<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
(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, 1998
-------------------------------------------------
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 0-12247
--------------------------------
SOUTHSIDE BANCSHARES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 75-1848732
- ---------------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1201 S. Beckham, Tyler, Texas 75701
- ---------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) 903-531-7111
----------------
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 .
----- -----
The number of shares outstanding of each of the issuer's classes of
capital stock, as of the latest practicable date, was 3,500,937 shares of Common
Stock, par value $2.50, outstanding at April 21, 1998.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
ASSETS
<S> <C> <C>
Cash and due from banks ................................... $ 31,143 $ 36,593
Federal funds sold ........................................ 5,200
--------- ---------
Cash and cash equivalents .............................. 36,343 36,593
Investment securities:
Available for sale ..................................... 72,116 71,031
Held to maturity ....................................... 656 804
--------- ---------
Total Investment securities .......................... 72,772 71,835
Mortgage-backed and related securities:
Available for sale ..................................... 138,505 127,751
Held to maturity ....................................... 12,510 13,662
--------- ---------
Total Mortgage-backed securities ..................... 151,015 141,413
Marketable equity securities:
Available for sale ..................................... 3,515 3,258
Loans:
Loans, net of unearned discount ........................ 296,557 296,035
Less: Reserve for loan losses ......................... (3,398) (3,370)
--------- ---------
Net Loans ............................................ 293,159 292,665
Premises and equipment, net ............................... 17,455 17,627
Other real estate owned, net .............................. 330 364
Interest receivable ....................................... 3,831 3,918
Deferred tax asset ........................................ 27 460
Other assets .............................................. 3,602 3,012
--------- ---------
TOTAL ASSETS ......................................... $ 582,049 $ 571,145
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing .................................... $ 110,886 $ 113,499
Interest bearing ....................................... 352,809 349,175
--------- ---------
Total Deposits ....................................... 463,695 462,674
Short-term obligations:
Federal funds purchased ................................ 1,138 3,884
FHLB Dallas advances ................................... 35,000 29,000
Other obligations ...................................... 1,468 1,647
Long-term obligations:
FHLB Dallas advances ................................... 28,205 28,547
Other liabilities ......................................... 11,317 5,362
--------- ---------
TOTAL LIABILITIES .................................... 540,823 531,114
--------- ---------
Shareholders' equity:
Common stock: ($2.50 par, 6,000,000 shares authorized,
3,500,937 and 3,496,269 shares issued and outstanding) 8,752 8,740
Paid-in capital ........................................ 21,372 21,290
Retained earnings ...................................... 11,249 10,414
Treasury stock (131,876 and 116,750 shares at cost) .... (2,119) (1,820)
Accumulated other comprehensive income ................. 1,972 1,407
--------- ---------
TOTAL SHAREHOLDERS' EQUITY .......................... 41,226 40,031
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .......... $ 582,049 $ 571,145
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE> 3
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1998 1997
-------- ------
<S> <C> <C>
Interest income
Loans ............................................. $6,266 $5,543
Investment securities ............................. 945 868
Mortgage-backed and related securities ............ 2,236 1,812
Other interest earning assets ..................... 106 44
------ ------
Total interest income ......................... 9,553 8,267
Interest expense
Time and savings deposits ......................... 3,816 3,480
Short-term obligations ............................ 272 124
Long-term obligations ............................. 616 127
------ ------
Total interest expense ........................ 4,704 3,731
------ ------
Net interest income .................................. 4,849 4,536
Provision for loan losses ............................ 300 175
------ ------
Net interest income after provision for loan losses... 4,549 4,361
------ ------
Noninterest income
Deposit services .................................. 1,198 764
Gain on sale of securities available for sale ..... 86 112
Other ............................................. 359 315
------ ------
Total noninterest income ...................... 1,643 1,191
------ ------
Noninterest expenses
Salaries and employee benefits .................... 2,837 2,541
Net occupancy expenses ............................ 539 491
Equipment expense ................................. 114 100
Advertising, travel & entertainment ............... 271 229
Supplies .......................................... 100 101
FDIC insurance .................................... 13 12
Postage ........................................... 85 76
Other ............................................. 672 527
------ ------
Total noninterest expense ..................... 4,631 4,077
------ ------
Income before federal tax expense .................... 1,561 1,475
Provision for tax expense ............................ 375 371
------ ------
Net Income ........................................... $1,186 $1,104
====== ======
Earnings Per Common Share-Basic ...................... $ .35 $ .32
====== ======
Earnings Per Common Share-Diluted .................... $ .34 $ .31
====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 4
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Accumulated Total
Other Share-
Comprehensive Common Paid in Retained Treasury Comprehensive holders'
Income Stock Capital Earnings Stock Income Equity
------------ --------- ---------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996................ $ $ 8,290 $ 18,501 $ 9,628 $ (777) $ 962 $ 36,604
Net Income.................................. 1,104 1,104 1,104
Other comprehensive income, net of tax
Unrealized losses on securities, net of
reclassification adjustment (see
disclosure).............................. (732) (732) (732)
---------
Comprehensive income........................ $ 372
=========
Common stock issued (4,527 shares).......... 11 68 79
Dividends declared on common stock.......... (323) (323)
Purchase of 27,271 shares of
Treasury stock............................. (477) (477)
Sale of 9,500 shares of Treasury stock...... (28) 90 62
FAS 109 - Incentive Stock Options........... 35 35
-------- -------- -------- ------- ------- --------
Balance at March 31, 1997................... $ 8,301 $ 18,604 $ 10,381 $(1,164) $ 230 $ 36,352
======== ======== ======== ======= ======= ========
Disclosure of reclassification amount:
Unrealized holding losses arising during
period................................... $ (658)
Less: reclassification adjustment for
gains included in net income............. (74)
---------
Net unrealized losses on securities......... $ (732)
=========
Balance at December 31, 1997................ $ $ 8,740 $ 21,290 $ 10,414 $(1,820) $ 1,407 $ 40,031
Net Income.................................. 1,186 1,186 1,186
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment (see
disclosure).............................. 565 565 565
---------
Comprehensive income........................ $ 1,751
=========
Common stock issued (4,668 shares).......... 12 71 83
Dividends declared on common stock.......... (336) (336)
Purchase of 19,126 shares of
Treasury stock............................ (339) (339)
Sale of 4,000 shares of Treasury stock...... (15) 40 25
FAS 109 - Incentive Stock Options........... 11 11
-------- -------- -------- ------- ------- --------
Balance at March 31, 1998................... $ 8,752 $ 21,372 $ 11,249 $(2,119) $ 1,972 $ 41,226
======== ========= ======== ======= ======= ========
Disclosure of reclassification amount:
Unrealized holding gains arising during
period................................... $ 622
Less: reclassification adjustment for
gains included in net income............. (57)
---------
Net unrealized gains on securities.......... $ 565
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 5
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1998 1997
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income .............................................................. $ 1,186 $ 1,104
Adjustments to reconcile net cash provided by operations:
Depreciation and amortization .......................................... 1,145 608
Accretion of discount and loan fee ..................................... (175) (237)
Provision for loan losses .............................................. 300 175
FAS 109 - incentive stock options ...................................... 11 35
Decrease in interest receivable ........................................ 87 181
(Increase) in other receivables and prepaids ........................... (427) (976)
Decrease (increase) in deferred tax asset .............................. 142 (65)
(Decrease) increase in interest payable ................................ (260) 47
Gain on sale of other real estate owned ................................ (26)
Gain on sale of securities available for sale .......................... (86) (112)
Increase in other payables ............................................. 6,036 2,437
-------- --------
Net cash provided by operating activities ............................ 7,933 3,197
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale ......... 24,138 5,597
Proceeds from sales of mortgage-backed securities available for sale .... 7,476
Proceeds from maturities of investment securities available for sale .... 2,882 2,782
Proceeds from maturities of mortgage-backed securities available for sale 13,249 7,233
Proceeds from maturities of investment securities held to maturity ...... 149 677
Proceeds from maturities of mortgage-backed securities held to maturity . 1,166 2,757
Purchases of investment securities available for sale ................... (27,688) (22,174)
Purchases of mortgage-backed securities available for sale .............. (24,140) (18,437)
Purchases of marketable equity securities available for sale ............ (257) (28)
Net (increase) in loans ................................................. (1,394) (4,623)
Purchases of premises and equipment ..................................... (151) (267)
Proceeds from sales of other real estate owned .......................... 70
Proceeds from sales of repossessed assets ............................... 427 240
-------- --------
Net cash used in investing activities ................................ (11,549) (18,767)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 6
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (continued)
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1998 1997
----------- ----------
FINANCING ACTIVITIES:
<S> <C> <C>
Net (decrease) increase in demand and savings accounts .................. $ (223) $ 132
Net increase in certificates of deposit ................................. 1,244 3,286
Proceeds from the issuance of common stock .............................. 83 79
Net (decrease) in federal funds purchased ............................... (2,746) (1,550)
Net increase in securities sold under agreement to repurchase ........... 8,976
Sale of treasury stock .................................................. 25 62
Purchase of treasury stock .............................................. (339) (477)
Dividends paid .......................................................... (336) (323)
Net increase (decrease) in FHLB Dallas advances ......................... 5,658 (375)
-------- --------
Net cash provided by financing activities .......................... 3,366 9,810
-------- --------
Net decrease in cash and cash equivalents ................................ (250) (5,760)
Cash and cash equivalents at beginning of period ......................... 36,593 31,653
-------- --------
Cash and cash equivalents at end of period ............................... $ 36,343 $ 25,893
======== ========
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION:
Interest paid ........................................................... $ 4,964 $ 3,778
Income taxes paid ....................................................... $ $ 75
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of OREO and other repossessed assets through foreclosure .... $ 600 $ 239
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 7
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated balance sheet as of March 31, 1998, and the related
consolidated statements of income, shareholders' equity and cash flow for the
three month periods ended March 31, 1998 and 1997 are unaudited; in the
opinion of management, all adjustments necessary for a fair presentation of
such financial statements have been included. Such adjustments consisted only
of normal recurring items. Interim results are not necessarily indicative of
results for a full year. These financial statements should be read in
conjunction with the financial statements and notes thereto in the Company's
latest report on Form 10-K.
2. Earnings Per Share
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (FAS 128) which supersedes APB 15,
"Earnings Per Share" and simplifies the computation of earnings per share
(EPS) by replacing the "primary" EPS requirements of APB 15 with a "basic" EPS
computation based upon weighted-average shares outstanding. Diluted EPS is
similar to fully diluted EPS required under APB 15 for entities with complex
capital structures. All previous periods have been restated to reflect the
adoption of FAS 128. Earnings per share have been adjusted to give retroactive
recognition to stock dividends.
Earnings per share on a basic and diluted basis as required by Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share" is
calculated as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
------------ -------------
<S> <C> <C>
Basic net earnings per share
Net income .......................................... $1,186 $1,104
Weighted average shares outstanding ................. 3,367 3,408
------ ------
$ .35 $ .32
====== ======
Diluted net earnings per share
Net income .......................................... $1,186 $1,104
Weighted average shares outstanding plus
assumed conversions .............................. 3,462 3,502
------ ------
$ .34 $ .31
====== ======
Calculation of weighted average shares outstanding plus
assumed conversions
Weighted average share outstanding .................. 3,367 3,408
Effect of dilutive securities options ............... 95 94
------ ------
3,462 3,502
====== ======
</TABLE>
3. Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(FAS 130). This statement, which the Company adopted January 1, 1998,
establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. The new
standard requires that all items that are required to be recognized under
generally accepted accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the
6
<PAGE> 8
same prominence as other financial statements. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The components of accumulated comprehensive income are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998
---------------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------------ ----------- -----------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period ... $ 942 $(320) $ 622
Less: reclassification adjustment for gains
realized in net income ....................... (86) 29 (57)
----- ----- -----
Net unrealized gains ............................ 856 (291) 565
----- ----- -----
Other comprehensive income .......................... $ 856 $(291) $ 565
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1997
----------------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------------ ------------ -----------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period ... $ (997) $ 339 $ (658)
Less: reclassification adjustment for gains
realized in net income ....................... (112) 38 (74)
------- ------- -------
Net unrealized gains ............................ (1,109) 377 (732)
------- ------- -------
Other comprehensive income .......................... $(1,109) $ 377 $ (732)
======= ======= =======
</TABLE>
4. Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (FAS 131). This statement, which the
Company will be required to adopt December 31, 1998, supersedes FAS 14,
Financial Reporting for Segments of a Business Enterprise, but retains the
requirement to report information about major customers. The new standard
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. In the initial year of
application, comparative information for earlier years is to be restated.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" (FAS 132). This statement,
which the Company will be required to adopt December 31, 1998, amends FAS 87,
Employers' Accounting for Pension, FAS 88, Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits and FAS 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions. The new standard revises employers' disclosures
about pension and other postretirement benefit plans without changing the
measurement or recognition of those plans. It standardizes the disclosure
requirements for pension and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures.
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Quarter ended March 31, 1998 compared to
March 31, 1997.
The following is a discussion of the consolidated financial condition, changes
in financial condition, and results of operations of Southside Bancshares,
Inc. (the "Company"), and should be read and reviewed in conjunction with the
financial statements, and the notes thereto, in this presentation and in the
Company's latest report on Form 10-K.
The Company reported an increase in net income for the quarter ended March 31,
1998 compared to the same period in 1997. Net income for the quarter ended
March 31, 1998 was $1,186,000 as compared to $1,104,000 for the same period in
1997.
Net Interest Income
Net interest income for the quarter ended March 31, 1998 was $4,849,000, an
increase of $313,000 or 6.9% when compared to the same period in 1997. Average
interest earning assets increased $85,864,000 or 19.6%, more than offsetting
the decrease in the net interest spread from 3.5% at March 31, 1997 to 3.0% at
March 31, 1998.
During the three months ended March 31, 1998, Average Loans, funded primarily
by the growth in average deposits and average FHLB Dallas advances increased
$36,813,000 or 14.3%, compared to the same period in 1997. The average yield
on loans decreased slightly from 8.7% at March 31, 1997 to 8.6% at March 31,
1998.
Average Securities increased $44,848,000 or 25.5% for the three months ended
March 31, 1998 when compared to the same period in 1997. The overall yield on
Average Securities decreased to 6.3% during the three months ended March 31,
1998, from 6.7% during the same period in 1997.
Interest income from federal funds and other interest earning assets increased
$62,000 or 140.9% for the three months ended March 31, 1998 when compared to
1997 as a result of the average balance increase of $4,203,000 or 135.7%. The
average yield increased slightly to 5.9% in 1998 from 5.8% in 1997.
Total interest expense increased $973,000 or 26.1% to $4,704,000 during the
three months ended March 31, 1998 as compared to $3,731,000 during the same
period in 1997. The increase was attributable to an increase in Average
Interest Bearing Liabilities of $68,326,000 or 19.7% and a slight increase in
the average yield on interest bearing liabilities from 4.4% in 1997 to 4.6% in
1998. Average Interest Bearing Deposits increased $22,155,000 or 6.7% while
the average rate paid increased slightly from 4.3% at March 31, 1997 to 4.4%
at March 31, 1998. Average Short-term Interest Bearing Liabilities, consisting
primarily of FHLB Dallas advances and Federal Funds Purchased, increased
$9,201,000 or 89.7% as compared to the same period in 1997. This increase
reflects a strategically planned increase in balance sheet leverage to achieve
certain Asset/Liability Management Committee ("ALCO") objectives. Average
Long-term Interest Bearing Liabilities consisting of FHLB Dallas advances
increased $36,970,000 or 417.6% compared to $8,852,000 at March 31, 1997. The
advances were obtained from FHLB Dallas to fund long-term loans. FHLB Dallas
advances are collateralized by FHLB Dallas stock, nonspecified real estate
loans and securities.
8
<PAGE> 10
The analysis below shows average interest earning assets and interest bearing
liabilities together with the average yield on the interest earning assets and
the average cost of the interest bearing liabilities.
SUMMARY OF INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998 Three Months Ended March 31, 1997
--------------------------------------------- ------------------------------------------
Average Yield or Average Yield or
Volume Interest Rate Paid Volume Interest Rate Paid
-------------- -------------- ---------- ------------- ------------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans........................ $ 294,916 $ 6,266 8.6% $ 258,103 $ 5,543 8.7%
Investment Securities (1).... 71,355 1,217 6.9% 63,240 1,088 7.0%
Mortgage-backed
Securities................. 149,573 2,236 6.1% 112,840 1,812 6.5%
Other Interest Earning
Assets..................... 7,300 106 5.9% 3,097 44 5.8%
-------------- ------------- ------------- -------------
TOTAL INTEREST
EARNING ASSETS............. $ 523,144 $ 9,825 7.6% $ 437,280 $ 8,487 7.9%
============== ============= ============= =============
INTEREST BEARING LIABILITIES:
Deposits..................... 350,545 3,816 4.4% $ 328,390 $ 3,480 4.3%
Fed Funds Purchased
and Other Interest Bearing
Liabilities................ 6,556 93 5.8% 10,255 124 4.9%
Short Term Interest Bearing
Liabilities - FHLB Dallas.. 12,900 179 5.6%
Long Term Interest Bearing
Liabilities - FHLB Dallas.. 45,822 616 5.5% 8,852 127 5.8%
-------------- ------------- ------------- -------------
TOTAL INTEREST
BEARING LIABILITIES............ $ 415,823 $ 4,704 4.6% $ 347,497 $ 3,731 4.4%
============== ============= ============= =============
NET INTEREST SPREAD............ 3.0% 3.5%
===== =====
</TABLE>
(1) Interest income includes taxable-equivalent adjustments of $272 and
$220 as of March 31, 1998 and 1997, respectively.
Noninterest Income
Noninterest income was $1,643,000 for the quarter ended March 31, 1998 compared
to $1,191,000 for the same period in 1997, an increase of $452,000 or 38.0% for
the period. A $434,000 increase in deposit services income accounted for most of
the change. Deposit services income increased as a direct result of the
introduction of a new overdraft privilege program, increased numbers of deposit
accounts and increased deposit activity from March 31, 1997 to March 31, 1998.
Other noninterest income increased $44,000 for the quarter ended March 31, 1998
primarily as a result of an increase in trust income. Gains on sales of
securities decreased $26,000 for the three months ended March 31, 1998 compared
to the same period in 1997. The Company sold securities out of its AFS portfolio
to accomplish ALCO and investment portfolio objectives aimed at maximizing the
total return of the securities portfolio.
The market value of the entire securities portfolio at March 31, 1998 was
$227,337,000 with a net unrealized gain on that date of $3,172,000. The net
unrealized gain is comprised of $3,392,000 in unrealized gains and $220,000 in
unrealized losses.
9
<PAGE> 11
Noninterest Expense
Noninterest expense was $4,631,000 for the quarter ended March 31, 1998,
compared to $4,077,000 for the same period of 1997, representing an increase of
$554,000 for the period.
Salaries and employee benefits increased $296,000 or 11.6% during the three
months ended March 31, 1998 when compared to the same period in 1997. Direct
salary expense including payroll taxes of $270,000 increased as a result of
personnel additions for the three months ended March 31, 1998 when compared to
the same period in 1997. Health insurance expense increased $29,000 or 15.1% for
the three months ended March 31, 1998 when compared to the same period in 1997.
Net occupancy expense increased $48,000 or 9.8% for the three months ended March
31, 1998 compared to the same period in 1997, largely due to higher real estate
taxes, depreciation expense and the expansion of the bank headquarters completed
during 1997.
Advertising, travel and entertainment expense increased $42,000 or 18.3% for the
three months ended March 31, 1998 compared to the same period in 1997. The
increase occurred due to increases in direct advertising as a result of new
products introduced in 1997.
Other noninterest expense increased $145,000 or 27.5% during the three months
ended March 31, 1998 when compared to the same period in 1997. The increase was
due primarily to increased professional fees paid for additional internal
auditing, data processing programming, compliance reviews, loan loss reviews and
consulting fees paid in relation to the overdraft privilege product.
Provision for Income Taxes
The provision for tax expense rate for the three months ended March 31, 1998 was
24.0% compared to 25.2% for the three months ended March 31, 1997. The reduction
is due to an increase in average tax free municipal securities when comparing
the two periods.
Capital Resources
Total shareholders' equity for the Company at March 31, 1998, of $41,226,000 was
up 3.0% or $1,195,000 from December 31, 1997, and represented 7.1% of total
assets at March 31, 1998 compared to 7.0% of total assets at December 31, 1997.
Increases to shareholders' equity during the three months ended March 31, 1998
were net income of $1,186,000, common stock (4,668 shares) issued through
dividend reinvestment of $83,000, an increase of $25,000 due to the sale of
4,000 shares of treasury stock and an increase of $565,000 in net unrealized
gains on securities available for sale. Decreases to shareholders' equity
consisted of $336,000 in dividends paid to shareholders and the purchase of
19,126 shares of treasury stock for $339,000.
Under the Federal Reserve Board's risk-based capital guidelines for bank holding
companies, the minimum ratio of total capital to risk-adjusted assets (including
certain off-balance sheet items, such as standby letters of credit) is currently
eight percent. The minimum Tier 1 capital to risk-adjusted assets is four
percent. Through implementation of its capital policies, the company has
achieved a sound capital position. The Federal Reserve Board also requires bank
holding companies to comply with the minimum leverage ratio guidelines. The
leverage ratio is a ratio of bank holding company's Tier 1 capital to its total
consolidated quarterly average assets, less goodwill and certain other
intangible assets. The guidelines require a minimum average of three percent for
bank holding companies that meet certain specified criteria. Failure to meet
minimum capital regulations can initiate certain mandatory and possibly
additional discretionary actions by regulation, that if undertaken, could have a
direct material effect on the Bank's financial statements. At March 31, 1998,
the Company and Southside Bank exceeded all regulatory minimum capital
requirements.
The Federal Reserve Deposit Insurance Act requires bank regulatory agencies to
take "prompt corrective action" with respect to FDIC-insured depository
institutions that do not meet minimum capital requirements.
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<PAGE> 12
A depository institution's treatment for purposes of the prompt corrective
action provisions will depend on how its capital levels compare to various
capital measures and certain other factors, as established by regulation.
It is management's intention to maintain the Company's capital at a level
acceptable to all regulatory authorities and future dividend payments will be
determined accordingly. Regulatory authorities require that any dividend
payments made by either the Company or Southside Bank not exceed earnings for
that year.
Liquidity and Interest Rate Sensitivity
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest sensitive earning
assets and interest bearing liabilities. Liquidity management involves the
ability to meet the cash flow requirements of customers who may be either
depositors wanting to withdraw funds or borrowers needing funds to meet their
credit needs. Interest rate sensitivity management seeks to avoid fluctuating
net interest margins and to enhance consistent growth of new interest income
through periods of changing interest rates. Through this process, market value
volatility is also a key consideration.
Cash, Interest Earning Deposits, Federal Funds Sold and short-term investments
with maturities or repricing characteristics of one year or less are the
principal sources of asset liquidity. At March 31, 1998, these investments were
16.4% of Total Assets. Historically, the overall liquidity of the Company has
been enhanced by a significant aggregate amount of core deposits and by the lack
of dependence on public fund deposits.
Composition of Loans
The Company's main objective is to seek attractive lending opportunities in
Smith County, Texas and adjoining counties. Total Average Loans were up
$20,339,000 or 7.4% at March 31, 1998 compared to December 31, 1997. The
majority of the increase is in Real Estate Loans and Commercial Loans. The
increase in Real Estate Loans is due to a stronger real estate market, interest
rates and an increased commitment in residential mortgage lending. Commercial
loans increased as a result of commercial growth in the Company's market area.
Loan Loss Experience and Reserve for Loan Losses
The loan loss reserve is based on the most current review of the loan portfolio
at that time. An internal loan review officer of the Company is responsible for
an ongoing review of Southside Bank's entire loan portfolio with specific goals
set for the volume of loans to be reviewed on an annual basis.
A list of loans which are graded as having more than the normal degree of risk
associated with them are maintained by the internal loan review officer. This
list is updated on a periodic basis but no less than quarterly by the servicing
officer in order to properly allocate necessary reserves and keep management
informed on the status of attempts to correct the deficiencies noted in the
credit.
While management is aware of certain risk factors within segments of the loan
portfolio, reserve allocations have been made on an individual loan basis. An
additional reserve is maintained on the remainder of the
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<PAGE> 13
portfolio of at risk loans that is based on tracking of the Company's loan
losses on loans that have not been previously identified as problems.
For the first quarter ended March 31, 1998, loan charge-offs were $332,000 and
recoveries were $60,000, resulting in net charge-offs of $272,000 for the
quarter ended March 31, 1998. For the three months ended March 31, 1997, net
charge-offs were $112,000.
The increase in net charge-offs for the quarter ended March 31, 1998 occurred
primarily as a result of the increase in loans and increased bankruptcies. As a
result of these and other factors, the necessary provision expense was estimated
at $300,000 for the three months ended March 31, 1998.
Nonperforming Assets
The categories of nonperforming assets consist of delinquent loans over 90 days
past due, nonaccrual and restructured loans, other real estate owned and
repossessed assets. Delinquent loans over 90 days past due represent loans for
which the payment of principal or interest has not been received in a timely
manner. The full collection of both the principal and interest is still expected
but is being withheld due to negotiation or other items expected to be resolved
in the near future. Generally, a loan is categorized as nonaccrual when
principal or interest is past due 90 days or more, unless, in the determination
of management, the principal and interest on the loan are well secured and in
the process of collection. In addition, a loan is placed on nonaccrual when, in
the opinion of management, the future collectibility of interest and principal
is in serious doubt. When a loan is categorized as nonaccrual, the accrual of
interest is discontinued and any remaining accrued interest is reversed in that
period; thereafter, interest income is recorded only when actually received.
Restructured loans represent loans which have been renegotiated to provide a
reduction or deferral of interest or principal because of deterioration in the
financial position of the borrowers. Categorization of a loan as nonperforming
is not in itself a reliable indicator of potential loan loss. Other factors,
such as the value of collateral securing the loan and the financial condition of
the borrower must be considered in judgments as to potential loan loss.
OREO represents real estate taken in full or partial satisfaction of debts
previously contracted. The OREO consists primarily of raw land and oil and gas
interests. The Company is actively marketing all properties and none are being
held for investment purposes.
Total nonperforming assets at March 31, 1998 were $2,372,000, down $719,000 or
23.3% from $3,091,000 at December 31, 1997. From December 31, 1997 to March 31,
1998, nonaccrual loans decreased $776,000 or 57.7% to $568,000. Loans 90 days
past due or more decreased $58,000 or 7.8% to $684,000. The majority of the 90
day past due loans are collateralized by residential dwellings that are
primarily owner occupied. Historically, the amount of losses suffered on this
type of loan have been significantly less than those on other properties. Other
real estate decreased $34,000 or 9.3% to $330,000 and restructured loans
decreased $14,000 or 3.2% to $421,000. Repossessed assets increased $163,000 or
79.1%.
Expansion
In February 1998 the Company made application to open a grocery store branch in
Longview, Texas. The Company anticipates it will also make application to open a
free standing full-service branch with drive up facilities in Longview as soon
as a suitable site is found. The Company's television and radio advertising has
extended into this market area for several years, providing Southside Bank name
recognition in the greater Longview area.
Subsequent Events
On April 10, 1998, the Company filed a registration statement on Form S-2 with
the Securities and Exchange Commission relating to the issuance by Southside
Capital Trust I of $20 million of cumulative trust preferred securities. All of
the proceeds from the issuance of the cumulative trust preferred securities will
be used by Southside Capital Trust I to purchase junior deferrable interest
subordinated debentures from the Company. The Company intends to use the net
proceeds from the sale of the junior deferrable interest subordinated debentures
for general purposes, including, but not limited to, capital contributions to
the Bank to support growth and for working capital, the possible repurchase of
shares of the Company's common stock, subject to acceptable market conditions,
and acquisitions by either the Company or the Bank (although there presently
exist no agreements or understanding with respect to any acquisition).
Forward-Looking Information
Certain statements of other than historical fact that are contained in this
document and in written material, press releases and oral statements issued by
or on behalf of the Company may be considered to be "forward-looking statements"
as that term is defined in the Private Securities Litigation Reform Act of 1995.
These statements may include words such as "expect," "estimate," "project,"
"anticipate," "should,"
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<PAGE> 14
"intend," "probability," "risk," "target," "objective" and similar expressions.
Forward-looking statements are subject to significant risks and uncertainties
and the Company's actual results may differ materially from the results
discussed in the forward-looking statements. For example, certain market risk
disclosures are dependent on choices about key model characteristics and
assumptions and are subject to various limitations. See "Item 2 Management's
Discussion and Analysis of Financial Condition and Results of Operations." By
their nature, certain of the market risk disclosures are only estimates and
could be materially different from what actually occurs in the future. As a
result, actual income gains and losses could materially differ from those that
have been estimated. Other factors that could cause actual results to differ
materially from forward-looking statements include, but are not limited to
general economic conditions, either nationally or in the State of Texas,
legislation or regulatory changes which adversely affect the businesses in which
the Company is engaged, changes in the interest rate environment which reduce
interest margins, significant increases in competition in the banking and
financial services industry, changes in consumer spending, borrowing and saving
habits, technological changes, the Company's ability to increase market share
and control expenses, the effect of compliance with legislation or regulatory
changes, the effect of changes in accounting policies and practices and the
costs and effects of unanticipated litigation.
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<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) An annual meeting of shareholders was held on April 22, 1998.
(b) The election of three directors (term expiring at the 2001 Annual
Meeting) were as follows:
FOR ABSTAIN WITHHELD
--------- ------- --------
Fred E. Bosworth 1,937,693 61,231 7,966
B. G. Hartley 1,937,693 61,231 7,966
Murph Wilson 1,937,693 61,231 7,966
Directors continuing until the 1999 Annual Meeting are as follows:
Rollins Caldwell
Sam Dawson
William Sheehy
Directors continuing until the 2000 Annual Meeting are as follows:
Herbert C. Buie
Robbie N. Edmonson
W. D. (Joe Norton)
(c) The matters voted upon and the results of the voting were as
follows:
The shareholders voted 2,004,350 shares in the affirmative, 2,105
shares in the negative, and 435 abstentions to ratify the selection
of Coopers and Lybrand as Southside Bancshares, Inc.'s Independent
Auditors for the year ending December 31, 1998.
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No.
27 - Financial Data Schedule for the three months ended March
31, 1998.
(b) Reports on Form 8-K - None
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<PAGE> 16
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, INC.
(Registrant)
BY: /s/ B.G. HARTLEY
---------------------------------
B.G. Hartley, Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
DATE: 5-12-98
---------------------------
/s/ LEE R. GIBSON
------------------------------------
Lee R. Gibson, Executive Vice
President (Principal Financial
and Accounting Officer)
DATE: 5-12-98
---------------------------
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<PAGE> 17
EXHIBIT INDEX
Exhibit No Description
---------- -----------------------------------------------------------------
27 Financial Data Schedule for the three months ended March 31, 1998
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<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 31,143
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 214,136
<INVESTMENTS-CARRYING> 13,166
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<LOANS> 296,557
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<TOTAL-ASSETS> 582,049
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<SHORT-TERM> 37,606
<LIABILITIES-OTHER> 11,317
<LONG-TERM> 28,205
0
0
<COMMON> 8,752
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<INTEREST-DEPOSIT> 3,816
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<EXPENSE-OTHER> 4,631
<INCOME-PRETAX> 1,561
<INCOME-PRE-EXTRAORDINARY> 1,561
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,186
<EPS-PRIMARY> .35
<EPS-DILUTED> .34
<YIELD-ACTUAL> 3.97
<LOANS-NON> 568
<LOANS-PAST> 684
<LOANS-TROUBLED> 421
<LOANS-PROBLEM> 366
<ALLOWANCE-OPEN> 3,370
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