<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 June 30, 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 3,506,485 shares of Common
Stock, par value $2.50, outstanding at July 21, 1998.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share amounts) June 30, December 31,
ASSETS 1998 1997
--------- ------------
<S> <C> <C>
Cash and due from banks ............................................................... $ 28,931 $ 36,593
Federal funds sold .................................................................... 1,675
--------- ---------
Cash and cash equivalents .......................................................... 30,606 36,593
Investment securities:
Available for sale ................................................................. 101,571 71,031
Held to maturity ................................................................... 556 804
--------- ---------
Total Investment securities ...................................................... 102,127 71,835
Mortgage-backed and related securities:
Available for sale ................................................................. 199,326 127,751
Held to maturity ................................................................... 10,570 13,662
--------- ---------
Total Mortgage-backed securities ................................................. 209,896 141,413
Marketable equity securities:
Available for sale ................................................................. 7,807 3,258
Loans:
Loans, net of unearned discount .................................................... 303,225 296,035
Less: Reserve for loan losses ..................................................... (3,540) (3,370)
--------- ---------
Net Loans ........................................................................ 299,685 292,665
Premises and equipment, net ........................................................... 18,314 17,627
Other real estate owned, net .......................................................... 320 364
Interest receivable ................................................................... 4,683 3,918
Deferred tax asset .................................................................... 305 460
Other assets .......................................................................... 5,113 3,012
--------- ---------
TOTAL ASSETS ..................................................................... $ 678,856 $ 571,145
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing ................................................................ $ 103,864 $ 113,499
Interest bearing ................................................................... 350,919 349,175
--------- ---------
Total Deposits ................................................................... 454,783 462,674
Short-term obligations:
Federal funds purchased ............................................................ 1,684 3,884
Notes payable - FHLB Dallas ........................................................ 72,000 29,000
Other obligations .................................................................. 1,554 1,647
Long-term obligations:
Notes payable - FHLB Dallas ........................................................ 78,171 28,547
Guaranteed Preferred Beneficial Interest in the Company's
Junior Subordinated Debentures ..................................................... 20,000
Other liabilities ..................................................................... 8,841 5,362
--------- ---------
TOTAL LIABILITIES ................................................................ 637,033 531,114
--------- ---------
Shareholders' equity:
Common stock: ($2.50 par, 6,000,000 shares authorized,
3,506,485 and 3,496,269 shares issued and outstanding) ......................... 8,766 8,740
Paid-in capital .................................................................... 21,482 21,290
Retained earnings .................................................................. 12,059 10,414
Treasury stock (131,876 and 116,750 shares at cost) ................................ (2,142) (1,820)
Accumulated other comprehensive income ............................................. 1,658 1,407
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ...................................................... 41,823 40,031
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...................................... $ 678,856 $ 571,145
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
1
<PAGE> 3
<TABLE>
<CAPTION>
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data) Quarter Ended June 30, Six Months Ended June 30,
---------------------- -------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income
Loans ............................................. $ 6,454 $ 5,816 $12,720 $11,359
Investment securities ............................. 1,139 963 2,084 1,831
Mortgage-backed and related securities ............ 2,391 1,879 4,627 3,691
Other interest earning assets ..................... 154 66 260 110
------- ------- ------- -------
Total interest income ......................... 10,138 8,724 19,691 16,991
Interest expense
Time and savings deposits ......................... 3,797 3,624 7,613 7,104
Short-term obligations ............................ 740 163 1,012 287
Long-term obligations ............................. 1,068 182 1,684 309
------- ------- ------- -------
Total interest expense ........................ 5,605 3,969 10,309 7,700
------- ------- ------- -------
Net interest income .................................. 4,533 4,755 9,382 9,291
Provision for loan losses ............................ 300 225 600 400
------- ------- ------- -------
Net interest income after provision for loan losses .. 4,233 4,530 8,782 8,891
------- ------- ------- -------
Noninterest income
Deposit services .................................. 1,279 860 2,477 1,624
Gain on securities available for sale ............. 149 40 235 152
Other ............................................. 352 306 711 621
------- ------- ------- -------
Total noninterest income ...................... 1,780 1,206 3,423 2,397
------- ------- ------- -------
Noninterest expense
Salaries and employee benefits .................... 2,667 2,541 5,504 5,082
Net occupancy expense ............................. 575 506 1,114 997
Equipment expense ................................. 111 101 225 201
Advertising, travel & entertainment ............... 295 256 566 485
Supplies .......................................... 107 103 207 204
FDIC insurance .................................... 14 13 27 25
Postage ........................................... 88 84 173 160
Other ............................................. 826 628 1,498 1,155
------- ------- ------- -------
Total noninterest expense ..................... 4,683 4,232 9,314 8,309
------- ------- ------- -------
Income before income taxes ........................... 1,330 1,504 2,891 2,979
Provision for income taxes ........................... 176 375 551 746
------- ------- ------- -------
Net Income ........................................... $ 1,154 $ 1,129 $ 2,340 $ 2,233
======= ======= ======= =======
Earnings Per Common Share-Basic ...................... $ .34 $ .34 $ .69 $ .66
======= ======= ======= =======
Earnings Per Common Share-Diluted .................... $ .33 $ .33 $ .67 $ .64
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE> 4
<TABLE>
<CAPTION>
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED) Accumulated
(in thousands) Other Total
Compre- Compre- Share-
hensive Common Paid in Retained Treasury hensive holders'
Income Stock Capital Earnings Stock Income Equity
-------- ------ ------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997................ $ $ 8,740 $ 21,290 $ 10,414 $ (1,820) $ 1,407 $ 40,031
Net Income.................................. 2,340 2,340 2,340
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment (see
disclosure).............................. 251 251 251
---------
Comprehensive income........................ $ 2,591
=========
Common stock issued (10,216 shares)......... 26 157 183
Dividends declared on common stock.......... (673) (673)
Purchase of 21,126 shares of
Treasury stock............................ (382) (382)
Sale of 6,000 shares of Treasury stock...... (22) 60 38
FAS 109 - Incentive Stock Options........... 35 35
--------- --------- --------- --------- --------- ----------
Balance at June 30, 1998.................... $ 8,766 $ 21,482 $ 12,059 $ (2,142) $ 1,658 $ 41,823
========= =========- ========== ========= ========= =========
Disclosure of reclassification amount:
Unrealized holding gains arising during
period................................... $ 406
Less: reclassification adjustment for
gains included in net income............. (155)
---------
Net unrealized gains on securities.......... $ 251
=========
Balance at December 31, 1996................ $ $ 8,290 $ 18,501 $ 9,628 $ (777) $ 962 $ 36,604
Net Income.................................. 2,233 2,233 2,233
Other comprehensive income, net of tax
Unrealized losses on securities, net of
reclassification adjustment (see
disclosure).............................. (211) (211) (211)
---------
Comprehensive income........................ $ 2,022
=========
Common stock issued (11,413 shares)......... 29 172 201
Dividends declared on common stock.......... (809) (809)
Purchase of 41,731 shares of
Treasury stock............................. (733) (733)
Sale of 11,700 shares of Treasury stock..... (34) 111 77
FAS 109 - Incentive Stock Options........... 43 43
--------- --------- --------- --------- --------- ----------
Balance at June 30, 1997.................... $ 8,319 $ 18,716 $ 11,018 $ (1,399) $ 751 $ 37,405
========= ========-- ========== ========= ========= =========
Disclosure of reclassification amount:
Unrealized holding losses arising during
period................................... $ (111)
Less: reclassification adjustment for
gains included in net income............. (100)
---------
Net unrealized losses on securities......... $ (211)
=========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE> 5
<TABLE>
<CAPTION>
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(in thousands)
Six Months Ended
June 30,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................................. $ 2,340 $ 2,233
Adjustments to reconcile net cash provided by operations:
Depreciation and amortization ............................................. 2,821 1,228
Accretion of discount and loan fees ....................................... (317) (499)
Provision for loan losses ................................................. 600 400
FAS109-Incentive stock options ............................................ 35 43
Increase in interest receivable ........................................... (765) (164)
Increase in other receivables and prepaids ................................ (1,986) (1,654)
Decrease (increase) in deferred tax asset ................................. 25 (161)
Increase in interest payable .............................................. 7 114
Gain on sale of securities available for sale ............................. (235) (152)
Gain on sale of assets .................................................... (12)
Gain on sale of other real estate owned ................................... (26)
Increase (decrease) in other payables ..................................... 3,379 (130)
--------- ---------
Net cash provided by operating activities ............................... 5,878 1,246
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale ............ 32,183 16,507
Proceeds from sales of mortgage-backed securities available for sale ....... 18,898
Proceeds from maturities of investment securities available for sale ....... 6,245 10,772
Proceeds from maturities of mortgage-backed securities available for sale .. 32,033 15,593
Proceeds from maturities of investment securities held to maturity ......... 248 700
Proceeds from maturities of mortgage-backed securities held to maturity .... 3,119 5,612
Purchases of investment securities available for sale ...................... (68,213) (28,613)
Purchases of mortgage-backed securities available for sale ................. (105,592) (38,426)
Purchases of marketable equity securities available for sale ............... (4,549) (55)
Net increase in loans ...................................................... (8,444) (16,984)
Purchases of premises and equipment ........................................ (1,373) (899)
Proceeds from sales of premises and equipment .............................. 17
Proceeds from sales of other real estate owned ............................. 80
Proceeds from sales of repossessed assets .................................. 699 518
--------- ---------
Net cash used in investing activities ................................... (113,564) (16,360)
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE> 6
<TABLE>
<CAPTION>
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (continued)
(UNAUDITED)
(in thousands)
Six Months Ended
June 30
------------------------
1998 1997
--------- ---------
<S> <C> <C>
FINANCING ACTIVITIES:
Net (decrease) increase in demand and savings accounts ................. $ (10,914) $ 4,202
Net increase in certificates of deposit ................................ 3,023 11,365
Net decrease in federal funds purchased ................................ (2,200) (4,550)
Net increase in securities sold under agreement to repurchase .......... 4,977
Net increase in FHLB Dallas advances ................................... 92,624 8,259
Net issuance of Guaranteed Preferred Beneficial Interest
in the Company's Junior Subordinated Debentures ...................... 20,000
Proceeds from the issuance of common stock ............................. 183 201
Purchase of treasury stock ............................................. (382) (733)
Sale of treasury stock ................................................. 38 77
Dividends paid ......................................................... (673) (809)
--------- ---------
Net cash provided by financing activities ......................... 101,699 22,989
--------- ---------
Net (decrease) increase in cash and cash equivalents ................... (5,987) 7,875
Cash and cash equivalents at beginning of period ....................... 36,593 31,653
--------- ---------
Cash and cash equivalents at end of period ............................. $ 30,606 $ 39,528
========= =========
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION:
Interest paid .......................................................... $ 10,302 $ 7,680
Income taxes paid ...................................................... $ 500 $ 875
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of OREO and other repossessed assets through foreclosure ... $ 824 $ 663
</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 June 30, 1998, and the related consolidated
statements of income, shareholders' equity and cash flow for the six month
periods ended June 30, 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>
Six Months Ended June 30,
-------------------------
1998 1997
------ ------
<S> <C> <C>
Basic net earnings per share
Net income ............................................. $2,340 $2,233
Weighted average shares outstanding .................... 3,368 3,402
------ ------
$ .69 $ .66
====== ======
Diluted net earnings per share
Net income ............................................. $2,340 $2,233
Weighted average shares outstanding plus
assumed conversions ................................. 3,496 3,497
------ ------
$ .67 $ .64
====== ======
Calculation of weighted average shares outstanding plus
assumed conversions
Weighted average shares outstanding .................... 3,368 3,402
Effect of dilutive securities options .................. 128 95
------ ------
3,496 3,497
====== ======
</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>
Six Months Ended June 30, 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 .. $ 615 $(209) $ 406
Less: reclassification adjustment for gains
realized in net income ...................... (235) 80 (155)
----- ----- -----
Net unrealized gains ........................... 380 (129) 251
----- ----- -----
Other comprehensive income ......................... $ 380 $(129) $ 251
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1997
------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
---------- ---------- ----------
<S> <C> <C> <C>
Unrealized losses on securities:
Unrealized holding losses arising during period .. $(168) $ 57 $(111)
Less: reclassification adjustment for gains
realized in net income ....................... (152) 52 (100)
----- ----- -----
Net unrealized losses ........................... (320) 109 (211)
----- ----- -----
Other comprehensive income .......................... $(320) $ 109 $(211)
===== ===== =====
</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
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133). FAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1,
2000 for the Company). FAS 133 requires that all derivative instruments be
recorded on the balance at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Management of the
Company anticipates that the adoption of FAS 133 will not have a significant
effect on the Company's results of operations or its financial position.
5. Guaranteed Preferred Beneficial Interest in the Company's Subordinated Debt
In April 1998, the Company formed a wholly-owned non-banking subsidiary
Southside Capital Trust (the "Trust Issuer"). The Trust Issuer was created under
the Business Trust Act of Delaware for the sole purpose of issuing and selling
Preferred Securities and Common Securities and using proceeds from the sale of
the Preferred Securities and Common Securities to acquire Junior Subordinated
Debentures (the "Debentures") issued by the Company. Accordingly, the Debentures
will be the sole assets of the Trust Issuer and payments under the Debentures
will be the sole revenue of the Trust Issuer. All of the Common Securities are
owned by the Company.
The Company's obligations under the Debentures and related documents, taken
together, constitute a full and unconditional guarantee by the Company of the
Trust Issuer's obligations under the Preferred Securities. Although the
Debentures will be treated as debt of the Company, they currently qualify for
tier 1 capital treatment subject to a limitation that the securities included as
tier 1 capital not exceed 25% of total tier 1 capital. The Securities are
callable by the Company on or about June 30, 2003, or earlier in the event the
deduction of related interest for federal income taxes is prohibited, treatment
as tier 1 capital is no longer permitted or certain other contingencies arise.
The Preferred Securities must be redeemed upon maturity of the Debentures in
year 2028.
On May 18, 1998, the Company through the Trust sold 2,000,000 Preferred
Securities at a liquidation amount of $10 per Preferred Security for an
aggregate amount of $20,000,000. It has a distribution rate of 8.50% per annum
payable at the end of each calendar quarter.
8
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Quarter and six months ended June 30, 1998 compared to
June 30, 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 and six months
ended June 30, 1998 compared to the same period in 1997. Net income for the
quarter and six months ended June 30, 1998 was $1,154,000 and $2,340,000, as
compared to $1,129,000 and $2,233,000 for the same period in 1997.
Net Interest Income
Net interest income for the quarter and six months ended June 30, 1998 was
$4,533,000 and $9,382,000, a decrease of $222,000 or 4.7% for the quarter and an
increase of $91,000 or 1.0% for the six months when compared to the same periods
in 1997. Average interest earning assets increased $110,627,000 or 24.9%, while
the net interest spread decreased from 3.5% at June 30, 1997 to 2.8% at June 30,
1998. During the second quarter, the Company leveraged the balance sheet to
offset the interest expense associated with the Trust Preferred Securities
issued. The leverage strategy produced additional income, however, the resulting
spread for the leveraged portion of the balance sheet was significantly less
than the Company's previous average. During the second quarter, prepayments on
the Company's mortgage-backed securities increased significantly. This resulted
in lower securities income and caused net interest income to decrease.
Prepayments have since stabilized at lower levels. Also decreasing net interest
income was the significant increase during the second quarter of the tax free
municipal securities portfolio which have lower coupons, but reduce federal
income tax expense.
During the six months ended June 30, 1998, Average Loans, funded primarily by
the growth in average deposits and average FHLB Dallas advances increased
$35,164,000 or 13.4%, compared to the same period in 1997. The average yield on
loans decreased slightly from 8.7% at June 30, 1997 to 8.6% at June 30, 1998.
Average Securities increased $70,907,000 or 39.7% for the six months ended June
30, 1998 when compared to the same period in 1997. The overall yield on Average
Securities decreased to 6.0% during the six months ended June 30, 1998 from 6.7%
during the same period in 1997, primarily due to increased prepayment speeds on
mortgage-backed securities combined with lower overall rates and an increase in
the tax free municipal securities portfolio.
Interest income from federal funds and other interest earning assets increased
$150,000 or 136.4% for the six months ended June 30, 1998 when compared to 1997
as a result of the average balance increase of 113.8%. The average yield
increased from 5.5% in 1997 to 6.1% at June 30, 1998.
Total interest expense increased $2,609,000 or 33.9% to $10,309,000 during the
six months ended June 30, 1998 as compared to $7,700,000 during the same period
in 1997. The increase was attributable to an increase in Average Interest
Bearing Liabilities of $92,510,000 or 26.1% and an increase in the average yield
on interest bearing liabilities from 4.4% at June 30, 1997 to 4.6% at June 30,
1998. Average Interest Bearing Deposits increased $18,961,000 or 5.7% while the
average rate paid increased slightly from 4.3% at June 30, 1997 to 4.4% at June
30, 1998. Average Short-term Interest Bearing Liabilities, consisting primarily
of FHLB Dallas advances and Federal Funds Purchased, increased $26,653,000 or
242.2% 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
$42,255,000 or 393.6% compared to $10,736,000 at June 30, 1997. The advances
were obtained from FHLB Dallas to fund long-term loans and as part of the
Company's balance sheet leverage strategy. FHLB Dallas advances are
collateralized by FHLB Dallas stock, nonspecified real estate loans and
securities.
9
<PAGE> 11
Average Long Term Junior Subordinated Debentures increased $4,641,000 or 100%
from June 30, 1997 to June 30, 1998 as a result of the issuance of the Preferred
Securities.
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.
<TABLE>
<CAPTION>
SUMMARY OF INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES
-----------------------------------------------------------------------------------
AVERAGE YIELD OR AVERAGE YIELD OR
VOLUME INTEREST RATE PAID VOLUME INTEREST RATE PAID
-----------------------------------------------------------------------------------
(Dollars in thousands)
Six Months Ended June 30, 1998 Six Months Ended June 30, 1997
------------------------------------ -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING
ASSETS:
Loans $ 297,444 $ 12,720 8.6% $ 262,280 $ 11,359 8.7%
Investment Securities (1) 81,549 2,851 7.1% 64,961 2,280 7.1%
Mortgage-backed Securities 168,005 4,627 5.6% 113,686 3,691 6.5%
Other Interest Earning
Assets 8,558 260 6.1% 4,002 110 5.5%
---------- --------- ---------- ----------
TOTAL INTEREST EARNING
ASSETS $ 555,556 $ 20,458 7.4% $ 444,929 $ 17,440 7.9%
========== ========= ========== ==========
INTEREST BEARING LIABILITIES:
Deposits $ 352,023 $ 7,613 4.4% $ 333,062 $ 7,104 4.3%
Fed Funds Purchased and
Other Interest Bearing
Liabilities 4,646 128 5.6% 11,004 287 5.3%
Short Term Interest Bearing
Liabilities - FHLB Dallas 33,011 884 5.4%
Long Term Interest Bearing
Liabilities - FHLB Dallas 52,991 1,486 5.7% 10,736 309 5.8%
Long Term Junior
Subordinated Debentures 4,641 198 8.5%
---------- --------- ---------- ----------
TOTAL INTEREST BEARING
LIABILITIES $ 447,312 $ 10,309 4.6% $ 354,802 $ 7,700 4.4%
========== ========= ------ ========== ========== ------
NET INTEREST SPREAD 2.8% 3.5%
====== ======
</TABLE>
(1) Interest income includes taxable-equivalent adjustments of $767 and $449 as
of June 30, 1998 and 1997, respectively.
Noninterest Income
Noninterest income was $3,423,000 for the six months ended June 30, 1998
compared to $2,397,000 for the same period in 1997. Deposit services income
increased $853,000 or 52.5% for the six months ended June 30, 1998. Deposit
services income increased as a direct result of the introduction in June 1997 of
an overdraft privilege program, increased numbers of deposit accounts and
increased deposit activity from June 30, 1997 to June 30, 1998. Other
noninterest income increased $90,000 or 14.5% for the six months ended June 30,
1998 primarily as a result of increases in trust income. Gains on sales of
securities increased $83,000 for the six months ended June 30, 1998 compared to
the same period in 1997. Sales of securities available for sale were the result
of changes in economic conditions and a change in the mix of the securities
portfolio.
The market value of the entire securities portfolio at June 30, 1998 was
$319,830,000 with a net unrealized gain on that date of $2,633,000. The net
unrealized gain is comprised of $3,438,000 in unrealized gains and $805,000 in
unrealized losses.
10
<PAGE> 12
Noninterest Expense
Noninterest expense was $9,314,000 for the six months ended June 30, 1998,
compared to $8,309,000 for the same period of 1997, representing an increase of
$1,005,000 or 12.1%.
Salaries and employee benefits increased $422,000 or 8.3% during the six months
ended June 30, 1998 when compared to the same period in 1997. Direct salary
expense including payroll taxes of $427,000 increased as a result of personnel
additions for the six months ended June 30, 1998 when compared to the same
period in 1997. Retirement expense increased $16,000 or 5.7% for the six months
ended June 30, 1998 when compared to the same period in 1997.
Net occupancy expense increased $117,000 or 11.7% for the six months ended June
30, 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 $81,000 or 16.7% for the
six months ended June 30, 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 $343,000 or 29.7% for the six months ended
June 30, 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. Other
increases occurred in trust expenses and atm expenses which were a direct result
of the increased activity in those accounts. The increases in expense were more
than offset by the increased income in trust income and atm fee income.
Provision for Income Taxes
The provision for the income tax expense ratio for the six months ended June 30,
1998 was 19.1% compared to 25.0% for the six months ended June 30, 1997. The
reduction is due to an increase in interest income from tax free municipal
securities.
Capital Resources
Total shareholders' equity for the Company at June 30, 1998, of $41,823,000 was
up $1,792,000 from December 31, 1997, and represented 6.2% of total assets at
June 30, 1998 compared to 7.0% of total assets at December 31, 1997. Increases
to shareholders' equity during the six months ended June 30, 1998 were net
income of $2,340,000, common stock (10,216 shares) issued through dividend
reinvestment of $183,000, an increase of $38,000 due to the sale of 6,000 shares
of treasury stock and an increase of $251,000 in net unrealized gains on
securities available for sale. Decreases to shareholders' equity consisted of
$673,000 in dividends paid to shareholders and the purchase of 21,126 shares of
treasury stock for $382,000.
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. 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 June 30, 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. A depository
institution's treatment for purposes of the prompt corrective action provisions
will depend on
11
<PAGE> 13
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 June 30, 1998, these investments were
20% 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
significant dependence on public fund deposits.
On May 18, 1998, the Company through the Trust Issuer sold 2,000,000 shares of
Preferred Securities at a liquidation amount of $10 per Preferred Security for
an aggregate amount of $20 million. It has a distribution rate of 8.50% per
annum payable at the end of each calendar quarter.
The proceeds received by the Company from the Trust Issuer will be used for
general corporate purposes which may include branch acquisitions of other
financial institutions. In addition, a portion of the proceeds may be
contributed through investments in or advances to the Subsidiary Banks.
Composition of Loans
The Company's main objective is to seek attractive lending opportunities in
Smith County, Texas and adjoining counties. Total Average Loans increased
$35,164,000 or 13.4% from the six months ended June 30, 1997 to June 30, 1998.
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 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.
12
<PAGE> 14
For the second quarter and six months ended June 30, 1998, loan charge-offs were
$257,000 and $589,000 and recoveries were $99,000 and $159,000, respectively,
resulting in net charge-offs of $158,000 and $430,000. For the second quarter
and six months ended June 30, 1997, net charge-offs were $160,000 and $271,000,
respectively.
The increase in net charge-offs for the six months ended June 30, 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 $600,000 for the six months ended June 30, 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.
Other Real Estate Owned (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 June 30, 1998 were $2,274,000, down $817,000 or
26.4% from $3,091,000 at December 31, 1997. From December 31, 1997 to June 30,
1998, nonaccrual loans decreased $748,000 or 55.7% to $596,000. Loans 90 days
past due or more decreased $171,000 or 23.0% to $571,000. 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 $44,000 or 12.1% to $320,000. Restructured loans increased
$31,000 or 7.1% to $466,000. Repossessed assets increased $115,000 or 55.8%.
Expansion
In June 1998 the Company opened a grocery store branch in Longview, Texas. The
Company anticipates it will also open a free standing full-service branch with
drive up facilities in Longview during the fourth quarter of 1998. 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.
The Company also plans to open a full service branch in the new Walmart
Supercenter in Tyler, Texas during the fourth quarter of 1998.
Year 2000 Compliance (Y2K)
The Company continues to address the Y2K issue as it effects all software,
hardware and other systems associated with ensuring the Company is Y2K
compliant. The Y2K issue could impact any computer or other date sensitive
systems that store dates using a two digit year format. These systems may
recognize the year "00" as 1900, not 2000. This could produce miscalculations,
generate erroneous data or even
13
<PAGE> 15
cause a system to fail. All software, hardware and other systems have been
identified and categorized as to its business significance and critical nature.
Third parties on which the Company is dependent have been notified regarding
their Y2K compliance status. The Company is initiating communication with large
customers to determine what steps they are undertaking to ensure they will be
Y2K compliant before January 1, 2000. Future credit decisions when appropriate
will include a detailed assessment of customers' Y2K plans for achieving timely
compliance. The Company's critical software, hardware and other systems should
be thoroughly tested and Y2K compliant before the end of 1998. Contingency plans
have been made as necessary for appropriate software, hardware and other
systems. It is anticipated the cost associated with the Company becoming fully
Y2K compliant is approximately $750,000. Approximately 80% of this cost will be
new equipment and new software which will be depreciated over a three to five
year period.
The Company presently believes that with modifications to existing software and
conversion to new software, the Y2K issue will not pose significant operational
problems for the Company's computer systems or business operations. However, if
such modifications and conversions are not made, or are not completed timely,
the Y2K issue could have a material impact on the operations of the Company. In
addition, there can be no assurance that unforeseen problems in the Company's
computer systems, or the systems of third parties on which the Company's
computers rely, would not have an adverse effect on the Company's systems or
operations.
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," "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.
14
<PAGE> 16
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
Not Applicable
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 six months
ended June 30, 1998.
(b) Reports on Form 8-K - None
15
<PAGE> 17
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: 08-07-98
/s/ LEE R. GIBSON
------------------------------------------
Lee R. Gibson, Executive Vice
President (Principal Financial
and Accounting Officer)
DATE: 08-07-98
16
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule for the six months ended
June 30, 1998.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 28,931
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,675
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 308,704
<INVESTMENTS-CARRYING> 11,126
<INVESTMENTS-MARKET> 11,126
<LOANS> 303,225
<ALLOWANCE> 3,540
<TOTAL-ASSETS> 678,856
<DEPOSITS> 454,783
<SHORT-TERM> 75,238
<LIABILITIES-OTHER> 8,841
<LONG-TERM> 98,171
0
0
<COMMON> 8,766
<OTHER-SE> 33,057
<TOTAL-LIABILITIES-AND-EQUITY> 678,856
<INTEREST-LOAN> 12,720
<INTEREST-INVEST> 6,711
<INTEREST-OTHER> 260
<INTEREST-TOTAL> 19,691
<INTEREST-DEPOSIT> 7,613
<INTEREST-EXPENSE> 10,309
<INTEREST-INCOME-NET> 9,382
<LOAN-LOSSES> 600
<SECURITIES-GAINS> 235
<EXPENSE-OTHER> 9,314
<INCOME-PRETAX> 2,891
<INCOME-PRE-EXTRAORDINARY> 2,891
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,340
<EPS-PRIMARY> .69
<EPS-DILUTED> .67
<YIELD-ACTUAL> 3.68
<LOANS-NON> 596
<LOANS-PAST> 571
<LOANS-TROUBLED> 466
<LOANS-PROBLEM> 342
<ALLOWANCE-OPEN> 3,370
<CHARGE-OFFS> 589
<RECOVERIES> 159
<ALLOWANCE-CLOSE> 3,540
<ALLOWANCE-DOMESTIC> 3,540
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 335
</TABLE>
