SOUTHSIDE BANCSHARES, INC.
Tyler, Texas (July 25, 2008) Southside Bancshares, Inc. (“Southside” or the “Company”) today reported its financial results for the three and six months ended June 30, 2008.
Southside reported record net income of $8.5 million for the three months ended June 30, 2008, an increase of $3.9 million, or 86.0%, when compared to $4.6 million for the same period in 2007.
Net income for the six months ended June 30, 2008, increased $5.7 million, or 68.6% to $14.1 million from $8.4 million, for the same period in 2007.
Earnings per fully diluted share increased $0.28, or 87.5%, to $0.60 for the three months ended June 30, 2008, when compared to $0.32 for the same period in 2007. Earnings per fully diluted share increased $0.40, or 67.8%, to $0.99 for the six months ended June 30, 2008, compared to $0.59 for the same period in 2007.
The return on average shareholders’ equity for the six months ended June 30, 2008, increased to 20.06%, compared to 14.70%, for the same period in 2007. The return on average assets increased to 1.27%, for the six months ended June 30, 2008, compared to 0.91%, for the same period in 2007.
“Our unwavering objective remains creating superior long-term returns for our shareholders,” stated B. G. Hartley, Chairman and CEO of Southside Bancshares, Inc. “To that end, we remain committed to making investments designed to enhance franchise value. Given the global economic uncertainties and chaotic conditions under which some in the financial industry are struggling, we are especially pleased to announce record net income for the second quarter and six months ended June 30, 2008. The earnings reported today are in large measure the result of strategic investments and decisions initiated, in some cases, years ago. I would like to report on a few initiatives and benchmarks on which we are currently focused. We anticipate many of these results will positively impact earnings well into the future.”
“Our regional lending initiative continues to bear fruit. Total loans increased $17.0 million, or 1.8%, during the first half of 2008. We have increased our focus on traditional, less volatile core deposits. Total deposits, net of brokered deposits, increased $95.5 million, or 6.8%, during the first six months of 2008. During the first half of 2008, we called $123.4 million of brokered deposits issued in a higher rate environment. We have replaced them with lower rate long-term advances at the FHLB. We use the same rigorous methodology to determine appropriate funding sources as we do to determine appropriate asset classes. The current economic troubles have forced many in the financial services industry to return to the basics. Southside, however, did not feel the need to depart from basic community banking.”
“We continue to make progress with respect to our two major acquisitions. Fort Worth National Bank is rapidly integrating into the Southside network. During the third quarter we anticipate introducing the Southside name into the Fort Worth National Bank markets. As the integration continues to progress, we anticipate further synergies in lending and deposit activities. We are also working to reduce total non-interest expense as we increase the economies of scale. Southside has traditionally built businesses with available proven talent. The Fort Worth metropolitan area has a large, dynamic labor pool, and we have been able to capitalize on the current turmoil in the financial sector by, successfully recruiting several banking professionals. We expect to begin integrating these individuals into the Southside franchise during the third quarter. Southside Financial Group (“SFG”) continues to progress according to plan. We are especially pleased to have added Gary Perdue to SFG. We believe we are putting the pieces into place for SFG to be a meaningful contributor to future earnings.”
“In the investment portfolio, we have realigned our agency mortgage-backed securities to profit from a slower, less robust real estate market. Our entire mortgage-backed portfolio is comprised of U. S. Agency securities. As real estate continued to weaken during 2008, we reviewed our investment portfolio and identified certain securities with poor economics in the event that housing turnover (as well as simple refinancing) slowed appreciably. Put simply, specific lower coupon bonds tended to have that exposure. We liquidated lower coupon bonds and replaced them with higher coupon securities that actually performed better as housing slowed. The net result was an increase in the average coupon for our mortgage-backed securities portfolio of just slightly over 30 basis points.”
“Determining the appropriate size of the balance sheet is one of the critical decisions any bank makes. At Southside, the balance sheet is not merely the result of a series of micro-decisions, but rather the size is controlled based on the economics of assets compared to the economics of funding. Our balance sheet has grown recently after a period of slight shrinkage during portions of 2006 and 2007. As a large number of firms are forced to shrink their balance sheet, the economics of funding additional assets has become advantageous to us. As this economic situation persists, we will continue to add assets as they become available. These assets, may include investment securities, loans, a branch network, as well as traditional organic and non-organic growth. We believe we are fortunate to be in a position to increase the size of the balance sheet at a time when some in the financial sector are forced to reduce assets.”
Loan and Deposit Growth
For the three months ended June 30, 2008, total loans decreased slightly by $2.6 million, or 0.27%. Management believes that the loan portfolio remains well diversified. During the quarter ended June 30, 2008, all real estate loan categories decreased along with loans to individuals while commercial and municipal loan portfolios increased. When comparing the period ended June 30, 2008 to the comparable period in 2007, total loans grew by $209.5 million, or 27.3%. Approximately $90.5 million of the increase is due to the purchase of Fort Worth National Bank in October of 2007 and approximately $63.0 million of SFG automobile loans. The remaining $56.0 million increase is due to loan growth at Southside Bank. We are pleased that our loan growth is well diversified as all loan categories increased when comparing June 30, 2008 to the same period in 2007.
Nonperforming assets decreased $487,000, or 6.0%, for the three months ended June 30, 2008, when compared to March 31, 2008. The ratio of non-performing assets to total assets decreased to one third of one percent or 0.33% from 0.36% at March 31, 2008. Nonperforming assets increased $5.3 million, or 229.0%, when comparing June 30, 2008 to June 30, 2007. The ratio of non-performing assets to total assets increased but remained relatively low at 0.33%. It is important to note that approximately $3.0 million of the nonperforming assets represents two loan relationships placed in nonaccrual during the six months ended June 30, 2008 and while we believe these loans are properly classified, based on information currently available, we do not believe there will be any significant nonreserved losses associated with these two loan relationships. In addition, approximately $1.2 million of SFG automobile loans were in nonaccrual status at June 30, 2008 compared to zero at June 30, 2007. This increase is a result of the $63 million in auto loan purchases by SFG beginning in September 2007.
Deposits, net of brokered deposits, increased $89.4 million, or 6.4%, to $1.5 billion during the three months ended June 30, 2008, when compared to March 31, 2008. During the quarter we called $32.2 million of brokered deposits. When comparing the period ended June 30, 2008 to the comparable period in 2007, deposits, net of brokered deposits, increased $280.2 million, or 23.1%. Approximately $104.0 million of the increase is due to the purchase of Fort Worth National Bank and approximately $176.0 million of core deposit growth at Southside Bank.
Net Interest Income
Net interest income increased $7.8 million, or 77.9%, to $17.9 million for the three months ended June 30, 2008, when compared to $10.1 million for the same period in 2007. This is a result of an increase in the average yield on our interest earning assets combined with a decrease in the average yield on the average interest bearing liabilities. The increase in the yield on interest earning assets is reflective of the purchase of $63.0 million of high yield auto loans by SFG, the addition of approximately $90.5 million of loans associated with the acquisition of Fort Worth National Bank, an 11 basis point increase in the yield on our securities portfolio and an increase in average interest earning assets of $392.1 million, or 23.2%. The decrease in the average yield on interest bearing liabilities is a result of an overall decrease in interest rates and calling $123.4 million of high yield brokered deposits during 2008. For the three months ended June 30, 2008, our net interest spread increased to 3.06% from 1.71% and our net interest margin increased to 3.65% from 2.57% when compared to the same period in 2007. The net interest margin and net interest spread for the three months ended June 30, 2008, increased to 3.65% and 3.06%, respectively, from 3.22% and 2.55% for the three months ended March 31, 2008.
Net Income for the Three Months
The increase in net income for the three months ended June 30, 2008, was primarily a result of the increase in net interest income and noninterest income partially offset by an increase in provision for loan loss and noninterest expense. Noninterest income, excluding gain on available for sale securities, increased $971,000, or 14.6%, for the three months ended June 30, 2008, compared to the same period in 2007. The increase in noninterest income was primarily the result of increases in deposit services income, gain on sale of loans and bank owned life insurance income primarily as a result of a death benefit on a retired officer. During the three months ended June 30, 2008, we primarily sold specific low coupon mortgage-backed securities where the risk reward profile had changed along with long duration municipal securities. As a result, we realized a $3.7 million gain on the sale of available for sale securities during the second quarter of 2008. Provision for loan losses increased $2.7 million, or 1,258.1%, for the three months ended June 30, 2008, compared to the same period in 2007 primarily as a result of the $63 million investment in the automobile loan portfolios.
Noninterest expense increased $3.0 million, or 26.4%, for the three months ended June 30, 2008, compared to the same period in 2007. Due to the acquisition of Fort Worth National Bank during the fourth quarter of 2007 and SFG in the third quarter of 2007, most noninterest expense categories experienced increases. The increase in noninterest expense was primarily a result of the increase in salaries and employee benefits, occupancy expense and other expense. The increase in salaries and employee benefits for the three months ended June 30, 2008 were $1.5 million, or 20.7%, compared to the same period in 2007.
About Southside Bancshares, Inc.
Southside Bancshares, Inc. is a bank holding company with approximately $2.3 billion in assets that owns 100% of Southside Bank and Fort Worth National Bank. Southside Bank and Fort Worth National Bank currently have 44 banking centers in Texas and operate a network of 45 ATMs.
To learn more about Southside Bancshares, Inc., please visit our investor relations website at www.southside.com/investor. Our investor relations site provides a detailed overview of our activities, financial information and historical stock price data. To receive e-mail notification of company news, events and stock activity, please register on the E-mail Notification portion of the website. Questions or comments may be directed to Susan Hill at (903) 531-7220, or susanh@southside.com.
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 the Company, 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 the Company’s 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 the Company's actual results to differ materially from the results discussed in the forward-looking statements. For example, discussions of the effect of the Company’s expansion, including expectations of the costs and profitability of such 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. 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.
Additional information concerning the Company and its business, including additional factors that could materially affect the Company’s financial results, is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 under “Forward-Looking Information” and Item 1A. “Risk Factors,” and in the Company’s other filings with the Securities and Exchange Commission. The Company disclaims 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.
The following table sets forth loan totals by category for the periods presented:
The analysis below shows average interest earning assets and interest bearing liabilities together with the average yield on the interest earning assets and the average cost of the interest bearing liabilities.
(1) Interest on loans includes fees on loans that are not material in amount.
(2) Interest income includes taxable-equivalent adjustments of $1,195 and $1,108 for the six months ended June 30, 2008 and 2007, respectively.
(3) Interest income includes taxable-equivalent adjustments of $855 and $437 for the six months ended June 30, 2008 and 2007, respectively.
(4) For the purpose of calculating the average yield, the average balance of securities is presented at historical cost.
(5) Represents junior subordinated debentures issued by us to Southside Statutory Trust III, IV, and V in connection with the issuance by Southside Statutory Trust III of $20 million of trust preferred securities, Southside Statutory Trust IV of $22.5 million of trust preferred securities, Southside Statutory Trust V of $12.5 million of trust preferred securities and junior subordinated debentures issued by Fort Worth Bancshares, Inc. to Magnolia Trust Company I in connection with the issuance by Magnolia Trust Company I of $3.5 million of trust preferred securities.
(1) Interest on loans includes fees on loans that are not material in amount.
(2) Interest income includes taxable-equivalent adjustments of $605 and $560 for the three months ended June 30, 2008 and 2007, respectively.
(3) Interest income includes taxable-equivalent adjustments of $383 and $221 for the three months ended June 30, 2008 and 2007, respectively.
(4) For the purpose of calculating the average yield, the average balance of securities is presented at historical cost.
(5) Represents junior subordinated debentures issued by us to Southside Statutory Trust III, IV, and V in connection with the issuance by Southside Statutory Trust III of $20 million of trust preferred securities, Southside Statutory Trust IV of $22.5 million of trust preferred securities, Southside Statutory Trust V of $12.5 million of trust preferred securities and junior subordinated debentures issued by Fort Worth Bancshares, Inc. to Magnolia Trust Company I in connection with the issuance by Magnolia Trust Company I of $3.5 million of trust preferred securities.
