<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 SEPTEMBER 30, 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 NOVEMBER 12, 1999, the number of shares outstanding of the
-----------------
registrant's common stock was 8,593,628.
---------
<PAGE> 2
SOUTHSIDE BANCSHARES CORP.
INDEX
PAGE
----
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited):
Condensed Consolidated Balance Sheets at
September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Income for
the nine months and three months ended
September 30, 1999 and September 30, 1998 4
Condensed Consolidated Statements of
Shareholders' Equity and Comprehensive
Income for the nine months ended September
30, 1999 and the year ended December 31, 1998 5
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 and
September 30, 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
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 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
<PAGE> 3
SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(dollars in thousands except share data)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
------------- ------------
<S> <C> <C>
Cash and due from banks $ 21,765 $ 17,924
Due from banks - interest-bearing 455 -
Federal funds sold 5,300 29,900
Investments in debt securities:
Available for sale, at fair value 150,723 97,895
Held to maturity, at amortized cost
(fair value of $66,951 in 1999, and $85,841 in 1998) 66,838 84,036
-------- --------
Total investments in debt securities 217,561 181,931
-------- --------
Loans, net of unearned discount 360,084 356,988
Less allowance for possible loan losses 6,103 6,192
-------- --------
Loans, net 353,981 350,796
-------- --------
Bank premises and equipment 17,483 16,152
Other assets 15,443 13,590
-------- --------
TOTAL ASSETS $631,988 $610,293
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 64,981 $ 70,436
Interest-bearing demand and savings 220,380 207,762
Time deposits 230,349 245,091
-------- --------
Total deposits 515,710 523,289
Securities sold under agreements to repurchase 1,864 2,949
FHLB borrowings 44,163 14,287
Debt of Employee Stock Ownership Plan 1,186 -
Other liabilities 4,608 4,804
-------- --------
Total liabilities 567,531 545,329
-------- --------
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 in 1999 and 1998 8,985 8,985
Surplus 5,400 5,248
Retained earnings 57,795 55,249
Unearned Employee Stock Ownership Plan shares (1,038) (1,186)
Treasury stock, at cost, 371,750 and 324,020 shares in
1999 and 1998, respectively (4,148) (3,590)
Accumulated other comprehensive income (loss) (2,537) 258
-------- --------
Total shareholders' equity 64,457 64,964
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 631,988 $610,293
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(dollars in thousands except share data)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------ ------ ----- ----
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 22,028 $ 22,347 $ 7,357 $ 8,051
Interest on investments in debt securities:
Taxable 7,865 6,897 2,884 2,393
Exempt from Federal income taxes 1,234 1,119 415 423
Interest on short-term investments 951 1,001 240 409
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 32,078 31,364 10,896 11,276
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Interest on interest-bearing demand and savings deposits 4,672 4,879 1,651 1,739
Interest on time deposits 8,714 9,421 2,813 3,432
Interest on short-term borrowings 93 124 32 22
Interest on FHLB borrowings 1,371 372 584 279
Interest on debt of Employee Stock Ownership Plan 4 - 4 -
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 14,854 14,796 5,084 5,472
---------- ---------- ---------- ----------
NET INTEREST INCOME 17,224 16,568 5,812 5,804
Provision for possible loan losses 45 47 15 17
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 17,179 16,521 5,797 5,787
---------- ---------- ---------- ----------
NONINTEREST INCOME:
Trust department 912 828 312 290
Service charges on deposit accounts 1,070 979 369 340
Gains on sales of loans 260 245 46 186
Other 407 395 143 103
---------- ---------- ---------- ----------
TOTAL NONINTEREST INCOME 2,649 2,447 870 919
---------- ---------- ---------- ----------
NONINTEREST EXPENSES:
Salaries and employee benefits 6,815 6,135 2,286 2,151
Net occupancy and equipment expense 2,028 1,661 685 581
Data processing 556 400 179 169
Other 4,201 3,711 1,418 1,392
---------- ---------- ---------- ----------
TOTAL NONINTEREST EXPENSES 13,600 11,907 4,568 4,293
---------- ---------- ---------- ----------
INCOME BEFORE FEDERAL INCOME TAX EXPENSE 6,228 7,061 2,099 2,413
Federal income tax expense 1,665 1,937 566 649
---------- ---------- ---------- ----------
NET INCOME $ 4,563 $ 5,124 $ 1,533 $ 1,764
========== ========== ========== ==========
SHARE DATA:
Earnings per common share - basic $ 0.54 $ 0.62 $ 0.18 $ 0.21
========== ========== ========== ==========
Earnings per share - diluted $ 0.53 $ 0.60 $ 0.18 $ 0.20
========== ========== ========== ==========
Dividends paid per common share $ 0.24 $ 0.21 $ 0.08 $ 0.07
========== ========== ========== ==========
Average common shares outstanding 8,410,986 8,247,126 8,417,354 8,497,956
========== ========== ========== ==========
Average common shares outstanding, including
potentially diluted share 8,614,671 8,482,761 8,594,946 8,720,979
========== ========== ========== ==========
</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
NINE MONTHS ENDED SEPTEMBER 30, 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 (Loss) 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 ($.29 per share) - - (2,402) - - - (2,402)
Allocation of 37,062 shares to ESOP
Participants - 263 - 198 - 461
Stock options exercised - (90) - - 90 - -
Issuance of 408,348 common shares
in acquisition 408 4,770 - - - - 5,178
Purchase 140,000 common shares
for treasury - - - - (1,860) - (1,860)
-------- -------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1998 8,985 5,248 55,249 (1,186) (3,590) 258 64,964
Comprehensive income:
Net income - - 4,563 - - - 4,563
Change in net unrealized gain
(loss) on available for sale
securities, net of tax effect - - - - - (2,795) (2,795)
-------- -------- -------- -------- -------- -------- --------
Total comprehensive income - - 4,563 - - (2,795) 1,768
Cash dividends paid ($.24 per share) - - (2,017) - - - (2,017)
Allocation of 27,796 shares to ESOP
Participants - 152 - 148 - - 300
Purchase 47,730 common shares
for treasury - - - - (558) - (558)
-------- -------- -------- -------- -------- -------- --------
BALANCE AT SEPTEMBER 30, 1999 $ 8,985 $ 5,400 $ 57,795 $ (1,038) $ (4,148) $ (2,537) $ 64,457
======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
5
<PAGE> 6
SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,563 $ 5,124
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,790 1,146
Provision for possible loan losses 45 47
Gains on sale of loans (260) (245)
Other operating activities, net (693) (1,468)
-------- --------
Total adjustments 882 (520)
Originations of loans for sale (7,563) (11,188)
Proceeds from sale of loans 10,355 9,567
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,237 2,983
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in Federal funds sold 24,600 3,775
Proceeds from maturities of and principal payments on
debt securities 40,203 46,290
Purchases of debt securities (80,649) (57,562)
Net (increase) decrease in loans (6,063) 10,002
Recoveries of loans previously charged off 239 233
Purchases of bank premises and equipment (2,225) (3,258)
Proceeds from sales of other real estate owned and other
foreclosed property 131 188
Cash and cash equivalents acquired, net of cash paid - 8,238
-------- --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (23,764) 7,906
======== ========
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits 7,163 5,588
Net decrease in time deposits (14,742) (15,210)
Net decrease in securities sold under agreements to repurchase (1,085) (4,063)
Net increase in FHLB borrowings 29,876 7,958
Proceeds from debt of Employee Stock Ownership Plan 1,186 -
Purchases of treasury stock (558) (1,437)
Cash dividends paid (2,017) (1,728)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 19,823 (8,892)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,296 1,997
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,924 18,302
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 22,220 $ 20,299
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowings $ 15,086 $ 14,771
Federal income taxes 2,246 2,176
======== ========
Noncash transactions:
Transfers to other real estate owned in settlement of loans $ 62 $ 57
Issuance of stock in financing of acquisition - 5,178
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 nine months ended September 30, 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 tables show the financial information of the
Company's subsidiary banks, South Side National Bank in St. Louis (SSNB), State
Bank of Jefferson County (SBJC), Bank of Ste. Genevieve County (BSG), and The
Bank of St. Charles County (BSCC), for the nine and three months ended September
30, 1999 and 1998, respectively. The "Other" column includes the Parent Company
and all intercompany elimination entries.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
SSNB SBJC BSG BSCC OTHER CONSOLIDATED
---- ---- --- ---- ----- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net interest income $ 11,223 $ 1,748 $ 2,655 $ 1,672 $ (74) $ 17,224
Provision for possible loan losses - 45 - - - 45
Noninterest income 1,927 186 273 209 54 2,649
Noninterest expense 8,600 1,214 1,394 1,087 1,305 13,600
Federal income tax expense (benefit) 1,132 212 447 259 (385) 1,665
Net income (loss) 3,418 463 1,087 535 (940) 4,563
AVERAGE BALANCES
Loans $220,362 $41,346 $51,400 $37,255 71 $350,434
Assets 416,806 61,815 89,901 57,745 1,348 627,615
Deposits 334,285 55,557 78,125 52,263 (455) 519,775
FINANCIAL RATIOS
Return on assets 1.09% 1.00% 1.61% 1.23% - 0.97%
Return on equity 10.25% 10.26% 15.38% 14.09% - 9.35%
Net interest margin 4.18% 4.18% 4.39% 4.03% - 4.09%
</TABLE>
<TABLE>
<CAPTION>
Nine Months ended September 30, 1998
SSNB SBJC BSG BSCC Other Consolidated
---- ---- --- ---- ----- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net interest income $ 10,612 $ 1,790 $ 2,642 $ 1,616 $ (92) $ 16,568
Provision for possible loan losses 2 45 - - - 47
Noninterest income 1,773 163 257 199 55 2,447
Noninterest expense 7,318 1,017 1,314 1,047 1,211 11,907
Federal income tax expense (benefit) 1,266 288 458 258 (333) 1,937
Net income (loss) 3,799 603 1,127 510 (915) 5,124
AVERAGE BALANCES
Loans $206,878 $40,919 $52,715 $37,306 $(1,384) $336,434
Assets 371,075 59,119 90,137 55,355 2,504 578,190
Deposits 319,035 52,688 78,750 50,353 (800) 500,026
FINANCIAL RATIOS
Return on assets 1.36% 1.36% 1.67% 1.23% - 1.18%
Return on equity 13.18% 13.31% 15.21% 14.87% - 11.33%
Net interest margin 4.52% 4.41% 4.31% 4.13% - 4.25%
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999
SSNB SBJC BSG BSCC OTHER CONSOLIDATED
---- ---- --- ---- ----- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net interest income $ 3,762 $ 603 $ 913 $ 559 $ (25) $ 5,812
Provision for possible loan losses - 15 - - - 15
Noninterest income 615 65 99 74 17 870
Noninterest expense 2,844 455 465 372 432 4,568
Federal income tax expense (benefit) 397 59 161 86 (137) 566
Net income (loss) 1,136 139 386 175 (303) 1,533
AVERAGE BALANCES
Loans $215,291 $43,820 $54,496 $37,951 $ 210 $351,768
Assets 423,893 62,908 90,007 57,904 2,078 636,790
Deposits 332,433 56,599 78,009 52,139 (420) 518,760
FINANCIAL RATIOS
Return on assets 1.07% 0.88% 1.72% 1.21% - 0.96%
Return on equity 10.22% 10.54% 15.27% 14.20% - 9.29%
Net interest margin 4.21% 4.15% 4.39% 4.02% - 4.05%
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998
SSNB SBJC BSG BSCC OTHER CONSOLIDATED
---- ---- --- ---- ----- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net interest income $ 3,783 $ 595 $ 904 $ 552 $ (30) $ 5,804
Provision for possible loan losses 2 15 - - - 17
Noninterest income 713 56 67 65 18 919
Noninterest expense 2,734 342 431 353 433 4,293
Federal income tax expense (benefit) 432 95 156 89 (123) 649
Net income (loss) 1,328 199 384 175 (322) 1,764
AVERAGE BALANCES
Loans $200,921 $40,969 $52,534 $37,168 $(1,444) $330,148
Assets 359,972 59,215 90,155 55,077 1,359 565,778
Deposits 310,588 52,793 79,052 50,084 (800) 491,717
FINANCIAL RATIOS
Return on assets 1.48% 1.34% 1.70% 1.27% - 1.25%
Return on equity 13.41% 13.39% 15.24% 14.79% - 11.49%
Net interest margin 4.46% 4.42% 4.27% 4.15% - 4.28%
</TABLE>
8
<PAGE> 9
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 and nine months
ended September 30, 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.
9
<PAGE> 10
Item 2. (continued)
FINANCIAL HIGHLIGHTS
COMPARISON OF SELECTED FINANCIAL DATA
(dollars in thousands except share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED Twelve Months Ended Nine Months Ended
SEPTEMBER 30, 1999 December 31, 1998 September 30, 1998
------------------ ------------------- ------------------
<S> <C> <C> <C>
EARNINGS
Total interest income $ 32,078 $ 42,227 $ 31,364
Total interest expense 14,854 19,857 14,796
---------- ---------- ----------
Net interest income 17,224 22,370 16,568
Provision for possible loan losses 45 62 47
---------- ---------- ----------
Net interest income after provision for
possible loan losses $ 17,179 22,308 $ 16,521
========== ========== ==========
Net income $ 4,563 $ 6,810 $ 5,124
========== ========== ==========
SHARE DATA
Earning per common share:
Basic $ 0.54 $ 0.82 $ 0.62
Diluted 0.53 0.80 0.60
Dividends paid per common share 0.24 0.29 0.21
Book value 7.66 7.70 7.63
Tangible book value 7.20 7.26 7.18
Shares outstanding (period-end)(1) 8,613,628 8,661,358 8,691,858
Average shares outstanding 8,410,986 8,297,250 8,247,126
Average shares outstanding, including
Potentially dilutive shares 8,614,671 8,554,635 8,482,761
FINANCIAL POSITION
Total assets $ 631,988 $610,293 $ 615,721
Total deposits 515,710 523,289 529,004
Total loans, net of unearned discount 360,084 356,988 364,127
Allowance for possible loan losses 6,103 6,192 6,222
Securities sold under agreements to repurchase 1,864 2,949 1,270
FHLB borrowings 44,163 14,287 16,328
Debt of Employee Stock Ownership Plan 1,186 - -
Total shareholders' equity 64,457 64,964 64,528
</TABLE>
SELECTED RATIOS
The table below summarizes various selected ratios as of the end of the periods
indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED Twelve Months Ended Nine Months Ended
SEPTEMBER 30, 1999(2) December 31, 1998 September 30, 1998(2)
--------------------- ------------------- ----------------------
<S> <C> <C> <C>
Loan-to-deposit ratio 69.82% 68.22% 68.83%
Allowance for possible loan losses to total loans 1.69 1.73 1.71
Dividend payout ratio(3) 44.44 39.02 33.87
Return on average assets 0.97 1.15 1.18
Return on average shareholders' equity 9.35 11.12 11.33
Net interest margin on average
interest-earning assets 4.09 4.15 4.25
Average shareholders' equity to average total
Assets 10.37 10.38 10.42
Tier I leverage capital to adjusted
total consolidated assets less intangibles 10.02 10.01 9.66
Tier I capital to risk-weighted assets 16.34 16.15 16.04
Total capital to risk-weighted assets 17.60 17.41 17.29
</TABLE>
(1) Shares outstanding at September 30, 1999, December 31, 1998 and September
30, 1998 include 194,576, 222,372, 231,636 shares, respectively, held by the
Employee Stock Ownership Plan 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.
10
<PAGE> 11
Item 2. (continued)
FINANCIAL POSITION
Total consolidated assets of the Company have increased $21,695,000
during 1999 to $631,988,000 at September 30, 1999 compared to $610,293,000 at
December 31, 1998. This increase was due to a $30 million leverage strategy
employed by the Company, which was partially offset by a decrease in time
deposits, as competition for banking relationships remains very strong.
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)
SEPTEMBER 30, 1999 December 31, 1998 September 30, 1998
------------------ ---------------- ------------------
<S> <C> <C> <C>
Commercial, financial and agricultural $ 65,566 $ 68,166 $ 67,991
Real estate-commercial 124,771 115,214 97,598
Real estate-construction 22,249 21,993 32,481
Real estate-residential 116,554 119,917 131,257
Consumer 23,095 22,219 23,915
Industrial revenue bonds 3,438 4,717 4,935
Other 4,411 4,762 5,950
-------- -------- --------
$360,084 $356,988 $364,127
======== ======== ========
</TABLE>
The Company's loan portfolio totaled $360,084,000 at September 30,
1999, which represents an increase of approximately $3 million since December
31, 1998. After decreasing over $16 million during the first and second quarters
of 1999, total loans outstanding increased by more than $19 million during the
third quarter. The third quarter increase in loans can be attributed to
increased marketing efforts and loan officer calling programs, which began
during the first quarter of the year. The third quarter growth has been in all
of the lending categories with the exception of real estate construction and
other loans. New home equity products, as well as, new adjustable rate mortgage
loan products have resulted in a $5.2 million net increase in the residential
real estate loan portfolio. Commercial real estate and commercial, financial and
agricultural loans have increased $12.8 million and $2.3 million, respectively,
as a direct result of intensified calling efforts of the Company's commercial
loan officers. Management is very pleased with the third quarter loan growth,
but the Company has not lost sight of the need to continually monitor credit
quality and apply sound underwriting standards.
SUMMARY OF ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
(in thousands)
NINE MONTHS ENDED Twelve Months Ended Nine Months Ended
SEPTEMBER 30, 1999 December 31, 1998 September 30, 1998
------------------ ----------------- ------------------
<S> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD $6,192 $6,120 $6,120
Provision charged to expense 45 62 47
Loans charged off (373) (536) (435)
Recoveries 239 289 233
Balance of allowance for possible loan
losses of PSB at date of acquisition - 257 257
------ ------ ------
BALANCE AT END OF PERIOD $6,103 $6,192 $6,222
====== ====== ======
</TABLE>
11
<PAGE> 12
Item 2. (continued)
The balance of the allowance for possible loan losses decreased by
$89,000 during the first nine months of 1999, as charge offs exceeded recoveries
of loans previously charged off for the period by $134,000 and the Company
recorded a provision for possible loan losses during the first nine months of
$45,000. 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 losses inherent in the loan portfolio under current
conditions. While management believes the current level of the allowance for
possible loan losses is adequate, continued loan growth in future quarters may
necessitate the Company recording increased provisions for loan losses in those
periods. The ratio of allowance for possible loan losses as a percentage of
total loans was 1.69% as of September 30, 1999 compared to 1.73% and 1.71% at
December 31, 1998 and September 30, 1998, respectively.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
(dollars in thousands)
SEPTEMBER 30, 1999 December 31, 1998 September 30, 1998
------------------ ----------------- ------------------
<S> <C> <C> <C>
Nonaccrual loans $4,430 $3,189 $2,726
Loans past due 90 days or more and still
Accruing interest 994 1,361 2,404
------ ------ ------
TOTAL NONPERFORMING LOANS 5,424 4,550 5,130
Other real estate owned 817 886 1,013
------ ------ ------
TOTAL NONPERFORMING ASSETS $6,241 $5,436 $6,143
====== ====== ======
RATIOS:
Total nonperforming loans as % of total loans 1.51% 1.27% 1.41%
Nonperforming assets as % of total loans and
Other real estate owned 1.73 1.52 1.68
Nonperforming assets as % of total assets 0.99 0.89 1.00
</TABLE>
Nonperforming assets totaled $6,241,000 or 0.99% of total assets at
September 30, 1999 compared to $5,436,000 or 0.89% and $6,143,000 or 1.00% at
December 31, 1998 and September 30, 1998, respectively. The increase in
nonaccrual loans during 1999 is the result of the addition of approximately
$1,900,000 in loans to one commercial borrower. The borrower is currently in the
process of liquidating assets to satisfy its obligations and sufficient reserves
have been established should there be a short-fall from the liquidation of the
collateral securing the loans. The decrease in loans past due 90 days or more
and still accruing interest was due to the renewal of several loans. Loans in
this category are typically past due because the loan has matured and the
renewal has not been processed because it is lacking all of the required
documentation. These loans are typically current as to the payment of principal
and interest. 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.
A loan is 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
12
<PAGE> 13
Item 2. (continued)
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 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 September 30, 1999, there were no concentrations of
loans exceeding 10% of total loans, which were not disclosed as a category of
loans, detailed on page 11.
INVESTMENTS IN DEBT SECURITIES
Investments in debt securities have increased $35.6 million since
December 31, 1998 due to a second leverage strategy employed by the Company's
lead bank. To utilize a portion of such bank's excess capital capacity, the bank
borrowed $30 million in FHLB advances to fund the purchase of mortgage-backed
securities. In 1998, the Company implemented a similar $10 million strategy. The
remainder of the increase can be attributed to a decrease in Federal funds sold.
Overall, the investment portfolio contains a diverse mixture of debt securities
in terms of the types of securities, interest rates, and maturity distribution,
which is beneficial to the Company when reacting to changes in the interest rate
environment.
DEPOSITS
Total deposits decreased $7.6 million during the first nine months of
1999 as a result of a decrease in noninterest-bearing and time deposits.
Noninterest-bearing and time deposits decreased by approximately $5.5 and $14.7
million, respectively, during the first nine months of 1999, but were partially
offset by approximately $12.6 million in growth of interest-bearing demand and
savings deposits. Competition for time deposits remains intense, as start-up
banks, as well as established institutions, fight for market share. While the
Company is careful to retain its core-deposit base, management is less
aggressive with respect to time deposit pricing than some of its competitors.
The decrease in noninterest-bearing demand deposits was largely the result of
normal fluctuations in the balances of some of the Company's larger commercial
deposit customers. The growth in interest-bearing demand deposits is due, in
part, to management's focus on attracting and retaining these deposits, as well
as the customers desire to keep more funds liquid during periods of low interest
rates.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase (REPOs) declined $1.1
million during the first nine months 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.
FEDERAL HOME LOAN BANK (FHLB) BORROWINGS
The $29.9 million increase in FHLB borrowings was due to $30 million in
FHLB borrowings obtained as part of the aforementioned leverage strategy.
DEBT OF EMPLOYEE STOCK OWNERSHIP PLAN
In September 1999, the Company's Employee Stock Ownership Plan borrowed
$1,186,000 from an unaffiliated financial institution. Previously, this debt was
financed through South Side National Bank in St. Louis, the proceeds of which
were used to purchase shares of the Company's common stock. The debt is
guaranteed by the Company and thus is reflected on the Company's consolidated
balance sheet.
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 1.04x. 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
13
<PAGE> 14
Item 2. (continued)
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)
SEPTEMBER 30, 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:
Due from bank interest bearing $ 455 $ - $ - $ - $ 455
Federal funds sold 5,300 - - - 5,300
Investments available-for-sale 19,828 18,685 59,506 52,704 150,723
Investments held-to-maturity 6,153 17,173 24,134 19,378 66,838
Loans, net of unearned discount (1) 197,588 45,575 84,224 32,697 360,084
-------- --------- -------- -------- --------
Total interest-earning assets 229,324 81,433 167,864 104,779 583,400
-------- --------- -------- -------- --------
Cumulative interest-earning assets 229,324 310,757 478,621 583,400 583,400
-------- --------- -------- -------- --------
Interest-bearing liabilities:
Interest-bearing demand deposits 54,567 31,181 38,977 31,181 155,906
Savings deposits 22,566 12,895 16,118 12,895 64,474
Time deposits under $100,000 44,194 80,288 61,258 - 185,740
Time deposits $100,000 and over 18,485 22,458 3,666 - 44,609
Securities sold under agreements
to repurchase 1,864 - - - 1,864
FHLB borrowings - 10,000 34,163 - 44,163
ESOP debt - - 1,186 - 1,186
-------- --------- -------- -------- --------
Total interest-bearing liabilities 141,676 156,822 155,368 44,076 497,942
-------- --------- -------- -------- --------
Cumulative interest-bearing liabilities 141,676 298,498 453,866 497,942 497,942
-------- --------- -------- -------- --------
Gap analysis:
Interest sensitivity gap $87,648 $(75,389) $ 12,496 $ 60,703 $ 85,458
======== ======== ======== ======== ========
Cumulative interest
sensitivity gap $87,648 $ 12,259 $ 24,755 $ 85,458 $ 85,458
======== ======== ======== ======== ========
Cumulative gap ratio of interest-
earning assets to interest-bearing
liabilities 1.62x 1.04x 1.05x 1.17x 1.17x
======== ======== ======== ======== ========
</TABLE>
(1) Nonaccrual loans are reported in the "Over 1 year through 5 years" column.
14
<PAGE> 15
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 17.60%, 17.41% and 17.29% as of September 30,
1999, December 31, 1998, and September 30, 1998, respectively, which included
Tier I capital ratios of 16.34%, 16.15%, and 16.04%, 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 gains and losses on
available-for-sale securities of the Company. The Company's Tier I leverage
ratios were 10.02%, 10.01%, and 9.66% at September 30, 1999, December 31, 1998,
and September 30, 1998, respectively. As of September 30, 1999, all of the
Company's subsidiary banks were well capitalized under the regulatory framework
for prompt corrective action.
RESULTS OF OPERATIONS
EARNINGS SUMMARY
Net income was $4,563,000 for the nine months ended September 30, 1999
compared to $5,124,000 for the nine months ended September 30, 1998, which
represents a $561,000 or a 12% decrease over the prior year. In addition, third
quarter net income was $1,533,000 compared to $1,764,000 in the prior year. Both
of the decreases were the result of a combination of several factors. First,
increases in net interest and noninterest income attributable to the acquisition
of Public Service Bank, FSB (PSB) on June 29, 1998, were more than offset by
increases in personnel, occupancy, data processing and other expenses associated
with the branches acquired. Second, noninterest expense increased in 1999 due to
start-up and operational overhead expenses related to the opening of two new
facilities. South Side National Bank in St. Louis opened the Company's sixteenth
facility in January, 1999 and the State Bank of Jefferson County opened the
Company's seventeenth branch in May of this year. Third, costs associated with
Y2K testing and preparedness also affected noninterest expense in the current
year. Management anticipates that ongoing Y2K expenses will not be significant,
and that start-up costs associated with the new facilities should not continue
into future quarters. However, as with any expansion effort, the Company will
continue to face downward pressure on earnings until growth at these new
branches provides a sufficient deposit base to offset the overhead expense at
these locations. While having a negative affect in the short-term, management
believes these expansion efforts will provide solid long-term financial results
for the Company.
Net income for the first nine months of 1999 resulted in an annualized
return on average assets (ROA) of 0.97% compared to 1.18% in the prior year, and
an annualized return on average shareholders' equity (ROE) of 9.35% compared to
11.33% 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 leverage strategy. Diluted earnings per
common share were $0.53 for the first nine months of 1999 compared to $0.60 for
the first nine months of 1998.
15
<PAGE> 16
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)
NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE Average
INTEREST RATES Interest Rates
AVERAGE INCOME\ EARNED\ Average Income\ Earned\
BALANCE EXPENSE PAID(3) Balance Expense Paid(3)
------- ------- ------- ------- ------- -------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Loans, net of unearned discount (1) (2) (3) $350,363 $22,128 8.42% $336,434 $22,488 8.91%
Investments in debt securities:
Taxable(4) 176,064 7,865 5.96 152,492 6,897 6.03
Exempt from Federal income tax (3) (4) 32,453 1,870 7.68 27,989 1,695 8.08
Short-term investments 26,659 951 4.76 25,259 1,001 5.28
-------- ------- -------- -------
Total interest-earning assets/interest
income/overall yield (3) 585,539 32,814 7.47 542,174 32,081 7.89
Allowance for possible loan losses (6,185) ------- ==== (6,142) ------- ====
Cash and due from banks 18,153 15,564
Other assets 30,108 26,594
-------- --------
TOTAL ASSETS $627,615 $578,190
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing demand and savings deposits $219,408 4,672 2.84% $205,543 4,879 3.16%
Time deposits 233,842 8,714 4.97 233,768 9,421 5.37
Short-term borrowings 2,856 93 4.34 3,721 124 4.44
Other borrowings 34,451 1,371 5.31 8,699 372 5.70
Debt of Employee Stock Ownership Plan 71 4 7.50 - - -
-------- ------- -------- -------
Total interest-bearing liabilities/interest-
expense/overall rate 490,628 14,854 4.04 451,731 14,796 4.37
------- ==== ------- ====
Non-interest-bearing demand deposits 66,525 60,715
Other liabilities 5,369 5,470
Shareholders' equity 65,093 60,274
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $627,615 $578,190
======== ========
NET INTEREST INCOME $17,960 $17,285
======= =======
NET INTEREST MARGIN ON AVERAGE
INTEREST-EARNING ASSETS 4.09% 4.25%
==== ====
</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.
16
<PAGE> 17
Item 2. (continued)
NET INTEREST INCOME
As reflected in the Selected Statistical Information table on the
previous page, net interest income on a fully tax-equivalent basis increased by
$675,000 in the first nine months of 1999 when compared to the first nine months
of 1998. The increase in net interest income was due in part to the acquisition
of PSB, as well as the $30 million leverage strategy employed during the first
quarter of 1999, however, these factors were offset by a decrease in the
Company's net interest margin on average interest-earning assets. Average
interest-earning assets increased by $49,425,000 from the comparable prior
period, but the average yield on those assets declined by 42 basis points from
7.89% in 1998 to 7.47% in 1999. The major factor in this decline has been a 49
basis point decrease in the yield on loans, as competition for loans in the
Company's markets continues to be very strong, consequently loans are being
priced with lower yields in order to attract and retain borrowing relationships.
The Company's cost of funds also decreased from 1998 to 1999, although the 33
basis point drop was not sufficient to offset the decrease in loan yields.
Because the Company's loan to deposit ratio is below its competitors, it has
been less aggressive in its deposit pricing, which explains the decrease in the
cost of funds. The Company was able to reverse this trend during the third
quarter, when the average rate earned on assets increased six basis points,
while the average rate paid on deposits and borrowings increased only 2 basis
points, which resulted in a 4 basis point improvement in the net interest margin
from 4.05% in the second to 4.09% in the third quarter of 1999. This improved
net interest margin resulted in a $101,000 increase in net interest income in
the third quarter of 1999 as compared to the second quarter of 1999. Management
believes the Company can continue this trend into the fourth quarter and beyond
through additional loan growth. Even in today's extremely competitive interest
rate environment, replacing investment securities with loans will have a
positive effect on the net interest margin.
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses remained at a relatively low
level of $45,000 during the first nine months 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, and if loan
growth continues throughout the year, increased provisions for possible loan
losses may be necessary to ensure the allowances for possible loan losses are
maintained at the appropriate levels.
NONINTEREST INCOME
Noninterest income increased $202,000 during the first nine months of
1999 in comparison to the first nine months of the prior year, and decreased
$49,000 from the third quarter of 1998. Trust department income increased in
both the first nine months and third quarter of 1999 when compared to 1998.
These increases were largely due to growth in this area over the past year,
resulting from mergers and consolidations in the banking industry, which has
prompted many trust customers to seek out more personalized trust services, like
those offered by the Company's trust department. Service charges also increased
in both the third quarter and first nine months of the year, due in part to the
additional accounts acquired in the PSB acquisition in June, 1998. Gains on
sales of loans remained higher than the prior year for the nine months ended
September 30, 1999, but are down significantly when comparing the third quarter
of 1999 to the third quarter of the prior year. The year-to-date increase was
due to the PSB acquisition in 1998, when only one quarter of operations was
included in the Company's financial statements, where as 1999 includes all three
quarters. The decrease in third quarter income was due in part to turnover in
the mortgage staff, which has resulted in a decrease in volume. In addition, a
slightly higher interest rate environment in the current year has caused a
reduction in the number of borrowers refinancing, and has prompted many new home
buyers to consider adjustable rate loan products which the Company typically
does not sell in the secondary market.
NONINTEREST EXPENSE
Noninterest expense for the first nine months of 1999 increased
$1,693,000 when compared to the first nine months of the prior year and $275,000
in the third quarter of 1999 compared to the third quarter of 1998. Salaries and
employee benefits increased by $680,000 for the year and $135,000 for the
quarter. The majority of the increase in the year-to-date amount was due to the
additional personnel acquired in the PSB acquisition, as well as, the employees
hired to staff two new
17
<PAGE> 18
Item 2. (continued)
branches opened during 1999. The remainder of the increases can be attributed to
normal pay increases and increased labor costs associated with the areas tight
labor market. The Company acquired the two PSB branches at the end of June,
1998, then opened its sixteenth facility in January, 1999 and its seventeenth
facility in May, 1999. These additional branches have been largely responsible
for the increase in net occupancy and equipment expense. The increase in data
processing expense was partially due to the Company's local area and wide area
networks being upgraded, in part to ensure Y2K compliance, and to improve
operating efficiency. There were also start-up and duplicate expenses incurred
during the first nine months of 1999, as the Company moved their network
operations center, which required running parallel systems to ensure minimal
disruption when the switchover occurred. Data processing expense for the first
nine months of 1999 also contained expenses associated with Y2K testing and
preparedness. The increase in other noninterest expense was caused by goodwill
amortization associated with PSB acquisition, as well as, increased costs for
supplies, telecommunications, insurance, postage, and other expenses related to
the operation of the additional branches.
INCOME TAXES
Federal income tax expense for the first nine months of 1999 was
$1,665,000 compared to $1,937,000 in the first nine months of 1998. The
Company's effective tax rate decreased to 26.73% for the first nine months of
1999, compared to 27.43% for the first nine months of 1998. This decrease was
due to the net effect of an increase in tax exempt income and additional
low-income housing tax credits, which were 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. In June 1999, the FASB issued SFAS 137- Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133, an Amendment of FASB Statement No. 133, which defers
the effective date of SFAS 133 from fiscal years beginning after June 15, 1999
to fiscal years beginning after June 15, 2000. Initial application should be as
of the beginning of an entity's fiscal quarter; on that date, hedging
relationships must be designated and documented pursuant to the provisions of
SFAS 133, as amended. Earlier application of all of the provisions is encouraged
but is permitted only as of the beginning of any fiscal quarter that begins
after the issuance date of SFAS 133, as amended. Additionally, SFAS 133, as
amended should not be applied retroactively to financial statements of prior
periods. The Company is currently evaluating the requirements of SFAS 133, as
amended, to determine its potential impact on the consolidated financial
statements.
THE YEAR 2000 ISSUE
Changing from the year 1999 to 2000 has the potential to cause problems
in data processing and other date-sensitive systems, a problem known as the Year
2000 or Y2K dilemma. The Year 2000 date change can affect any system that uses
computer software programs or computer chips, including automated equipment and
machinery. 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. These programs could
experience malfunctions when the last two digits of the change to "00" and are
interpreted as 1900 rather than 2000. This misinterpretation could result in
disruption to normal business operations. Due to these possible ramifications,
the Company is taking the Year 2000 Issue very serious. Management has
implemented a company-wide initiative for preparing its systems, 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 substantially complete.
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 substantially
complete, and management presently believes that the Year 2000 issue will not
pose a substantial internal operating risk to the Company. However, the novelty
and complexity of the issues presented and the proposed solutions therefore and
our dependence on the technical skills of employees and
18
<PAGE> 19
Item 2. (continued)
independent contractors and on the representations and preparedness of their
parties are among the factors that could cause our efforts to be less than fully
effective. Moreover, Year 2000 compliance issues present a number of risks that
are beyond our reasonable control, such as failure of telecommunications
companies to provide voice and data services, the failure of other financial
institutions to process transactions and transfer funds, the failure of vendors
to deliver materials and perform services required by us and the collateral
effects on us of the effects of Year 2000 issues on the economy in general or on
our customers in particular. Although we believe that our Year 2000 compliance
program has appropriately identified and addressed potential Year 2000 issues
that are subject to our reasonable control, there can be no assurances that our
efforts in this regard will be fully effective or that Year 2000 issues will not
have a material adverse effect on our business, financial condition or results
of operation
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. If the systems and
applications of key third parties are materially impacted by the year 2000
issue, the Company could lose certain of its abilities to effectively engage in
normal business activities which could have a material adverse effect on the
Company's business, financial condition or results of operations.
The Company's efforts to become Y2K compliant are being monitored by
its federal banking regulators. Failure to be Y2K compliant could subject the
Company to formal supervisory or enforcement actions. The Company feels that it
has assessed the worst case scenario that can be caused by the oncoming Year
2000 and has adequately addressed the possible effect thereof. The Company has
assessed the types and nature of contingency plans that will be required to
maintain the Company's operational capacity after January 1, 2000. Contingency
plans 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
$340,000 in direct costs associated with Year 2000 readiness efforts, of which
$90,000 relates to 1999. 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.
Specific factors that might cause such material differences include, but are not
limited to, failure of a key third party to meet expectations, availability and
costs of key personnel, and the public's perception of the Year 2000 risk.
19
<PAGE> 20
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>
3RD QUARTER - 1999 $11.3125 $9.00 $9.50 $7.66 124.02% $0.080
2nd Quarter - 1999 11.625 10.00 11.3125 7.63 148.26 0.080
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 September 30, 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 6. EXHIBITS AND REPORTS ON FORM 8-K
None
20
<PAGE> 21
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.
----------------------------------
November 12, 1999 /s/ Thomas M. Teschner
- ----------------- ----------------------------------
Thomas M. Teschner
President
(Principal Executive Officer)
November 12, 1999 /s/ Joseph W. Pope
- ----------------- ----------------------------------
Joseph W. Pope
Senior Vice President and Chief
Financial Officer (Principal Financial
Officer, Controller, and Principal
Accounting Officer)
21
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM SOUTHSIDE BANCSHARES CORP'S QUARTERLY REPORT ON FORM 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 21,765
<INT-BEARING-DEPOSITS> 455
<FED-FUNDS-SOLD> 5,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 150,723
<INVESTMENTS-CARRYING> 66,838
<INVESTMENTS-MARKET> 66,951
<LOANS> 360,084
<ALLOWANCE> 6,103
<TOTAL-ASSETS> 631,988
<DEPOSITS> 515,710
<SHORT-TERM> 46,027
<LIABILITIES-OTHER> 4,608
<LONG-TERM> 1,186
0
0
<COMMON> 8,985
<OTHER-SE> 55,472
<TOTAL-LIABILITIES-AND-EQUITY> 631,988
<INTEREST-LOAN> 22,028
<INTEREST-INVEST> 9,099
<INTEREST-OTHER> 951
<INTEREST-TOTAL> 32,078
<INTEREST-DEPOSIT> 13,386
<INTEREST-EXPENSE> 14,854
<INTEREST-INCOME-NET> 17,224
<LOAN-LOSSES> 45
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 13,600
<INCOME-PRETAX> 6,228
<INCOME-PRE-EXTRAORDINARY> 6,228
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,563
<EPS-BASIC> .54
<EPS-DILUTED> .53
<YIELD-ACTUAL> 4.09
<LOANS-NON> 4,430
<LOANS-PAST> 994
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,192
<CHARGE-OFFS> 373
<RECOVERIES> 239
<ALLOWANCE-CLOSE> 6,103
<ALLOWANCE-DOMESTIC> 6,103
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
