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This excerpt taken from the SBSI 10-Q filed Nov 2, 2005. Noninterest Income
Noninterest income was $15.7 million for the nine months ended September 30, 2005 compared to $16.9 million for the same period in 2004, representing a decrease of $1.1 million, or 6.7%. Noninterest income was $5.4 million for the quarter ended September 30, 2005, compared to $5.2 million for the same period in 2004, representing an increase of $212,000, or 4.1%. During the quarter ended September 30, 2005 the Company had gains on the sale of AFS securities of $24,000 compared to gains of $375,000 for the same period in 2004. During the nine months ended September 30, 2005, the Company had losses on the sale of AFS securities of $32,000 compared to gains of $2.4 million for the same period in 2004. During 2005 the Company sold securities out of its AFS portfolio to accomplish ALCO and investment portfolio objectives aimed at repositioning a portion of the securities portfolio in an effort to maximize the total return of the securities portfolio and to reduce alternative minimum tax. Sales of AFS securities were the result of changes in economic conditions and a change in the desired mix of the securities portfolio. During the quarter and nine months ended September 30, 2005, the yield curve continued to flatten as short-term interest rates increased more than long-term interest rates. The Company used this interest-rate environment to reposition a portion of the securities portfolio. Sales of AFS municipal securities will continue to be evaluated based on the Company’s ability to replace these municipal securities with more attractive municipal loans and the appropriate overall level of tax free income. The market value of the AFS securities portfolio at September 30, 2005 was $703.5 million with a net unrealized loss on that date of $0.9 million. The net unrealized loss is comprised of $6.8 million in unrealized losses and $5.9 million in unrealized gains. The market value of the HTM securities portfolio at September 30, 2005 was $227.4 million with a net unrealized loss on that date of $1.7 million. The net unrealized loss is comprised of $1.8 million in unrealized losses and $139,000 in unrealized gains.
Other changes to noninterest income included gain on sale of loans income which increased $43,000, or 11.6% to $414,000 for the quarter ended September 30, 2005 due to the increase in mortgage loans sold during the quarter ended September 30, 2005 when compared to the same period in 2004. Gain on sale of loans income increased $175,000, or 13.9%, to $1.4 million for the nine months ended September 30, 2005 from $1.3 million for the same period in 2004 due to the premium earned of $248,000 from the sale of $6.2 million in student loans during the second quarter ended June 30, 2005, which more than offset the decrease in gains from mortgage loans sold during the nine months ended September 30, 2005 when compared to the same period in 2004. Trust income increased $74,000 and $139,000, or 23.1% and 15.5%, for the quarter and nine months ended September 30, 2005, respectively, when compared to the same period in 2004, due to growth experienced in the Trust department. Other noninterest income increased $100,000 and $561,000, or 22.9% and 45.7%, for the quarter and nine months ended September 30, 2005, respectively, when compared to the same period in 2004. The largest single factor for the increase in other noninterest income was a result of a $286,000 special distribution as a result of the merger of the Pulse EFT Association with Discover Financial Services received during the first six months of 2005. Other increases in other income included increases in Southside Select fee income, credit card fee income, Travelers Express income and gains on sale of assets.
Noninterest Expense
Noninterest expense was $32.2 million for the nine months ended September 30, 2005, compared to $29.9 million for the same period of 2004, representing an increase of $2.2 million, or 7.4%. Noninterest expense was $10.5 million for the quarter ended September 30, 2005, compared to $10.0 million for the same period of 2004, representing an increase of $528,000, or 5.3%.
Salaries and employee benefits increased $443,000 and $1.6 million, or 7.0% and 8.6%, during the quarter and nine months ended September 30, 2005, respectively, when compared to the same period in 2004. Direct salary expense and payroll taxes increased $700,000 and $1.9 million, or 15.0% and 13.1%, for the quarter and nine months ended September 30, 2005, respectively, when compared to the same period in 2004, as a result of overall bank growth, new branches opened since second quarter 2004, hiring associated with plans to expand the regions in which the Company lends, and normal payroll increases. While continued expansion has and will continue to impact short-term earnings, the Company believes the potential long-term benefits to the Company greatly outweigh the short-term expense.
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Retirement expense increased $402,000, or 20.2%, for the nine months ended September 30, 2005 when compared to the same period in 2004, primarily as a result of the increase in the number of participants, level of performance of retirement plan assets and actuarial assumptions. The Company’s actuarial assumptions used to determine net periodic pension costs were reduced for 2005 when compared to 2004 and the assumed long-term rate of return for 2005 is 8.5% and the assumed discount rate for 2005 is 5.75%. The Company will continue to evaluate the assumed long-term rate of return and the discount rate to determine if either should be changed in the future. If either of these assumptions were decreased, the cost and funding required for the retirement plan could increase. The Company is currently evaluating a plan to change the benefits offered through the Defined Benefit Plan, which could, if implemented, reduce retirement expense in future years. Health insurance expense decreased $286,000 and $648,000, or 31.6% and 24.5%, for the quarter and nine months ended September 30, 2005, respectively, when compared to the same periods in 2004 due to lower claims paid. The Company has a self-insured health plan which is supplemented with stop loss insurance policies. Health insurance costs are rising nationwide and these costs may increase in future quarters.
Equipment expense increased $15,000 and $75,000, or 7.9% and 13.7%, for the quarter and nine months ended September 30, 2005, respectively, compared to the same periods in 2004 due to increases in various maintenance contracts.
Advertising, travel and entertainment increased $55,000 and $149,000, or 14.3% and 11.4%, for the quarter and nine months ended September 30, 2005, respectively, compared to the same periods in 2004, due to increases in direct advertising costs incurred partially as a result of expansion into new market areas.
Professional fees decreased $151,000 and $200,000, or 43.9% and 25.5%, for the quarter and nine months ended September 30, 2005, respectively, compared to the same periods in 2004. The decreases occurred primarily due to a reduction in consulting fees associated with the Company’s internal and financial controls.
Other expense increased $132,000 and $429,000, or 11.7% and 13.0%, for the quarter and nine months ended September 30, 2005, respectively, compared to the same periods in 2004. The increases occurred primarily due to increases in bank exam fees, legal fees, telephone expense and a loss contingency that were partially offset by decreases in bank analysis fees and auto expense.
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