
Interest
rate at end of period
|
5.5
|
%
|
4.3
|
%
|
|||
|
FHLB
advances
|
|||||||
|
Balance
at end of period
|
$
|
322,241
|
$
|
312,271
|
|||
|
Average
amount outstanding during the period (1)
|
367,068
|
274,689
|
|||||
|
Maximum
amount outstanding during the period (3)
|
396,416
|
337,808
|
|||||
|
Weighted
average interest rate during the period (2)
|
4.4
|
%
|
3.5
|
%
|
|||
|
Interest
rate at end of period
|
4.7
|
%
|
3.7
|
%
|
|||
|
Other
obligations
|
|||||||
|
Balance
at end of period
|
$
|
1,605
|
$
|
2,174
|
|||
|
Average
amount outstanding during the period (1)
|
901
|
1,109
|
|||||
|
Maximum
amount outstanding during the period (3)
|
2,500
|
2,500
|
|||||
|
Weighted
average interest rate during the period (2)
|
4.8
|
%
|
3.0
|
%
|
|||
|
Interest
rate at end of period
|
5.0
|
%
|
4.0
|
%
|
|||
| (1) |
The
average amount outstanding during the period was computed by
dividing the
total daily outstanding principal balances by the number of
days in the
period.
|
| (2) |
The
weighted average interest rate during the period was computed
by dividing
the actual interest expense by the average balance outstanding
during the
period.
|
| (3) |
The
maximum amount outstanding at any month-end during the
period.
|
We
have
three lines of credit for the purchase of federal funds. Two $15.0 million
and
one $10.0 million unsecured lines of credit have been established with
Bank of
America, Frost Bank and TIB - The Independent Bankers Bank, respectively.
At
December 31, 2006, the amount of additional funding we could obtain from
FHLB
using our unpledged securities at FHLB was approximately $400 million,
net of
FHLB stock purchases required. We have obtained a $12.0 million letter
of credit
from FHLB as collateral for a portion of our public fund
deposits.
| 11. |
LONG-TERM
OBLIGATIONS
|
|
Years
Ended December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
(dollars
in thousands)
|
|||||||
|
FHLB
advances
|
|||||||
|
Balance
at end of period
|
$
|
129,379
|
$
|
208,413
|
|||
|
Weighted
average interest rate during the period (1)
|
4.1
|
%
|
3.6
|
%
|
|||
|
Interest
rate at end of period
|
4.5
|
%
|
3.8
|
%
|
|||
|
Long-term
debt
|
|||||||
|
Balance
at end of period
|
$
|
20,619
|
$
|
20,619
|
|||
|
Weighted
average interest rate during the period (1)
|
8.0
|
%
|
6.2
|
%
|
|||
|
Interest
rate at end of period
|
8.3
|
%
|
7.5
|
%
|
|||
|
(1)
|
The
weighted average interest rate during the period was computed
by dividing
the actual interest expense by the average balance outstanding
during the
period.
|
Maturities
of fixed rate long-term obligations based on scheduled repayments at December
31, 2006 are as follows (in thousands):
|
Under
1
Year
|
Due
1-5 Years
|
Due
6-10 Years
|
Over
10
Years
|
Total
|
||||||||||||
|
FHLB
advances
|
$
|
374
|
$
|
126,465
|
$
|
2,540
|
$
|
-
|
$
|
129,379
|
||||||
|
Long-term
debt
|
-
|
-
|
-
|
20,619
|
20,619
|
|||||||||||
|
Total
long-term obligations
|
$
|
374
|
$
|
126,465
|
$
|
2,540
|
$
|
20,619
|
$
|
149,998
|
||||||
FHLB
advances represent borrowings with fixed interest rates ranging from 2.5%
to
7.6% and with maturities of one to ten years. FHLB advances are collateralized
by FHLB stock, nonspecified real estate loans and mortgage-backed
securities.
Long-term
debt consisting entirely of our junior subordinated debentures issued in
2003 in
connection with the issuance of trust preferred securities by Southside
Statutory Trust III was $20,619,000 for the years ended December 31, 2005
and
2006. The interest on our long-term debt adjusts quarterly at a rate equal
to
three month LIBOR plus 294 basis points. The long-term debt reflected in
the
table above has a stated maturity date of September 4, 2033 with an option
to
prepay the debt at par beginning September 30, 2008.
| 12. |
EMPLOYEE
BENEFITS
|
Southside
Bank has a deferred compensation agreement with seven of its executive
officers,
which generally provides for payment of an aggregate amount of $3.8 million
over
a maximum period of fifteen years after retirement or death. Deferred
compensation expense was $83,000, $112,000 and $112,000 for the years ended
December 31, 2006, 2005 and 2004, respectively. For both years ended December
31, 2006 and 2005, the deferred compensation plan liability totaled $2.3
million.
We
provide accident and health insurance for substantially all employees through
a
self funded insurance program. Our healthcare plan was amended December
2006 to
eliminate retiree health insurance for all current employees effective
December
31, 2006. Effective July 31, 2007, the healthcare plan will no longer provide
health insurance coverage for any current retirees. The cost of health
care
benefits was $2,489,000, $2,469,000 and $3,381,000 for the years ended
December
31, 2006, 2005 and 2004, respectively. There were nineteen and sixteen
retirees
participating in the health insurance plan as of December 31, 2006 and
2005,
respectively.
We
have
an Employee Stock Ownership Plan (the “ESOP”) which covers substantially all
employees. Contributions to the ESOP are at the sole discretion of the
board of
directors. There were no contributions to the ESOP for the years ended
December
31, 2006, 2005 and 2004. At December 31, 2006 and 2005, 240,458 and 255,670
shares of common stock were owned by the ESOP, respectively. The number
of
shares has been adjusted as a result of stock splits and stock dividends.
These
shares are treated as externally held shares for dividend and earnings
per share
calculations.
We
have
an officers long-term disability income policy which covers officers of
Southside Bank in the event they become disabled as defined under its terms.
Individuals are automatically covered under the policy if they (a) have
been
elected as an officer, (b) have been an employee of Southside Bank for
three
years and (c) receive earnings of $50,000 or more on an annual basis. The
policy
provides, among other things, that should a covered individual become totally
disabled he would receive 66-2/3%, not to exceed $10,000 per month, of
their
current salary. The benefits paid out of the policy are limited by the
benefits
paid to the individual under the terms of our other Company sponsored benefit
plans.
We
entered into split dollar agreements with eight of our executive officers.
The
agreements provide we will be the beneficiary of BOLI insuring the executives’
lives. The agreements provide the executives the right to designate the
beneficiaries of the death benefits guaranteed in each agreement. The agreements
originally provided for death benefits of an initial aggregate amount of
$4.5
million. The individual amounts are increased annually on the anniversary
date
of the agreement by inflation adjustment factors ranging from 3% to 5%.
As of
December 31, 2006, the death benefits total $4.8 million. The agreements
also
state that before and after the executive’s retirement dates, we shall also pay
an annual gross-up bonus to the executive in an amount sufficient to enable
the
executive to pay federal income tax on both the economic benefit and on
the
gross-up bonus. The expense required to record the postretirement liability
associated with the split dollar post retirement bonuses was $121,000 for
the
year ended December 31, 2005. There was no expense associated with the
postretirement liability for the year ended December 31, 2006.
We
have a
defined benefit pension plan (“the Plan”) pursuant to which participants are
entitled to benefits based on final average monthly compensation and years
of
credited service determined in accordance with plan provisions.
On
November 3, 2005, our board of directors approved amendments to the Plan
which
affected future participation in the Plan and reduced the accrual of
future
benefits. The following amendments to the Plan became effective in
2006.
Entrance
into the Plan by new employees was frozen effective December 31, 2005.
Employees
hired after December 31, 2005 are not eligible to participate in the
plan. All
other employees are eligible to participate under the plan on the first
day of
the month coincident with or next following the first anniversary of
hire.
“Employee” means any person on the payroll whose wages are subject to
withholding for the purposes of federal income tax. Certain hourly-paid
security
personnel are excluded. Employees are vested upon the earlier of five
years
credited service or the employee attaining 60 years of age. Benefits
are payable
monthly commencing on the later of age 65 or the participant’s date of
retirement. Eligible participants may retire at reduced benefit levels
after
reaching age 55. We contribute amounts to the pension fund sufficient
to satisfy
funding requirements of the Employee Retirement Income Security Act.
The
benefits under the Plan are determined using the following formula, stated
as a
single life annuity with 120 payments guaranteed, payable at normal retirement
age.
Formula
(1) and Formula (2), calculated using Credit Service at Normal Retirement
Date,
multiplied by a service ratio and summed as described below:
|
Formula
(1)
|
x
|
The
fraction in which the numerator is Credited Service as of 12/31/05
and the
denominator is Credited Service at Normal Retirement
Date
|
||
|
plus
|
||||
|
Formula
(2)
|
x
|
The
fraction in which the numerator is Credited Service earned
after 12/31/05
and the denominator is Credited Service at Normal Retirement
Date
|
Formula
(1) is an amount equal to:
2%
of
Final Average Monthly Compensation times Credited Service up to 20 years,
PLUS
1%
of
Final Average Monthly Compensation times Credited Service, if any, in
excess of
20 years, PLUS
0.60%
of
that portion of Final Average Monthly Compensation which exceeds Monthly
Covered
Compensation times Credited Service up to 35 years
Formula
(2) is an amount equal to:
0.90%
of
Final Average Monthly Compensation times Credited Service, PLUS
0.54%
of
that portion of Final Average Monthly Compensation which exceeds Monthly
Covered
Compensation times Credited Service up to 35 years
Benefit
Formula Definitions
Credit
Service
A
participant’s years of credited service are based on the number of years an
employee works for the Company. The Company has no policy to grant extra
years
of credited service.
Final
Average Monthly Compensation (FAMC)
The
monthly average of the 60 consecutive months’ compensation during the
participant’s period of credited service that gives the highest average.
Compensation generally includes all gross income received by the participant
for
services actually rendered in the course of employment, with certain
exclusions,
plus any elective deferrals under Section 125 and Section 402(g)(c).
Compensation in the Plan is limited as required.
Covered
Compensation
A
rounded
35-year average of the Maximum Taxable Wages (MTW) under social security.
The
table in effect during the calendar year proceeding termination or retirement
is
used.
102
Plan
assets, which consist primarily of marketable equity and, debt instruments,
are
valued using market quotations. Plan obligations and the annual pension
expense
are determined by independent actuaries and through the use of a number
of
assumptions. Key assumptions in measuring the plan obligations include
the
discount rate, the rate of salary increases and the estimated future return
on
plan assets. In determining the discount rate, we utilized a cash flow
matching
analysis to determine a range of appropriate discount rates for the defined
benefit pension plan and restoration plans. In developing the cash flow
matching
analysis, we constructed a portfolio of high quality non-callable bonds
(rated
AA- or better) to match as closely as possible the timing of future benefit
payments of the plans at December 31, 2006. Based on this cash flow matching
analysis, we were able to determine an appropriate discount rate.
Salary
increase assumptions are based upon historical experience and anticipated
future
management actions. The expected long-term rate of return assumption reflects
the average return expected based on the investment strategies and asset
allocation on the assets invested to provide for the Plan’s liabilities. We
considered broad equity and bond indices, long-term return projections,
and
actual long-term historical Plan performance when evaluating the expected
long-term rate of return assumption. At December 31, 2006, the weighted-average
actuarial assumptions used to determine the benefit obligation of the Plan
were:
a discount rate of 6.05%; a long-term rate of return on Plan assets of
7.875%;
and assumed salary increases of 4.50%. Material changes in pension benefit
costs
may occur in the future due to changes in these assumptions. Future annual
amounts could be impacted by changes in the number of Plan participants,
changes
in the level of benefits provided, changes in the discount rates, changes
in the
expected long-term rate of return, changes in the level of contributions
to the
Plan and other factors.
Plan
assets included 144,140 shares of our stock at December 31, 2006 and 2005.
Our
stock included in plan assets was purchased at fair market value. The number
of
shares has been adjusted as a result of stock splits and stock dividends.
During
2006 our underfunded status decreased $4.1 million to an underfunded status
of
$5.3 million at December 31, 2006.
We
have a
nonfunded supplemental retirement plan (the “Restoration Plan”) for our
employees whose benefits under the principal retirement plan are reduced
because
of compensation deferral elections or limitations under federal tax
laws.
We
have
adopted the provisions of Statement of Financial Accounting Standards 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS
158”), as of December 31, 2006. In accordance with SFAS 158, our 2005 accounting
and related disclosures were not affected by the adoption of the new standard.
The table below summarizes the adjustment to the additional minimum pension
liability (“AML”) as well as the incremental effects of the adoption of SFAS 158
on the individual line items included in our Consolidated Balance Sheet
at
December 31, 2006 (in thousands):
|
Prior
to AML and
SFAS
158
Adjustments
|
AML
Adjustment
|
SFAS
158Adjustment
|
Post
AML and
SFAS
158
Adjustments
|
||||||||||
|
Assets:
|
|||||||||||||
|
Prepaid
pension cost
|
$
|
6,497
|
$
|
-
|
$
|
(6,497
|
)
|
$
|
-
|
||||
|
Deferred
tax asset
|
276
|
(153
|
)
|
4,343
|
4,466
|
||||||||
|
Liabilities:
|
|||||||||||||
|
Liability
for pension benefits
|
2,512
|
(451
|
)
|
6,276
|
8,337
|
||||||||
|
Shareholders’
Equity:
|
|||||||||||||
|
Accumulated
other comprehensive loss
|
537
|
(298
|
)
|
8,430
|
8,669
|
||||||||
We
use a
measurement date of December 31 for our plans.
|
2006
|
2005
|
||||||||||||
|
Defined
Benefit
Pension
Plan
|
Restoration
Plan
|
Defined
Benefit
Pension
Plan
|
Restoration
Plan
|
||||||||||
|
(in
thousands)
|
|||||||||||||
|
Change
in Projected Benefit Obligation:
|
|||||||||||||
|
Benefit
obligation at end of prior year
|
$
|
39,510
|
$
|
3,518
|
$
|
35,174
|
$
|
2,615
|
|||||
|
Service
cost
|
1,339
|
68
|
2,011
|
102
|
|||||||||
|
Interest
cost
|
2,190
|
183
|
2,024
|
184
|
|||||||||
|
Actuarial
(gain) loss
|
(1,519
|
)
|
(630
|
)
|
1,441
|
696
|
|||||||
|
Benefits
paid
|
(1,128
|
)
|
(80
|
)
|
(1,083
|
)
|
(79
|
)
|
|||||
|
Expenses
paid
|
(93
|
)
|
-
|
(57
|
)
|
-
|
|||||||
|
Plan
change
|
(684
|
)
|
(9
|
)
|
-
|
-
|
|||||||
|
Benefit
obligation at end of year
|
39,615
|
3,050
|
39,510
|
3,518
|
|||||||||
|
Change
in Plan Assets:
|
|||||||||||||
|
Fair
value of plan assets at end of prior year
|
30,085
|
-
|
25,571
|
-
|
|||||||||
|
Actual
return
|
3,464
|
-
|
498
|
-
|
|||||||||
|
Employer
contributions
|
2,000
|
80
|
5,156
|
79
|
|||||||||
|
Benefits
paid
|
(1,128
|
)
|
(80
|
)
|
(1,083
|
)
|
(79
|
)
|
|||||
|
Expenses
paid
|
(93
|
)
|
-
|
(57
|
)
|
-
|
|||||||
|
Fair
value of plan assets at end of year
|
34,328
|
-
|
30,085
|
-
|
|||||||||
|
Funded
status
|
$
|
(5,287
|
)
|
$
|
(3,050
|
)
|
(9,425
|
)
|
(3,518
|
)
|
|||
|
Unrecognized
net loss in 2005
|
15,859
|
2,174
|
|||||||||||
|
Unrecognized
prior service costs (credit) in 2005
|
10
|
(8
|
)
|
||||||||||
|
Unrecognized
net transition obligation in 2005
|
-
|
5
|
|||||||||||
|
Net
amount recognized in 2005
|
$
|
6,444
|
$
|
(1,347
|
)
|
||||||||
|
Accumulated
benefit obligation
|
$
|
30,281
|
$
|
2,062
|
$
|
29,666
|
$
|
2,160
|
|||||
|
2006
|
2005
|
||||||||||||
|
Defined
Benefit
Pension
Plan
|
Restoration
Plan
|
Defined
Benefit
Pension
Plan
|
Restoration
Plan
|
||||||||||
|
(in
thousands)
|
|||||||||||||
|
Amount
Recognized in the Consolidated Balance Sheet:
|
|||||||||||||
|
Liabilities
|
$
|
(5,287
|
)
|
$
|
(3,050
|
)
|
$
|
-
|
$
|
-
|
|||
|
Prepaid
(accrued) benefit cost
|
-
|
-
|
6,444
|
(2,160
|
)
|
||||||||
|
Accumulated
other comprehensive loss
|
-
|
-
|
-
|
813
|
|||||||||
|
Total
|
$
|
(5,287
|
)
|
$
|
(3,050
|
)
|
$
|
6,444
|
$
|
(1,347
|
)
|
||
At
December 31, 2006 and 2005, the assumptions used to determine the benefit
obligation were as follows:
|
2006
|
2005
|
||||||||||||
|
Defined
Benefit
Pension
Plan
|
Restoration
Plan
|
Defined
Benefit
Pension
Plan
|
Restoration
Plan
|
||||||||||
|
Discount
rate
|
6.05
|
%
|
6.05
|
%
|
5.625
|
%
|
5.625
|
%
|
|||||
|
Compensation
increase rate
|
4.50
|
%
|
4.50
|
%
|
4.50
|
%
|
4.50
|
%
|
|||||
Net
periodic pension cost and postretirement benefit cost for the years ended
December 31, 2006, 2005 and 2004 included the following components:
|
2006
|
|
2005
|
|
2004
|
||||||
|
Defined
Benefit Pension Plan
|
(in
thousands)
|
|||||||||
|
Service
cost
|
$
|
1,339
|
$
|
2,011
|
$
|
1,640
|
||||
|
Interest
cost
|
2,190
|
2,024
|
1,837
|
|||||||
|
Expected
return on assets
|
(2,324
|
)
|
(2,125
|
)
|
(1,928
|
)
|
||||
|
Net
loss amortization
|
784
|
643
|
423
|
|||||||
|
Prior
service (credit) cost amortization
|
(42
|
)
|
1
|
1
|
||||||
|
Net
periodic benefit cost
|
$
|
1,947
|
$
|
2,554
|
$
|
1,973
|
||||
|
Restoration
Plan
|
||||||||||
|
Service
cost
|
$
|
68
|
$
|
102
|
$
|
65
|
||||
|
Interest
cost
|
183
|
184
|
143
|
|||||||
|
Transition
obligation recognition
|
3
|
3
|
3
|
|||||||
|
Net
loss amortization
|
180
|
202
|
155
|
|||||||
|
Prior
service credit amortization
|
(2
|
)
|
(1
|
)
|
(1
|
)
|
||||
|
Net
periodic benefit cost
|
$
|
432
|
$
|
490
|
$
|
365
|
||||
For
the
years ended December 31, 2006, 2005, and 2004, the assumptions used to
determine
net periodic pension cost and postretirement benefit costs were as
follows:
|
Defined
Benefit Pension Plan
|
2006
|
2005
|
2004
|
|||||||
|
Discount
rate
|
5.625
|
%
|
5.75
|
%
|
6.50
|
%
|
||||
|
Expected
long-term rate of return on plan assets
|
7.875
|
%
|
8.50
|
%
|
8.50
|
%
|
||||
|
Compensation
increase rate
|
4.50
|
%
|
4.50
|
%
|
4.50
|
%
|
||||
|
Restoration
Plan
|
||||||||||
|
Discount
rate
|
5.625
|
%
|
5.75
|
%
|
6.50
|
%
|
||||
|
Compensation
increase rate
|
4.50
|
%
|
4.50
|
%
|
4.50
|
%
|
||||
The
amounts in accumulated other comprehensive loss that are expected to be
recognized as components of net periodic benefit cost during 2007 are as
follows
(in thousands):
|
Defined
Benefit Pension
Plan
|
Restoration
Plan
|
||||||
|
Net
Loss
|
$
|
527
|
$
|
117
|
|||
|
Prior
service credit
|
(42
|
)
|
(2
|
)
|
|||
|
Net
transition obligation
|
-
|
3
|
|||||
|
Total
|
$
|
485
|
$
|
118
|
|||
The
asset
allocation for the defined benefit pension plan by asset category, is as
follows:
|
Asset
Category
|
Percentage
of Plan Assets
at
December 31,
|
||||||
|
2006
|
2005
|
||||||
|
Equity
securities
|
65.3
|
%
|
55.4
|
%
|
|||
|
Debt
securities
|
32.1
|
%
|
28.2
|
%
|
|||
|
Other
|
2.6
|
%
|
16.4
|
%
|
|||
|
Total
|
100.0
|
%
|
100.0
|
%
|
|||
We
attempt to invest Plan assets to employ investment strategies that achieve
a
weighted average target asset allocation of 60% to 70% in equity securities,
30%
to 40% in fixed income and approximately 5% to 10% in cash. During 2006,
our
Plan assets met the target allocations. In late December 2005, we made
a
contribution of $2.0 million in cash into the Plan assets. This caused
the asset
category percentages to fall outside the target asset allocations we attempt
to
stay within as of December 31, 2005.
As
of
December 31, 2006, expected future benefit payments related to our defined
benefit pension plan and restoration plan were as follows (in
thousands):
|
Defined
Benefit
Pension
Plan
|
|
Restoration
Plan
|
|||||
|
2007
|
$
|
1,289
|
$
|
88
|
|||
|
2008
|
1,352
|
92
|
|||||
|
2009
|
1,451
|
100
|
|||||
|
2010
|
1,586
|
109
|
|||||
|
2011
|
1,663
|
118
|
|||||
|
2012
through 2016
|
11,836
|
1,123
|
|||||
|
$
|
19,177
|
$
|
1,630
|
||||
We
expect
to contribute $3.0 million to our defined benefit pension plan and $88,000
to
our postretirement benefit plan in 2007.
401(k)
Plan
We
have a
401(k) defined contribution plan (the “401(k) Plan”) covering substantially all
employees, who have completed one year of service and are age twenty-one
or
older. A participant may elect to defer a percentage of their compensation
subject to certain limits based on federal tax laws. For the years ended
December 31, 2006, 2005 and 2004, expense attributable to the 401(k) Plan
amounted to $70,000, $62,000 and $56,000, respectively.
Incentive
Stock Options
In
April
1993, we adopted the Southside Bancshares, Inc. 1993 Incentive Stock Option
Plan
("the ISO Plan"), a stock-based incentive compensation plan. The ISO Plan
expired March 31, 2003. Prior to January 1, 2006, we applied APB Opinion
25 and
related Interpretations in accounting for the ISO Plan and disclosed the
pro
forma information required by SFAS123 and SFAS148. There was no compensation
expense recognized for the stock options.
As
of
January 1, 2006, we transitioned to fair value based accounting for stock-based
compensation using a modified version of prospective application in accordance
with Statement of Financial Accounting Standards No. 123R, (“SFAS 123R”),
Share-Based Payment. The compensation cost charged against income for the
ISO
Plan was $27,000 for the year ended December 31, 2006. The financial statements
for the year ended December 31, 2005 have not been restated in connection
with
the transition to SFAS 123R and do not reflect the recognition of the
compensation cost related to the stock options.
A
summary
of the status of our nonvested options as of December 31, 2006 is as
follows:
|
Number
of
Options
|
Weighted
Average Grant-Date
Fair Value
|
||||||
|
Nonvested
at beginning of the period
|
19,697
|
$
|
4.91
|
||||
|
Granted
|
-
|
-
|
|||||
|
Vested
|
(6,559
|
)
|
$
|
4.91
|
|||
|
Forfeited
|
(1,460
|
)
|
$
|
4.91
|
|||
|
Nonvested
at end of period
|
11,678
|
$
|
4.91
|
||||
As
of
December 31, 2006, there was $34,000 of total unrecognized compensation
cost
related to the ISO Plan for nonvested options granted in March 2003. The
cost is
expected to be recognized over a weighted-average period of 1.25 years.
The
fair
value of each stock option granted is estimated on the date of grant using
the
Black-Scholes method of option pricing with the following weighted-average
assumptions for grants in 2003: dividend yield of 1.93%; risk-free interest
rate
of 4.93%; expected life of 6 years; and expected volatility of
28.90%.
Under
the
ISO Plan, we were authorized to issue shares of common stock pursuant to
"Awards" granted in the form of incentive stock options (intended to qualify
under Section 422 of the Internal Revenue Code of 1986, as amended). Before
the
ISO Plan expired, awards were granted to selected employees and directors.
No
stock options have been available for grant under the ISO Plan since its
expiration in March 2003. Currently, we do not offer share-based payment
programs to our employees.
The
ISO
Plan provided that the exercise price of any stock option not be less than
the
fair market value of the common stock on the date of grant. The outstanding
stock options have contractual terms of 10 years. All options vest on a
graded
schedule, 20% per year for 5 years, beginning on the first anniversary
date of
the grant date.
A
summary
of the status of our stock options as of December 31, 2006, 2005 and 2004,
and
the changes during the years ended on those dates is presented
below:
|
2006
|
|
2005
|
|
2004
|
|
||||||||||||||
|
|
|
Number
of
Options
|
|
Weighted
Average
Exercise
Prices
|
|
Number
of
Options
|
|
Weighted
Average
Exercise
Prices
|
|
Number
of
Options
|
|
Weighted
Average
Exercise
Prices
|
|||||||
|
Outstanding
at beginning of year
|
725,942
|
$
|
5.96
|
970,553
|
$
|
5.65
|
1,140,144
|
$
|
5.55
|
||||||||||
|
Granted
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Exercised
|
(149,000
|
)
|
$
|
5.55
|
(243,046
|
)
|
$
|
4.70
|
(166,773
|
)
|
$
|
4.95
|
|||||||
|
Forfeited
|
(1,460
|
)
|
$
|
13.24
|
(1,565
|
)
|
$
|
7.31
|
(2,818
|
)
|
$
|
5.51
|
|||||||
|
Expired
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Outstanding
at end of year
|
575,482
|
$
|
6.05
|
725,942
|
$
|
5.96
|
970,553
|
$
|
5.65
|
||||||||||
|
Exercisable
at end of year
|
563,804
|
$
|
5.90
|
706,245
|
$
|
5.76
|
874,939
|
$
|
5.43
|
||||||||||
The
following table summarizes information about stock options outstanding
and
exercisable at December 31, 2006:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||
|
Range
of
Exercise
Prices
|
Number
Outstanding
|
Weighted
Average Remaining
Contract Life
in
Years
|
Weighted
Average
Exercise
Price
|
Number
Exercisable
|
Weighted
Average
Exercise
Price
|
|||||||||||
|
$
5.44 to $ 6.18
|
552,280
|
2.61
|
$
|
5.75
|
552,280
|
$
|
5.75
|
|||||||||
|
$
13.24 to $ 13.24
|
23,202
|
6.25
|
$
|
13.24
|
11,524
|
$
|
13.24
|
|||||||||
|
$
5.44 to $ 13.24
|
575,482
|
2.76
|
$
|
6.05
|
563,804
|
$
|
5.90
|
|||||||||
The
total
intrinsic value of stock options for the year ended December 31, 2006 is
summarized as follows (dollars in thousands):
|
Number
of
Shares
|
Aggregate
Intrinsic
Value
|
||||||
|
Options
Outstanding
|
575,482
|
$
|
11,342
|
||||
|
Options
Exercisable
|
563,804
|
$
|
11,196
|
||||
The
total
intrinsic value (i.e., the amount by which the fair value of the underlying
common stock exceeds the exercise price of a stock option on exercise date)
of
stock options exercised during the years ended December 31, 2006 and 2005
were
$2.5 million and $3.5 million, respectively.
Cash
received from stock option exercises for the year ended December 31, 2006
and
2005 was $828,000 and $1.1 million, respectively. The tax benefit realized
for
the deductions related to the stock option exercises were $252,000 and
$629,000
for the year ended December 31, 2006 and 2005, respectively.
| 13. |
SHAREHOLDERS'
EQUITY
|
Cash
dividends declared and paid were $0.47, $0.46 and $0.42 per share for the
years
ended December 31, 2006, 2005 and 2004, respectively. Future dividends
will
depend on our earnings, financial condition and other factors which the
board of
directors considers to be relevant. Our dividend policy requires that any
cash
dividend payments made not exceed consolidated earnings for that year.
We
are
subject to various regulatory capital requirements administered by the
federal
banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on our financial
statements. Under capital adequacy guidelines and the regulatory framework
for
prompt corrective action, we must meet specific capital guidelines that
involve
quantitative measures of our assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. Our capital
amounts
and classification are also subject to qualitative judgments by the regulators
regarding components, risk weightings, and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require us
to
maintain minimum amounts and ratios (set forth in the table below) of Total
and
Tier 1 capital (as defined in the regulations) to risk-weighted assets
(as
defined), and of Tier 1 capital (as defined) to average assets (as defined).
At
December 31, 2006, we exceeded all regulatory minimum capital
requirements.
As
of
December 31, 2006, the most recent notification from the FDIC categorized
us as
well capitalized under the regulatory framework for prompt corrective action.
To
be categorized as well capitalized we must maintain minimum Total risk-based,
Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table.
There
are no conditions or events since that notification that management believes
have changed the institution's category.
|
Actual
|
For
Capital Adequacy Purposes
|
To
Be Well Capitalized Under Prompt Corrective Action
Provisions
|
|||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||
|
As
of December 31, 2006:
|
(dollars
in thousands)
|
||||||||||||||||||
|
Total
Capital (to Risk Weighted Assets)
|
|||||||||||||||||||
|
Consolidated
|
$
|
152,198
|
17.76
|
%
|
$
|
68,540
|
8.00
|
%
|
N/A
|
N/A
|
|||||||||
|
Bank
Only
|
$
|
146,458
|
17.09
|
%
|
$
|
68,540
|
8.00
|
%
|
$
|
85,675
|
10.00
|
%
|
|||||||
|
Tier
1 Capital (to Risk Weighted Assets)
|
|||||||||||||||||||
|
Consolidated
|
$
|
145,005
|
16.93
|
%
|
$
|
34,270
|
4.00
|
%
|
N/A
|
N/A
|
|||||||||
|
Bank
Only
|
$
|
139,265
|
16.26
|
%
|
$
|
34,270
|
4.00
|
%
|
$
|
51,405
|
6.00
|
%
|
|||||||
|
Tier
1 Capital (to Average Assets) (1)
|
|||||||||||||||||||
|
Consolidated
|
$
|
145,005
|
7.68
|
%
|
$
|
75,570
|
4.00
|
%
|
N/A
|
N/A
|
|||||||||
|
Bank
Only
|
$
|
139,265
|
7.37
|
%
|
$
|
75,542
|
4.00
|
%
|
$
|
94,427
|
5.00
|
%
|
|||||||
|
Actual
|
For
Capital Adequacy Purposes
|
To
Be Well Capitalized Under Prompt Corrective Action
Provisions
|
|||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||
|
As
of December 31, 2005:
|
(dollars
in thousands)
|
||||||||||||||||||
|
Total
Capital (to Risk Weighted Assets)
|
|||||||||||||||||||
|
Consolidated
|
$
|
140,158
|
18.04
|
%
|
$
|
62,158
|
8.00
|
%
|
N/A
|
N/A
|
|||||||||
|
Bank
Only
|
$
|
136,396
|
17.57
|
%
|
$
|
62,107
|
8.00
|
%
|
$
|
77,634
|
10.00
|
%
|
|||||||
|
Tier
1 Capital (to Risk Weighted Assets)
|
|||||||||||||||||||
|
Consolidated
|
$
|
133,068
|
17.13
|
%
|
$
|
31,079
|
4.00
|
%
|
N/A
|
N/A
|
|||||||||
|
Bank
Only
|
$
|
129,306
|
16.66
|
%
|
$
|
31,054
|
4.00
|
%
|
$
|
46,580
|
6.00
|
%
|
|||||||
|
Tier
1 Capital (to Average Assets) (1)
|
|||||||||||||||||||
|
Consolidated
|
$
|
133,068
|
7.62
|
%
|
$
|
69,852
|
4.00
|
%
|
N/A
|
N/A
|
|||||||||
|
Bank
Only
|
$
|
129,306
|
7.41
|
%
|
$
|
69,824
|
4.00
|
%
|
$
|
87,281
|
5.00
|
%
|
|||||||
(1) Refers
to
quarterly average assets as calculated by bank regulatory agencies.
Our
payment of dividends is limited under regulation. The amount that can be
paid in
any calendar year without prior approval of our regulatory agencies cannot
exceed the lesser of net profits (as defined) for that year plus the net
profits
for the preceding two calendar years, or retained earnings.
| 14. |
DIVIDEND
REINVESTMENT AND COMMON STOCK REPURCHASE
PLAN
|
We
have a
Dividend Reinvestment Plan funded by stock authorized but not yet issued.
Proceeds from the sale of the common stock will be used for general corporate
purposes and could be directed to our subsidiaries. For the year ended
December
31, 2006, 39,758 shares were sold under this plan at an average price of
$23.20
per share, reflective of other trades at the time of each sale. For the
year
ended December 31, 2005, 45,387 shares were sold under this plan at an
average
price of $19.96 per share, reflective of other trades at the time of each
sale.
We
instituted a Common Stock Repurchase Plan in late 1994. Under the repurchase
plan, our board of directors establishes, on a quarterly basis, total dollar
limitations and price per share for stock to be repurchased. Our board
reviews
this plan in conjunction with our capital needs and Southside Bank and
may, at
their discretion, modify or discontinue the plan. During 2006, no shares
of
common stock were purchased under this plan. During 2005, 233,550 shares
of
common stock were purchased under this plan at a cost of $5.0
million.
| 15. |
INCOME
TAXES
|
The
provisions for federal income taxes included in the accompanying statements
of
income consist of the following (in thousands):
|
|
Years
Ended December 31,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
Current
tax provision
|
$
|
8,582
|
$
|
1,569
|
$
|
5,118
|
||||
|
Deferred
tax (benefit) expense
|
(4,482
|
)
|
1,724
|
(1,166
|
)
|
|||||
|
Provision
for tax expense charged to operations
|
$
|
4,100
|
$
|
3,293
|
$
|
3,952
|
||||
The
components of the net deferred tax asset as of December 31, 2006 and 2005
are
summarized below (in thousands):
|
Assets
|
Liabilities
|
||||||
|
Writedowns
on OREO
|
$
|
71
|
$
|
||||
|
Allowance
for loan losses
|
2,446
|
||||||
|
Retirement
and other benefit plans
|
(664
|
)
|
|||||
|
Unrealized
losses on securities available for sale
|
3,016
|
||||||
|
Premises
and equipment
|
(312
|
)
|
|||||
|
FHLB
stock dividends
|
(1,136
|
)
|
|||||
|
Alternative
minimum tax credit
|
625
|
||||||
|
Unfunded
status of defined benefit plan
|
4,466
|
||||||
|
Other
|
166
|
||||||
|
Gross
deferred tax assets (liabilities)
|
10,790
|
(2,112
|
)
|
||||
|
Net
deferred tax asset at December 31, 2006
|
$
|
8,678
|
|||||
|
Assets
|
Liabilities
|
||||||
|
Writedowns
on OREO
|
$
|
60
|
$
|
||||
|
Allowance
for loan losses
|
2,411
|
||||||
|
Retirement
and other benefit plans
|
(772
|
)
|
|||||
|
Unrealized
losses on securities available for sale
|
2,046
|
||||||
|
Premises
and equipment
|
(435
|
)
|
|||||
|
FHLB
stock dividends
|
(2,195
|
)
|
|||||
|
Alternative
minimum tax credit
|
1,682
|
||||||
|
Minimum
pension liability
|
276
|
||||||
|
Other
|
153
|
||||||
|
Gross
deferred tax assets (liabilities)
|
6,628
|
(3,402
|
)
|
||||
|
Net
deferred tax asset at December 31, 2005
|
$
|
3,226
|
|||||
A
reconciliation of tax at statutory rates and total tax expense is as follows
(dollars in thousands):
|
Years
Ended December 31,
|
|||||||||||||||||||
|
2006
|
2005
|
2004
|
|||||||||||||||||
|
Amount
|
Percent
of Pre-Tax Income
|
Amount
|
Percent
of Pre-Tax Income
|
Amount
|
Percent
of Pre-Tax Income
|
||||||||||||||
|
Statutory
Tax Expense
|
$
|
6,495
|
34.0
|
%
|
$
|
6,081
|
34.0
|
%
|
$
|
6,817
|
34.0
|
%
|
|||||||
|
Increase
(Decrease) in Taxes from:
|
|||||||||||||||||||
|
Tax
Exempt Interest
|
(2,415
|
)
|
(12.6
|
%)
|
(2,808
|
)
|
(15.7
|
%)
|
(2,855
|
)
|
(14.2
|
%)
|
|||||||
|
Other
Net
|
20
|
0.1
|
%
|
20
|
0.1
|
%
|
(10
|
)
|
(0.1
|
%)
|
|||||||||
|
Provision
for Tax Expense Charged to
Operations
|
$
|
4,100
|
21.5
|
%
|
$
|
3,293
|
18.4
|
%
|
$
|
3,952
|
19.7
|
%
|
|||||||
| 16. |
OFF-BALANCE-SHEET
ARRANGEMENTS, COMMITMENTS AND
CONTINGENCIES
|
Financial
Instruments with Off-Balance-Sheet Risk.
In the
normal course of business, we are a party to certain financial instruments,
with
off-balance-sheet risk, to meet the financing needs of our customers. These
off-balance-sheet instruments include commitments to extend credit and
standby
letters of credit. These instruments involve, to varying degrees, elements
of
credit and interest rate risk in excess of the amount reflected in the
financial
statements. The contract or notional amounts of these instruments reflect
the
extent of involvement and exposure to credit loss we have in these particular
classes of financial instruments.
Commitments
to extend credit are agreements to lend to a customer provided that the
terms
established in the contract are met. Commitments generally have fixed expiration
dates and may require payment of fees. Since some commitments are expected
to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Standby letters of credit are conditional
commitments issued to guarantee the performance of a customer to a third
party.
These guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan commitments to
customers.
We
had
outstanding unused commitments to extend credit of $105.2 million and $84.2
million at December 31, 2006 and 2005, respectively. Each commitment has
a
maturity date and the commitment expires on that date with the exception
of
credit card and ready reserve commitments, which have no stated maturity
date.
Unused commitments for credit card and ready reserve at December 31, 2006
and
2005 were $8.2 million and $7.3 million, respectively, and are reflected
in the
due after one year category. We had outstanding standby letters of credit
of
$3.5 million and $3.6 million at December 31, 2006 and 2005, respectively.
The
scheduled maturities of unused commitments as of December 31, 2006 and
2005 were
as follows (in thousands):
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Unused
commitments:
|
|||||||
|
Due
in one year or less
|
$
|
61,821
|
$
|
54,649
|
|||
|
Due
after one year
|
43,333
|
29,507
|
|||||
|
Total
|
$
|
105,154
|
$
|
84,156
|
|||
We
apply
the same credit policies in making commitments and standby letters of credit
as
we do for on-balance-sheet instruments. We evaluate each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained,
if deemed
necessary, upon extension of credit is based on management's credit evaluation
of the borrower. Collateral held varies but may include cash or cash
equivalents, negotiable instruments, real estate, accounts receivable,
inventory, property, plant, and equipment.
Lease
Commitments.
We
lease certain branch facilities and office equipment under operating leases.
Rent expense for branch facilities was $697,000, $643,000 and $534,000
for the
years ended December 31, 2006, 2005 and 2004, respectively. Rent expense
for
leased equipment was $217,000, $178,000 and $175,000 for the years ended
December 31, 2006, 2005 and 2004, respectively.
Future
minimum rental commitments due under non-cancelable operating leases at
December
31, 2006 were as follows (in thousands):
|
2007
|
$
|
781
|
||
|
2008
|
620
|
|||
|
2009
|
451
|
|||
|
2010
|
349
|
|||
|
2011
|
205
|
|||
|
Thereafter
|
9
|
|||
|
$
|
2,415
|
It
is
expected that certain leases will be renewed, or equipment replaced with
new
leased equipment, as these leases expire.
Securities.
In the
normal course of business we buy and sell securities. There were no unsettled
trades to purchase or sell securities at December 31, 2006. At December
31,
2005, we had recorded in our balance sheet unsettled trades to purchase
$7.5
million in securities. There were no unsettled trades to sell securities
at
December 31, 2005.
Litigation.
We are
involved with various litigation in the normal course of business. Management,
after consulting with our legal counsel, believes that any liability resulting
from litigation will not have a material effect on the financial position
and
results of operations and our liquidity.
| 17. |
SIGNIFICANT
GROUP CONCENTRATIONS OF CREDIT RISK
|
Although
we have a diversified loan portfolio, a significant portion of our loans
are
collateralized by real estate. Repayment of these loans is in part dependent
upon the economic conditions in the market area. Part of the risk associated
with real estate loans has been mitigated since 50.7% of this group represents
loans collateralized by residential dwellings that are primarily owner
occupied.
Losses on this type of loan have historically been less than those on
speculative properties. Many of the remaining real estate loans are
collateralized primarily with owner occupied commercial real estate. The
oil and
gas industry remains a significant component of the East Texas economy
and as
such the health of the oil and gas industry has an effect on our
business.
A
significant portion of our loan portfolio is dependent on the medical community.
Medical
loan types include commercial loans and commercial real estate loans. Collateral
for these loans varies depending on the type of loan and financial strength
of
the borrower. The primary source of repayment for loans in the medical
community
is cash flow from continuing operations. The medical community represents
a
concentration of risk in our Commercial loan and Commercial Real Estate
loan
portfolio. See “Item 1. Business - Market Area.” We believe that risk in the
medical community is mitigated because it is spread among multiple practice
types and multiple specialties. Should the government change the amount
it pays
the medical community through the various government health insurance programs
or if new government regulation impacts the profitability of the medical
community, the medical community could be adversely impacted which in turn
could
result in higher default rates by borrowers in the medical industry.
The
mortgage-backed securities we hold consist almost exclusively of government
pass-through securities which are either directly or indirectly backed
by the
full faith and credit of the United States Government or guaranteed by
GSEs,
FNMA or Freddie Mac. GSEs are not backed by the full faith and credit of
the
United States government.
| 18. |
RELATED
PARTY TRANSACTIONS
|
Loan
activity of executive officers of the registrant and directors of the registrant
and Southside Bank and their affiliates for the years ended December 31,
2006 and 2005 were (in thousands):
|
|
2006
|
2005
|
|||||
|
Beginning
Balance of Loans
|
$
|
3,747
|
$
|
4,265
|
|||
|
Additional
Loans
|
1,692
|
1,659
|
|||||
|
Payments
|
(1,408
|
)
|
(2,143
|
)
|
|||
|
Other
|
(1,470
|
)
|
(34
|
)
|
|||
|
Ending
Balance of Loans
|
$
|
2,561
|
$
|
3,747
|
|||
The
primary reason for the change in the other category is due to the death
of two
Southside Bank directors during 2006, one of which was also a director
of the
Company, and two advisory directors of Southside Bank who are no longer
serving
on the board. The total of loans associated with these directors was
approximately $1.4 million.
We
incurred legal costs of $188,000, $163,000 and $206,000 during the years
ended
December 31, 2006, 2005 and 2004, respectively, from a law firm of which a
director is a partner. We paid approximately $164,000, $153,000 and $154,000
in
insurance premiums during the years ended December 31, 2006, 2005 and 2004,
respectively, to a company of which a director was Chairman of the Board
until
his retirement in 1997 and was Honorary Chairman until his death in September
2006.
| 19. |
DISCLOSURES
ABOUT THE FAIR VALUE OF FINANCIAL
INSTRUMENTS
|
Statement
of Financial Accounting Standard No. 107, "Disclosures about Fair Value
of
Financial Instruments" (“SFAS 107”), requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on
estimates
using present value or other estimation techniques. Those techniques are
significantly affected by the assumptions used, including the discount
rate and
estimates of future cash flows. Such techniques and assumptions, as they
apply
to individual categories of our financial instruments, are as
follows:
|
Cash
and cash equivalents
-
The carrying amounts for cash and cash equivalents is a reasonable
estimate of those assets' fair
value.
|
|
Investment
and mortgage-backed and related securities
-
Fair values for these securities are based on quoted market prices,
where
available. If quoted market prices are not available, fair values
are
based on quoted market prices for similar securities or estimates
from
independent pricing services.
|
|
FHLB
stock and other investments
-
The carrying amount of FHLB stock is a reasonable estimate of
those
assets’ fair value.
|
|
Loans
receivable
-
For adjustable rate loans that reprice frequently and with no
significant
change in credit risk, the carrying amounts are a reasonable
estimate of
those assets' fair value. The fair value of fixed rate loans
is estimated
by discounting the future cash flows using the current rates
at which
similar loans would be made to borrowers with similar credit
ratings and
for the same remaining maturities. Nonperforming loans are estimated
using
discounted cash flow analyses or underlying value of the collateral
where
applicable.
|
|
Deposit
liabilities
-
The fair value of demand deposits, savings accounts, and certain
money
market deposits is the amount on demand at the reporting date,
that is,
the carrying value. Fair values for fixed rate certificates of
deposits
are estimated using a discounted cash flow calculation that applies
interest rates currently being offered for deposits of similar
remaining
maturities.
|
|
Federal
funds purchased - Federal
funds purchased generally have an original term to maturity of
one day and
thus are considered short-term borrowings. Consequently, their
carrying
value is a reasonable estimate of fair
value.
|
|
FHLB
advances
-
The fair value of these advances is estimated by discounting
the future
cash flows using rates at which advances would be made to borrowers
with
similar credit ratings and for the same remaining
maturities.
|
|
Long-term
debt
-
The carrying amount for long-term debt is a reasonable estimate
of the
debts’ fair value due to the fact the debt floats based on LIBOR and
resets quarterly.
|
The
following table presents our assets, liabilities, and unrecognized financial
instruments at both their respective carrying amounts and fair
value:
|
At
December 31, 2006
|
At
December 31, 2005
|
||||||||||||
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
||||||||||
|
|
(in
thousands)
|
||||||||||||
|
Financial
assets:
|
|||||||||||||
|
Cash
and cash equivalents
|
$
|
55,012
|
$
|
55,012
|
$
|
51,829
|
$
|
51,829
|
|||||
|
Investment
securities:
|
|||||||||||||
|
Available
for sale, at estimated fair value
|
98,952
|
98,952
|
121,240
|
121,240
|
|||||||||
|
Held
to maturity, at cost
|
1,351
|
1,342
|
-
|
-
|
|||||||||
|
Mortgage-backed
and related securities:
|
|||||||||||||
|
Available
for sale, at estimated fair value
|
643,164
|
643,164
|
592,435
|
592,435
|
|||||||||
|
Held
to maturity, at cost
|
226,162
|
222,748
|
229,321
|
226,886
|
|||||||||
|
Federal
Home Loan Bank stock and other investments, at cost
|
26,496
|
26,496
|
29,607
|
29,607
|
|||||||||
|
Loans,
net of allowance for loan losses
|
751,954
|
748,473
|
673,274
|
679,645
|
|||||||||
|
Loans
held for sale
|
3,909
|
3,909
|
4,281
|
4,281
|
|||||||||
|
Financial
liabilities:
|
|||||||||||||
|
Retail
deposits
|
$
|
1,282,475
|
$
|
1,281,305
|
$
|
1,110,813
|
$
|
1,107,872
|
|||||
|
Federal
funds purchased
|
5,675
|
5,675
|
2,400
|
2,400
|
|||||||||
|
FHLB
advances
|
451,620
|
448,383
|
520,684
|
513,850
|
|||||||||
|
Long-term
debt
|
20,619
|
20,619
|
20,619
|
20,619
|
|||||||||
As
discussed earlier, the fair value estimate of financial instruments for
which
quoted market prices are unavailable is dependent upon the assumptions
used.
Consequently, those estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. Accordingly, the aggregate fair value amounts
presented in the above fair value table do not necessarily represent our
underlying value.
The
estimated fair value of our commitments to extend credit, credit card
arrangements and letters of credit, was not material at December 31, 2006
or
2005.
| 20. |
PARENT
COMPANY FINANCIAL INFORMATION
|
Condensed
financial information for Southside Bancshares, Inc. (parent company only)
was
as follows
(in
thousands, except share amounts):
|
CONDENSED
BALANCE SHEETS
|
|||||||
|
ASSETS
|
December
31.
2006
|
December
31.
2005
|
|||||
|
Cash
and due from banks
|
$
|
4,433
|
$
|
656
|
|||
|
Investment
in bank subsidiary at equity in underlying net assets
|
124,801
|
125,460
|
|||||
|
Investment
in nonbank subsidiary at equity in underlying net assets
|
634
|
634
|
|||||
|
Other
assets
|
1,382
|
3,174
|
|||||
|
TOTAL
ASSETS
|
$
|
131,250
|
$
|
129,924
|
|||
|
LIABILITIES
|
|||||||
|
Long-term
debt
|
$
|
20,619
|
$
|
20,619
|
|||
|
Other
liabilities
|
27
|
15
|
|||||
|
TOTAL
LIABILITIES
|
20,646
|
20,634
|
|||||
|
SHAREHOLDERS'
EQUITY
|
|||||||
|
Common
stock ($1.25 par, 20,000,000 shares authorized:14,075,653 and
13,306,241
shares issued)
|
17,594
|
16,633
|
|||||
|
Paid-in
capital
|
100,736
|
87,962
|
|||||
|
Retained
earnings
|
29,648
|
32,054
|
|||||
|
Treasury
stock (1,718,737 shares, at cost)
|
(22,850
|
)
|
(22,850
|
)
|
|||
|
Accumulated
other comprehensive loss
|
(14,524
|
)
|
(4,509
|
)
|
|||
|
TOTAL
SHAREHOLDERS' EQUITY
|
110,604
|
109,290
|
|||||
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
$
|
131,250
|
$
|
129,924
|
|||
CONDENSED
STATEMENTS OF INCOME
|
Years
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
INCOME
|
(in
thousands)
|
|||||||||
|
Dividends
from subsidiary
|
$
|
7,600
|
$
|
5,400
|
$
|
9,000
|
||||
|
Interest
income
|
50
|
39
|
28
|
|||||||
|
TOTAL
INCOME
|
7,650
|
5,439
|
9,028
|
|||||||
|
EXPENSE
|
||||||||||
|
Interest
expense
|
1,681
|
1,305
|
923
|
|||||||
|
Other
|
907
|
726
|
708
|
|||||||
|
TOTAL
EXPENSE
|
2,588
|
2,031
|
1,631
|
|||||||
|
Income
before federal income tax expense
|
5,062
|
3,408
|
7,397
|
|||||||
|
Federal
income tax benefit
|
863
|
677
|
545
|
|||||||
|
Income
before equity in undistributed earnings of subsidiaries
|
5,925
|
4,085
|
7,942
|
|||||||
|
Equity
in undistributed earnings of subsidiaries
|
9,077
|
10,507
|
8,157
|
|||||||
|
NET
INCOME
|
$
|
15,002
|
$
|
14,592
|
$
|
16,099
|
||||
CONDENSED
STATEMENTS OF CASH FLOW
|
Years
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(in
thousands)
|
||||||||||
|
OPERATING
ACTIVITIES:
|
||||||||||
|
Net
Income
|
$
|
15,002
|
$
|
14,592
|
$
|
16,099
|
||||
|
Adjustments
to reconcile net income to net cash provided by
operations:
|
||||||||||
|
Equity
in undistributed earnings of subsidiaries
|
(9,077
|
)
|
(10,507
|
)
|
(8,157
|
)
|
||||
|
Decrease
(increase) in other assets
|
1,792
|
(2,008
|
)
|
(258
|
)
|
|||||
|
Increase
(decrease) in other liabilities
|
12
|
(10
|
)
|
(10
|
)
|
|||||
|
Net
cash provided by operating activities
|
7,729
|
2,067
|
7,674
|
|||||||
|
INVESTING
ACTIVITIES:
|
||||||||||
|
Net
cash used in investing activities
|
-
|
-
|
-
|
|||||||
|
FINANCING
ACTIVITIES:
|
||||||||||
|
Purchase
of common stock
|
-
|
(4,997
|
)
|
(1,309
|
)
|
|||||
|
Proceeds
from issuance of common stock
|
1,750
|
2,048
|
1,602
|
|||||||
|
Dividends
paid
|
(5,702
|
)
|
(5,214
|
)
|
(4,443
|
)
|
||||
|
Net
cash used in financing activities
|
(3,952
|
)
|
(8,163
|
)
|
(4,150
|
)
|
||||
|
Net
increase (decrease) in cash and cash equivalents
|
3,777
|
(6,096
|
)
|
3,524
|
||||||
|
Cash
and cash equivalents at beginning of year
|
656
|
6,752
|
3,228
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
4,433
|
$
|
656
|
$
|
6,752
|
||||
| 21. |
QUARTERLY
FINANCIAL INFORMATION OF REGISTRANT
|
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in
thousands, except per share data)
|
|
2006
|
||||||||||||
|
|
Fourth
Quarter
|
Third
Quarter
|
Second
Quarter
|
First
Quarter
|
|||||||||
|
Interest
income
|
$
|
25,357
|
$
|
25,101
|
$
|
23,925
|
$
|
22,569
|
|||||
|
Interest
expense
|
15,157
|
14,739
|
13,388
|
12,000
|
|||||||||
|
Net
interest income
|
10,200
|
10,362
|
10,537
|
10,569
|
|||||||||
|
Provision
for loan losses
|
125
|
226
|
448
|
281
|
|||||||||
|
Noninterest
income
|
6,230
|
6,186
|
5,967
|
5,098
|
|||||||||
|
Noninterest
expense
|
10,850
|
11,120
|
11,563
|
11,434
|
|||||||||
|
Income
before federal income tax expense
|
5,455
|
5,202
|
4,493
|
3,952
|
|||||||||
|
Provision
for federal income tax expense
|
1,276
|
1,150
|
950
|
724
|
|||||||||
|
Net
income
|
4,179
|
4,052
|
3,543
|
3,228
|
|||||||||
|
Earnings
per share
|
|||||||||||||
|
Basic:
|
$
|
0.34
|
$
|
0.33
|
$
|
0.29
|
$
|
0.26
|
|||||
|
Diluted:
|
$
|
0.33
|
$
|
0.32
|
$
|
0.28
|
$
|
0.25
|
|||||
|
2005
|
|||||||||||||
|
Fourth
Quarter
|
Third
Quarter
|
Second
Quarter
|
First
Quarter
|
||||||||||
|
Interest
income
|
$
|
21,079
|
$
|
20,438
|
$
|
19,288
|
$
|
18,876
|
|||||
|
Interest
expense
|
10,798
|
10,050
|
9,077
|
8,497
|
|||||||||
|
Net
interest income
|
10,281
|
10,388
|
10,211
|
10,379
|
|||||||||
|
Provision
for loan losses
|
516
|
485
|
227
|
235
|
|||||||||
|
Noninterest
income
|
5,504
|
5,374
|
5,613
|
4,757
|
|||||||||
|
Noninterest
expense
|
11,003
|
10,523
|
11,078
|
10,555
|
|||||||||
|
Income
before federal income tax expense
|
4,266
|
4,754
|
4,519
|
4,346
|
|||||||||
|
Provision
for federal income tax expense
|
779
|
921
|
822
|
771
|
|||||||||
|
Net
income
|
3,487
|
3,833
|
3,697
|
3,575
|
|||||||||
|
Earnings
per share
|
|||||||||||||
|
Basic:
|
$
|
0.29
|
$
|
0.32
|
$
|
0.31
|
$
|
0.29
|
|||||
|
Diluted:
|
$
|
0.27
|
$
|
0.31
|
$
|
0.29
|
$
|
0.28
|
|||||
|
INDEX
TO EXHIBITS
|
|||
|
Exhibit
No.
|
|||
|
3
(a)(i)
|
-
|
Articles
of Incorporation as amended and in effect on December 31, 1992,
of SoBank,
Inc. (now named Southside Bancshares, Inc.)(filed as Exhibit
3 to the
Registrant's Form 10-K for the year ended December 31, 1992,
(commission
file number 000-12247) and incorporated herein by
reference).
|
|
|
3
(a)(ii)
|
-
|
Articles
of Amendment effective May 9, 1994 to Articles of Incorporation
of SoBank,
Inc. (now named Southside Bancshares, Inc.) (filed as Exhibit
3(a)(ii) to
the Registrant’s Form 10-K for the year ended December 31, 1994,
(commission file number 000-12247) and incorporated herein
by
reference).
|
|
|
3
(b)
|
-
|
Bylaws
as amended and restated and in effect on December 16, 2004,
of Southside
Bancshares, Inc. (filed as Exhibit 3(b) to the Registrant’s Form 8-K,
filed June 28, 2006, and incorporated herein by
reference).
|
|
|
4
|
-
|
Management
agrees to furnish to the Securities and Exchange Commission,
upon request,
a copy of any other agreements or instruments of Southside
Bancshares,
Inc. and its subsidiaries defining the rights of holders of
any long-term
debt whose authorization does not exceed 10% of total
assets.
|
|
|
**
|
10
(a)(i)
|
-
|
Deferred
Compensation Plan for B. G. Hartley effective February 13, 1984, as
amended June 28, 1990, December 15, 1994, November 20, 1995,
December 21,
1999 and June 29, 2001 (filed as Exhibit 10(a)(i) to the Registrant’s Form
10-Q for the quarter ended June 30, 2001, (commission file
number
000-12247) and incorporated herein by reference).
|
|
**
|
10
(a)(ii)
|
-
|
Deferred
Compensation Plan for Robbie N. Edmonson effective February 13, 1984,
as amended June 28, 1990 and March 16, 1995 (filed as Exhibit
10(a)(ii) to
the Registrant's Form 10-K for the year ended December 31,
1995,
(commission file number 000-12247) and incorporated herein
by
reference).
|
|
**
|
10
(b)
|
-
|
Officers
Long-term Disability Income Plan effective June 25, 1990 (filed
as Exhibit
10(b) to the Registrant's Form 10-K for the year ended June 30, 1990,
(commission file number 000-12247) and incorporated herein
by
reference).
|
|
**
|
10
(c)
|
-
|
Retirement
Plan Restoration Plan for the subsidiaries of SoBank, Inc.
(now named
Southside Bancshares, Inc.)(filed as Exhibit 10(c) to the Registrant's
Form 10-K for the year ended December 31, 1992, (commission file
number 000-12247) and incorporated herein by
reference).
|
|
**
|
10
(e)
|
-
|
Form
of Deferred Compensation Agreement dated June 30, 1994 with
Andy Wall as
amended November 13, 1995. (filed as Exhibit 10(e) to the Registrant's
Form 10-K for the year ended December 31, 1995, (commission
file number
000-12247) and incorporated herein by reference).
|
|
**
|
10
(f)
|
-
|
Form
of Deferred Compensation Agreements dated June 30, 1994 with
each of Sam
Dawson, Lee Gibson and Jeryl Story as amended October 15, 1997
and Form of
Deferred Compensation Agreement dated October 15, 1997 with
Lonny Uzzell
(filed as Exhibit 10(f) to the Registrant’s Form 10-K for the year ended
December 31, 1997, (commission file number 000-12247) and incorporated
herein by reference).
|
|
**
|
10
(g)
|
-
|
Postretirement
Agreement for B. G. Hartley effective June 20, 2001 (filed
as Exhibit
10(g) to the Registrant’s Form 10-Q for the quarter ended June 30, 2001,
(commission file number 000-12247) and incorporated herein
by
reference).
|
|
**
|
10
(h)
|
-
|
Split
dollar compensation plan dated August 27, 2004, with B. G.
Hartley, (filed
as exhibit 10 (j) to the Registrant’s Form 8-K, filed October 19, 2004,
and incorporated herein by reference).
|
|
**
|
10
(i)
|
-
|
Split
dollar compensation plan dated August 31, 2004, with Charles
E. Dawson
(filed as exhibit 10(k) to the Registrant’s Form 8-K, filed October 19,
2004, and incorporated herein by reference).
|
|
**
|
10
(j)
|
-
|
Split
dollar compensation plan dated September 7, 2004, with Lee
R. Gibson, III
(filed as exhibit 10(i) to the Registrant’s Form 8-K, filed October 19,
2004, and incorporated herein by reference).
|
|
**
|
10
(k)
|
-
|
Split
dollar compensation plan dated October 13, 2004, with Jeryl
Wayne Story
(filed as exhibit 10(h) to the Registrant’s Form 8-K, filed October 19,
2004, and incorporated herein by reference).
|
|
*
|
-
|
Subsidiaries
of the Registrant.
|
|
|
*
|
-
|
Consent
of Independent Registered Public Accounting Firm.
|
|
|
*
|
-
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
*
|
-
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
*
|
-
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
_____________
* Filed
herewith.
** Compensation
plan, benefit plan or employment contract or arrangement
121