<PAGE> 1
UNITED STATES
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, 1999
------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM to
---------------
------------
Commission file number 0-12247
---------------------
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 3,693,642 shares of Common Stock,
par value $2.50, outstanding at May 3, 1999.
<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,
ASSETS 1999 1998
---------- ------------
<S> <C> <C>
Cash and due from banks ......................................... $ 29,117 $ 41,372
Federal funds sold .............................................. 2,000
---------- ----------
Cash and cash equivalents .................................... 31,117 41,372
Investment securities:
Available for sale ........................................... 148,006 132,447
Held to maturity ............................................. 347
---------- ----------
Total Investment securities ................................ 148,006 132,794
Mortgage-backed and related securities:
Available for sale ........................................... 373,382 333,194
Held to maturity ............................................. 6,949 7,810
---------- ----------
Total Mortgage-backed securities ........................... 380,331 341,004
Marketable equity securities:
Available for sale ........................................... 16,736 14,171
Loans:
Loans, net of unearned discount .............................. 322,246 319,723
Less: Reserve for loan losses ............................... (3,829) (3,564)
---------- ----------
Net Loans .................................................. 318,417 316,159
Premises and equipment, net ..................................... 19,212 19,166
Other real estate owned, net .................................... 132 195
Interest receivable ............................................. 5,535 6,065
Deferred tax asset .............................................. 417
Other assets .................................................... 5,770 5,403
---------- ----------
TOTAL ASSETS ............................................... $ 925,673 $ 876,329
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing .......................................... $ 118,443 $ 122,440
Interest bearing ............................................. 388,491 392,594
---------- ----------
Total Deposits ............................................. 506,934 515,034
Short-term obligations:
Federal funds purchased ...................................... 2,245 4,168
FHLB Dallas advances ......................................... 145,000 118,000
Other obligations ............................................ 4,259 1,523
---------- ----------
Total Short-term obligations .............................. 151,504 123,691
Long-term obligations:
FHLB Dallas advances ......................................... 183,716 156,027
Guaranteed Preferred Beneficial Interest in the Company's
Junior Subordinated Debentures ............................... 20,000 20,000
---------- ----------
Total Long-term obligations ............................... 203,716 176,027
Deferred tax liability .......................................... 1,184
Other liabilities ............................................... 19,405 13,980
---------- ----------
TOTAL LIABILITIES .......................................... 881,559 829,916
---------- ----------
Shareholders' equity:
Common stock: ($2.50 par, 6,000,000 shares authorized,
3,689,606 and 3,685,775 shares issued and outstanding) .... 9,224 9,214
Paid-in capital .............................................. 24,229 24,198
Retained earnings ............................................ 12,648 11,391
Treasury stock (216,787 and 182,176 shares at cost) .......... (3,795) (3,158)
Accumulated other comprehensive income ....................... 1,808 4,768
---------- ----------
TOTAL SHAREHOLDERS' EQUITY ................................ 44,114 46,413
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................ $ 925,673 $ 876,329
========== ==========
</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,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Interest income
Loans ................................................... $ 6,659 $ 6,266
Investment securities ................................... 1,869 945
Mortgage-backed and related securities .................. 4,866 2,236
Other interest earning assets ........................... 210 106
-------- --------
Total interest income ............................... 13,604 9,553
Interest expense
Time and savings deposits ............................... 3,963 3,816
Short-term obligations .................................. 1,586 272
Long-term obligations ................................... 2,706 616
-------- --------
Total interest expense .............................. 8,255 4,704
-------- --------
Net interest income ........................................ 5,349 4,849
Provision for loan losses .................................. 325 300
-------- --------
Net interest income after provision for loan losses ........ 5,024 4,549
-------- --------
Noninterest income
Deposit services ........................................ 1,449 1,198
Gain on sale of securities available for sale ........... 230 86
Other ................................................... 545 359
-------- --------
Total noninterest income ............................ 2,224 1,643
-------- --------
Noninterest expenses
Salaries and employee benefits .......................... 3,195 2,837
Net occupancy expenses .................................. 676 539
Equipment expense ....................................... 110 114
Advertising, travel & entertainment ..................... 274 271
Supplies ................................................ 126 100
Postage ................................................. 93 85
Other ................................................... 846 685
-------- --------
Total noninterest expense ........................... 5,320 4,631
-------- --------
Income before federal tax expense .......................... 1,928 1,561
Provision for tax expense .................................. 323 375
-------- --------
Net Income ................................................. $ 1,605 $ 1,186
======== ========
Net Income Per Common Share
Basic ................................................... $ .46 $ .34
======== ========
Diluted ................................................. $ .45 $ .33
======== ========
</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
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) $ 1,322 $ 39,946
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 paid ............................. (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) $ 1,887 $ 41,141
======== ========= ======== ======== ======== ========
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
========
Balance at December 31, 1998................ $ $ 9,214 $ 24,198 $ 11,391 $ (3,158) $ 4,768 $ 46,413
Net Income.................................. 1,605 1,605 1,605
Other comprehensive income, net of tax
Unrealized losses on securities, net of
reclassification adjustment (see
disclosure).............................. (2,960) (2,960) (2,960)
--------
Comprehensive loss.......................... $ (1,355)
========
Common stock issued (3,831 shares).......... 10 17 27
Dividends declared on common stock.......... (348) (348)
Purchase of 34,611 shares of
Treasury stock............................ (637) (637)
FAS 109 - Incentive Stock Options........... 14 14
-------- --------- -------- --------- -------- --------
Balance at March 31, 1999................... $ 9,224 $ 24,229 $ 12,648 $ (3,795) $ 1,808 $ 44,114
======== ========= ======== ======== ======== ========
Disclosure of reclassification amount:
Unrealized holding losses arising during
period................................... $ (3,112)
Less: reclassification adjustment for
gains included in net income............. (152)
--------
Net unrealized losses on securities......... $ (2,960)
========
</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,
------------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................................. $ 1,605 $ 1,186
Adjustments to reconcile net cash provided by operations:
Depreciation .............................................................. 357 323
Amortization of premium ................................................... 1,565 822
Accretion of discount and loan fee ........................................ (306) (175)
Provision for loan losses ................................................. 325 300
FAS 109 - incentive stock options ......................................... 14 11
Decrease in interest receivable ........................................... 530 87
Increase in other receivables and prepaids ................................ (529) (427)
(Increase) decrease in deferred tax asset ................................. (77) 142
Increase (decrease) in interest payable ................................... 119 (260)
Gain on sale of assets .................................................... (14)
Gain on sale of other real estate owned ................................... (1) (26)
Gain on sale of securities available for sale ............................. (230) (86)
Increase in other payables ................................................ 7,694 6,036
-------- --------
Net cash provided by operating activities ............................... 11,052 7,933
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale ............ 26,645 24,138
Proceeds from sales of mortgage-backed securities available for sale ....... 8,702
Proceeds from maturities of investment securities available for sale ....... 1,190 2,882
Proceeds from maturities of mortgage-backed securities available for sale .. 27,770 13,249
Proceeds from maturities of investment securities held to maturity ......... 347 149
Proceeds from maturities of mortgage-backed securities held to maturity .... 868 1,166
Purchases of investment securities available for sale ...................... (45,381) (27,688)
Purchases of mortgage-backed securities available for sale ................. (80,193) (24,140)
Purchases of marketable equity securities available for sale ............... (2,565) (257)
Net increase in loans ...................................................... (2,757) (1,394)
Purchases of premises and equipment ........................................ (403) (151)
Proceeds from sales of premises and equipment .............................. 14
Proceeds from sales of other real estate owned ............................. 64 70
Proceeds from sales of repossessed assets .................................. 336 427
-------- --------
Net cash used in investing activities ................................... (65,363) (11,549)
</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,
------------------------
1999 1998
-------- --------
<S> <C> <C>
FINANCING ACTIVITIES:
Net decrease in demand and savings accounts ............................. $ (1,150) $ (223)
Net (decrease) increase in certificates of deposit ...................... (6,950) 1,244
Proceeds from the issuance of common stock .............................. 27 83
Net decrease in federal funds purchased ................................. (1,923) (2,746)
Sale of treasury stock .................................................. 25
Purchase of treasury stock .............................................. (637) (339)
Dividends paid .......................................................... (336)
Net increase in FHLB Dallas advances .................................... 54,689 5,658
-------- --------
Net cash provided by financing activities .......................... 44,056 3,366
-------- --------
Net decrease in cash and cash equivalents ................................ (10,255) (250)
Cash and cash equivalents at beginning of period ......................... 41,372 36,593
-------- --------
Cash and cash equivalents at end of period ............................... $ 31,117 $ 36,343
======== ========
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION:
Interest paid ........................................................... $ 8,137 $ 4,964
Income taxes paid ....................................................... $ $
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of OREO and other repossessed assets through foreclosure .... $ 174 $ 600
</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, 1999, and the related
consolidated statements of income, shareholders' equity and cash flow for the
three month period ended March 31, 1999 and 1998 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. 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 FAS 128,
"Earnings Per Share" is calculated as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
--------- ----------
<S> <C> <C>
Basic net earnings per share
Net income ............................................ $ 1,605 $ 1,186
Weighted average shares outstanding ................... 3,492 3,536
-------- --------
$ .46 $ .34
======== ========
Diluted net earnings per share
Net income ............................................ $ 1,605 $ 1,186
Weighted average shares outstanding plus
assumed conversions ................................ 3,596 3,645
-------- --------
$ .45 $ .33
======== ========
Calculation of weighted average shares outstanding plus
assumed conversions
Weighted average shares outstanding ................... 3,492 3,536
Effect of dilutive securities options ................. 104 109
-------- --------
3,596 3,645
======== ========
</TABLE>
3. Comprehensive Income
The Company adopted the provisions of Statement of Financial Accounting
Standard 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 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 same prominence as other financial
statements. Reclassification of financial statements for earlier periods
provided for comparative purposes is required.
6
<PAGE> 8
The components of accumulated comprehensive income are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
--------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
-------- -------- --------
<S> <C> <C> <C>
Unrealized losses on securities:
Unrealized holding losses arising during period ......... $ (4,715) $ 1,603 $ (3,112)
Less: reclassification adjustment for gains
realized in net income .............................. (230) 78 (152)
-------- -------- --------
Net unrealized losses .................................. (4,485) 1,525 (2,960)
-------- -------- --------
Other comprehensive loss ................................... $ (4,485) $ 1,525 $ (2,960)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998
--------------------------------------
Before-Tax 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>
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Three months ended March 31, 1999 compared to
March 31, 1998.
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,
1999 compared to the same period in 1998. Net income for the three months ended
March 31, 1999 was $1.6 million compared to $1.2 million for the same period in
1998.
Net Interest Income
Net interest income for the three months ended March 31, 1999 was $5.3 million,
an increase of $.5 million or 10.3% for the quarter when compared to the same
period in 1998. Average interest earning assets increased $304.3 million or
58.5%, while the net interest spread decreased from 3.1% at March 31, 1998 to
2.2% at March 31, 1999. Beginning in the second quarter of 1998, the Company
leveraged the balance sheet to offset the interest expense associated with the
Trust Preferred Securities issued. The leverage strategy produced a resulting
spread for the leveraged portion of the balance sheet which was significantly
less than the Company's previous average. Also impacting net interest income was
the significant increase beginning in the second quarter of 1998 of tax free
municipal securities. These securities have lower coupons, but reduce federal
income tax expense.
During the three months ended March 31, 1999, Average Loans, funded primarily by
the growth in average deposits and average FHLB Dallas advances, increased $28.3
million or 9.6%, compared to the same period in 1998. The average yield on loans
decreased slightly from 8.6% at March 31, 1998 to 8.4% at March 31, 1999,
reflective of an overall decrease in rates.
Average Securities increased $267.0 million or 122.7% for the three months ended
March 31, 1999 when compared to the same period in 1998. The overall yield on
Average Securities decreased to 6.1% during the three months ended March 31,
1999 from 6.4% during the same period in 1998, primarily due to increased
prepayment speeds on mortgage-backed securities which lead to increased
amortization, combined with lower overall rates.
Interest income from federal funds and other interest earning assets increased
$.1 million or 98.1% for the three months ended March 31, 1999 when compared to
1998 as a result of the average balance increase of 124.1%. The average yield
decreased from 5.9% in 1998 to 5.2% at March 31, 1999 due to lower rates.
Total interest expense increased $3.6 million or 75.5% to $8.3 million during
the three months ended March 31, 1999 as compared to $4.7 million during the
same period in 1998. The increase was attributable to an increase in Average
Interest Bearing Liabilities of $297.1 million or 71.5% and a slight increase
in the average yield on interest bearing liabilities from 4.6% at March 31,
1998 to 4.7% at March 31, 1999. Average Interest Bearing Deposits increased
$40.4 million or 11.5% while the average rate paid decreased slightly from 4.4%
at March 31, 1998 to 4.1% at March 31, 1999. Average Short-term Interest
Bearing Liabilities, consisting primarily of FHLB Dallas advances and Federal
Funds Purchased, increased $112.9 million or 580.4% as compared to the same
period in 1998. 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 $123.8 million or 270.2% compared to $45.8
million at March 31, 1998. The advances were obtained from FHLB Dallas as part
of the Company's balance sheet leverage strategy and partially to fund
long-term loans. FHLB Dallas advances are collateralized by FHLB Dallas stock,
securities and nonspecified real estate loans.
Average Long Term Junior Subordinated Debentures increased $20 million or 100%
from March 31, 1998 to March 31, 1999 as a result of the issuance of the
Preferred 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.
<TABLE>
<CAPTION>
SUMMARY OF INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES
-------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
VOLUME INTEREST YIELD VOLUME INTEREST YIELD
----------------------------------------------------------------------------
(Dollars in thousands)
Three Months Ended March 31, 1999 Three Months Ended March 31, 1998
----------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING
ASSETS:
Loans $323,186 $ 6,659 8.4% $294,916 $ 6,266 8.6%
Investment Securities (1)(2) 142,052 2,364 6.7% 69,168 1,217 7.1%
Mortgage-backed Securities(2) 342,509 4,866 5.8% 148,394 2,236 6.1%
Other Interest Earning
Assets 16,362 210 5.2% 7,300 106 5.9%
-------- -------- -------- --------
TOTAL INTEREST EARNING
ASSETS $824,109 $ 14,099 6.9% $519,778 $ 9,825 7.7%
======== ======== ======== ========
INTEREST BEARING LIABILITIES:
Deposits $390,922 $ 3,963 4.1% $350,545 $ 3,816 4.4%
Fed Funds Purchased and
Other Interest Bearing
Liabilities 11,500 138 4.9% 6,556 93 5.8%
Short Term Interest Bearing
Liabilities - FHLB Dallas 120,878 1,448 4.9% 12,900 179 5.6%
Long Term Interest Bearing
Liabilities - FHLB Dallas 169,645 2,281 5.5% 45,822 616 5.5%
Long Term Junior
Subordinated Debentures 20,000 425 8.5%
-------- -------- -------- --------
TOTAL INTEREST BEARING
LIABILITIES $712,945 $ 8,255 4.7% $415,823 $ 4,704 4.6%
======== ======== --- ======== ======== ---
NET INTEREST SPREAD 2.2% 3.1%
=== ===
</TABLE>
(1) Interest income includes taxable-equivalent adjustments of $495 and $272 as
of March 31, 1999 and 1998, respectively.
(2) For the purpose of calculating the average yield, the average balance of
securities is presented at historical cost.
Noninterest Income
Noninterest income was $2.2 million for the three months ended March 31, 1999
compared to $1.6 million for the same period in 1998. Deposit services income
increased $.3 million or 21.0% for the three months ended March 31, 1999.
Deposit services income increased as a direct result of the overdraft privilege
program, increased numbers of deposit accounts and increased deposit activity
from March 31, 1998 to March 31, 1999. Other noninterest income increased $.2
million or 51.8% for the three months ended March 31, 1999 primarily as a result
of increases in mortgage servicing release fees income. Gains on sales of
securities increased $.1 million for the three months ended March 31, 1999
compared to the same period in 1998. During the quarter, Southside sold longer
term municipal securities and higher collateral mortgage-backed securities and
replaced them primarily with lower collateral mortgage-backed securities in an
effort to reduce the overall risk of prepayments. 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 March 31, 1999 was $545.1
million with a net unrealized gain on that date of $2.9 million. The net
unrealized gain is comprised of $4.9 million in unrealized gains and $2.0
million in unrealized losses.
9
<PAGE> 11
Noninterest Expense
Noninterest expense was $5.3 million for the three months ended March 31, 1999,
compared to $4.6 million for the same period of 1998, representing an increase
of $.7 million or 14.9%.
Salaries and employee benefits increased $.4 million or 12.6% during the three
months ended March 31, 1999 when compared to the same period in 1998. Direct
salary expense and payroll taxes increased $.3 million as a result of personnel
additions for the three months ended March 31, 1999 when compared to the same
period in 1998. Retirement expense decreased $29,000 or 15.2% for the three
months ended March 31, 1999 when compared to the same period in 1998. Health
insurance expense increased $39,000 or 17.6% for the three months ended March
31, 1999 when compared to the same period in 1998.
Net occupancy expense increased $.1 million or 25.4% for the three months ended
March 31, 1999 compared to the same period in 1998, largely due to higher real
estate taxes, depreciation expense and the opening of three new branches in
1998.
Supplies increased $26,000 or 26% for the three months ended March 31, 1999
compared to the same period in 1998, primarily due to the opening of three new
branches in 1998.
Other noninterest expense increased $.2 million or 23.5% for the three months
ended March 31, 1999 when compared to the same period in 1998. The increase was
due primarily to increased ATM fees and telephone expense due to added
locations. In addition, trust and legal fees increased due to bank asset and
transaction growth. Also, costs associated with the Company's junior
subordinated debentures increased.
Provision for Income Taxes
The provision for the income tax expense for the three months ended March 31,
1999 was 16.8% compared to 24.0% for the three months ended March 31, 1998. The
reduction is due to an increase in interest income from tax free municipal
securities.
Capital Resources
Total shareholders' equity for the Company at March 31, 1999, of $44.1 million
was down $2.3 million from December 31, 1998, and represented 4.8% of total
assets at March 31, 1999 compared to 5.3% of total assets at December 31, 1998.
Increases to shareholders' equity during the three months ended March 31, 1999
were net income of $1.6 million and common stock (3,831 shares) issued through
the Company's incentive stock option plan of $27,000. Decreases to shareholders'
equity consisted of a decrease of $3.0 million in net unrealized gains on
securities available for sale, $.3 million in dividends declared to shareholders
and the purchase of 34,611 shares of treasury stock for $.6 million.
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 March 31, 1999, 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 how its capital levels compare to various capital measures and
certain other factors, as established by regulation.
10
<PAGE> 12
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, 1999, these investments were
24.6% 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.
Composition of Loans
The Company's main objective is to seek attractive lending opportunities in
East Texas. Total Average Loans increased $28.3 million or 9.6% from the three
months ended March 31, 1998 to March 31, 1999. The majority of the increase is
in Real Estate 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.
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.
For the three months ended March 31, 1999, loan charge-offs were $132,000 and
recoveries were $72,000, resulting in net charge-offs of $60,000. For the three
months ended March 31, 1998, net charge-offs were $272,000.
Approximately half of the decrease in net charge-offs for the three months ended
March 31, 1999 occurred primarily as a result of one commercial loan charge-off
in the first quarter of 1998. The remainder was due to the large volume of
consumer loan charge-offs in the first quarter of 1998. As a result of these and
other factors, the necessary provision expense was estimated at $.3 million for
the three months ended March 31, 1999.
11
<PAGE> 13
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 March 31, 1999 were $1,742,000, down $260,000 or
13% from $2,002,000 at December 31, 1998. Loans 90 days past due or more
decreased $57,000 or 9.9% to $519,000. 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. Repossessed assets decreased
$162,000 or 49.7%. Other real estate decreased $63,000 or 32.3% to $132,000.
Restructured loans decreased $22,000 or 4.7% to $451,000. From December 31, 1998
to March 31, 1999, nonaccrual loans increased $44,000 or 10.2% to $476,000.
Expansion
During the first quarter of 1999, the Company received approval from the FDIC to
open a third full service branch in Longview. The Company plans to open this
branch during 1999.
Year 2000 Compliance (Y2K)
In May 1997, the Federal Financial Institutions Examination Council ("FFIEC")
issued an interagency statement to the chief executive officers of all federally
supervised financial institutions regarding Y2K project management awareness.
The FFIEC has highly prioritized Y2K compliance in order to avoid major
disruptions to the operations of financial institutions and the country's
financial systems when the new century results in two digit dates for the year
being below the prior year's value. The FFIEC statement provides guidance to
financial institutions, providers of data services, and all examining personnel
of the federal banking agencies regarding the Y2K issue. The federal banking
agencies have been conducting Y2K compliance examinations, and the failure to
implement an adequate Y2K program can be identified as an unsafe and unsound
banking practice. The FDIC has established an examination procedure which
contains three categories of ratings: "Satisfactory," "Needs Improvement," and
"Unsatisfactory." Institutions that receive a Y2K rating of Unsatisfactory may
be subject to formal enforcement action, supervisory agreements, cease and
desist orders, civil money penalties, or the appointment of a conservator. In
addition, federal banking agencies will be taking into account Y2K compliance
programs when reviewing applications and may deny an application based on Y2K
related issues.
12
<PAGE> 14
Y2K Issue
The Y2K issue concerns the potential impact of historic computer software code
that only utilizes two digits to represent the calendar year (e.g. "98" for
"1998"). Software so developed, and not corrected, could produce inaccurate or
unpredictable results commencing upon January 1, 2000, when current and future
dates present a lower two digit year number than dates in the prior century. The
Company, similar to most financial services providers, is significantly subject
to the potential impact of the Y2K issue due to the nature of financial
information. Potential impacts to the Company may arise from software, computer
hardware, and other equipment both within the Company's direct control and
outside of the Company's ownership, yet with which the Company electronically or
operationally interfaces. Financial institution regulators have intensively
focused upon Y2K exposures, issuing guidance concerning the responsibilities of
senior management and directors. Y2K testing and certification is being
addressed as a key safety and soundness issue in conjunction with regulatory
exams.
In order to address the Y2K issue, the Company has developed and implemented a
five phase plan divided into the following major components:
1. awareness
2. assessment
3. renovation
4. validation
5. implementation
The Company has completed the first four phases of the plan with customer
awareness ongoing and is currently working internally and with external vendors
on the final phase. Other important segments of the Y2K plan are to identify
those loan customers whose possible lack of Y2K preparedness might expose the
Bank to financial loss, and to highlight any servicers of purchased loans or
securities which might present Y2K operating problems.
The Board of Directors has established a Y2K subcommittee to monitor progress
with achieving and certifying Y2K compliance. In addition, the Company has
utilized external consulting firms to assist with its Y2K program. The Company's
current plan is to complete the Y2K project by June 30, 1999.
Following its completion of the assessment phase, the Company determined that a
significant portion of its computer hardware and software did not require
updating or replacement to achieve Y2K compliance.
The Company has limited internally generated programmed software coding to
correct, as substantially all of the software utilized by the Company is
purchased or licensed from external providers. The Company has determined that
it has little to no exposure to contingencies related to the Y2K issue for
products it has sold.
The Company initiated formal communications with all of its significant
suppliers and customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Y2K issues.
The Company requested third party vendors represent their products and services
to be Y2K compliant and that they have a program to test for that compliance.
Significant suppliers have been contacted and where applicable their products
successfully tested. All testing, communications and correspondence indicates
the necessary levels of concern and planning for their own Y2K readiness. At
this time, the Company cannot estimate the additional cost, if any, that might
develop in relation to significant suppliers and customers. The Company is
prepared to curtail credit availability to customers identified as having
material exposure to the Y2K issue. However, the Company's ability to exercise
such curtailment may be limited by various factors, including existing legal
agreements and potential concerns regarding lender liability.
13
<PAGE> 15
The Company's total Y2K estimated project cost, which is based upon currently
available information, includes expenses for the review and testing of third
parties, including government entities. However, there can be no guarantee that
the hardware, software, and systems of such third parties will be without
unfavorable Y2K issues and, therefore, not present a material adverse impact
upon the Company.
Y2K compliance costs incurred to date total approximately $360,000, the majority
of which was related to hardware and software acquisitions. This figure does not
include the implicit costs associated with the reallocation of internal staff
hours to Y2K project related efforts. At this time management currently
estimates additional Y2K compliance costs, which are expensed on a current
period basis except for fixed asset purchases, at between $75,000 and $125,000.
The estimated costs associated with the Y2K project have decreased from the
original estimate. The Company's testing indicates less hardware purchases will
be required than originally estimated. This range of cost does not include
normal ongoing costs for computer hardware (including ATM's) and software that
would be replaced in the next year even without the presence of the Y2K issue in
conjunction with the Company's ongoing programs for updating and expanding its
delivery infrastructure. The aforementioned Y2K project cost estimate may change
as the Company progresses in its Y2K program and obtains additional information
associated with and conducts further testing concerning third parties. At this
time, no significant projects have been delayed as a result of the Company's Y2K
effort.
Despite the Company's activities in regards to the Y2K issue, there can be no
assurance that partial or total systems interruptions or the costs necessary to
update hardware and software would not have a material adverse effect upon the
Company's business, financial condition, results of operations and business
prospects.
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 three months ended
March 31, 1999.
(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: 05-10-99
------------
/s/ LEE R. GIBSON
----------------------------------------
Lee R. Gibson, Executive Vice
President (Principal Financial
and Accounting Officer)
DATE: 05-10-99
------------
16
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No Description
- ---------- -----------
<S> <C>
27 Financial Data Schedule for the three months
ended March 31, 1999.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 29,117
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 538,124
<INVESTMENTS-CARRYING> 6,949
<INVESTMENTS-MARKET> 6,945
<LOANS> 322,246
<ALLOWANCE> 3,829
<TOTAL-ASSETS> 925,673
<DEPOSITS> 506,934
<SHORT-TERM> 151,504
<LIABILITIES-OTHER> 19,405
<LONG-TERM> 203,716
0
0
<COMMON> 9,224
<OTHER-SE> 34,890
<TOTAL-LIABILITIES-AND-EQUITY> 925,673
<INTEREST-LOAN> 6,659
<INTEREST-INVEST> 6,735
<INTEREST-OTHER> 210
<INTEREST-TOTAL> 13,604
<INTEREST-DEPOSIT> 3,963
<INTEREST-EXPENSE> 8,255
<INTEREST-INCOME-NET> 5,349
<LOAN-LOSSES> 325
<SECURITIES-GAINS> 230
<EXPENSE-OTHER> 5,320
<INCOME-PRETAX> 1,928
<INCOME-PRE-EXTRAORDINARY> 1,928
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,605
<EPS-PRIMARY> .46
<EPS-DILUTED> .45
<YIELD-ACTUAL> 2.88
<LOANS-NON> 476
<LOANS-PAST> 519
<LOANS-TROUBLED> 451
<LOANS-PROBLEM> 299
<ALLOWANCE-OPEN> 3,564
<CHARGE-OFFS> 132
<RECOVERIES> 72
<ALLOWANCE-CLOSE> 3,829
<ALLOWANCE-DOMESTIC> 3,829
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 56
</TABLE>
