<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 September 30, 1999
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
--------------------
to
-----------------------
Commission file number 0-12247
-------------------
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 3,894,852 shares of Common
Stock, par value $2.50, outstanding at November 4, 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>
September 30, December 31,
ASSETS 1999 1998
------------- ------------
<S> <C> <C>
Cash and due from banks ........................................................ $ 28,832 $ 41,372
Federal funds sold .......................................................... 15,650
---------- ----------
Cash and cash equivalents ................................................... 44,482 41,372
Investment securities:
Available for sale .......................................................... 154,922 132,447
Held to maturity ............................................................ 3,620 347
---------- ----------
Total Investment securities ............................................... 158,542 132,794
Mortgage-backed and related securities:
Available for sale .......................................................... 365,120 333,194
Held to maturity ............................................................ 5,764 7,810
---------- ----------
Total Mortgage-backed securities .......................................... 370,884 341,004
Marketable equity securities:
Available for sale .......................................................... 18,294 14,171
Loans:
Loans, net of unearned discount ............................................. 356,382 319,723
Less: Reserve for loan losses .............................................. (4,264) (3,564)
---------- ----------
Net Loans ................................................................. 352,118 316,159
Premises and equipment, net .................................................... 20,495 19,166
Other real estate owned, net ................................................... 231 195
Interest receivable ............................................................ 6,132 6,065
Deferred tax asset ............................................................. 5,312
Other assets ................................................................... 4,512 5,403
---------- ----------
TOTAL ASSETS .............................................................. $ 981,002 $ 876,329
========== ==========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Deposits:
Noninterest bearing ......................................................... $ 158,665 $ 122,440
Interest bearing ............................................................ 401,830 392,594
---------- ----------
Total Deposits ............................................................ 560,495 515,034
Short-term obligations:
Federal funds purchased ..................................................... 4,168
FHLB Dallas advances ........................................................ 181,500 118,000
Other obligations ........................................................... 2,478 1,523
---------- ----------
Total Short-term obligations ............................................. 183,978 123,691
Long-term obligations:
FHLB Dallas advances ........................................................ 170,615 156,027
Guaranteed Preferred Beneficial Interest in the Company's
Junior Subordinated Debentures .............................................. 20,000 20,000
---------- ----------
Total Long-term obligations .............................................. 190,615 176,027
Deferred tax liability ......................................................... 1,184
Other liabilities .............................................................. 8,535 13,980
---------- ----------
TOTAL LIABILITIES ......................................................... 943,623 829,916
---------- ----------
Shareholders' equity:
Common stock: ($2.50 par, 6,000,000 shares authorized,
3,894,852 and 3,685,775 shares issued and outstanding) ................... 9,737 9,214
Paid-in capital ............................................................. 27,401 24,198
Retained earnings ........................................................... 12,367 11,391
Treasury stock (239,361 and 182,176 shares at cost) ......................... (4,210) (3,158)
Accumulated other comprehensive (loss) income ............................... (7,916) 4,768
---------- ----------
TOTAL SHAREHOLDERS' EQUITY ............................................... 37,379 46,413
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................... $ 981,002 $ 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>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income
Loans ................................................... $ 7,174 $ 6,704 $ 20,654 $ 19,424
Investment securities ................................... 2,465 1,440 6,597 3,524
Mortgage-backed and related securities .................. 5,784 3,006 15,845 7,633
Other interest earning assets ........................... 313 175 886 435
-------- -------- -------- --------
Total interest income ............................... 15,736 11,325 43,982 31,016
Interest expense
Time and savings deposits ............................... 4,129 3,941 12,121 11,554
Short-term obligations .................................. 2,478 1,359 6,051 2,371
Long-term obligations ................................... 2,711 1,629 8,172 3,313
-------- -------- -------- --------
Total interest expense .............................. 9,318 6,929 26,344 17,238
-------- -------- -------- --------
Net interest income ........................................ 6,418 4,396 17,638 13,778
Provision for loan losses .................................. 375 300 1,028 900
-------- -------- -------- --------
Net interest income after provision for loan losses ........ 6,043 4,096 16,610 12,878
-------- -------- -------- --------
Noninterest income
Deposit services ........................................ 1,793 1,343 4,944 3,820
Gain (loss) on securities available for sale ............ (30) 700 274 935
Other ................................................... 524 361 1,578 1,072
-------- -------- -------- --------
Total noninterest income ............................ 2,287 2,404 6,796 5,827
-------- -------- -------- --------
Noninterest expense
Salaries and employee benefits .......................... 3,608 2,861 10,157 8,365
Net occupancy expense ................................... 717 621 2,077 1,735
Equipment expense ....................................... 157 111 376 336
Advertising, travel & entertainment ..................... 269 263 903 829
Supplies ................................................ 120 124 366 331
Postage ................................................. 107 86 298 259
Other ................................................... 841 781 2,585 2,306
-------- -------- -------- --------
Total noninterest expense ........................... 5,819 4,847 16,762 14,161
-------- -------- -------- --------
Income before income taxes ................................. 2,511 1,653 6,644 4,544
Provision for income taxes ................................. 537 248 1,301 799
-------- -------- -------- --------
Net Income ................................................. $ 1,974 $ 1,405 $ 5,343 $ 3,745
======== ======== ======== ========
Earnings Per Common Share-Basic ............................ $ .54 $ .38 $ 1.46 $ 1.01
======== ======== ======== ========
Earnings Per Common Share-Diluted .......................... $ .52 $ .37 $ 1.41 $ .97
======== ======== ======== ========
</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
Compre- Compre- Total
hensive hensive Share-
Income Common Paid in Retained Treasury Income holders'
(Loss) Stock Capital Earnings Stock (Loss) 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 ............................... 3,745 3,745 3,745
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment (see
disclosure) ........................... 2,707 2,707 2,707
--------
Comprehensive income ..................... $ 6,452
========
Common stock issued (16,162 shares) ...... 41 225 266
Dividends paid ........................... (1,009) (1,009)
Purchase of 51,426 shares of
Treasury stock ......................... (1,016) (1,016)
Sale of 6,000 shares of Treasury stock ... (22) 60 38
FAS 109 - Incentive Stock Options ........ 42 42
Stock dividend ........................... 421 2,571 (2,992)
-------- -------- -------- -------- -------- --------
Balance at September 30, 1998 ............ $ 9,202 $ 24,128 $ 10,136 $ (2,776) $ 4,029 $ 44,719
======== ======== ======== ======== ======== ========
Disclosure of reclassification amount:
Unrealized holding gains arising during
period ................................ $ 3,324
Less: reclassification adjustment for
gains included in net income .......... 617
--------
Net unrealized gains on securities ....... $ 2,707
========
Balance at December 31, 1998 ............. $ $ 9,214 $ 24,198 $ 11,391 $ (3,158) $ 4,768 $ 46,413
Net Income ............................... 5,343 5,343 5,343
Other comprehensive loss, net of tax
Unrealized losses on securities, net of
reclassification adjustment (see
disclosure) ........................... (12,684) (12,684) (12,684)
--------
Comprehensive loss ....................... $ (7,341)
========
Common stock issued (34,159 shares) ...... 86 288 374
Dividends paid on common stock ........... (1,044) (1,044)
Purchase of 57,185 shares of
Treasury stock ......................... (1,052) (1,052)
FAS 109 - Incentive Stock Options ........ 29 29
Stock dividend ........................... 437 2,886 (3,323)
-------- -------- -------- -------- -------- --------
Balance at September 30, 1999 ............ $ 9,737 $ 27,401 $ 12,367 $ (4,210) $ (7,916) $ 37,379
======== ======== ======== ======== ======== ========
Disclosure of reclassification amount:
Unrealized holding losses arising during
period ................................ $(12,503)
Less: reclassification adjustment for
gains included in net income .......... 181
--------
Net unrealized losses on securities ...... $(12,684)
========
</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>
Nine Months Ended
September 30,
-----------------------------
1999 1998
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income .................................................................. $ 5,343 $ 3,745
Adjustments to reconcile net cash provided by operations:
Depreciation ............................................................... 1,092 1,056
Amortization of premium .................................................... 4,080 3,891
Accretion of discount and loan fee ......................................... (1,280) (461)
Provision for loan losses .................................................. 1,028 900
FAS 109 - incentive stock options .......................................... 29 42
Increase in interest receivable ............................................ (67) (1,312)
Decrease (increase) in other receivables and prepaids ...................... 590 (3,029)
Decrease (increase) in deferred tax asset .................................. 38 (54)
Increase in interest payable ............................................... 568 187
(Gain) loss on sale of assets .............................................. (37) 35
Gain on sale of other real estate owned .................................... (100) (32)
Gain on sale of securities available for sale .............................. (274) (935)
(Decrease) increase in other payables ...................................... (5,058) 21,375
---------- ----------
Net cash provided by operating activities ................................ 5,952 25,408
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale ............. 69,310 48,783
Proceeds from sales of mortgage-backed securities available for sale ........ 89,209 30,455
Proceeds from maturities of investment securities available for sale ........ 22,909 7,399
Proceeds from maturities of mortgage-backed securities available for sale ... 70,308 48,986
Proceeds from maturities of investment securities held to maturity .......... 347 345
Proceeds from maturities of mortgage-backed securities held to maturity ..... 2,064 4,522
Purchases of investment securities available for sale ....................... (125,288) (87,247)
Purchases of mortgage-backed securities available for sale .................. (203,411) (247,657)
Purchases of marketable equity securities available for sale ................ (4,123) (7,459)
Purchases of investment securities held to maturity ......................... (2,820)
Net increase in loans ....................................................... (37,874) (18,025)
Purchases of premises and equipment ......................................... (3,051) (1,461)
Proceeds from sales of premises and equipment ............................... 667 106
Proceeds from sales of other real estate owned .............................. 296 275
Proceeds from sales of repossessed assets ................................... 956 1,111
---------- ----------
Net cash used in investing activities .................................... (120,501) (219,867)
</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>
Nine Months Ended
September 30,
-----------------------------
1999 1998
---------- ----------
<S> <C> <C>
FINANCING ACTIVITIES:
Net increase in demand and savings accounts ............................... $ 40,990 $ 5,966
Net increase in certificates of deposit ................................... 4,471 5,040
Proceeds from the issuance of common stock ................................ 374 266
Net (decrease) increase in federal funds purchased ........................ (4,168) 35
Sale of treasury stock .................................................... 38
Purchase of treasury stock ................................................ (1,052) (1,016)
Dividends paid ............................................................ (1,044) (1,009)
Net increase in FHLB Dallas advances ...................................... 78,088 150,798
Issuance of guaranteed preferred beneficial interest in
the Company's junior subordinated debentures ........................... 20,000
---------- ----------
Net cash provided by financing activities ............................ 117,659 180,118
---------- ----------
Net increase (decrease) in cash and cash equivalents ....................... 3,110 (14,341)
Cash and cash equivalents at beginning of period ........................... 41,372 36,593
---------- ----------
Cash and cash equivalents at end of period ................................. $ 44,482 $ 22,252
========== ==========
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION:
Interest paid ............................................................. $ 25,777 $ 17,051
Income taxes paid ......................................................... $ 1,350 $ 850
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of OREO and other repossessed assets through foreclosure ...... $ 887 $ 1,170
</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 September 30, 1999, and the related
consolidated statements of income, shareholders' equity and cash flow for the
nine month period ended September 30, 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
Earnings per share on a basic and diluted basis as required by Statement of
Financial Accounting Standard No. 128, "Earnings Per Share" is calculated as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Basic net earnings per share
Net income $ 5,343 $ 3,745
Weighted average shares outstanding 3,656 3,713
-------------- --------------
$ 1.46 $ 1.01
============== ==============
Diluted net earnings per share
Net income $ 5,343 $ 3,745
Weighted average shares outstanding plus
assumed conversions 3,776 3,867
-------------- --------------
$ 1.41 $ .97
============== ==============
Calculation of weighted average shares outstanding plus
assumed conversions
Weighted average shares outstanding 3,656 3,713
Effect of dilutive securities options 120 154
-------------- --------------
3,776 3,867
============== ==============
</TABLE>
3. Comprehensive Income
The components of accumulated comprehensive income (loss) as required by
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" are as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
--------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
---------- ------------- ----------
<S> <C> <C> <C>
Unrealized losses on securities:
Unrealized holding losses arising during period $ (18,944) $ 6,441 $ (12,503)
Less: reclassification adjustment for gains
realized in net income 274 (93) 181
---------- ---------- ----------
Net unrealized losses (19,218) 6,534 (12,684)
---------- ---------- ----------
Other comprehensive losses $ (19,218) $ 6,534 $ (12,684)
========== ========== ==========
</TABLE>
6
<PAGE> 8
<TABLE>
<CAPTION>
Quarter Ended September 30, 1999
-----------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
----------- ------------- -----------
<S> <C> <C> <C>
Unrealized losses on securities:
Unrealized holding losses arising during period $ (6,398) $ 2,175 $ (4,223)
Less: reclassification adjustment for losses
realized in net income (30) 10 (20)
----------- ----------- -----------
Net unrealized losses (6,368) 2,165 (4,203)
----------- ----------- -----------
Other comprehensive losses $ (6,368) $ 2,165 $ (4,203)
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
-----------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
----------- ------------ -----------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period $ 5,036 $ (1,712) $ 3,324
Less: reclassification adjustment for gains
realized in net income 935 (318) 617
----------- ----------- -----------
Net unrealized gains 4,101 (1,394) 2,707
----------- ----------- -----------
Other comprehensive income $ 4,101 $ (1,394) $ 2,707
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended September 30, 1998
-----------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
----------- ------------ -----------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period $ 4,421 $ (1,503) $ 2,918
Less: reclassification adjustment for gains
realized in net income 700 (238) 462
----------- ----------- -----------
Net unrealized gains 3,721 (1,265) 2,456
----------- ----------- -----------
Other comprehensive income $ 3,721 $ (1,265) $ 2,456
=========== =========== ===========
</TABLE>
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Quarter and nine months ended September 30, 1999
compared to September 30, 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 and nine months
ended September 30, 1999 compared to the same periods in 1998. Net income for
the quarter and nine months ended September 30, 1999 was $2.0 million and $5.3
million, as compared to $1.4 million and $3.7 million for the same periods in
1998.
Net Interest Income
Net interest income for the quarter and nine months ended September 30, 1999 was
$6.4 million and $17.6 million, an increase of $2.0 million or 46.0% for the
quarter and $3.9 million or 28.0% for the nine months when compared to the same
periods in 1998. Average interest earning assets increased $280.6 million or
47.3%, while the net interest spread decreased from 2.6% at September 30, 1998
to 2.3% at September 30, 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 and to utilize the additional capital
provided. 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. Interest expense on Trust Preferred Securities was $1.3 million for the
nine months ended September 30, 1999 compared to $.6 million for the same period
in 1998 due to the fact the securities were not issued until May 18, 1998.
During the nine months ended September 30, 1999, Average Loans, funded primarily
by the growth in average deposits and average FHLB Dallas advances, increased
$30.8 million or 10.2%, compared to the same period in 1998. The average yield
on loans decreased from 8.6% at September 30, 1998 to 8.3% at September 30,
1999.
Average Securities increased $236.5 million or 83.7% for the nine months ended
September 30, 1999 when compared to the same period in 1998. This increase was a
direct result of the leverage strategy implemented in 1998. The overall yield on
Average Securities increased to 6.2% during the nine months ended September 30,
1999 from 5.9% during the same period in 1998.
Interest income from federal funds and other interest earning assets increased
$.5 million or 103.7% for the nine months ended September 30, 1999 when compared
to the same period in 1998 as a result of the average balance increase of
135.9%. The average yield decreased from 6.0% in 1998 to 5.2% at September 30,
1999 due to lower federal funds rates.
Total interest expense increased $9.1 million or 52.8% to $26.3 million during
the nine months ended September 30, 1999 as compared to $17.2 million during the
same period in 1998. The increase was attributable to an increase in Average
Interest Bearing Liabilities of $254.6 million or 51.9% while the average yield
remained unchanged at 4.7% from September 30, 1998 to September 30, 1999.
Average Interest Bearing Deposits increased $36.4 million or 10.1% while the
average rate paid decreased from 4.3% at September 30, 1998 to 4.1% at September
30, 1999. Average Short-term Interest Bearing Liabilities, consisting primarily
of FHLB Dallas advances and Federal Funds Purchased, increased $98.5 million or
167.1% 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 $109.6
million or 173.6% compared to $63.1 million at September 30, 1998. The advances
were obtained from FHLB Dallas as part of the Company's balance sheet leverage
strategy and partially to fund long-term
8
<PAGE> 10
loans. FHLB Dallas advances are collateralized by FHLB Dallas stock, securities,
and nonspecified real estate loans.
Average Long Term Junior Subordinated Debentures increased $10.2 million or
103.7% from September 30, 1998 to September 30, 1999 as a result of the issuance
of the Preferred Securities. The increase is due to the fact the Junior
Subordinated Debentures were not issued until May 18, 1998.
The analysis below shows average interest earning assets and interest bearing
liabilities together with the average yield on the interest earning assets and
the average cost of the interest bearing liabilities.
SUMMARY OF INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES
<TABLE>
<CAPTION>
AVERAGE YIELD OR AVERAGE YIELD OR
VOLUME INTEREST RATE PAID VOLUME INTEREST RATE PAID
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Nine Months Ended September 30, 1999 Nine Months Ended September 30, 1998
-------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING
ASSETS:
Loans $ 332,171 $ 20,654 8.3% $ 301,335 $ 19,424 8.6%
Investment Securities(1)(2) 163,487 8,164 6.7% 89,102 4,796 7.2%
Mortgage-backed Securities(2) 355,651 15,845 6.0% 193,496 7,633 5.3%
Other Interest Earning
Assets 22,877 886 5.2% 9,697 435 6.0%
---------- ---------- ---------- ----------
TOTAL INTEREST EARNING
ASSETS $ 874,186 $ 45,549 7.0% $ 593,630 $ 32,288 7.3%
========== ========== ========== ==========
INTEREST BEARING LIABILITIES:
Deposits $ 394,795 $ 12,121 4.1% $ 358,432 $ 11,554 4.3%
Fed Funds Purchased and
Other Interest Bearing
Liabilities 7,501 271 4.8% 5,028 207 5.5%
Short Term Interest Bearing
Liabilities - FHLB Dallas 149,903 5,780 5.2% 53,908 2,164 5.4%
Long Term Interest Bearing
Liabilities - FHLB Dallas 172,678 6,897 5.3% 63,110 2,690 5.7%
Long Term Junior
Subordinated Debentures 20,000 1,275 8.5% 9,817 623 8.5%
---------- ---------- ---------- ----------
TOTAL INTEREST BEARING
LIABILITIES $ 744,877 $ 26,344 4.7% $ 490,295 $ 17,238 4.7%
========== ========== ---------- ========== ========== ----------
NET INTEREST SPREAD 2.3% 2.6%
========== ==========
</TABLE>
(1) Interest income includes taxable-equivalent adjustments of $1,567 and
$1,272 as of September 30, 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 $6.8 million for the nine months ended September 30, 1999
compared to $5.8 million for the same period in 1998. Deposit services income
increased $1.1 million or 29.4% for the nine months ended September 30, 1999
compared to the same period in 1998. Deposit services income increased primarily
as a direct result of the overdraft privilege program and also due to increased
numbers of deposit accounts and increased deposit activity from September 30,
1998 to September 30, 1999. Other noninterest income increased $.5 million or
47.2% for the nine months ended September 30, 1999 primarily as a result of
increases in mortgage servicing release fees income. Gains on sales of
securities decreased $.7 million for the nine months ended September 30, 1999
compared to the same period in 1998. During the quarter, short-term municipal
securities were sold and were replaced with tax free loans made by the Company's
loan department. In addition, short-term U.S. Treasury and agency securities
were sold and replaced primarily with premium mortgage backed securities. Sales
of securities available for sale were the result of changes in economic
conditions as intermediate and long-term interest rates increased over 134 basis
points from the lows of last
9
<PAGE> 11
fall due to concerns of increased inflation and the rate of growth in the
economy.
The market value of the available for sale and held to maturity securities
portfolio at September 30, 1999 was $547.6 million with a net unrealized loss on
that date of $12.0 million. The net unrealized loss is comprised of $13.6
million in unrealized losses and $1.6 million in unrealized gains.
Noninterest Expense
Noninterest expense was $16.8 million for the nine months ended September 30,
1999, compared to $14.2 million for the same period of 1998, representing an
increase of $2.6 million or 18.4%.
Salaries and employee benefits increased $1.8 million or 21.4% during the nine
months ended September 30, 1999 when compared to the same period in 1998. Direct
salary expense and payroll taxes increased $1.2 million as a result of personnel
additions for the nine months ended September 30, 1999 when compared to the same
period in 1998. Branch expansion combined with normal payroll increases
accounted for this increase. Retirement expense increased $.3 million or 56.1%
for the nine months ended September 30, 1999 when compared to the same period in
1998. Health insurance expense increased $.3 million or 44.4% for the nine
months ended September 30, 1999 when compared to the same period in 1998.
Net occupancy expense increased $.3 million or 19.7% for the nine months ended
September 30, 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.
Other noninterest expense increased $.3 million or 12.1% for the nine months
ended September 30, 1999 when compared to the same period in 1998. The increase
was due primarily to ATM fees and telephone expense due to added locations. In
addition, bank exam and bank analysis 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 nine months ended September 30,
1999 was 19.6% compared to 17.6% for the nine months ended September 30, 1998.
The increase is due to higher pretax income.
Capital Resources
Total shareholders' equity for the Company at September 30, 1999, of $37.4
million was down $9 million from December 31, 1998, and represented 3.8% of
total assets at September 30, 1999 compared to 5.3% of total assets at December
31, 1998. Increases to shareholders' equity during the nine months ended
September 30, 1999 were net income of $5.3 million, common stock (12,801 shares)
issued through dividend reinvestment of $32,000 and $54,000 due to
the exercise of 21,358 shares of incentive stock options. Decreases to
shareholders' equity consisted of $1.0 million in dividends paid to
shareholders, the purchase of 57,185 shares of treasury stock for $1.1 million,
and a decrease of $12.7 million in net unrealized gains on securities available
for sale.
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
10
<PAGE> 12
regulation, that if undertaken, could have a direct material effect on the
Bank's financial statements. At September 30, 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.
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 September 30, 1999, these investments
were 21.1% 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 $30.8 million or 10.2% from the nine months
ended September 30, 1998 to September 30, 1999. 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.
11
<PAGE> 13
For the third quarter and nine months ended September 30, 1999, loan charge-offs
were $230,000 and $547,000 and recoveries were $68,000 and $219,000,
respectively, resulting in net charge-offs of $162,000 and $328,000. For the
third quarter and nine months ended September 30, 1998, net charge-offs were
$255,000 and $685,000, respectively.
The decrease in net charge-offs for the nine months ended September 30, 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 $1.0 million for the
nine months ended September 30, 1999.
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 September 30, 1999 were $2,366,000, up $364,000 or
18.2% from $2,002,000 at December 31, 1998. From December 31, 1998 to September
30, 1999, nonaccrual loans increased $273,000 or 63.2% to $705,000. At September
30, 1999, nonaccrual loans represented .2% of total loans and 16.5% of reserve
for loan losses. Loans 90 days past due or more increased $216,000 or 37.5% to
$792,000. 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 increased $36,000 or 18.5% to
$231,000. Restructured loans decreased $74,000 or 15.6% to $399,000. Repossessed
assets decreased $87,000 or 26.7%.
Expansion
During the third quarter of 1999, the Company opened a third full service branch
in Longview, Texas.
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
12
<PAGE> 14
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.
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 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 completed all phases of the plan with customer awareness ongoing.
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 established a Y2K subcommittee to monitor progress with
achieving and certifying Y2K compliance. In addition, the Company utilized
external consulting firms to assist with its Y2K program. The Company's current
plan is to continue customer awareness.
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 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
13
<PAGE> 15
curtailment may be limited by various factors, including existing legal
agreements and potential concerns regarding lender liability.
The Company developed contingency plans which represent enhancements of the
Company's existing business resumption plans to safeguard the Company under
various Y2K scenarios. The contingency plans are designed to address critical
system failures. The contingency plans include the use of third party service
providers, alternative commercial vendors, alternative data security and other
contingency service suppliers.
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 $395,000, 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 $40,000 and $90,000.
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 nine months ended
September 30, 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: 11-10-99
----------------------
/s/ LEE R. GIBSON
----------------------------------------
Lee R. Gibson, Executive Vice
President (Principal Financial
and Accounting Officer)
DATE: 11-10-99
----------------------
16
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO DESCRIPTION
- ---------- -----------
<S> <C>
27 Financial Data Schedule for the nine months ended
September 30, 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> SEP-30-1999
<CASH> 28,832
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 15,650
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 538,336
<INVESTMENTS-CARRYING> 9,384
<INVESTMENTS-MARKET> 9,302
<LOANS> 356,382
<ALLOWANCE> 4,264
<TOTAL-ASSETS> 981,002
<DEPOSITS> 560,495
<SHORT-TERM> 183,978
<LIABILITIES-OTHER> 8,535
<LONG-TERM> 190,615
0
0
<COMMON> 9,737
<OTHER-SE> 27,642
<TOTAL-LIABILITIES-AND-EQUITY> 981,002
<INTEREST-LOAN> 20,654
<INTEREST-INVEST> 22,442
<INTEREST-OTHER> 886
<INTEREST-TOTAL> 43,982
<INTEREST-DEPOSIT> 12,121
<INTEREST-EXPENSE> 26,344
<INTEREST-INCOME-NET> 17,638
<LOAN-LOSSES> 1,028
<SECURITIES-GAINS> 274
<EXPENSE-OTHER> 16,762
<INCOME-PRETAX> 6,644
<INCOME-PRE-EXTRAORDINARY> 6,644
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,343
<EPS-BASIC> 1.46
<EPS-DILUTED> 1.41
<YIELD-ACTUAL> 2.94
<LOANS-NON> 705
<LOANS-PAST> 792
<LOANS-TROUBLED> 399
<LOANS-PROBLEM> 121
<ALLOWANCE-OPEN> 3,564
<CHARGE-OFFS> 547
<RECOVERIES> 219
<ALLOWANCE-CLOSE> 4,264
<ALLOWANCE-DOMESTIC> 4,264
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 53
</TABLE>
