<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1999
-------------------------------------------------
OR
[ ] 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 0-10849
SOUTHSIDE BANCSHARES CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MISSOURI 43-1262037
- ------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3606 GRAVOIS AVENUE, ST. LOUIS, MISSOURI 63116
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (314) 776-7000
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
--- ---
At MAY 12, 1999 , the number of shares outstanding of the registrant's
common stock was 8,638,978.
<PAGE> 2
SOUTHSIDE BANCSHARES CORP.
<TABLE>
<CAPTION>
INDEX
PAGE
----
<S> <C> <C>
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at
March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Income for
the three months ended March 31, 1999 and
March 31, 1998 4
Condensed Consolidated Statements of
Shareholders' Equity and Comprehensive
Income for the three months ended March
31, 1999 and the year ended December 31,
1998
5
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 1999 and
March 31, 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures Regarding
Market Risk - There have been no material changes
from the information provided in the 12/31/98 Annual
Report on Form 10-K.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
2
<PAGE> 3
SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(dollars in thousands except share data)
(unaudited)
<TABLE>
<CAPTION>
MARCH 31, December 31,
ASSETS 1999 1998
----------- ------------
<S> <C> <C>
Cash and due from banks $ 17,111 $ 17,924
Federal funds sold 44,300 29,900
Investments in debt securities:
Available for sale, at fair value 136,214 97,895
Held to maturity, at amortized cost
(fair value of $78,683 in 1999, and $85,841 in 1998) 77,423 84,036
--------- ---------
Total investments in debt securities 213,637 181,931
--------- ---------
Loans, net of unearned discount 347,061 356,988
Less allowance for possible loan losses 6,286 6,192
--------- ---------
Loans, net 340,775 350,796
--------- ---------
Bank premises and equipment 16,979 16,152
Other assets 13,363 13,590
--------- ---------
TOTAL ASSETS $ 646,165 $ 610,293
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 68,401 $ 70,436
Interest-bearing demand and savings 223,526 207,762
Time deposits 236,882 245,091
--------- ---------
Total deposits 528,809 523,289
Securities sold under agreements to repurchase 2,752 2,949
FHLB borrowings 44,247 14,287
Other liabilities 4,991 4,804
--------- ---------
Total liabilities 580,799 545,329
--------- ---------
Commitments and contingent liabilities
Shareholders' equity:
Cumulative preferred stock, no par value, 1,000,000 shares
Authorized and unissued -- --
Common stock, $1 par value, 15,000,000 shares authorized,
8,985,378 shares issued and outstanding in 1999 and 1998 8,985 8,985
Surplus 5,305 5,248
Retained earnings 56,178 55,249
Unearned ESOP shares (1,137) (1,186)
Treasury stock, at cost, 346,400 and 324,020 shares in
1999 and 1998, respectively (3,865) (3,590)
Accumulated other comprehensive income (loss) (100) 258
--------- ---------
Total shareholders' equity 65,366 64,964
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 646,165 $ 610,293
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(dollars in thousands except share data)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 7,471 $ 7,176
Interest on investments in debt securities:
Taxable 2,265 2,249
Exempt from Federal income taxes 406 325
Interest on Federal funds sold 305 270
------ ------
TOTAL INTEREST INCOME 10,447 10,020
------ ------
INTEREST EXPENSE:
Interest on interest-bearing demand and savings deposits 1,479 1,552
Interest on time deposits 3,029 3,029
Interest on securities sold under agreements to repurchase 29 56
Interest on FHLB borrowings 209 -
------ -
TOTAL INTEREST EXPENSE 4,746 4,637
------ -----
NET INTEREST INCOME 5,701 5,383
Provision for possible loan losses 15 15
------ -----
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 5,686 5,368
------ -----
NONINTEREST INCOME:
Trust fees 296 263
Service charges on deposit accounts 344 313
Gains on the sales of loans 122 17
Other 168 133
------ -----
TOTAL NONINTEREST INCOME 930 726
------ -----
NONINTEREST EXPENSES:
Salaries and employee benefits 2,236 2,012
Net occupancy and equipment expense 641 536
Data processing 187 111
Other 1,333 1,158
------ -----
TOTAL NONINTEREST EXPENSES 4,397 3,817
------ -----
INCOME BEFORE FEDERAL INCOME TAX EXPENSE 2,219 2,277
Federal income tax expense 617 639
------ ------
NET INCOME $1,602 $1,638
====== ======
SHARE DATA:
Earnings per common share - basic $0.19 $0.20
==== ====
Earnings per common share - diluted $0.19 $0.20
==== ====
Dividends paid per common share $0.08 $0.07
==== ====
Average common shares outstanding 8,399,066 8,118,576
========= =========
Average common shares outstanding, including
potentially dilutive shares 8,621,121 8,350,689
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 1999
AND YEAR ENDED DECEMBER 31, 1998
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Unearned Other Com-
Common Retained ESOP Treasury prehensive
Stock Surplus Earnings Shares Stock Income Total
----- ------- -------- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 $ 8,577 $ 305 $ 50,841 $ (1,384) $(1,820) $134 $56,653
Comprehensive income:
Net income -- -- 6,810 -- -- -- 6,810
Change in net unrealized gain
(loss) on available for sale
securities, net of tax effect -- -- -- -- -- 124 124
------- -------- -------- -------- ------- ---- -------
Total comprehensive income -- -- 6,810 -- -- 124 6,934
Cash dividends paid ($.29 per share) (2,402) -- -- -- (2,402)
Allocation of 37,062 shares to ESOP -- --
Participants -- 263 -- 198 -- 461
Stock options exercised -- (90) -- -- 90 -- --
Issuance of 408,348 common shares
in acquisition 408 4,770 -- -- -- -- 5,178
Purchase 140,000 common shares
for treasury -- -- -- -- (1,860) -- (1,860)
------- -------- -------- -------- ------- ---- -------
BALANCE AT DECEMBER 31, 1998 8,985 5,248 55,249 (1,186) (3,590) 258 64,964
Comprehensive income:
Net income -- -- 1,602 -- -- -- 1,602
Change in net unrealized gain
(loss) on available for sale
securities, net of tax effect -- -- -- -- -- (358) (358)
------- -------- -------- -------- ------- ---- -------
Total comprehensive income -- -- 1,602 -- -- (358) 1,244
Cash dividends paid ($.08 per share) -- -- (673) -- -- -- (673)
Allocation of 9,265 shares to ESOP
Participants -- 57 -- 49 -- -- 106
Purchase 22,380 common shares
for treasury -- -- -- -- (275) -- (275)
------- -------- -------- -------- ------- ----- -------
BALANCE AT MARCH 31, 1999 $ 8,985 $ 5,305 $ 56,178 $ (1,137) $(3,865) $(100) $65,366
======= ======== ======== ======== ======= ===== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,602 $1,638
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 540 278
Provision for possible loan losses 15 15
Gains on sale of loans (122) (17)
Other operating activities, net 588 1,025
------- ------
Total adjustments 1,021 1,301
Originations of loans for sale (8,590) (1,803)
Proceeds from sale of loans 7,712 1,263
------- ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,745 2,399
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in Federal funds sold (14,400) --
Proceeds from maturities of and principal payments
on debt securities 15,229 17,933
Purchases of debt securities (47,650) (19,007)
Net decrease in loans 10,871 1,335
Recoveries of loans previously charged off 135 94
Purchases of bank premises and equipment (1,097) (756)
Proceeds from sales of other real estate owned and
other foreclosed property 19 --
-------- ------
NET CASH USED IN INVESTING ACTIVITIES (36,893) (401)
-------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand and savings deposits 13,729 (924)
Net decrease in time deposits (8,209) (1,540)
Net decrease in securities sold under agreements to repurchase (197) (1,073)
Net increase in FHLB borrowings 29,960 --
Purchases of treasury stock (275) (176)
Cash dividends paid (673) (541)
------ ------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 34,335 (4,254)
------ ------
NET DECREASE IN CASH AND CASH EQUIVALENTS (813) (2,256)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,924 18,302
------ ------
CASH AND CASH EQUIVALENTS, END OF PERIOD $17,111 $16,046
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowings $4,970 $ 4,548
Income taxes 100 75
====== =======
Noncash transactions:
Transfers to other real estate owned in settlement of loans $ -- $ 21
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(unaudited)
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. They do not include all information and footnotes
required by generally accepted accounting principles for complete consolidated
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation have
been included. For further information, refer to Southside Bancshares Corp.'s
(the Company) Annual Report on Form 10-K for the year ended December 31, 1998.
Operating results for the three months ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999.
SEGMENT INFORMATION
The responsibility for management of the subsidiary banks remains with
the officers and directors of the respective banks. The financial performance of
the Company is measured internally by subsidiary bank results and key
performance measures. The following table shows the financial information of the
Company's subsidiary banks for the first quarter of 1999 and 1998. The "Other"
column includes the Parent Company and all intercompany elimination entries.
<TABLE>
<CAPTION>
(dollars in thousands)
THREE MONTHS ENDED MARCH 31, 1999
SSNB SBJC BSG BSCC OTHER CONSOLIDATED
---- ---- --- ---- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net interest income $ 3,750 $ 560 $ 872 $ 545 $ (26) $ 5,701
Provision for possible loan losses -- 15 -- -- -- 15
Noninterest income 675 56 104 62 33 930
Noninterest expense 2,815 352 457 347 426 4,397
Income taxes 410 80 152 85 (110) 617
Net income 1,200 169 367 175 (309) 1,602
AVERAGE BALANCES
Loans $228,190 $39,428 $50,357 $36,945 $(1,384) $353,536
Assets 399,009 60,377 90,072 57,129 (702) 605,885
Deposits 336,055 54,082 78,323 51,771 (98) 520,133
FINANCIAL RATIOS
Return on assets 1.20% 1.12% 1.63% 1.23% -- 1.06%
Return on equity 10.76% 11.31% 15.97% 13.97% -- 9.82%
Net interest margin 4.42% 4.10% 4.32% 3.96% -- 4.14%
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands)
Three Months ended March 31, 1998
SSNB SBJC BSG BSCC Other Consolidated
---- ---- --- ---- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net interest income $ 3,427 $ 597 $ 874 $ 518 $ (33) $ 5,383
Provision for possible loan losses -- 15 -- -- -- 15
Noninterest income 488 52 101 67 18 726
Noninterest expense 2,289 338 439 340 411 3,817
Income taxes 413 96 156 82 (108) 639
Net income 1,213 200 380 163 (318) 1,638
AVERAGE BALANCES
Loans $195,665 $41,298 $53,553 $36,289 $(1,581) $325,224
Assets 346,422 59,095 89,593 54,467 1,652 551,229
Deposits 302,172 52,734 79,244 49,503 (1,100) 482,553
FINANCIAL RATIOS
Return on assets 1.40% 1.35% 1.70% 1.20% -- 1.19%
Return on equity 13.98% 13.49% 15.83% 14.50% -- 11.45%
Net interest margin 4.50% 4.40% 4.34% 3.83% -- 4.31%
</TABLE>
7
<PAGE> 8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
This discussion is presented to provide an understanding of Southside
Bancshares Corp. and subsidiaries (the "Company" or "Registrant") consolidated
financial condition and the results of operations for the three months ended
March 31, 1999 and 1998.
The Company's net income is derived primarily from the net interest
income of its subsidiary banks. Net interest income is the difference (or
spread) between the interest income the subsidiary banks receive from their loan
and investment portfolios and their cost of funds, consisting primarily of the
interest paid on deposits and borrowings. Net income is also affected by the
levels of provisions for possible loan losses, noninterest income, and
noninterest expense.
Statements contained in this Report and in future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases and in oral statements made with the approval of an authorized
executive officer which are not historical or current facts are "forward-looking
statements" made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of
1993, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended). Such statements are based on management's beliefs, and assumptions
made by and information currently available to management and are subject to
certain risks and uncertainties that could cause actual results to differ
materially from historical earnings and those currently anticipated or
projected. When used in the Company's documents or oral presentations, the words
"anticipates," "believes," "estimates," "expects," "intends," "forecasts,"
"plan," "projects," and similar expressions are intended to identify such
forward-looking statements. There can be no assurance that such forward-looking
statements will in fact transpire. The following important factors, risks and
uncertainties, among others, could cause actual results to differ materially
from such forward-looking statements: (1) credit risk, (2) interest rate risk,
(3) competition, (4) changes in the regulatory environment and (5) changes in
general business and economic trends. The foregoing list should not be construed
as exhaustive and the Company disclaims any obligation to subsequently update or
revise any forward-looking statements after the date of this Report.
8
<PAGE> 9
Item 2. (continued)
FINANCIAL HIGHLIGHTS
COMPARISON OF SELECTED FINANCIAL DATA
(dollars in thousands except share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED Twelve Months Ended Three Months Ended
MARCH 31, 1999 December 31, 1998 March 31, 1998
-------------- ----------------- --------------
<S> <C> <C> <C>
EARNINGS
Total interest income $ 10,447 $ 42,227 $ 10,020
Total interest expense 4,746 19,857 4,637
-------- --------- --------
Net interest income 5,701 22,370 5,383
-------- --------- --------
Net interest income after provision for
possible loan losses $ 5,686 $ 22,308 $ 5,368
======== ========= ========
Net income $ 1,602 $ 6,810 $ 1,638
======== ========= ========
SHARE DATA
Earning per common share:
Basic $ 0.19 $0.82 $ 0.20
Diluted 0.19 0.80 .20
Dividends paid per common share .08 0.29 .07
Book value 7.76 7.70 7.11
Tangible book value 7.27 7.26 7.08
Shares outstanding (period-end)(1) 8,638,978 8,661,358 8,378,010
Average shares outstanding 8,399,066 8,297,250 8,118,576
Average shares outstanding, including
Potentially dilutive shares 8,621,121 8,554,635 8,350,689
FINANCIAL POSITION
Total assets $646,165 $610,293 $548,243
Total deposits 528,809 523,289 480,899
Total loans, net of unearned discount 347,061 356,988 325,467
Allowance for possible loan losses 6,286 6,192 6,058
Securities sold under agreements to repurchase 2,752 2,949 4,260
FHLB borrowings 44,247 14,287 --
Total shareholders' equity 65,366 64,964 57,713
</TABLE>
SELECTED RATIOS
The table below summarizes various selected ratios as of the end of the periods
indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED Twelve Months Ended Three Months Ended
MARCH 31, 1999(2) December 31, 1998 March 31, 1998(2)
----------------- ----------------- -----------------
<S> <C> <C> <C>
Loan-to-deposit ratio 65.63% 68.22% 67.68%
Allowance for possible loan losses to total loans 1.81 1.73 1.86
Dividend payout ratio(3) 42.11 39.02 33.06
Return on average assets 1.06 1.15 1.19
Return on average shareholders' equity 9.82 11.12 11.45
Net interest margin on average
interest-earning assets 4.14 4.15 4.31
Average shareholders' equity to average total
Assets 10.77 10.38 10.38
Tier I leverage capital to adjusted total
consolidated assets less intangibles 10.04 10.01 10.41
Tier I capital to risk-weighted assets 16.57 16.15 16.57
Total capital to risk-weighted assets 17.83 17.41 17.83
</TABLE>
(1) Shares outstanding at March 31, 1999, December 31, 1998 and March 31, 1998
include 213,107, 222,372, 250,167 shares, respectively, held by the ESOP
which have not been allocated to participants' accounts and thus are not
considered outstanding for purposes of computing book value and tangible
book value per share. These unallocated shares are also excluded from the
average shares outstanding used to compute earnings per common share.
(2) Statistical information is annualized where applicable.
(3) Dividends paid per common share divided by basic earnings per common share.
9
<PAGE> 10
Item 2. (continued)
FINANCIAL POSITION
Total consolidated assets of the Company have increased $35,872,000 during 1999
to $646,165,000 at March 31, 1999 compared to $610,293,000 at December 31, 1998.
This increase was largely due to a $30,000,000 leverage strategy employed by the
Company to enhance return on equity. Total consolidated assets of the Company
have also increased $97,922,000 since the end of the first quarter of 1998. This
increase was largely the result of an increase in total assets at South Side
National Bank in St. Louis, attributable to the aforementioned leverage strategy
and the acquisition of Public Service Bank, FSB (PSB). On June 29, 1998, the
Company acquired and merged PSB with South Side National Bank in St. Louis. As
of the purchase date, PSB had total assets of $73,731,000, total loans of
$46,318,000, and total deposits of $55,264,000. PSB had three offices in the St.
Louis metropolitan area. The Company paid approximately $3,456,000 in cash and
408,348 shares of common stock to acquire PSB, in a transaction accounted for
under the purchase method of accounting.
LOAN PORTFOLIO
The Company's loan portfolio consists of business loans to small and
medium size companies, commercial, construction and residential real estate
loans, and consumer loans. Traditionally, the majority of the loan portfolio has
focused on real estate as an integral component of a credit's underlying source
of collateral. The following table is a breakdown of the Company's loan
portfolio as of the end of the periods indicated.
<TABLE>
<CAPTION>
(in thousands)
MARCH 31, 1999 December 31, 1998 March 31, 1998
-------------- ----------------- --------------
<S> <C> <C> <C>
Commercial, financial and agricultural $ 66,823 $ 68,166 $ 72,255
Real estate-commercial 109,689 115,214 97,633
Real estate-construction 22,831 21,993 29,455
Real estate-residential 116,957 119,917 91,529
Consumer 22,021 22,219 24,017
Industrial revenue bonds 3,409 4,717 5,238
Other 5,331 4,762 5,340
-------- -------- --------
$347,061 $356,988 $325,467
======== ======== ========
</TABLE>
The Company's loan portfolio totaled $347,061,000 at March 31, 1999,
which represents a decrease of $9,927,000, or 2.8%, since December 31, 1998.
This decrease was due in part to a continued decline in residential real estate
loans. The current interest rate environment continues to attract borrowers to
long-term fixed rate financing which is then sold in the secondary market. The
remainder of the decline was in the commercial real estate portfolio, which was
largely the result of the payoff of two commercial loans.
SUMMARY OF ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
(in thousands)
THREE MONTHS ENDED Twelve Months Ended Three Months Ended
MARCH 31, 1999 December 31, 1998 March 31, 1998
-------------------- ----------------------- ----------------
<S> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD $6,192 $6,120 $6,120
Provision charged to expense 15 62 15
Loans charged off (56) (536) (171)
Recoveries 135 289 94
Balance of allowance for possible loan
losses of PSB at date of acquisition -- 257 --
------ ------ ------
BALANCE AT END OF PERIOD $6,286 $6,192 $6,058
====== ====== ======
</TABLE>
10
<PAGE> 11
Item 2. (continued)
The balance of the allowance for possible loan losses increased by
$94,000 during the first three months of 1999, due in large part to recoveries
of loans previously charged off exceeding charge offs for the quarter. In
addition, the Company recorded a provision for possible loan losses during the
first quarter of $15,000. Based upon the Company's internal analysis
of the adequacy of the allowance for possible loan losses, management of the
Company believes the level is adequate to cover actual and potential losses in
the loan portfolio under current conditions. The ratio of allowance for possible
loan losses as a percentage of total loans was 1.81% as of March 31, 1999
compared to 1.73% and 1.86% at December 31, 1998 and March 31, 1998,
respectively.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
(dollars in thousands)
MARCH 31, 1999 December 31, 1998 March 31, 1998
-------------- ----------------- --------------
<S> <C> <C> <C>
Nonaccrual loans $5,339 $3,189 $2,957
Loans past due 90 days or more and still
accruing interest 767 1,361 255
------ ------ ------
TOTAL NONPERFORMING LOANS 6,106 4,550 3,212
Other real estate owned 867 886 1,043
------ ------ ------
TOTAL NONPERFORMING ASSETS $6,973 $5,436 $4,255
====== ====== ======
RATIOS:
Total nonperforming loans as % of total loans 1.76% 1.27% 0.99%
Nonperforming assets as % of total loans and
other real estate owned 2.00 1.52 1.30
Nonperforming assets as % of total assets 1.08 0.89 0.78
</TABLE>
Nonperforming assets totaled $6,973,000 or 1.08% of total assets at
March 31, 1999 compared to $5,436,000 or 0.89% and $4,255,000 or 0.78% at
December 31, 1998 and March 31, 1998, respectively. Fluctuations in the level of
nonperforming assets are a normal part of the Company's business, however,
management is cognizant of the need to continually ensure that nonperforming
assets remain at acceptably low levels.
Current standards require that a loan be reported as impaired when it
is probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. The Company's loan policy
generally requires that a credit meeting the above criteria be placed on
nonaccrual status; however, loans which are past due more than 90 days as to
payment of principal or interest are also considered to be impaired. These loans
are included in the total of nonperforming assets. Loans past due less than 90
days are generally not considered impaired; however, a loan which is current as
to payments may be determined by management to demonstrate some of the
characteristics of an impaired loan. In these cases, the loan is classified as
impaired while management evaluates the appropriate course of action. The
Company's primary basis for measurements of impaired loans is the collateral
underlying the identified loan.
Any loans classified for regulatory purposes, but not included above in
nonperforming loans, do not
11
<PAGE> 12
Item 2. (continued)
represent material credits about which management is aware of any information
which causes management to have serious doubts as to the borrower's ability to
comply with the loan repayment terms or which management reasonably expects will
materially impact future operating results or capital resources. As of March 31,
1999, there were no concentrations of loans exceeding 10% of total loans which
were not disclosed as a category of loans detailed on page 10.
INVESTMENTS IN DEBT SECURITIES
Investments in debt securities have increased $31,706,000 since
December 31, 1998 due to a second return on equity enhancement strategy employed
by the Company's lead bank. To utilize a portion of such bank's excess capital
capacity, the bank borrowed approximately $30,000,000 in FHLB advances to fund
the purchase of mortgage-backed securities. The strategy was executed at the end
of the first quarter, and the resulting income and expense will be realized in
future quarters. In 1998, the Company implemented a similar $10,000,000
strategy. Overall, the investment portfolio contains a mixture of debt
securities in terms of the types of securities, interest rates, and maturity
distribution.
DEPOSITS
Total deposits decreased $5,520,000 during the first quarter of 1999
primarily as a result of a decrease in certificates of deposit. This decline is
largely the result of the Company's subsidiary banks being less aggressive with
respect to the interest rates being paid on deposits than some of their
competitors.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase (REPOs) declined
$197,000 during the first quarter of 1999, due to normal daily fluctuations in
the balances of the underlying accounts. The majority of the Company's REPOs are
used by larger commercial customers as a daily cash management tool, therefore,
depending on their individual liquidity positions, the balances in these
accounts can vary considerably.
FHLB BORROWINGS
The $29,960,000 increase in FHLB borrowings was due to $30,000,000 in
FHLB borrowings obtained as part of the aforementioned return on equity
enhancement strategy.
12
<PAGE> 13
Item 2. (continued)
ASSET/LIABILITY MANAGEMENT
As reflected on the Repricing and Interest Rate Sensitivity Analysis
below, the Company has a reasonably well balanced interest rate sensitivity
position. The Company's current one-year cumulative gap is 1.14x. Generally, a
one-year cumulative gap ratio in a range of 0.80x - 1.20x indicates an entity is
not subject to undue interest rate risk. A one-year cumulative gap ratio of
1.00x indicates that an institution has an equal amount of assets and
liabilities repricing within twelve months. A ratio in excess of 1.00x indicates
more assets than liabilities will be repriced during the period indicated, and a
ratio less than 1.00x indicates more liabilities than assets will be repriced
during the period indicated. However, actual experience may differ because of
the assumptions used in the allocation of deposits and other factors, which are
beyond management's control. Additionally, the following analysis includes the
available-for-sale securities spread throughout their respective repricing
and/or maturity horizons, even though such securities are available for
immediate liquidity should the need arise in any particular time horizon.
REPRICING AND INTEREST RATE SENSITIVITY ANALYSIS
(dollars in thousands)
MARCH 31, 1999
<TABLE>
<CAPTION>
Over Over
3 months 1 year
3 months through through Over
or less 12 months 5 years 5 years Total
------- --------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $44,300 $ -- $ -- $ -- $ 44,300
Investments available-for-sale 21,286 21,829 46,625 46,474 136,214
Investments held-to-maturity 6,172 16,059 34,633 20,559 77,423
Loans, net of unearned discount (1) 193,944 46,707 72,840 33,570 347,061
------- ------ ------- ------ -------
Total interest-earning assets 265,702 84,595 154,098 100,603 604,998
------- ------ ------- ------- -------
Cumulative interest-earning assets 265,702 350,297 504,395 604,998 604,998
------- ------- ------- ------- -------
Interest-bearing liabilities:
Interest-bearing demand deposits 54,722 31,270 39,086 31,270 156,348
Savings deposits 23,512 13,436 16,794 13,436 67,178
Time deposits under $100,000 45,920 83,564 61,178 -- 190,662
Time deposits $100,000 and over 13,013 28,938 4,269 -- 46,220
Securities sold under agreements
to repurchase 2,752 -- -- -- 2,752
FHLB borrowings -- 10,000 34,247 -- 44,247
------- ------- ------- -------- --------
Total interest-bearing liabilities 139,919 167,208 155,574 44,706 507,407
------- ------- ------- -------- -------
Cumulative interest-bearing liabilities 139,919 307,127 462,701 507,407 507,407
------- ------- ------- ------- -------
Gap analysis:
Interest sensitivity gap $125,783 $(82,613) $ (1,476) $ 55,897 $ 97,591
======== ======== ======== ======== ========
Cumulative interest
Sensitivity gap $125,783 $ 43,170 $ 41,694 $ 97,591 $ 97,591
======== ======== ======== ======== ========
Cumulative gap ratio of interest-
Earning assets to interest-bearing
Liabilities 1.90x 1.14x 1.09x 1.19x 1.19x
</TABLE>
(1) Nonaccrual loans are reported in the "Over 1 year through 5 years" column.
13
<PAGE> 14
Item 2. (continued)
CAPITAL RESOURCES
The regulatory capital guidelines require banking organizations to
maintain a minimum total capital ratio of 8% of risk-weighted assets (of which
at least 4% must be Tier I capital). The Company's total capital ratios under
the risk-weighted guidelines were 17.83%, 17.41% and 17.83% as of March 31,
1999, December 31, 1998, and March 31, 1998, respectively, which included Tier I
capital ratios of 16.57%, 16.15%, and 16.57%, respectively. These ratios are
well above the minimum risk-weighted capital requirements.
In addition, the Company and its subsidiary banks must maintain a
minimum Tier I leverage ratio (Tier I capital to total adjusted consolidated
assets) of at least 3%. Capital, as defined under these guidelines, is total
shareholders' equity less goodwill and excluding unrealized holding gains and
losses on available-for-sale securities of the Company. The Company's Tier I
leverage ratios were 10.04%, 10.01%, and 10.41% at March 31, 1999, December 31,
1998, and March 31, 1998, respectively.
RESULTS OF OPERATIONS
EARNINGS SUMMARY
Net income was $1,602,000 for the three months ended March 31, 1999
compared to $1,638,000 for the three months ended March 31, 1998, which
represents a $36,000 or a 2% decrease over the prior year. The decrease was
largely due to an increase in personnel expense, costs associated with new
facilities, and expenses associated with Y2K testing and preparedness.
Diluted earnings per common share were $0.19 for the first three months
of 1999 compared to $0.20 for the first three months of 1998. Net income for the
first three months of 1999 resulted in an annualized return on average assets
(ROA) of 1.06% compared to 1.15% in the prior year, and an annualized return on
average shareholders' equity (ROE) of 9.82% compared to 11.12% in the prior
year. ROE continues to be negatively impacted by the Company's strong equity
position, and was a major factor in the Company's decision to implement the $30
million return on equity enhancement strategy.
NET INTEREST INCOME
As reflected in the Selected Statistical Information table on the
following page, net interest income on a tax-equivalent basis increased by
$274,000 in the first three months of 1999 when compared to the first three
months of 1998. Net interest income increased because of the increase in earning
assets attributable to the PSB acquisition. This increase in earning assets was
partially offset by a decrease in the Company's net interest margin to 4.14% in
the first quarter of 1999, compared to 4.31% in the first quarter of the prior
year. During the first quarter, the Company's net interest margin was negatively
effected by a highly competitive lending environment. This trend will likely
continue throughout 1999, as the leverage strategy implemented at the end of the
first quarter begins to produce income in subsequent quarters. While the
leverage strategy will have a positive effect on both earnings and return on
equity, the impact on the net interest margin will be negative, as the spread,
or difference, between the interest earned or the assets purchased and the
borrowed funds will be less than the Company's current net interest margin.
14
<PAGE> 15
Item 2. (continued)
SELECTED STATISTICAL INFORMATION
THE FOLLOWING IS SELECTED STATISTICAL INFORMATION FOR SOUTHSIDE BANCSHARES CORP.
AND SUBSIDIARIES.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES
AND INTEREST DIFFERENTIAL
CONDENSED CONSOLIDATED AVERAGE BALANCE SHEET AND AVERAGE INTEREST RATES
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE Interest Average
INTEREST RATES Income\ Rates
AVERAGE INCOME\ EARNED\ Average Expense Earned\
BALANCE EXPENSE PAID(3) Balance ------- Paid(3)
------- ------- ------- ------- -------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Loans, net of unearned discount (1) (2) (3) $353,536 $ 7,433 8.41% $325,224 $ 7,224 8.89%
Investments in debt securities:
Taxable(4) 154,108 2,265 5.88 150,417 2,249 5.98
Exempt from Federal income tax (3) (4) 31,789 615 7.74 23,633 492 8.33
Short-term investments 27,325 305 4.46 20,438 270 5.28
------ ------ ---- ------- ----- ----
Total interest-earning assets/interest
income/overall yield (3) 566,758 10,618 7.49 519,712 10,235 7.88
------ ---- ------ ----
Allowance for possible loan losses (6,220) (6,079)
Cash and due from banks 16,853 15,281
Other assets 28,494 22,315
-------- ---------
TOTAL ASSETS $605,885 $ 551,229
-------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing demand and savings deposits $214,445 1,479 2.76% $ 198,194 1,552 3.13%
Time deposits 241,331 3,029 5.02 227,884 3,029 5.32
Short-term borrowings 2,790 29 4.16 5,095 56 4.40
Other borrowings 14,606 209 5.72 -- -- --
-------- -------- --------- --------
Total interest-bearing liabilities/interest-
expense/overall rate 473,172 4,746 4.01 4,637 4.30
Non-interest-bearing demand deposits 64,357 431,173
Other liabilities 3,125 56,475
Shareholders' equity 65,231 6,352
-------
TOTAL LIABILITIES AND SHAREHOLDERS' $605,885 57,229
======= --------
EQUITY $551,229
========
NET INTEREST INCOME $5,872 $5,598
====== ======
NET INTEREST MARGIN ON AVERAGE 4.14% 4.31%
INTEREST-EARNING ASSETS ==== ====
</TABLE>
(1) Interest income includes loan origination fees.
(2) Average balance includes nonaccrual loans.
(3) Interest yields are presented on a tax-equivalent basis.
(4) Includes investments available-for-sale.
15
<PAGE> 16
Item 2. (continued)
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses remained at a relatively low
level of $15,000 during the first quarter of 1999. Based on the Company's
analysis of the adequacy of the allowance for possible loan losses, management
determined it was not necessary to record significant provisions for possible
loan losses. Management will continue to assess the adequacy of the allowance
for possible loan losses on a regular basis throughout the year.
NONINTEREST INCOME
Noninterest income increased $204,000 during the first quarter of 1999
in comparison to the first quarter of the prior year. The increase was due to
increases in all categories of noninterest income. Trust fees increased due to
growth in the personal trust business; service charges increased due to the
addition of the PSB accounts during 1998; and gains on sales of loans increased
due to the mortgage operation acquired in the PSB acquisition.
NONINTEREST EXPENSE
Noninterest expense for the first quarter of 1999 increased $580,000
when compared to the first quarter of the prior year, as a result of increases
in all categories of noninterest expenses. The increase in salaries and employee
benefits expense was due, in part, to normal pay increases, as well compensation
expense related to the two branches acquired in the PSB acquisition, the new
facility opened in January, and salaries and commissions relating to the
secondary market mortgage operation. The increase in occupancy and equipment
expenses were also attributable to the operation of the three additional
facilities during 1999. The increase in data processing expense was also due in
part to the additional locations, as well as costs incurred which were related
to Y2K testing and preparedness. The increase in other noninterest expense also
related to the additional locations including advertising, supplies,
telecommunication costs and goodwill amortization.
INCOME TAXES
Federal income tax expense for the first quarter of 1999 was $617,000
compared to $639,000 in the first quarter of 1998. The Company's effective tax
rate decreased to 27.81% for the first quarter of 1999, compared to 28.06% for
the first quarter of 1998. This decrease was due to the net effect of an
increase in tax exempt income, which was partially offset by an increase in
goodwill amortization, which is a nondeductible expense for tax purposes.
EFFECT OF NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) 133, Accounting for
Derivative Instruments and Hedging Activities, which was issued in June 1998,
establishes accounting and reporting standards for derivative instruments and
hedging activities. Under SFAS 133, derivatives are recognized on the balance
sheet at fair value as an asset or liability. Changes in the fair value of
derivatives are reported as a component of other comprehensive income or
recognized as earnings through the income statement depending on the nature of
the instrument. SFAS 133 is effective for all quarters of fiscal years beginning
after June 15, 1999 with earlier adoption permitted. The Company is currently
evaluating SFAS 133's effect on its consolidated financial statements.
THE YEAR 2000 ISSUE
The Year 2000 issue relates to computer programs and systems that have
used a two-digit field rather than a four-digit field to represent the year.
Therefore, these programs do not properly recognize a year that begins with "20"
instead of "19". The risk of a system failure and data processing errors may be
the result of this programming logic. Management has implemented a company-wide
initiative for preparing its systems,
16
<PAGE> 17
Item 2. (continued)
applications and equipment for functionality in the Year 2000 and beyond. The
Company's Year 2000 project consists of five phases including awareness,
assessment, renovation, testing and implementation, all of which are well
underway.
The Company continues to monitor efforts to ready internal systems for
the Year 2000. Highest priority has been assigned to those systems determined to
be critical to the ongoing operations of the Company. Programming changes and
testing of critical systems, applications, and equipment are scheduled to be
substantially completed by the second quarter of 1999. If modifications to
existing systems and conversions to new systems proceed as scheduled, management
presently believes that the Year 2000 issue will not pose a substantial internal
operating risk to the Company.
The Company modified its credit risk assessment to include the
consideration of incremental risk that may be posed by customer's inability, if
any, to address Year 2000 issues. Management presently believes this risk to be
manageable, and continues to monitor customer's efforts to prepare for the Year
2000. Additionally, the Company has implemented a process for assessing the
readiness of its major vendors, suppliers and business partners. There can be no
guarantee however, that the systems of these outside parties will be remediated
on a timely basis or that a failure to remediate by one of these parties would
not have a material adverse effect on the Company.
The Company believes it will substantially complete the implementation
of its Year 2000 program prior to the commencement of the Year 2000. However,
the risk of the system failures, either internal or external, cannot be
eliminated. Therefore, the Company intends to assess the worst case scenario
caused by Year 2000 issue and address the possible effects thereof. The Company
will assess the types and nature of contingency plans that will be required to
maintain the Company's operational capacity after January 1, 2000. Contingency
planning will cover all critical areas of the Company, as well as customers,
suppliers and business partners.
To date, the Company and its subsidiaries have incurred approximately
$300,000 in direct costs associated with Year 2000 readiness efforts. The
Company estimates that total expenditures will approximate $350,000 through the
Year 2000. This includes external costs that will be expensed, as well as new
hardware and software totaling approximately $250,000, which will be
capitalized. Funding for costs associated with Year 2000 efforts will be derived
from normal operating cash flow. As a result, Year 2000 expenses are not
expected to a have a material effect on the Company's results of operations.
The foregoing discussion of Year 2000 issues is based on management's
most current estimates. These estimates utilize multiple assumptions of future
events, including, but not limited to, the continued availability of certain
resources, third party efforts, and other factors. However, there can be no
guarantee that these estimates will be achieved, and actual costs and results
could differ materially from the estimates currently anticipated by the Company.
17
<PAGE> 18
Item 2. (continued)
COMMON STOCK - MARKET PRICE AND DIVIDENDS
The table below sets forth the high, low and closing bid prices of the
Company's common stock for the periods presented. The Company's common stock is
traded on the National Association of Securities Dealers Automated Quotation
System/Small-Cap Market System ("NASDAQ/SCM") under the symbol SBCO.
Accordingly, information included below represents the high and low bid prices
of the common stock reported on NASDAQ/SCM.
<TABLE>
<CAPTION>
Book Dividends Paid Per
High Bid Low Bid Close Value Market/Book Common Share
-------- ------- ----- ----- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1ST QUARTER - 1999 $13.00 $10.75 $11.625 $7.76 149.81% $ 0.080
4th Quarter - 1998 15.00 11.75 12.25 7.70 159.09 0.080
3rd Quarter - 1998 13.00 11.17 12.375 7.63 162.19 0.073
2nd Quarter - 1998 14.92 12.08 12.08 7.48 161.50 0.070
1st Quarter - 1998 12.58 11.42 12.58 7.11 176.93 0.067
</TABLE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of business, the Company had certain routine
lawsuits pending at March 31, 1999. In the opinion of management, after
consultation with legal counsel, none of these lawsuits will have a material
adverse effect on the consolidated financial condition of the Company.
ITEM 5. OTHER INFORMATION
None
ITEM 6. Exhibits and Reports on Form 8-K
Reports on 8-K
None
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHSIDE BANCSHARES CORP.
----------------------------------------------------
May 14, 1999 /s/ Thomas M. Teschner
----------------------------------------------------
Thomas M. Teschner
President
(Principal Executive Officer)
May 14, 1999 /s/ Joseph W. Pope
----------------------------------------------------
Joseph W. Pope
Senior Vice President and Chief
Financial Officer (Principal Financial
Officer, Controller, and Principal
Accounting Officer)
19
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOUTHSIDE
BANCSHARES CORP'S QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH DOCUMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 17,111
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 44,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 136,214
<INVESTMENTS-CARRYING> 77,423
<INVESTMENTS-MARKET> 78,683
<LOANS> 347,061
<ALLOWANCE> 6,286
<TOTAL-ASSETS> 646,165
<DEPOSITS> 528,809
<SHORT-TERM> 46,999
<LIABILITIES-OTHER> 4,991
<LONG-TERM> 0
0
0
<COMMON> 8,985
<OTHER-SE> 56,381
<TOTAL-LIABILITIES-AND-EQUITY> 65,366
<INTEREST-LOAN> 7,471
<INTEREST-INVEST> 2,671
<INTEREST-OTHER> 305
<INTEREST-TOTAL> 10,447
<INTEREST-DEPOSIT> 4,537
<INTEREST-EXPENSE> 4,746
<INTEREST-INCOME-NET> 5,701
<LOAN-LOSSES> 15
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,397
<INCOME-PRETAX> 2,219
<INCOME-PRE-EXTRAORDINARY> 2,219
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,243
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
<YIELD-ACTUAL> 4.14
<LOANS-NON> 5,339
<LOANS-PAST> 767
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,192
<CHARGE-OFFS> 56
<RECOVERIES> 15
<ALLOWANCE-CLOSE> 6,286
<ALLOWANCE-DOMESTIC> 6,286
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
