SBSI 3.31.2013 10-Q -A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2013
OR
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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)
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TEXAS | | 75-1848732 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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1201 S. Beckham, Tyler, Texas | | 75701 |
(Address of principal executive offices) | | (Zip Code) |
903-531-7111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o | Accelerated filer x |
Non-accelerated filer o | Smaller reporting company o |
(Do not check if a smaller reporting company) | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of the issuer's common stock, par value $1.25, outstanding as of April 30, 2013 was 17,842,463 shares.
Explanatory Note
This Amendment No. 1 on Form 10-Q/A amends the Quarterly Report on Form 10-Q for the period ended March 31, 2013, which was originally filed with the Securities and Exchange Commission (the “SEC”) on May 7, 2013 (the “Original Filing”). This amendment is being filed to reflect (i) the restatement of the quarterly results of Southside Bancshares, Inc. (the “Company”), as discussed in Note 2 to the unaudited consolidated financial statements contained herein, and (ii) other information related to such restated financial information. In addition, this amendment is being filed to report the notice of resignation received from Michael L. Coogan, one of our named executive officers, during the first quarter of 2013. Except for Items 1, 2 and 4 of Part I and Items 5 and 6 of Part II, no other information included in the Original Filing is amended by this Form 10-Q/A.
During the preparation of the Form 10-K for the year ended December 31, 2013 (the “2013 Form 10-K”), the Company determined that in periods prior to December 31, 2013, it incorrectly accounted for the recognition of interest income on its municipal bonds purchased at a premium as a result of amortizing the premium to the earliest call date instead of amortizing the premium to maturity as prescribed pursuant to GAAP. Therefore, the Company determined the municipal bonds purchased at a premium should be re-amortized to maturity.
The Company evaluated the effect of this error and concluded that it was immaterial to any of the previously issued consolidated financial statements except for the unaudited consolidated financial statements included in the Company’s Quarterly Reports on Form 10-Q for the periods ended March 31, June 30, and September 30, 2013. Accordingly, on February 10, 2014, the Company filed a Form 8-K reporting that the Audit Committee of the Board of Directors of the Company determined based on the recommendation of management, that the Company should restate its unaudited consolidated financial statements in each of these Quarterly Reports on Form 10-Q. In addition, the Company will record, in the fourth quarter of 2013, the immaterial cumulative effect of the error relating to prior years, which will increase net income by approximately $1.1 million for the year ended December 31, 2013.
See Note 2 – Restatement to Previously Issued Financial Statements contained in the Notes to Financial Statements included in this Form 10-Q/A which further describes the effect of this restatement.
Pursuant to Rule 12b-15 of the Securities Exchange Act of 1934, as amended, this Form 10-Q/A includes new certifications by our principal executive officer and principal financial officer under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. Except for the items noted above, no other information included in the Original Filing is being amended by this Form 10-Q/A. This Form 10-Q/A continues to speak as of the date of the Original Filing and we have not updated the filing to reflect events occurring subsequent to the date of the Original Filing other than those associated with the restatement of the Company’s financial statements. Accordingly, this Form 10-Q/A should be read in conjunction with the Company’s filings with the SEC subsequent to the Original Filing, including any amendments to those filings.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION | |
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PART II. OTHER INFORMATION | |
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EXHIBIT 31.1 – CERTIFICATION PURSUANT TO SECTION 302 | |
EXHIBIT 31.2 – CERTIFICATION PURSUANT TO SECTION 302 | |
EXHIBIT 32 – CERTIFICATION PURSUANT TO SECTION 906 | |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share amounts) |
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| March 31, 2013 | | December 31, 2012 |
ASSETS | (Restated) | | |
Cash and due from banks | $ | 42,992 |
| | $ | 47,312 |
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Interest earning deposits | 12,126 |
| | 103,318 |
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Total cash and cash equivalents | 55,118 |
| | 150,630 |
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Investment securities: | |
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Available for sale, at estimated fair value | 685,794 |
| | 617,707 |
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Held to maturity, at amortized cost | 1,009 |
| | 1,009 |
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Mortgage-backed and related securities: | |
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Available for sale, at estimated fair value | 905,107 |
| | 806,360 |
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Held to maturity, at amortized cost | 234,245 |
| | 245,538 |
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FHLB stock, at cost | 25,415 |
| | 27,889 |
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Other investments, at cost | 2,064 |
| | 2,064 |
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Loans held for sale | 3,138 |
| | 3,601 |
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Loans: | |
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Loans | 1,281,647 |
| | 1,262,977 |
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Less: Allowance for loan losses | (18,542 | ) | | (20,585 | ) |
Net Loans | 1,263,105 |
| | 1,242,392 |
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Premises and equipment, net | 49,985 |
| | 50,075 |
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Goodwill | 22,034 |
| | 22,034 |
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Other intangible assets, net | 283 |
| | 324 |
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Interest receivable | 13,610 |
| | 18,936 |
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Deferred tax asset | 6,388 |
| | 4,120 |
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Unsettled trades to sell securities | 1,857 |
| | — |
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Other assets | 43,131 |
| | 44,724 |
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TOTAL ASSETS | $ | 3,312,283 |
| | $ | 3,237,403 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | |
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Deposits: | |
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Noninterest bearing | $ | 546,143 |
| | $ | 595,093 |
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Interest bearing | 1,791,094 |
| | 1,756,804 |
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Total deposits | 2,337,237 |
| | 2,351,897 |
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Short-term obligations: | |
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Federal funds purchased and repurchase agreements | 857 |
| | 984 |
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FHLB advances | 163,159 |
| | 150,985 |
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Other obligations | 219 |
| | 219 |
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Total short-term obligations | 164,235 |
| | 152,188 |
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Long-term obligations: | |
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FHLB advances | 389,804 |
| | 369,097 |
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Long-term debt | 60,311 |
| | 60,311 |
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Total long-term obligations | 450,115 |
| | 429,408 |
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Unsettled trades to purchase securities | 71,757 |
| | 10,047 |
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Other liabilities | 33,041 |
| | 36,100 |
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TOTAL LIABILITIES | 3,056,385 |
| | 2,979,640 |
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Off-Balance-Sheet Arrangements, Commitments and Contingencies (Note 11) |
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Shareholders' equity: | |
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Common stock ($1.25 par, 40,000,000 shares authorized, 20,312,101 shares issued in 2013 (including 851,404 shares declared on March 28, 2013 as a stock dividend) and 19,446,187 shares issued in 2012) | 25,390 |
| | 24,308 |
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Paid-in capital | 212,151 |
| | 195,602 |
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Retained earnings | 59,237 |
| | 70,708 |
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Treasury stock (2,469,638 and 2,379,338 shares at cost) | (37,692 | ) | | (35,793 | ) |
Accumulated other comprehensive (loss) income | (3,188 | ) | | 2,938 |
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TOTAL SHAREHOLDERS' EQUITY | 255,898 |
| | 257,763 |
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 3,312,283 |
| | $ | 3,237,403 |
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The accompanying notes are an integral part of these consolidated financial statements.
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands, except per share data) |
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| Three Months Ended |
| March 31, |
| 2013 | | 2012 |
Interest income | (Restated) | | |
Loans | $ | 17,665 |
| | $ | 16,770 |
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Investment securities – taxable | 364 |
| | 31 |
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Investment securities – tax-exempt | 4,488 |
| | 2,667 |
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Mortgage-backed and related securities | 3,936 |
| | 12,163 |
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FHLB stock and other investments | 65 |
| | 79 |
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Other interest earning assets | 43 |
| | 6 |
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Total interest income | 26,561 |
| | 31,716 |
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Interest expense | |
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Deposits | 2,070 |
| | 3,395 |
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Short-term obligations | 1,250 |
| | 1,592 |
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Long-term obligations | 1,781 |
| | 2,733 |
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Total interest expense | 5,101 |
| | 7,720 |
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Net interest income | 21,460 |
| | 23,996 |
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Provision for loan losses | 492 |
| | 3,052 |
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Net interest income after provision for loan losses | 20,968 |
| | 20,944 |
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Noninterest income | |
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Deposit services | 3,753 |
| | 3,748 |
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Gain on sale of securities available for sale | 4,345 |
| | 5,972 |
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Loss on sale of securities carried at fair value through income | — |
| | (485 | ) |
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Total other-than-temporary impairment losses | (52 | ) | | — |
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Portion of loss recognized in other comprehensive income (before taxes) | 10 |
| | (141 | ) |
Net impairment losses recognized in earnings | (42 | ) | | (141 | ) |
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FHLB advance option impairment charges | — |
| | (472 | ) |
Gain on sale of loans | 319 |
| | 131 |
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Trust income | 720 |
| | 677 |
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Bank owned life insurance income | 254 |
| | 266 |
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Other | 891 |
| | 1,111 |
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Total noninterest income | 10,240 |
| | 10,807 |
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Noninterest expense | |
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Salaries and employee benefits | 13,209 |
| | 11,833 |
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Occupancy expense | 1,871 |
| | 1,758 |
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Advertising, travel & entertainment | 641 |
| | 604 |
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ATM and debit card expense | 381 |
| | 279 |
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Director fees | 264 |
| | 268 |
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Supplies | 250 |
| | 159 |
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Professional fees | 640 |
| | 691 |
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Telephone and communications | 451 |
| | 406 |
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FDIC insurance | 421 |
| | 470 |
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Other | 2,191 |
| | 2,054 |
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Total noninterest expense | 20,319 |
| | 18,522 |
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Income before income tax expense | 10,889 |
| | 13,229 |
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Provision for income tax expense | 1,847 |
| | 3,090 |
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Net income | $ | 9,042 |
| | $ | 10,139 |
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Earnings per common share – basic | $ | 0.51 |
| | $ | 0.56 |
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Earnings per common share – diluted | $ | 0.51 |
| | $ | 0.56 |
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Dividends paid per common share | $ | 0.20 |
| | $ | 0.18 |
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The accompanying notes are an integral part of these consolidated financial statements.
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (in thousands) |
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| Three Months Ended |
| March 31, |
| 2013 | | 2012 |
| (Restated) | | |
Net income | $ | 9,042 |
| | $ | 10,139 |
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Other comprehensive income (loss): | |
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Unrealized holding losses on available for sale securities during the period | (5,744 | ) | | (4,886 | ) |
Noncredit portion of other-than-temporary impairment losses on the AFS securities | (10 | ) | | 141 |
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Reclassification adjustment for gain on sale of available for sale securities included in net income | (4,345 | ) | | (5,972 | ) |
Reclassification of other-than-temporary impairment charges on available for sale securities included in net income | 42 |
| | 141 |
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Amortization of net actuarial loss, included in net periodic benefit cost | 643 |
| | 499 |
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Amortization of prior service credit, included in net periodic benefit cost | (11 | ) | | (10 | ) |
Other comprehensive loss, before tax | (9,425 | ) | | (10,087 | ) |
Income tax benefit related to other items of comprehensive income | 3,299 |
| | 3,531 |
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Other comprehensive loss, net of tax | (6,126 | ) | | (6,556 | ) |
Comprehensive income | $ | 2,916 |
| | $ | 3,583 |
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The accompanying notes are an integral part of these consolidated financial statements.
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED) (in thousands, except share and per share data) |
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| Common Stock | | Paid In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Total Shareholders' Equity |
Balance at December 31, 2011 | $ | 23,146 |
| | $ | 176,791 |
| | $ | 72,646 |
| | $ | (28,377 | ) | | $ | 14,721 |
| | $ | 258,927 |
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Net Income | |
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| | 10,139 |
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| | 10,139 |
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Other comprehensive loss | |
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| | (6,556 | ) | | (6,556 | ) |
Issuance of common stock (14,496 shares) | 18 |
| | 282 |
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| | 300 |
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Stock compensation expense | |
| | 39 |
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| | 39 |
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Cash dividends paid on common stock ($0.18 per share) | |
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| | (2,970 | ) | | |
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| | (2,970 | ) |
Stock dividend declared | 1,035 |
| | 16,441 |
| | (17,476 | ) | | |
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Balance at March 31, 2012 | $ | 24,199 |
| | $ | 193,553 |
| | $ | 62,339 |
| | $ | (28,377 | ) | | $ | 8,165 |
| | $ | 259,879 |
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Balance at December 31, 2012 | $ | 24,308 |
| | $ | 195,602 |
| | $ | 70,708 |
| | $ | (35,793 | ) | | $ | 2,938 |
| | $ | 257,763 |
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Net Income (Restated) | |
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| | 9,042 |
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| | 9,042 |
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Other comprehensive loss (Restated) | |
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| | (6,126 | ) | | (6,126 | ) |
Issuance of common stock (14,361 shares) | 18 |
| | 288 |
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| | 306 |
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Purchase of common stock (90,300 shares) | | | | | | | (1,899 | ) | | | | (1,899 | ) |
Stock compensation expense | |
| | 207 |
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| | 207 |
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Net issuance of common stock under employee stock plans |
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| | 62 |
| | (62 | ) | | |
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| | — |
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Cash dividends paid on common stock ($0.20 per share) | |
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| | (3,395 | ) | | |
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| | (3,395 | ) |
Stock dividend declared | 1,064 |
| | 15,992 |
| | (17,056 | ) | | |
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Balance at March 31, 2013 (Restated) | $ | 25,390 |
| | $ | 212,151 |
| | $ | 59,237 |
| | $ | (37,692 | ) | | $ | (3,188 | ) | | $ | 255,898 |
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The accompanying notes are an integral part of these consolidated financial statements.
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) (in thousands) |
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| Three Months Ended |
| March 31, |
| 2013 | | 2012 |
OPERATING ACTIVITIES: | (Restated) | | |
Net income | $ | 9,042 |
| | $ | 10,139 |
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Adjustments to reconcile net income to net cash provided by operations: | |
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Depreciation | 895 |
| | 870 |
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Amortization of premium | 8,543 |
| | 10,366 |
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Accretion of discount and loan fees | (1,363 | ) | | (1,129 | ) |
Provision for loan losses | 492 |
| | 3,052 |
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Stock compensation expense | 207 |
| | 39 |
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Deferred tax expense (benefit) | 1,031 |
| | (2,880 | ) |
Loss on sale of securities carried at fair value through income | — |
| | 485 |
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Gain on sale of securities available for sale | (4,345 | ) | | (5,972 | ) |
Net other-than-temporary impairment losses | 42 |
| | 141 |
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FHLB advance option impairment charges | — |
| | 472 |
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Gain on sale of other real estate owned | (21 | ) | | — |
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Net change in: | |
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Interest receivable | 5,326 |
| | 5,491 |
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Other assets | 895 |
| | 991 |
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Interest payable | (244 | ) | | (289 | ) |
Other liabilities | (2,183 | ) | | 3,227 |
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Loans held for sale | 463 |
| | 1,650 |
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Net cash provided by operating activities | 18,780 |
| | 26,653 |
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INVESTING ACTIVITIES: | |
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Securities held to maturity: | |
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Purchases | (42,898 | ) | | — |
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Maturities, calls and principal repayments | 57,275 |
| | 15,365 |
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Securities available for sale: | |
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Purchases | (448,973 | ) | | (618,587 | ) |
Sales | 237,318 |
| | 127,298 |
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Maturities, calls and principal repayments | 87,694 |
| | 58,500 |
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Securities carried at fair value through income: | |
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Purchases | — |
| | (57,606 | ) |
Sales | — |
| | 664,224 |
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Maturities, calls and principal repayments | — |
| | 24,872 |
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Proceeds from redemption of FHLB stock | 5,242 |
| | 8,533 |
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Purchases of FHLB stock and other investments | (2,768 | ) | | (7,071 | ) |
Net increase in loans | (21,524 | ) | | (55,281 | ) |
Purchases of premises and equipment | (805 | ) | | (656 | ) |
Proceeds from sales of other real estate owned | 266 |
| | — |
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Proceeds from sales of repossessed assets | 1,778 |
| | 1,002 |
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Net cash (used in) provided by investing activities | (127,395 | ) | | 160,593 |
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(continued) | | | |
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) (continued) (in thousands) |
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| Three Months Ended |
| March 31, |
| 2013 | | 2012 |
FINANCING ACTIVITIES: | | | |
Net increase in demand and savings accounts | 30,071 |
| | 71,978 |
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Net decrease in certificates of deposit | (44,734 | ) | | (83,512 | ) |
Net decrease in federal funds purchased and repurchase agreements | (127 | ) | | (1,019 | ) |
Proceeds from FHLB advances | 942,466 |
| | 2,964,409 |
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Repayment of FHLB advances | (909,585 | ) | | (3,133,462 | ) |
Purchase of common stock | (1,899 | ) | | — |
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Proceeds from the issuance of common stock | 306 |
| | 300 |
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Cash dividends paid | (3,395 | ) | | (2,970 | ) |
Net cash provided by (used in) financing activities | 13,103 |
| | (184,276 | ) |
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Net (decrease) increase in cash and cash equivalents | (95,512 | ) | | 2,970 |
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Cash and cash equivalents at beginning of period | 150,630 |
| | 43,238 |
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Cash and cash equivalents at end of period | $ | 55,118 |
| | $ | 46,208 |
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SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION: | |
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Interest paid | $ | 5,345 |
| | $ | 8,009 |
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Income taxes paid | $ | — |
| | $ | 2,000 |
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SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: | |
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Loans transferred to other repossessed assets and real estate through foreclosure | $ | 1,410 |
| | $ | 872 |
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Adjustment to pension liability | $ | (632 | ) | | $ | (489 | ) |
Declaration of 5% stock dividend | $ | 17,056 |
| | $ | 17,476 |
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Unsettled trades to purchase securities | $ | (71,757 | ) | | $ | (96,171 | ) |
Unsettled trades to sell securities | $ | 1,857 |
| | $ | 104,065 |
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The accompanying notes are an integral part of these consolidated financial statements.
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
In this report, the words “the Company,” “we,” “us,” and “our” refer to the combined entities of Southside Bancshares, Inc. and its subsidiaries. The words “Southside” and “Southside Bancshares” refer to Southside Bancshares, Inc. The words “Southside Bank” and “the Bank” refer to Southside Bank (which, subsequent to the internal merger of Fort Worth National Bank (“FWNB”) with and into Southside Bank, includes FWNB). “FWBS” refers to Fort Worth Bancshares, Inc., a bank holding company acquired by Southside of which FWNB was a wholly-owned subsidiary. “SFG” refers to SFG Finance, LLC (formerly Southside Financial Group, LLC) which is a wholly-owned subsidiary of the Bank as of July 15, 2011. “SSI” refers to Southside Securities, Inc., which is a wholly-owned subsidiary of Southside Bancshares, Inc.
Subsequent to December 31, 2012, we made a decision to close Southside Securities, Inc. It is our expectation that we will complete the closing in the first half of 2013.
The consolidated balance sheet as of March 31, 2013, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows and notes to the financial statements for the three-month periods ended March 31, 2013 and 2012 are unaudited; in the opinion of management, all adjustments necessary for a fair statement of such financial statements have been included. Such adjustments consisted only of normal recurring items. All significant intercompany accounts and transactions are eliminated in consolidation. The preparation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires the use of management’s estimates. These estimates are subjective in nature and involve matters of judgment. Actual amounts could differ from these estimates.
Interim results are not necessarily indicative of results for a full year. These financial statements should be read in conjunction with the financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2012. For a description of our significant accounting and reporting policies, refer to Note 1 of the Notes to Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2012. Additionally, we add the following to our significant accounting and reporting policies: For securities purchased at a premium or discount the recognition of interest income on an individual security is accounted for by amortizing the premium or discount to the maturity of that security.
On March 28, 2013 our board of directors declared a 5% stock dividend to common stock shareholders of record as of April 18, 2013, payable on May 9, 2013. All share data has been adjusted to give retroactive recognition to stock dividends.
Accounting Pronouncements
ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 amends Topic 210, “Balance Sheet,” to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement. We adopted ASU 2011-11 on January 1, 2013, and it did not have a significant impact on our consolidated financial statements.
ASU 2013-02, “Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 requires entities to provide information about the significant amounts reclassified out of accumulated other comprehensive income by component. This update also requires companies to disclose the income statement line items impacted by any significant reclassifications. We adopted ASU 2013-02 on January 1, 2013, and it did not have a significant impact on our consolidated financial statements.
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2. | Restatement of Previously Issued Financial Statements |
During the preparation of the 2013 Form 10-K, we determined that in periods prior to December 31, 2013, we incorrectly accounted for the recognition of interest income on our municipal bonds purchased at a premium based on amortizing the premium to the earliest call date instead of amortizing the premium to maturity as prescribed pursuant to GAAP. These municipal bonds included bonds classified as available for sale and held to maturity. As a result, we determined the municipal bonds purchased at a premium should be re-amortized to maturity.
We evaluated the effect of this error and concluded that it was immaterial to any of the previously issued consolidated financial statements except for the unaudited consolidated financial statements included in our Quarterly Reports on Form 10-Q for the periods ended March 31, June 30, and September 30, 2013. Accordingly, on February 10, 2014, we filed a Form 8-K reporting that the Audit Committee of the Board of Directors of the Company determined based on the recommendation of management, that the Company should restate its unaudited consolidated financial statements in each of these Quarterly Reports on Form 10-Q. In addition, we will record, in the fourth quarter of 2013, the immaterial cumulative effect of the error relating to prior years, which will increase net income by approximately $1.1 million for the year ended December 3l, 2013.
The aggregate net income resulting from the change in the amortization method for municipal securities purchased at a premium to maturity from the earliest call date for the first quarter of 2013 was $517,000, which should have been recorded during the first quarterly period of 2013.
The correction of the error resulted in an increase in net income of $517,000 for the three months ended March 31, 2013 resulting in net income on a restated basis of $9.0 million for that period.
A summary of the adjustments made and their effect on the financial statements is presented below (dollars in thousands):
|
| | | | | | | | | | | | |
| | As of March 31, 2013 |
Consolidated Balance Sheet (unaudited) | | As Originally Reported | | Corrections | | As Restated |
| | | | | | |
Investment securities: | | | | | | |
Held to maturity, at amortized cost (1) | | $ | 1,008 |
| | $ | 1 |
| | $ | 1,009 |
|
Deferred tax asset (4) | | 6,148 |
| | 240 |
| | 6,388 |
|
Other assets (5) | | 43,186 |
| | (55 | ) | | 43,131 |
|
Total assets | | 3,312,097 |
| | 186 |
| | 3,312,283 |
|
| | | | | | |
Retained earnings (2) | | 58,720 |
| | 517 |
| | 59,237 |
|
Accumulated other comprehensive loss (3) | | (2,857 | ) | | (331 | ) | | (3,188 | ) |
Total shareholders’ equity | | 255,712 |
| | 186 |
| | 255,898 |
|
Total liabilities and shareholders' equity | | 3,312,097 |
| | 186 |
| | 3,312,283 |
|
“As Originally Reported” reflects balances reported in the March 31, 2013 Form 10-Q filed on May 7, 2013.
“Corrections” reflect changes to the originally reported balances and are described below.
“As Restated” reflects the final restated balances.
Balance Sheet Corrections:
| |
(1) | The increase in investment securities held to maturity for the three months ended March 31, 2013 reflects the reduction in amortization expense that resulted in an increase in book value. |
| |
(2) | Retained earnings increased due to the decrease in amortization expense associated with amortizing our municipal securities purchased at a premium to the maturity of the security. The increase was partially offset by a reduction in the gain on the sale of available for sale municipal securities sold during the period due to the increase in book value of the securities sold during the three months ended March 31, 2013. |
| |
(3) | Accumulated other comprehensive loss increased as a result of an increase in the unrealized loss on the available for sale securities due to an increase in the book value of the municipal securities resulting from a decrease in amortization at March 31, 2013. |
| |
(4) | The correction to the deferred tax asset occurred as a result of recording the increase in the unrealized loss on available for sale securities for the municipal securities. In addition, deferred taxes changed as a result of the additional alternative minimum tax recorded as a result of recording the additional tax-exempt interest income. |
| |
(5) | The correction of other assets relates to a decrease in taxes receivable as a result of recording the additional alternative minimum tax. |
|
| | | | | | | | | | | | |
| | For the Three Months Ended March 31, 2013 (in thousands) |
Consolidated Statement of Income (unaudited) | | As Originally Reported | | Corrections | | As Restated |
| | | | | | |
Investment securities - tax-exempt (1) | | $ | 3,958 |
| | $ | 530 |
| | $ | 4,488 |
|
Total interest income | | 26,031 |
| | 530 |
| | 26,561 |
|
Net interest income | | 20,930 |
| | 530 |
| | 21,460 |
|
Net interest income after provision for loan losses | | 20,438 |
| | 530 |
| | 20,968 |
|
Gain on sale of securities available for sale (2) | | 4,365 |
| | (20 | ) | | 4,345 |
|
Total noninterest income | | 10,260 |
| | (20 | ) | | 10,240 |
|
Income before income tax expense | | 10,379 |
| | 510 |
| | 10,889 |
|
Provision for income tax expense (3) | | 1,854 |
| | (7 | ) | | 1,847 |
|
Net income | | 8,525 |
| | 517 |
| | 9,042 |
|
Earnings per common share – basic | | 0.48 |
| | 0.03 |
| | 0.51 |
|
Earnings per common share – diluted | | 0.48 |
| | 0.03 |
| | 0.51 |
|
“As Originally Reported” reflects balances reported in the March 31, 2013 Form 10-Q filed on May 7, 2013.
“Corrections” reflect changes to the originally reported balances and are described below.
“As Restated” reflects the final restated balances.
Income Statement Corrections:
| |
(1) | The correction to investment securities - tax-exempt is a result of the reduction in tax-free amortization due to amortizing our municipal securities purchased at a premium to the maturity of the security. |
| |
(2) | The decrease in the gain on sale of securities available for sale is a result of the increase in book value on the municipal securities due to the decrease in amortization expense as a result of changing the amortization method to maturity from the earliest call date. |
| |
(3) | The change in provision for income tax expense is a direct result of the tax benefit associated with the decrease in the gain on sale of available for sale securities. |
|
| | | | | | | | | | | | |
| | As of and For the Three Months Ended March 31, 2013 (in thousands) |
Consolidated Statement of Comprehensive Income (unaudited) | | As Originally Reported | | Corrections | | As Restated |
| | | | | | |
Net income | | $ | 8,525 |
| | $ | 517 |
| | $ | 9,042 |
|
| | | | | | |
Unrealized holding losses on available for sale securities during the period | | (5,215 | ) | | (529 | ) | | (5,744 | ) |
| | | | | | |
Reclassification adjustment for gain on sale of available for sale securities included in net income | | (4,365 | ) | | 20 |
| | (4,345 | ) |
Other comprehensive loss, before tax | | (8,916 | ) | | (509 | ) | | (9,425 | ) |
Income tax benefit related to other items of comprehensive income | | 3,121 |
| | 178 |
| | 3,299 |
|
Other comprehensive loss, net of tax | | (5,795 | ) | | (331 | ) | | (6,126 | ) |
Comprehensive income | | 2,730 |
| | 186 |
| | 2,916 |
|
| | | | | | |
Consolidated Statement of Changes in Equity (unaudited) | | | | | | |
| | | | | | |
Retained earnings: | | | | | | |
Net income | | 8,525 |
| | 517 |
| | 9,042 |
|
Balance, at March 31, 2013 | | 58,720 |
| | 517 |
| | 59,237 |
|
| | | | | | |
Accumulated other comprehensive loss: | | | | | | |
Other comprehensive loss | | (5,795 | ) | | (331 | ) | | (6,126 | ) |
Balance, at March 31, 2013 | | (2,857 | ) | | (331 | ) | | (3,188 | ) |
Total shareholders' equity | | 255,712 |
| | 186 |
| | 255,898 |
|
| | | | | | |
Consolidated Statement of Cash Flow (unaudited) | | | | | | |
| | | | | | |
Operating Activities: | | | | | | |
Net income | | 8,525 |
| | 517 |
| | 9,042 |
|
Amortization of premium | | 9,073 |
| | (530 | ) | | 8,543 |
|
Deferred tax expense (benefit) | | 1,093 |
| | (62 | ) | | 1,031 |
|
Gain on sale of securities available for sale | | (4,365 | ) | | 20 |
| | (4,345 | ) |
Other assets | | 840 |
| | 55 |
| | 895 |
|
“As Originally Reported” reflects balances reported in the March 31, 2013 Form 10-Q filed on May 7, 2013.
“Corrections” reflect changes to the originally reported balances.
“As Restated” reflects the final restated balances.
3. Earnings Per Share - (2013 Restated)
Earnings per share on a basic and diluted basis have been adjusted to give retroactive recognition to stock dividends and is calculated as follows (in thousands, except per share amounts):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2013 | | 2012 |
Basic and Diluted Earnings: | | | |
Net income | $ | 9,042 |
| | $ | 10,139 |
|
Basic weighted-average shares outstanding | 17,857 |
| | 18,191 |
|
Add: Stock options | 20 |
| | 13 |
|
Diluted weighted-average shares outstanding | 17,877 |
| | 18,204 |
|
| |
| | |
|
Basic Earnings Per Share: | $ | 0.51 |
| | $ | 0.56 |
|
| |
| | |
|
Diluted Earnings Per Share: | $ | 0.51 |
| | $ | 0.56 |
|
For the three month periods ended March 31, 2013 and 2012, there were approximately 25,000 and 8,000 anti-dilutive shares, respectively.
4. Accumulated Other Comprehensive (Loss) Income - (2013 Restated)
The changes in accumulated other comprehensive income by component are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2013 |
| Unrealized Gains (Losses) on Securities | | Pension Plans | | |
| Other | | OTTI | | Net Prior Service (Cost) Credit | | Net Gain (Loss) | | Total |
Balance, January 1, 2013, net of tax | $ | 30,500 |
| | $ | (1,140 | ) | | $ | 248 |
| | $ | (26,670 | ) | | $ | 2,938 |
|
Other comprehensive loss (income): | | | | | | | | | |
Other comprehensive (loss) gain before reclassifications | (5,356 | ) | | (398 | ) | | — |
| | — |
| | (5,754 | ) |
Reclassified from accumulated other comprehensive income | (4,345 | ) | | 42 |
| | (11 | ) | | 643 |
| | (3,671 | ) |
Income tax benefit | 3,395 |
| | 125 |
| | 4 |
| | (225 | ) | | 3,299 |
|
Net current-period other comprehensive loss, net of tax | (6,306 | ) | | (231 | ) | | (7 | ) | | 418 |
| | (6,126 | ) |
Balance, March 31, 2013, net of tax | $ | 24,194 |
| | $ | (1,371 | ) | | $ | 241 |
| | $ | (26,252 | ) | | $ | (3,188 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2012 |
| Unrealized Gains (Losses) on Securities | | Pension Plans | | |
| Other | | OTTI | | Net Prior Service (Cost) Credit | | Net Gain (Loss) | | Total |
Balance, January 1, 2012, net of tax | $ | 37,271 |
| | $ | (1,577 | ) | | $ | 276 |
| | $ | (21,249 | ) | | $ | 14,721 |
|
Other comprehensive loss (income): | | | | | | | | | |
Other comprehensive (loss) gain before reclassifications | (4,904 | ) | | 159 |
| | — |
| | — |
| | (4,745 | ) |
Reclassified from accumulated other comprehensive income | (5,972 | ) | | 141 |
| | (10 | ) | | 499 |
| | (5,342 | ) |
Income tax benefit | 3,807 |
| | (105 | ) | | 4 |
| | (175 | ) | | 3,531 |
|
Net current-period other comprehensive loss, net of tax | (7,069 | ) | | 195 |
| | (6 | ) | | 324 |
| | (6,556 | ) |
Balance, March 31, 2012, net of tax | $ | 30,202 |
| | $ | (1,382 | ) | | $ | 270 |
| | $ | (20,925 | ) | | $ | 8,165 |
|
The reclassifications out of accumulated other comprehensive income into net income are presented below (in thousands):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2013 | | 2012 |
Unrealized holding gains arising during period: | | | |
Realized gain on sale of securities (1) | $ | 4,345 |
| | $ | 5,972 |
|
Impairment losses (2) | (42 | ) | | (141 | ) |
Total before tax | 4,303 |
| | 5,831 |
|
Tax expense | (1,506 | ) | | (2,041 | ) |
Net of tax | $ | 2,797 |
| | $ | 3,790 |
|
| | | |
Amortization of defined benefit pension items: | | | |
Net loss (3) | $ | (643 | ) | | $ | (499 | ) |
Prior service credit (3) | 11 |
| | 10 |
|
Total before tax | (632 | ) | | (489 | ) |
Tax expense | 221 |
| | 171 |
|
Net of tax | $ | (411 | ) | | $ | (318 | ) |
Total reclassifications for the period, net of tax | $ | 2,386 |
| | $ | 3,472 |
|
(1) Listed as Gain on sale of securities available for sale on the Statements of Income.
(2) Listed as Net impairment losses recognized in earnings on the Statements of Income.
(3) These accumulated other comprehensive income components are included in the computation of net periodic pension cost presented in “Note 8 - Employee Benefit Plans.”
5. Securities - (2013 Restated)
The amortized cost and estimated fair value of investment and mortgage-backed securities as of March 31, 2013 and December 31, 2012, are reflected in the tables below (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| March 31, 2013 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
AVAILABLE FOR SALE: | | | OTTI | | Other | |
Investment Securities: | | | | | | | | | |
U.S. Government Agency Debentures | $ | 39,215 |
| | $ | — |
| | $ | — |
| | $ | 499 |
| | $ | 38,716 |
|
State and Political Subdivisions | 612,876 |
| | 22,072 |
| | — |
| | 1,715 |
| | 633,233 |
|
Other Stocks and Bonds | 15,767 |
| | 188 |
| | 2,110 |
| | — |
| | 13,845 |
|
Mortgage-backed Securities: (1) | |
| | |
| | |
| | |
| | |
|
Residential | 654,539 |
| | 17,730 |
| | — |
| | 568 |
| | 671,701 |
|
Commercial | 233,254 |
| | 673 |
| | — |
| | 521 |
| | 233,406 |
|
Total | $ | 1,555,651 |
| | $ | 40,663 |
| | $ | 2,110 |
| | $ | 3,303 |
| | $ | 1,590,901 |
|
|
| | | | | | | | | | | | | | | | | | | |
| March 31, 2013 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
HELD TO MATURITY: | | | OTTI | | Other | |
Investment Securities: | | | | | | | | | |
State and Political Subdivisions | $ | 1,009 |
| | $ | 148 |
| | $ | — |
| | $ | — |
| | $ | 1,157 |
|
Mortgage-backed Securities: (1) | |
| | |
| | |
| | |
| | |
|
Residential | 186,966 |
| | 7,074 |
| | — |
| | 18 |
| | 194,022 |
|
Commercial | 47,279 |
| | 58 |
| | — |
| | 152 |
| | 47,185 |
|
Total | $ | 235,254 |
| | $ | 7,280 |
| | $ | — |
| | $ | 170 |
| | $ | 242,364 |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2012 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
AVAILABLE FOR SALE: | | | OTTI | | Other | |
Investment Securities: | | | | | | | | | |
U.S. Government Agency Debentures | $ | 61,461 |
| | $ | — |
| | $ | — |
| | $ | 598 |
| | $ | 60,863 |
|
State and Political Subdivisions | 515,116 |
| | 30,888 |
| | — |
| | 316 |
| | 545,688 |
|
Other Stocks and Bonds | 12,807 |
| | 104 |
| | 1,754 |
| | 1 |
| | 11,156 |
|
Mortgage-backed Securities: (1) | |
| | |
| | |
| | |
| | |
|
Residential | 789,356 |
| | 18,003 |
| | — |
| | 999 |
| | 806,360 |
|
Total | $ | 1,378,740 |
| | $ | 48,995 |
| | $ | 1,754 |
| | $ | 1,914 |
| | $ | 1,424,067 |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2012 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
HELD TO MATURITY: | | | OTTI | | Other | |
Investment Securities: | | | | | | | | | |
State and Political Subdivisions | $ | 1,009 |
| | $ | 128 |
| | $ | — |
| | $ | — |
| | $ | 1,137 |
|
Mortgage-backed Securities: (1) | |
| | |
| | |
| | |
| | |
|
Residential | 245,538 |
| | 8,770 |
| | — |
| | 47 |
| | 254,261 |
|
Total | $ | 246,547 |
| | $ | 8,898 |
| | $ | — |
| | $ | 47 |
| | $ | 255,398 |
|
(1) All mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
Securities carried at fair value through income were as follows (in thousands):
|
| | | | | | | | | | | |
| At March 31, | | At December 31, | | At December 31, |
| 2013 | | 2012 | | 2011 |
Mortgage-backed Securities: | | | | | |
U.S. Government Agencies | $ | — |
| | $ | — |
| | $ | 30,413 |
|
Government-Sponsored Enterprises | — |
| | — |
| | 617,346 |
|
Total | $ | — |
| | $ | — |
| | $ | 647,759 |
|
Net gains and losses on securities carried at fair value through income were as follows (in thousands):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2013 | | 2012 |
Net (loss) gain on sales transactions | $ | — |
| | $ | (485 | ) |
Net mark-to-market gains | — |
| | — |
|
Net (loss) gain on securities carried at fair value through income | $ | — |
| | $ | (485 | ) |
The following table represents the unrealized loss on securities for the three months ended March 31, 2013 and year ended December 31, 2012 (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 March 31, 2013: | | | | | | | | | | | |
Available for Sale | | | | | | | | | | | |
U.S. Government Agency Debentures | $ | 38,716 |
| | $ | 499 |
| | $ | — |
| | $ | — |
| | $ | 38,716 |
| | $ | 499 |
|
State and Political Subdivisions | 190,967 |
| | 1,690 |
| | 571 |
| | 25 |
| | 191,538 |
| | 1,715 |
|
Other Stocks and Bonds | — |
| | — |
| | 592 |
| | 2,110 |
| | 592 |
| | 2,110 |
|
Mortgage-backed Securities | 258,567 |
| | 1,071 |
| | 2,323 |
| | 18 |
| | 260,890 |
| | 1,089 |
|
Total | $ | 488,250 |
| | $ | 3,260 |
| | $ | 3,486 |
| | $ | 2,153 |
| | $ | 491,736 |
| | $ | 5,413 |
|
Held to Maturity | |
| | |
| | |
| | |
| | |
| | |
|
Mortgage-backed Securities | $ | 38,276 |
| | $ | 170 |
| | $ | — |
| | $ | — |
| | $ | 38,276 |
| | $ | 170 |
|
Total | $ | 38,276 |
| | $ | 170 |
| | $ | — |
| | $ | — |
| | $ | 38,276 |
| | $ | 170 |
|
As of December 31, 2012: | |
| | |
| | |
| | |
| | |
| | |
|
Available for Sale | |
| | |
| | |
| | |
| | |
| | |
|
U.S. Government Agency Debentures | $ | 60,863 |
| | $ | 598 |
| | $ | — |
| | $ | — |
| | $ | 60,863 |
| | $ | 598 |
|
State and Political Subdivisions | 49,548 |
| | 316 |
| | — |
| | — |
| | 49,548 |
| | 316 |
|
Other Stocks and Bonds | 4,856 |
| | 1 |
| | 990 |
| | 1,754 |
| | 5,846 |
| | 1,755 |
|
Mortgage-backed Securities | 260,909 |
| | 967 |
| | 3,122 |
| | 32 |
| | 264,031 |
| | 999 |
|
Total | $ | 376,176 |
| | $ | 1,882 |
| | $ | 4,112 |
| | $ | 1,786 |
| | $ | 380,288 |
| | $ | 3,668 |
|
Held to Maturity | |
| | |
| | |
| | |
| | |
| | |
|
Mortgage-backed Securities | $ | 3,251 |
| | $ | 47 |
| | $ | — |
| | $ | — |
| | $ | 3,251 |
| | $ | 47 |
|
Total | $ | 3,251 |
| | $ | 47 |
| | $ | — |
| | $ | — |
| | $ | 3,251 |
| | $ | 47 |
|
When it is determined that a decline in fair value of Held to Maturity (“HTM”) and Available for Sale (“AFS”) securities is other-than-temporary, the carrying value of the security is reduced to its estimated fair value, with a corresponding charge to earnings for the credit portion and to other comprehensive income for the noncredit portion . In estimating other-than-temporary impairment losses, management considers, among other things, the length of time and the extent to which the fair value has been less than cost and the financial condition and near-term prospects of the issuer. Additionally, we do not currently intend to sell the securities and it is not more likely than not that we will be required to sell the securities before the anticipated recovery of their amortized cost basis.
The turmoil in the capital markets had a significant impact on our estimate of fair value for certain of our securities. We believe the fair values are reflective of illiquidity and credit impairment. At March 31, 2013, we have in AFS Other Stocks and Bonds, $2.7 million amortized cost basis in pooled trust preferred securities (“TRUPs”). Those securities are structured products with cash flows dependent upon securities issued by U.S. financial institutions, including banks and insurance companies. Our estimate of fair value at March 31, 2013 for the TRUPs is approximately $592,000 and reflects the market illiquidity. With the exception of the TRUPs, to the best of management’s knowledge and based on our consideration of the qualitative factors associated with each security, there were no securities in our investment and mortgage-backed securities portfolio at March 31, 2013 with an other-than-temporary impairment.
Given the facts and circumstances associated with the TRUPs we performed detailed cash flow modeling for each TRUP using an industry-accepted cash flow model. Prior to loading the required assumptions into the model we reviewed the financial condition of each of the underlying issuing banks within the TRUP collateral pool that had not deferred or defaulted as of March 31, 2013. Management’s best estimate of a deferral assumption was assigned to each issuing bank based on the category in which it fell. Our analysis of the underlying cash flows contemplated various default, deferral and recovery scenarios to arrive at our best estimate of cash flows. Based on that detailed analysis, we have concluded that the other-than-temporary impairment, which
captures the credit component, was estimated at $3.3 million at March 31, 2013 and December 31, 2012. The noncredit charge to other comprehensive income was estimated at $2.1 million and $1.8 million at March 31, 2013 and December 31, 2012, respectively. The carrying amount of the TRUPs was written down with $75,000 and $3.0 million recognized in earnings for the years ended December 31, 2010 and 2009, respectively. There was no write-down recognized in earnings during 2011 but there was an additional write-down of the TRUPs recognized in earnings in the amount of approximately $181,000 during 2012. For the three months ended March 31, 2013 and 2012, the additional write-down recognized in earnings was approximately $42,000 and $141,000, respectively. The cash flow model assumptions represent management’s best estimate and consider a variety of qualitative factors, which include, among others, the credit rating downgrades, the severity and duration of the mark-to-market loss, and the structural nuances of each TRUP. Management believes that the detailed review of the collateral and cash flow modeling support the conclusion that the TRUPs had an other-than-temporary impairment at March 31, 2013. We will continue to update our assumptions and the resulting analysis each reporting period to reflect changing market conditions. Additionally, we do not currently intend to sell the TRUPs and it is not more likely than not that we will be required to sell the TRUPs before the anticipated recovery of their amortized cost basis.
The table below provides more detail on the TRUPs at March 31, 2013 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
TRUP | | Par | | Credit Loss | | Amortized Cost | | Fair Value | | Tranche | | Credit Rating |
1 | | $ | 2,000 |
| | $ | 1,298 |
| | $ | 702 |
| | $ | 65 |
| | C1 | | Ca |
2 | | 2,000 |
| | 550 |
| | 1,450 |
| | 309 |
| | B1 | | C |
3 | | 2,000 |
| | 1,450 |
| | 550 |
| | 218 |
| | B2 | | C |
| | $ | 6,000 |
| | $ | 3,298 |
| | $ | 2,702 |
| | $ | 592 |
| | | | |
The following tables present a roll forward of the credit losses recognized in earnings, on AFS debt securities
(in thousands):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2013 | | 2012 |
Balance, beginning of period | $ | 3,256 |
| | $ | 3,075 |
|
Additions for credit losses recognized on debt securities that had previously incurred impairment losses | 42 |
| | 141 |
|
Balance, end of period | $ | 3,298 |
| | $ | 3,216 |
|
Interest income recognized on securities for the periods presented (in thousands):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2013 | | 2012 |
U.S. Treasury | $ | 17 |
| | $ | — |
|
U.S. Government Agency Debentures | 212 |
| | — |
|
State and Political Subdivisions | 4,578 |
| | 2,674 |
|
Other Stocks and Bonds | 45 |
| | 24 |
|
Mortgage-backed Securities | 3,936 |
| | 12,163 |
|
Total interest income on securities | $ | 8,788 |
| | $ | 14,861 |
|
There were no securities transferred from AFS to HTM during the three months ended March 31, 2013 or 2012. There were no sales from the HTM portfolio during the three months ended March 31, 2013 or 2012. There were $235.3 million and $246.5 million of securities classified as HTM at March 31, 2013 and December 31, 2012, respectively.
Of the $4.3 million in net securities gains from the AFS portfolio for the three months ended March 31, 2013, there were $5.5 million in realized gains and approximately $1.2 million in realized losses. Of the $6.0 million in net securities gains from the AFS portfolio for the three months ended March 31, 2012, there were $6.0 million in realized gains and approximately $3,000 in realized losses.
The amortized cost and fair value of securities at March 31, 2013, 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 security 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.
|
| | | | | | | |
| March 31, 2013 |
| Amortized Cost | | Fair Value |
Available for sale securities: | (in thousands) |
Investment Securities | | | |
Due in one year or less | $ | 3,161 |
| | $ | 3,174 |
|
Due after one year through five years | 29,695 |
| | 30,248 |
|
Due after five years through ten years | 142,336 |
| | 145,638 |
|
Due after ten years | 492,666 |
| | 506,734 |
|
| 667,858 |
| | 685,794 |
|
Mortgage-backed securities | 887,793 |
| | 905,107 |
|
Total | $ | 1,555,651 |
| | $ | 1,590,901 |
|
|
| | | | | | | |
| March 31, 2013 |
| Amortized Cost | | Fair Value |
Held to maturity securities: | (in thousands) |
Investment Securities | | | |
Due in one year or less | $ | — |
| | $ | — |
|
Due after one year through five years | — |
| | — |
|
Due after five years through ten years | — |
| | — |
|
Due after ten years | 1,009 |
| | 1,157 |
|
| 1,009 |
| | 1,157 |
|
Mortgage-backed securities | 234,245 |
| | 241,207 |
|
Total | $ | 235,254 |
| | $ | 242,364 |
|
Investment and mortgage-backed securities with book values of $934.5 million and $945.7 million were pledged as of March 31, 2013 and December 31, 2012, respectively, to collateralize Federal Home Loan Bank (“FHLB”) advances, repurchase agreements, and public funds or for other purposes as required by law.
Securities with limited marketability, such as FHLB stock and other investments, are carried at cost, which approximates its fair value and assessed for other-than-temporary impairment. These securities have no maturity date.
6. Loans and Allowance for Probable Loan Losses
Loans in the accompanying consolidated balance sheets are classified as follows (in thousands):
|
| | | | | | | |
| March 31, 2013 | | December 31, 2012 |
Real Estate Loans: | | | |
Construction | $ | 119,326 |
| | $ | 113,744 |
|
1-4 Family residential | 376,421 |
| | 368,845 |
|
Other | 242,571 |
| | 236,760 |
|
Commercial loans | 160,831 |
| | 160,058 |
|
Municipal loans | 215,869 |
| | 220,947 |
|
Loans to individuals | 166,629 |
| | 162,623 |
|
Total loans | 1,281,647 |
| | 1,262,977 |
|
Less: Allowance for loan losses | 18,542 |
| | 20,585 |
|
Net loans | $ | 1,263,105 |
| | $ | 1,242,392 |
|
Allowance for Loan Losses
The allowance for loan losses is based on the most current review of the loan portfolio and is validated by multiple processes. First, the bank utilizes historical data to establish general reserve amounts for each class of loans. Previously, a review of data for one year was used to establish a general reserve. Beginning in the fourth quarter of 2012, an average three-year history of annualized net charge-offs against the average portfolio balance for that time period is utilized. The historical charge-off figure is further adjusted through qualitative factors that include general trends in past dues, nonaccruals and classified loans to more effectively and promptly react to both positive and negative movements. Management feels this change in methodology is appropriate to accurately estimate the bank's inherent losses in the current fragile economic climate. Second, our lenders have the primary responsibility for identifying problem loans and estimating necessary reserves based on customer financial stress and underlying collateral. These recommendations are reviewed by the senior lender, the Special Assets department, and the Loan Review department. Third, the Loan Review department does independent reviews of the portfolio on an annual basis. The Loan Review department follows a board-approved annual loan review scope. The loan review scope encompasses a number of metrics that takes into consideration the size of the loan, the type of credit extended, the seasoning of the loan along with the performance of the loan. The loan review scope as it relates to size, focuses more on larger dollar loan relationships, typically, for example, aggregate debt of $500,000 or greater. The loan review officer also tracks specific reserves for loans by type compared to general reserves to determine trends in comparative reserves as well as losses not reserved for prior to charge-off to determine the effectiveness of the specific reserve process.
At each review, a subjective analysis methodology is used to grade the respective loan. Categories of grading vary in severity from loans that do not appear to have a significant probability of loss at the time of review to loans that indicate a probability that the entire balance of the loan will be uncollectible. If full collection of the loan balance appears unlikely at the time of review, estimates of future expected cash flows or appraisals of the collateral securing the debt are used to determine the necessary allowances. The internal loan review department maintains a list of all loans or loan relationships that are graded as having more than the normal degree of risk associated with them. In addition, a list of specifically reserved loans or loan relationships of $50,000 or more is updated on a quarterly basis in order to properly determine necessary allowances and keep management informed on the status of attempts to correct the deficiencies noted with respect to the loan.
For loans to individuals, the methodology associated with determining the appropriate allowance for losses on loans primarily consists of an evaluation of individual payment histories, remaining term to maturity and underlying collateral support.
Industry and our own experience indicates that a portion of our loans will become delinquent and a portion of the loans will require partial or full 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 appropriateness of the 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 in accordance with GAAP), and geographic and industry loan concentration.
Consumer loans at SFG are reserved for based on general estimates of loss at the time of purchase for current loans. SFG loans experiencing past due status or extension of maturity characteristics are reserved for at significantly higher levels based on the circumstances associated with each specific loan. In general the reserves for SFG are calculated based on the past due status of the loan. For reserve purposes, the portfolio has been segregated by past due status and by the remaining term variance from the original contract. During repayment, loans that pay late will take longer to pay out than the original contract. Additionally, some loans may be granted extensions for extenuating payment circumstances and evaluated for troubled debt classification. The remaining term extensions increase the risk of collateral deterioration and, accordingly, reserves are increased to recognize this risk.
New pools purchased are reserved following the expiration of their respective recourse period at their estimated annual loss. Additionally, we use data mining measures to track migration within risk tranches. Reserves are adjusted quarterly to match the migration metrics.
Credit Quality Indicators
We categorize loans into risk categories on an ongoing basis, based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We use the following definitions for risk ratings:
| |
• | Satisfactory (Rating 1 – 4) – This rating is assigned to all satisfactory loans. This category, by definition, should consist of acceptable credit. Credit and collateral exceptions should not be present, although their presence would not necessarily prohibit a loan from being rated Satisfactory, if deficiencies are in process of correction. These loans will not be included in the Watch List. |
| |
• | Satisfactory (Rating 5) – Special Treatment Required – (Pass Watch) – These loans require some degree of special treatment, but not due to credit quality. This category does not include loans specially mentioned or adversely classified by the Loan Review Officer or regulatory authorities; however, particular attention must be accorded such credits due to characteristics such as: |
| |
• | A lack of, or abnormally extended payment program; |
| |
• | A heavy degree of concentration of collateral without sufficient margin; |
| |
• | A vulnerability to competition through lesser or extensive financial leverage; and |
| |
• | A dependence on a single, or few customers, or sources of supply and materials without suitable substitutes or alternatives. |
| |
• | Special Mention (Rating 6) – A Special Mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. |
| |
• | Substandard (Rating 7) – Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. |
| |
• | Doubtful (Rating 8) – Loans classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation, in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. |
| |
• | Loss (Rating 9) – Loans classified as Loss are currently in the process of being charged off and are fully reserved. They are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. |
Loans that are accruing and not considered troubled debt restructurings ("TDR") are reserved for as a group of similar type credits and included in the general portion of the allowance for loan losses.
The general portion of the loan loss allowance is reflective of historical charge-off levels for similar loans adjusted for changes in current conditions and other relevant factors. These factors are likely to cause estimated losses to differ from historical loss experience and include:
| |
• | Changes in lending policies or procedures, including underwriting, collection, charge-off, and recovery procedures; |
| |
• | Changes in local, regional and national economic and business conditions including entry into new markets; |
| |
• | Changes in the volume or type of credit extended; |
| |
• | Changes in the experience, ability, and depth of lending management; |
| |
• | Changes in the volume and severity of past due, nonaccrual, restructured, or classified loans; |
| |
• | Changes in loan review or Board oversight; |
| |
• | Changes in the level of concentrations of credit; and |
| |
• | Changes in external factors, such as competition and legal and regulatory requirements. |
The following tables detail activity in the Allowance for Loan Losses by portfolio segment for the periods presented (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2013 |
| Real Estate | | | | | | | | | | |
| Construction | | 1-4 Family Residential | | Other | | Commercial Loans | | Municipal Loans | | Loans to Individuals | | Unallocated | | Total |
Balance at beginning of period | $ | 2,355 |
| | $ | 3,545 |
| | $ | 2,290 |
| | $ | 3,158 |
| | $ | 633 |
| | $ | 7,373 |
| | $ | 1,231 |
| | $ | 20,585 |
|
Provision (reversal) for loan losses | (125 | ) | | 167 |
| | (247 | ) | | (290 | ) | | (12 | ) | | 1,344 |
| | (345 | ) | | 492 |
|
Loans charged off | — |
| | (228 | ) | | (46 | ) | | (71 | ) | | — |
| | (2,807 | ) | | — |
| | (3,152 | ) |
Recoveries of loans charged off | 17 |
| | 4 |
| | 5 |
| | 50 |
| | — |
| | 541 |
| | — |
| | 617 |
|
Balance at end of period | $ | 2,247 |
| | $ | 3,488 |
| | $ | 2,002 |
| | $ | 2,847 |
| | $ | 621 |
| | $ | 6,451 |
| | $ | 886 |
| | $ | 18,542 |
|