Southside Bancshares, Inc. Announces Net Income for the Three and Nine Months Ended September 30, 2010

TYLER, Texas, Oct. 28 /PRNewswire-FirstCall/ -- Southside Bancshares, Inc. (“Southside” or the “Company”) (Nasdaq: SBSI) today reported its financial results for the three and nine months ended September 30, 2010.

Southside reported net income of $11.0 million for the three months ended September 30, 2010, an increase of $551,000, or 5.2%, when compared to the same period in 2009.  

Net income for the nine months ended September 30, 2010, decreased $2.1 million, or 6.1%, to $31.9 million from $34.0 million, for the same period in 2009.

Diluted earnings per common share increased $0.04, or 6.1%, to $0.70 for the three months ended September 30, 2010, when compared to $0.66 for the same period in 2009.  Diluted earnings per common share decreased $0.14, or 6.5%, to $2.02 for the nine months ended September 30, 2010, compared to $2.16 for the same period in 2009.  

The return on average shareholders’ equity for the nine months ended September 30, 2010, decreased to 19.84% compared to 25.15%, for the same period in 2009.  The annual return on average assets decreased to 1.44% for the nine months ended September 30, 2010, compared to 1.65% for the same period in 2009.

“We are pleased with the progress made during the three quarters of 2010,” stated B. G. Hartley, Chairman and Chief Executive Officer of Southside Bancshares, Inc.  “Our bank has enjoyed two major sources of profitability on the asset side, traditional lending and investments.  Our business plan is designed so that, as one arm of the bank performs in a less robust manner due to the economic situation, the other usually increases performance.  While our lending operation has done a good job managing through the economic headwinds, we are fortunate that the same economy has actually provided tailwinds for our investment portfolio.  We look forward to the eventual economic recovery, when more robust loan demand will reemerge in our market areas.”

“For fifty years, our core business has revolved around gathering deposits and making loans.  In addition to our well established East Texas markets, we are now also making inroads in the Fort Worth, Arlington and Austin markets.  In the third quarter, we added two lenders to the Austin area, providing Southside with an enhanced presence in this large and growing market.  Combined with recent hires in Fort Worth and Arlington, we believe this positions us to add assets from those tremendous markets.”

“For the investment portfolio, this year has involved two overall themes, change and uncertainty.  As 2010 opened, Fannie Mae and Freddie Mac announced a large one time repurchase to remove delinquent loans from the mortgage-backed securities.  As we entered spring, the uncertainty in Europe spread, causing many to question the strength of the economic recovery.  As we entered the fall months, the stubborn high unemployment rate caused the markets to speculate that we are on the verge of another round of quantitative easing.  Each of those events caused us to reevaluate our portfolio, selling securities to replace them with better “risk/reward” securities.  The sale of securities resulted in investment gains.  Those gains are a product of high security market values, which are a function of low current interest rates combined with a subdued mortgage prepayment environment.  In effect, the investment portfolio has benefited from a “goldilocks” environment, profiting from not too hot prepayments as well as not too cold interest rates.    It is uncertain how long this environment will persist as well as whether the heat of potentially increasing prepayments or the chill of possible rising interest rates will change this dynamic.  This environment has lead to a level of gains on the sale of securities not previously anticipated.  Therefore, it is difficult to anticipate the level of security gains as we enter the next phase of the economic recovery.”

“The investment and economic landscape makes it uncertain whether Southside will experience asset growth over the near term.  High security valuations make it more difficult to find acceptable risk reward securities.  Loan demand continues to be less than robust, making it unlikely that our loan portfolio will experience any significant growth until the economy significantly recovers.  However, this environment has caused Southside to spend much effort on the “funding” side of the balance sheet.  During the third quarter, we called over $52 million in brokered CDs with a one time cost of $340,000.  Most were replaced with lower cost callable brokered CDs.  We also entered into $50 million par in advance commitments from the FHLB to replace longer term fixed rate advances.  These funding commitments, or options to fund in the future at today’s interest rates, expire two years forward from the advance commitment date.  We paid a fee for this option.  We are pleased that the majority of our longer term funding has options which Southside controls.  Therefore, should rates stay low or actually decline, we are free to fund operations at the then current low rates.  However, should rates rise, we will have locked in our funding and will be able to finance future higher yielding loans and investments at today’s low rates.  While our asset repositioning has impacted 2010 earnings, we believe the asset repositioning as well as our work on the funding side has set us up well for 2011 and beyond.”

“As 2010 began, the board of directors authorized a $6 million stock buyback.  During the third quarter, we began to execute that buyback.  We repurchased 254,276 shares at an average price of $18.45.  In total we have spent $4.7 million to increase your proportional ownership in your bank.  The board of directors voted to replenish the $4.7 million spent for the stock repurchase plan, taking the total authorized for the repurchase of common stock to $6.0 million.  The dollar amount of shares purchased and the timing of purchases under the program are at the discretion of management.  Shares may be purchased in the open market or in privately negotiated transactions.”

“As part of our 50th anniversary celebration we rang the opening bell at NASDAQ and held an open house at our original location welcoming customers and shareholders to share in the celebration.  Since we opened, we have been proud to be a part of all the growth in our service areas.  Partnership with our communities is one of our founding principles.  Fundamentally, if it is good for our communities, it is usually good for Southside.  As our communities and borrowers needs have evolved over the years so has our approach to handle those needs.  Everyday that we open our doors, we believe we have to earn the right to partner with our communities.  We look forward to continuing to earn that right throughout this economic cycle.“

Loans and Deposits

For the three months ended September 30, 2010, total loans increased by $19.8 million, when compared to June 30, 2010.  During the three months ended September 30, 2010, municipal loans increased $18.0 million, real estate loans increased $3.8 million, commercial loans increased $603,000, and loans to individuals decreased $2.6 million.  

Nonperforming assets continued to stabilize during the third quarter decreasing $1.0 million, or 5.2%, to $18.7 million, or 0.62% of total assets, as of September 30, 2010 when compared to June 30, 2010.  Future performance will be influenced by economic trends.  

During the three months ended September 30, 2010, deposits, net of brokered deposits, increased $89.7 million, or 5.1%, compared to June 30, 2010.  When comparing September 30, 2010 to September 30, 2009, deposits, net of brokered deposits, increased $163.6 million, or 9.7%.

Net Interest Income

Net interest income decreased $1.4 million, or 6.1%, to $21.3 million for the three months ended September 30, 2010, when compared to $22.7 million for the same period in 2009.  For the three months ended September 30, 2010, our net interest spread decreased to 3.02% from 3.35% for the same period in 2009.  The net interest margin decreased to 3.35% for the three months ended September 30, 2010 compared to 3.73% for the same period in 2009.  The net interest spread and net interest margin for the three months ended September 30, 2010 increased to 3.02% and 3.35%, respectively, from 2.77% and 3.09% for the three months ended June 30, 2010.  This is due primarily to the one time prepayment announcements by Fannie Mae and Freddie Mac which increased amortization expense for agency mortgage-backed securities during the second quarter.  Interest rates fell sharply in the third quarter resulting in a reduction in the slope of the yield curve in the fixed income market.

Net Income

The increase in net income for the three months ended September 30, 2010, when compared to the same period in 2009, was a result of an increase in noninterest income that included an increase in security gains, a decrease in net impairment losses on the $2.9 million amortized cost basis of trust preferred securities we owned at September 30, 2010 that was partially offset by a decrease in net interest income, and an increase in the provision for loan losses and income tax expense.

Noninterest expense decreased $96,000, or 0.5%, for the three months ended September 30, 2010, compared to the same period in 2009.  The decrease in noninterest expense was primarily a result of a decrease in ATM and debit card expense, professional fees and other expenses that were partially offset by an increase in salaries and employee benefits.  ATM and debit card expense decreased $105,000, or 32.0%, when compared to the same period in 2009.  The increase in salaries and employee benefits was associated with our overall growth and expansion, an increase in retirement expense and normal salary increases for existing personnel which increased a combined $672,000, or 6.6%, when compared to the same period in 2009.  Professional fees decreased $154,000, or 26.9%, due primarily to a decrease in legal fees.  Other expense decreased $614,000, or 28.8%, when compared to the same period in 2009 due to a decrease in the provision for losses on ORE property of $521,000, or 102.8%.  Income tax expense increased $191,000, or 5.3%, for the three months ended September 30, 2010, compared to the same period in 2009.  The effective tax rate increased to 25.2% for the three months ended September 30, 2010, compared to 25.0% for the same period in 2009.  The income tax expense and the effective tax rate increased due to an increase in taxable income when compared to the same period in 2009.  

About Southside Bancshares, Inc.

Southside Bancshares, Inc. is a bank holding company with approximately $3.0 billion in assets that owns 100% of Southside Bank.  Southside Bank currently has 48 banking centers in Texas and operates a network of 50 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 [email protected].

Forward-Looking Statements

Certain statements of other than historical fact that are contained in this document and in other 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 about the effect of the Company’s expansion, including expectations of the potential profitability of such expansion, trends in asset quality and earnings from growth, and certain market risk disclosures, including the impact of potential interest rate increases, 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, 2009 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.  

SOURCE Southside Bancshares, Inc.

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