<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON __________, 2000
REGISTRATION NO. 333-_____
REGISTRATION NO. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------
<TABLE>
<S> <C>
SOUTHSIDE BANCSHARES, INC. SOUTHSIDE CAPITAL TRUST II
(EXACT NAME OF REGISTRANT AS SPECIFIED (EXACT NAME OF CO-REGISTRANT AS SPECIFIED
IN ITS CHARTER) IN ITS CHARTER)
TEXAS DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION (STATE OR OTHER JURISDICTION OF INCORPORATION
OR ORGANIZATION) OR ORGANIZATION)
75-1848732 APPLIED FOR
(I.R.S. EMPLOYER IDENTIFICATION NO.) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1201 S. BECKHAM C/O SOUTHSIDE BANCSHARES, INC.
TYLER, TEXAS 75701 1201 S. BECKHAM
(903) 531-7111 TYLER, TEXAS 75701
(ADDRESS, INCLUDING ZIP CODE, (903) 531-7111
AND TELEPHONE NUMBER, (ADDRESS, INCLUDING ZIP CODE,
INCLUDING AREA CODE, OF REGISTRANT'S AND TELEPHONE NUMBER,
PRINCIPAL EXECUTIVE OFFICE) INCLUDING AREA CODE, OF REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICE)
</TABLE>
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SAM DAWSON
PRESIDENT
SOUTHSIDE BANCSHARES, INC.
1201 S. BECKHAM
TYLER, TEXAS 75701
(903) 531-7111
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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COPIES TO:
<TABLE>
<S> <C>
THOMAS C. ERB, ESQ.
RONALD J. FRAPPIER, ESQ. TOM W. ZOOK, ESQ.
JENKENS & GILCHRIST, A PROFESSIONAL CORPORATION LEWIS, RICE & FINGERSH, L.C.
1445 ROSS AVENUE, SUITE 3200 500 N. BROADWAY, SUITE 2000
DALLAS, TEXAS 75202 ST. LOUIS, MISSOURI 63102-2147
(214) 855-4743 (314) 342-2000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [ ]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and eligible facsimile thereof, pursuant to Item 11(a)(1)
of this form, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
====================================================================================================================
PROPOSED PROPOSED
TITLE OF EACH AMOUNT TO BE MAXIMUM MAXIMUM AMOUNT OF
CLASS OF SECURITIES REGISTERED OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED PER UNIT OFFERING PRICE Fee(2)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
% Cumulative Convertible Trust
Preferred Securities of Southside 1,725,000(1) $10.00 $17,250,000 $ 4,554
Capital Trust II.......................
--------------------------------------------------------------------------------------------------------------------
Junior Subordinated Deferrable Interest
Debentures of Southside Bancshares,
Inc. (3)(4) ........................... -- -- -- --
--------------------------------------------------------------------------------------------------------------------
Southside Bancshares, Inc. Guarantee
with respect to % Cumulative
Convertible Trust Preferred Securities
(3)(5) ................................ -- -- -- --
--------------------------------------------------------------------------------------------------------------------
Common Stock, par value $1.25 per
share, of Southside Bancshares, Inc.... (6) -- -- $
--------
====================================================================================================================
</TABLE>
(1) Includes 225,000 of Convertible Preferred Securities which may be sold by
Southside Capital Trust II to cover over-allotments.
(2) The registration fee is calculated in accordance with Rule 457(i) and
(n).
(3) This registration statement is deemed to cover the % Convertible Junior
Subordinated Debentures due 2030 of Southside Bancshares Inc., the rights
of holders thereof under the related Indenture, and the rights of holders
of the Convertible Preferred Securities under the related Trust
Agreement, the Guarantee and the Expense Agreement entered into by
Southside Bancshares, Inc.
(4) The % Convertible Junior Subordinated Debentures due 2030 will be
purchased by Southside Capital Trust II with the proceeds of the sale of
the Convertible Preferred Securities. Such securities may later be
distributed for no additional consideration to the holders of the
Convertible Preferred Securities of Southside Capital Trust II upon its
dissolution and the distribution of its assets.
(5) No separate consideration will be received for the Guarantee.
(6) Such indeterminate number of shares of common stock as may be issuable
upon conversion of the Convertible Preferred Securities registered
hereunder. Shares of common stock issued upon conversion of the
convertible preferred securities will be issued without the payment of
additional consideration. This registration statement also covers such
shares as may be issuable upon such conversion pursuant to anti-dilution
adjustments.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
The information in this prospectus in not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities, and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED , 2000
1,500,000 CONVERTIBLE PREFERRED SECURITIES
SOUTHSIDE CAPITAL TRUST II
% CUMULATIVE CONVERTIBLE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10 PER CONVERTIBLE
PREFERRED SECURITY) FULLY, IRREVOCABLY AND UNCONDITIONALLY
GUARANTEED, AS DESCRIBED IN THIS PROSPECTUS, BY
[LOGO OF SOUTHSIDE BANCSHARES, INC. APPEARS HERE]
SOUTHSIDE BANCSHARES, INC.
----------
Southside Capital Trust II is offering 1,500,000 convertible
preferred securities at $10 per security. The convertible preferred
securities represent an indirect interest in our % convertible junior
subordinated debentures. The convertible debentures have the same payment
terms as the convertible preferred securities and will be purchased by
Southside Capital Trust II using the proceeds from its offering of the
convertible preferred securities. The convertible preferred securities are
convertible into shares of our common stock as described in this prospectus.
Our common stock trades in the Nasdaq National Market under the
symbol "SBSI." The closing price as reported on the Nasdaq National Market
on October , 2000, was [$ ]. The convertible preferred securities are
expected to be approved for inclusion on the Nasdaq National Market under
the symbol "SBSIO." Trading is expected to commence on or before delivery of
the securities.
----------
INVESTING IN THE SECURITIES INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 11.
----------
THE SECURITIES OFFERED BY THIS PROSPECTUS ARE NOT SAVINGS ACCOUNTS,
DEPOSITS OR OBLIGATIONS OF ANY BANK AND ARE NOT INSURED BY THE BANK
INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
<TABLE>
<CAPTION>
PER CONVERTIBLE
PREFERRED
SECURITY TOTAL
---------------- -----
<S> <C> <C>
PUBLIC OFFERING PRICE............................................. $10.00 $15,000,000
PROCEEDS TO THE TRUST............................................. $10.00 $15,000,000
</TABLE>
This is a firm commitment underwriting. We will pay underwriting
commissions of $ per convertible preferred security, or a total of $ ,
for arranging the investment in our convertible junior subordinated
debentures. The underwriters have been granted a 30-day option to purchase
up to an additional 225,000 convertible preferred securities to cover
over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon
the adequacy or accuracy of this prospectus. Any representation to the
contrary is a criminal offense.
STIFEL, NICOLAUS & COMPANY
INCORPORATED
, 2000
<PAGE> 3
[MAP INDICATING THE BANK'S BRANCH OFFICES]
<PAGE> 4
SUMMARY
This summary highlights information contained in, or incorporated by
reference into, this prospectus. Because this is a summary, it may not contain
all of the information that is important to you. Therefore, you should also read
the more detailed information set forth in this prospectus, our financial
statements and the other information that is incorporated by reference into this
prospectus. Unless otherwise indicated, the information in this prospectus
assumes that the underwriters will not exercise their option to purchase
additional convertible preferred securities to cover over-allotments.
SOUTHSIDE BANCSHARES, INC.
WHO WE ARE
Southside Bancshares, Inc. is a bank holding company for Southside Bank
headquartered in Tyler, Texas. The bank is the largest independent bank based on
asset size headquartered in East Texas. Tyler has a metropolitan area population
of approximately 171,000 and is located 90 miles east of Dallas/Fort Worth,
Texas and 90 miles west of Shreveport, Louisiana.
We have been, and intend to remain, a community-focused financial
institution offering a full range of financial services to individuals,
businesses and nonprofit organizations in the communities we serve. These
services include consumer and commercial loans, deposit accounts, trust
services, safe deposit services and brokerage services.
FINANCIAL SUMMARY
As reflected in the financial summary presented below, over the last five
and a half years, we have achieved significant asset growth, increased our loan
and deposit base and increased earnings. We have paid a cash dividend every year
since 1970.
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTH PERIOD ENDED AT OR FOR THE
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------ ------------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND LOCATION DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Income ................... $ 4,911 $ 3,369 $ 7,924 $ 5,351 $ 5,006 $ 4,205 $ 4,532
Fully Diluted
Earnings Per Share ........... 0.66 0.45 1.05 0.70 0.65 0.55 0.60
Return on Average
Shareholders' Equity ..... 25.15% 15.18% 18.99% 12.42% 13.20% 12.20% 15.01%
Investment Securities ........ $ 174,322 $ 189,379 $ 182,452 $ 132,794 $ 71,835 $ 57,825 $ 76,919
Mortgage-Backed and
Related Securities ....... 368,953 354,582 347,574 341,004 141,413 114,356 99,407
Loans, Net of Reserve
for Loan Loss ............ 424,125 331,699 382,871 316,159 292,665 254,918 225,461
Total Assets ................. 1,062,782 959,048 1,012,565 876,329 571,189 482,755 448,673
Deposits ..................... 642,240 528,862 587,544 515,034 462,674 425,950 388,308
Short-term Obligations ....... 156,629 186,931 186,041 123,691 34,531 6,835 5,952
Long-term Obligations ........ 212,244 190,912 194,704 176,027 28,547 9,096 13,686
Total Shareholders'
Equity ....................... 42,806 40,054 37,672 46,413 39,946 36,484 33,352
Number of Locations .......... 12 11 12 11 8 8 5
</TABLE>
OUR MARKET AREA
We consider our primary market area to be all of Smith and Gregg Counties
in East Texas, and to a lesser extent, portions of adjoining counties. During
1998 and 1999, we opened three branches in Gregg County and one branch in Smith
County. We plan to open two additional branches in Lindale and Whitehouse, both
in Smith County. The Lindale branch should open in temporary facilities before
the end of the year and the Whitehouse branch should open in late 2001. We
expect our presence in the Gregg County market area to increase in the future,
however presently, the city of Tyler in Smith County represents our primary
market area. The bank serves our markets through twelve full service branch
locations, including seven branches located in grocery stores. The
3
<PAGE> 5
bank's customers may access various banking services through 21 ATMs owned by
the bank and ATMs owned by others, through debit cards, and through the bank's
automated telephone, internet and electronic banking products.
The principal economic activities in our market area include retail,
distribution, manufacturing, medical services, education and oil and gas
industries. Additionally, Tyler's industry base includes conventions and
tourism, as well as retirement relocation. All of these support a growing
regional system of medical service, retail and education centers. Tyler is home
to several nationally recognized health care systems. Tyler hospitals represent
all major specialties and employ over 6,500 individuals. In 1998, Target Stores
opened a multi-state distribution center in the greater Tyler area along
Interstate 20 that employs over 1,000 workers.
BUSINESS STRATEGY
Our goal is to be the premier financial institution in East Texas,
recognized for quality customer service and financial soundness. The bank
weathered the Texas economic downturn in the 1980's, which contributed in part
to the customer loyalty that we enjoy today.
Our business strategy is to operate the bank as a well capitalized,
profitable, independent, community-oriented financial institution. With that
focus, we have developed a niche in small business and consumer lending as well
as other small business and consumer financial services, including the addition
of Countywide, a consumer finance subsidiary of the bank with total loans at
June 30, 2000 of $1.1 million.
Key aspects of our business strategy include:
o maintaining asset quality;
o providing a high level of customer service through convenient,
well-planned facilities and electronic delivery systems which take
advantage of technological advancements;
o continuing to manage our leverage strategy which is designed to
enhance profitability with acceptable levels of credit, interest
rate and liquidity risk;
o increasing market share within our existing market and expanding
into new markets;
o increasing the revenue of our existing financial subsidiaries and
adding new products and services which contribute to noninterest
income;
o controlling expenses; and
o attracting and retaining qualified and experienced management.
SOUTHSIDE CAPITAL TRUST II
The trust is a newly formed financing subsidiary of Southside. Upon
issuance of the convertible preferred securities offered by this prospectus, the
purchasers in this offering will own all of the issued and outstanding
convertible preferred securities. In exchange for our capital contribution to
the trust, we will own all of the common securities of the trust. The trust
exists exclusively for the following purposes:
o issuing the convertible preferred securities to the public for
cash;
o issuing the common securities to us;
o investing the proceeds from the sale of its convertible preferred
and common securities in an equivalent amount of convertible
debentures to be issued by us; and
o engaging in only those other activities that are necessary or
incidental to those listed above, such as receiving payments on the
convertible debentures and making distributions to security
holders, furnishing notices and other administrative tasks.
The address of the principal executive office of Southside and the trust
is 1201 S. Beckham, Tyler, Texas 75701 and our telephone number is (903)
531-7111. Our website can be found at www.Southside.com.
4
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
The issuer..................................... Southside Capital Trust II.
Securities being offered....................... 1,500,000 convertible preferred securities which represent
preferred undivided interests in the assets of the trust. Those
assets will consist solely of the convertible debentures and
payments received on the convertible debentures.
The trust will sell the convertible preferred securities to the
public for cash. The trust will use that cash to buy the
convertible debentures from us.
Offering price................................. $10 per convertible preferred security.
When distributions will be paid to you......... If you purchase the convertible preferred securities, you are
entitled to receive cumulative cash distributions at a % annual
rate. Distributions will accumulate from the date the trust
issues the convertible preferred securities and will be paid
quarterly on March 31, June 30, September 30 and December 31 of
each year, beginning December 31, 2000. As long as the
convertible preferred securities are represented by a global
security, the record date for distributions on the convertible
preferred securities will be the business day prior to the
distribution date. We may defer the payment of cash
distributions, as described below.
When the securities must be redeemed........... The convertible debentures will mature and the convertible
preferred securities must be redeemed on December 31, 2030. We
have the option to shorten the maturity date to a date not
earlier than December 31, 2005 without the payment of any premium
amount, and to certain dates between December 31, 2003 and
December 31, 2005 with the payment of specific premium amounts.
We will not shorten the maturity date unless we have received the
prior approval of the Board of Governors of the Federal Reserve,
if required.
Redemption before December 31, 2030
is possible.................................. The trust must redeem the convertible preferred securities when
the convertible debentures are paid at maturity, or upon any
earlier redemption of the convertible debentures to the extent
the convertible debentures are redeemed. We may redeem all or
part of the convertible debentures at any time on or after
December 31, 2005 without the payment of any premium amounts.
We may redeem all or part of the convertible debentures prior to
December 31, 2005, if we pay the following redemption premium:
o on or after December 31, 2003 but before December 31, 2004,
we pay a % premium over the principal amount to be
redeemed; and
o on or after December 31, 2004 but before December 31, 2005,
we pay a % premium over the principal amount to be
redeemed.
</TABLE>
5
<PAGE> 7
<TABLE>
<S> <C>
However, we may only use these early redemption rights when the
fair market value of our common stock is at least 125% of the
conversion price of the convertible preferred securities for a
period of 20 consecutive trading days ending within five business
days of the date of notice of redemption.
In addition, we may redeem all of the convertible debentures, at
any time, without premium, if:
o there is a change in existing laws or regulations, or a new
official administrative interpretation or application of
these laws and regulations, that causes the interest we pay
on the convertible debentures to no longer be deductible by
us for federal income tax purposes; or the trust becomes
subject to federal income tax; or the trust becomes or will
become subject to certain other taxes or governmental
charges;
o there is a change in existing laws or regulations that
requires the trust to register as an investment company; or
o there is a change in the capital adequacy guidelines of the
Federal Reserve that results in the convertible preferred
securities not being counted as Tier 1 capital.
We may also redeem the convertible debentures at any time, and
from time to time, without premium, in an amount equal to the
liquidation amount of any convertible preferred securities we
purchase, plus a proportionate amount of common securities, but
only in exchange for a like amount of the convertible preferred
securities and common securities then owned by us.
Redemption of the convertible debentures prior to maturity will
be subject to the prior approval of the Federal Reserve, if
approval is then required. If your convertible preferred
securities are redeemed by the trust, you will receive the
liquidation amount of $10 per convertible preferred security,
plus any accrued and unpaid distributions to the date of
redemption, plus the applicable premium, if any.
We have the option to extend the interest
payment period.......................... The trust will rely solely on payments made by us under the
convertible debentures to pay distributions on the convertible
preferred securities. As long as we are not in default under the
indenture relating to the convertible debentures, we may, at one
or more times, defer interest payments on the convertible
debentures for up to 20 consecutive quarters, but not beyond
December 31, 2030. If we defer interest payments on the
convertible debentures:
o the trust will also defer distributions on the convertible
preferred securities;
o the distributions you are entitled to will accumulate; and
o these accumulated distributions will earn interest at an
annual rate of %, compounded quarterly, until paid.
At the end of any deferral period, we will pay to the trust all
accrued and unpaid interest under the convertible debentures. The
trust will then pay all accumulated and unpaid distributions to
you.
</TABLE>
6
<PAGE> 8
<TABLE>
<S> <C>
You will still be taxed if distributions are
deferred................................ If a deferral of payment occurs, you will still be required to
recognize the deferred amounts as income for federal income tax
purposes in advance of receiving these amounts, even if you are a
cash basis taxpayer.
Our guarantee of payment....................... Our obligations described in this prospectus, in the aggregate,
constitute a full, irrevocable and unconditional guarantee on a
subordinated basis by us of the obligations of the trust under
the convertible preferred securities Under the guarantee
agreement, we guarantee the trust will use its assets to pay the
distributions on the convertible preferred securities and the
liquidation amount upon liquidation of the trust. However, the
guarantee does not apply when the trust does not have sufficient
funds to make the payments. If we do not make payments on the
convertible debentures, the trust will not have sufficient funds
to make payments on the convertible preferred securities. In this
event, your remedy is to institute a legal proceeding directly
against us for enforcement of payments under the convertible
debentures.
We may distribute the convertible debentures
directly to you............................. We may, at any time, dissolve the trust and distribute the
convertible debentures to you, subject to the prior approval of
the Federal Reserve, if required. If we distribute the
convertible debentures, we will use our best efforts to list them
on a national securities exchange or comparable automated
quotation system.
How the securities will rank in right
of payment.................................. Our obligations under the convertible preferred securities,
convertible debentures and guarantee are unsecured and will rank
as follows with regard to right of payment:
o the convertible preferred securities will rank equally with
the common securities of the trust. The trust will pay
distributions on the convertible preferred securities and
the common securities pro rata. However, if we default with
respect to the convertible debentures, then no
distributions on the common securities of the trust or our
common stock will be paid until all accumulated and unpaid
distributions on the convertible preferred securities have
been paid;
o our obligations under the convertible debentures and the
guarantee are unsecured and generally will rank:
-- junior in priority to our existing and future
senior and subordinated indebtedness; and
-- equal in priority to our subordinated debentures
associated with the $20 million of trust
preferred securities that an affiliated trust of
ours currently has outstanding.
o because we are a holding company, the convertible
debentures and the guarantee will effectively be
subordinated to all depositors' claims, as well as existing
and future liabilities of our subsidiaries.
Voting rights.................................. Except in limited circumstances, holders of the convertible
preferred securities will have no voting rights.
</TABLE>
7
<PAGE> 9
<TABLE>
<S> <C>
Proposed Nasdaq National Market
symbol...................................... SBSIO.
You will not receive certificates.............. The convertible preferred securities will be represented by a
global security that will be deposited with and registered in the
name of The Depository Trust Company, New York, New York, or its
nominee. This means that you will not receive a certificate for
the convertible preferred securities, and your ownership
interests will be recorded through the DTC book-entry system.
How the proceeds of this offering will
be used..................................... The trust will invest all of the proceeds from the sale of the
convertible preferred securities in the convertible debentures.
We estimate that the net proceeds to us from the sale of the
convertible debentures to the trust, after deducting offering
expenses and underwriting commissions, will be approximately
$ million. The purpose of the offering is to increase our
regulatory capital and support the growth and operations of our
subsidiaries.
Conversion into common stock................... Each convertible preferred security is convertible on or after
December 31, 2000, at the option of the holder into shares of our
common stock, at the initial conversion ratio of shares of
common stock for each convertible preferred security (equivalent
to an initial conversion price of $ per share of common stock),
subject to adjustment under certain circumstances. The last
reported sales price of our common stock on the Nasdaq National
Market on , 2000, was $ . If you want to convert a
convertible preferred security, the conversion agent will
exchange your convertible preferred security for the appropriate
principal amount of convertible debentures held by the trust and
immediately convert the convertible debentures into shares of our
common stock. You will receive cash in lieu of fractional shares.
However, you will not receive cash or additional shares of our
common stock to compensate you for any accrued but unpaid
distributions on the convertible preferred security through the
time of conversion. These accrued amounts will be forfeited.
Risk factors................................... Before purchasing the convertible preferred securities being
offered, you should carefully consider the "Risk Factors"
beginning on page 11.
</TABLE>
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<PAGE> 10
[SUMMARY OF RECENT DEVELOPMENTS OF CERTAIN FINANCIAL INFORMATION FOR PERIOD
ENDED SEPTEMBER 30, 2000 TO BE INSERTED HERE]
9
<PAGE> 11
[SUMMARY OF RECENT DEVELOPMENTS OF CERTAIN FINANCIAL INFORMATION FOR PERIOD
ENDED SEPTEMBER 30, 2000 TO BE INSERTED HERE]
10
<PAGE> 12
RISK FACTORS
An investment in the convertible preferred securities involves a number
of risks. We urge you to read all of the information contained in this
prospectus. In addition, we urge you to consider carefully the following factors
in evaluating an investment in Southside and the trust before you purchase any
of the convertible preferred securities offered by this prospectus.
Because the trust will rely on the payments it receives on the
convertible debentures it owns to fund all payments on the convertible preferred
securities, and because the trust may distribute the convertible debentures it
owns in exchange for the preferred securities that it issues, you are making an
investment decision that relates to the convertible debentures being issued by
us as well as the convertible preferred securities. You should carefully review
the information in this prospectus about the convertible preferred securities,
the convertible debentures and the guarantee.
Because the convertible preferred securities are convertible into our
common stock as described in this prospectus, prospective purchasers of
convertible preferred securities are also making an investment decision with
regard to our common stock. For this reason, you should also carefully review
the information in this prospectus and in the documents incorporated by
reference about our business and our common stock.
RISKS RELATED TO AN INVESTMENT IN SOUTHSIDE BANCSHARES, INC.
IF WE ARE UNABLE TO SUCCESSFULLY EXECUTE OUR LEVERAGE STRATEGY, OUR BUSINESS MAY
BE ADVERSELY AFFECTED.
We have implemented a leverage strategy in an attempt to enhance
profitability while maintaining acceptable levels of credit, interest rate and
liquidity risk. Our leverage strategy consists of borrowing long and short-term
funds from the Federal Home Loan Bank and investing the funds primarily in
mortgage-backed securities and, to a lesser extent, long-term municipal
securities. Our failure to successfully execute this strategy could adversely
affect our financial performance and our ability to make payments on our trust
preferred securities. Our leverage strategy and our ability to successfully
execute it is subject to the following risks:
o We fund our leverage strategy primarily through funds borrowed
from the Federal Home Loan Bank. These funds are more costly than
most funds received from deposits. We invest a substantial portion
of our assets in a securities portfolio consisting mainly of
mortgage-backed and municipal securities. The yield on our
securities portfolio is lower than interest earned on our loan
portfolio. As a result, these investments have reduced our
interest rate spreads and margins. Although we believe that the
impact of lower operating expenses and reduced credit and interest
rate risk associated with these investments have exceeded the
impact of spread and margin reductions, we cannot be sure whether
this situation will continue.
o Our implementation of our leverage strategy has increased our
asset growth. We experienced asset growth of 15.5% in 1999 and
53.4% in 1998 when compared to the respective prior years. Our
asset growth significantly outpaced our tier 1 capital growth of
13.8% and 40.6%, respectively, during the same periods. Our asset
growth has reduced our capital protection. At December 31, 1999,
our tier 1 leverage ratio was 6.20%, as compared to 6.76% at
December 31, 1998. The bank regulatory agencies analyze an
institution's tier 1 capital ratio as one indication of financial
strength. We cannot be sure whether we will be able to maintain
our tier 1 capital ratio at an acceptable level. Our tier 1
leverage ratio at June 30, 2000 was 6.42%. Our shareholders'
equity to total assets ratio at June 30, 2000 was 4.03%.
o The size and composition of our securities portfolio has increased
in connection with the implementation of our leverage strategy.
This size and complexity has substantially increased our
sensitivity to market risk and requires a significantly higher
degree of continuous management. Our failure to effectively manage
the size and composition of our securities portfolio could have an
adverse affect on our financial condition.
11
<PAGE> 13
WE MAY BE ADVERSELY AFFECTED BY INTEREST RATE CHANGES.
Our profitability is dependent to a large extent on the bank's net
interest income, which is the difference between its income on interest-earning
assets and its expense on interest-bearing liabilities. The bank, like most
financial institutions, is affected by changes in general interest rate levels,
other economic factors and by the policies of regulatory authorities, including
the monetary policies of the Federal Reserve, each which are beyond its control.
Interest rate risk arises in part from mismatches (i.e., the interest rate
sensitivity gap) between the dollar amount of repricing or maturing assets and
liabilities, and is measured in terms of the ratio of the interest rate
sensitivity gap to total assets. More assets than liabilities repricing or
maturing over a given time frame is considered asset-sensitive and is reflected
as a positive gap, and more liabilities than assets repricing or maturing over a
given time frame is considered liability-sensitive and is reflected as a
negative gap. A liability-sensitive position (i.e., a negative gap) will
generally enhance earnings in a falling interest rate environment and reduce
earnings in a rising interest rate environment, while an asset-sensitive
position (i.e., a positive gap) will generally enhance earnings in a rising
interest rate environment and will reduce earnings in a falling interest rate
environment. Fluctuations in interest rates are not predictable or controllable
and, therefore, there can be no assurances of our ability to continue to achieve
positive net interest income
Although we have taken measures intended to manage the risks of operating
in a changing interest rate environment, we may not be able to effectively
mitigate interest rate sensitivity. In addition, there are costs associated with
our risk management techniques, and these costs could be substantial.
Under our current interest rate risk position, our net interest income
could be negatively affected by an increase in interest rates.
WE MAY HAVE HIGHER LOAN LOSSES THAN WE HAVE ALLOWED FOR.
Industry experience shows that a portion of our loans will become
delinquent and a portion of the loans will require partial or entire charge-off.
Regardless of the underwriting criteria we utilize, losses may be experienced as
a result of various factors beyond our control, including, among other things,
changes in market conditions affecting the value of properties and problems
affecting the credit of the borrower. Our determination of the adequacy of
allowance for loan losses is based on various considerations, including an
analysis of the risk characteristics of various classifications of loans,
previous loan loss experience, specific loans which would have loan loss
potential, delinquency trends, estimated fair value of the underlying
collateral, current economic conditions, the views of our regulators (who have
the authority to require additional reserves), and geographic and industry loan
concentration.
Despite our methods and procedures, loan losses could exceed the
allowance set aside by us. Our average loan size continues to increase and
reliance on historic allowances for loan losses may not be adequate.
Some borrowers may not repay loans that we make to them. Like all
financial institutions, we maintain an allowance for loan and lease losses to
absorb the level of losses that we think is probable in the portfolios that we
own, but our allowance for loan and lease losses may not be sufficient to cover
the loan and lease losses that we may actually incur. While we maintain a
reserve at a level management believes is adequate, our charge-offs could exceed
these reserves. If we experience defaults in these loans to a greater extent
than we anticipated, these defaults could adversely affect our ability to pay
interest on the convertible debentures. In this event, the trust may not be able
to make distributions on the convertible preferred securities.
THE LOSS OF OUR KEY PERSONNEL COULD ADVERSELY AFFECT OUR OPERATIONS.
Our success and the success of the bank depends on the services of our
employees. In particular, our growth and development and the management of our
leverage strategy depends primarily on the continuing efforts of B. G. Hartley,
Sam Dawson, Jeryl Story, and Lee Gibson. Our business may be adversely affected
if the services of these officers or any of our other key personnel become
unavailable to us. While we have obtained a key person life insurance policy on
the lives of the above-mentioned officers, amounts payable under these policies
may not be sufficient to offset the loss of their services.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY THE HIGHLY REGULATED ENVIRONMENT IN
WHICH WE OPERATE.
We are subject to extensive federal and state regulation and supervision.
Recently enacted, proposed and future legislation and regulations have had, will
continue to have or may have significant impact on our business.
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<PAGE> 14
Changes in regulation or government policies could increase our costs of doing
business and could adversely affect our operations. The bank is a member of the
Federal Home Loan Bank of Dallas. The bank is subject to certain limited
regulation by the Federal Reserve. As the holding company of the bank, we are
also subject to regulation and oversight by the Federal Reserve. This regulation
and supervision governs our activities and is intended primarily for the
protection of the Federal Deposit Insurance Corporation insurance funds and
depositors. Regulatory authorities have extensive discretion in connection with
their supervisory and enforcement activities and regulations have been
implemented which have increased capital requirements, increased insurance
premiums and resulted in increased administrative, professional and compensation
expenses. Any change in the regulatory structure or the applicable statutes or
regulations could have a material adverse impact on us and our operations.
Additional legislation and regulations may be enacted or adopted in the future
which could significantly affect the powers, authority and operations of our
competitors, which in turn could have a material adverse effect on our
operations. See Supervision and Regulation on page 58.
OUR FUTURE SUCCESS IS DEPENDENT ON OUR ABILITY TO COMPETE EFFECTIVELY IN A
HIGHLY COMPETITIVE INDUSTRY.
The banking business in our trade area, which includes Smith and Gregg
Counties and surrounding areas in East Texas, has become increasingly
competitive over the past several years, and the level of competition facing us
may increase further. We experience competition in both lending and attracting
funds from other banks and nonbank financial institutions located within East
Texas. Nonbank competitors for deposits and deposit-type accounts include
savings associations, credit unions, securities firms, money market funds, life
insurance companies and the mutual funds industry. For loans, we encounter
competition from other banks, savings associations, finance companies, mortgage
bankers and brokers, insurance companies, small loan and credit card companies,
credit unions, pension trusts and securities firms.
Recent legislation, court decisions and administrative actions have
expanded the areas of business activities in which the bank and nonbank
financial institutions can participate. To the extent that these activities are
engaged in by others, we expect the level of competition to increase. Some
competitors are not subject to the same degree of regulation and supervision as
we are.
Some of the banks and other financial institutions with which we compete
have capital resources and legal loan limits substantially in excess of those
available to us. These institutions can perform certain functions for their
customers which we presently do not offer directly. Although we may offer these
services through correspondent banks, our inability to provide such services
directly may be a competitive disadvantage.
OUR OPERATIONS ARE CONCENTRATED IN SMITH AND GREGG COUNTIES AND SURROUNDING
COUNTIES OF EAST TEXAS.
Our operations are conducted primarily in Smith and Gregg Counties and
surrounding counties in East Texas. Substantially all of our real estate loans
are collateralized by properties located primarily in East Texas, and
substantially all of our loans are made to borrowers who live in and conduct
business in East Texas. A weakening of the East Texas real estate market or the
local or national economy could result in an increase in the number of borrowers
who default on their loans and a reduction in the value of the collateral
securing the loans, which in turn could have a material adverse effect on us and
our operations.
THE OPENING OF BRANCH FACILITIES AND OTHER FACILITIES MAY NOT BE PROFITABLE.
We have recently opened several branch facilities and expect to further
expand our branch network by opening additional branch facilities in the next
two years. It may be difficult to adequately and profitably manage our growth
through the establishment of new branches or ATMs. We may not be able to
correctly identify profitable or growing markets. The costs to start up new
branch facilities, and the additional costs to operate these facilities, may
increase our noninterest expense and decrease earnings in the short term. This
growth may also impact the bank's ability to pay dividends and our ability to
pay interest on the convertible debentures. In this event, the trust may not be
able to make distributions on the convertible preferred securities.
RISKS RELATED TO AN INVESTMENT IN THE CONVERTIBLE PREFERRED SECURITIES
IF WE DO NOT MAKE INTEREST PAYMENTS UNDER THE CONVERTIBLE DEBENTURES, THE TRUST
WILL BE UNABLE TO PAY DISTRIBUTIONS AND LIQUIDATION AMOUNTS. THE GUARANTEE WOULD
NOT APPLY BECAUSE THE GUARANTEE COVERS PAYMENTS ONLY IF THE TRUST HAS FUNDS
AVAILABLE.
The trust will depend solely on our payments on the convertible
debentures to pay amounts due to you on the convertible
13
<PAGE> 15
debentures, the trust will not have sufficient funds to pay distributions or the
liquidation amount on the convertible preferred securities. In that case, you
will not be able to rely on the guarantee for payment of these amounts because
the guarantee only applies if the trust has sufficient funds to make
distributions or to pay the liquidation amount. Instead, you or the property
trustee will have to institute a direct action against us to enforce the
property trustee's rights under the indenture relating to the convertible
debentures.
TO THE EXTENT WE MUST RELY ON DIVIDENDS FROM OUR SUBSIDIARIES TO MAKE INTEREST
PAYMENTS ON THE CONVERTIBLE DEBENTURES TO THE TRUST, OUR AVAILABLE CASH FLOW MAY
BE RESTRICTED.
We are a holding company and substantially all of our assets are held by
our subsidiaries. Our ability to make payments on the convertible debentures
when due will depend primarily on available cash resources at the bank holding
company and dividends from our subsidiaries. Dividend payments or extensions of
credit from the bank are subject to regulatory limitations, generally based on
capital levels and current and retained earnings, imposed by the various
regulatory agencies with authority over our banking subsidiary. The ability of
our subsidiaries to pay dividends is also subject to their profitability,
financial condition, capital expenditures and other cash flow requirements. Our
subsidiaries may not be able to pay dividends to us in the future.
OUR ABILITY TO MAKE INTEREST PAYMENTS TO THE TRUST ON THE CONVERTIBLE DEBENTURES
MAY BE RESTRICTED.
Our obligations under the convertible debentures and the guarantee are
unsecured and will rank junior in priority of payment to our existing and future
senior and subordinated indebtedness, of which we had none at June 30, 2000. Our
obligations under the convertible debentures and the guarantee will rank equal
in priority to our subordinated debentures associated with the $20 million of
trust preferred securities that an affiliated trust of ours currently has
outstanding. The issuance of the convertible debentures and the convertible
preferred securities does not limit our ability or the ability of our
subsidiaries to incur additional indebtedness, guarantees or other liabilities.
Because we are a holding company, the creditors of our subsidiaries,
including depositors, also will have priority over you in any distribution of
our subsidiaries' assets in liquidation, reorganization or otherwise.
Accordingly, the convertible debentures and the guarantee will be effectively
subordinated to all existing and future liabilities of our subsidiaries, and you
should look only to our assets for payments on the convertible preferred
securities and the convertible debentures.
We may also be precluded from making interest payments on the
subordinated debentures by our regulators in order to address any perceived
deficiencies in liquidity or regulatory capital levels at the holding company
level. Such regulatory action would require us to obtain consent from our
regulators prior to paying dividends on our common stock or interest on the
subordinated debentures. In the event our regulators withheld their consent to
our payment of interest on the subordinated debentures, we would exercise our
right to defer interest payments on the subordinated debentures, and the trust
would not have funds available to make distributions on the convertible
preferred securities during such period. The commencement of a deferral period
would likely cause the market price of the convertible preferred securities to
decline. We cannot assure you that our subsidiaries will be able to pay
dividends in the future or that our regulators will not attempt to preclude us
from making interest payments on the convertible subordinated debentures.
WE HAVE THE OPTION TO DEFER INTEREST PAYMENTS ON THE CONVERTIBLE DEBENTURES FOR
SUBSTANTIAL PERIODS.
We may, at one or more times, defer interest payments on the convertible
debentures for up to 20 consecutive quarters. If we defer interest payments on
the convertible debentures, the trust will defer distributions on the
convertible preferred securities during any deferral period. During a deferral
period, you will be required to recognize as income for federal income tax
purposes the amount approximately equal to the interest that accrues on your
proportionate share of the convertible debentures, held by the trust in the tax
year in which that interest accrues, even though you will not receive these
amounts until a later date.
You will also not receive the cash related to any accrued and unpaid
interest from the trust if you sell the convertible preferred securities before
the end of any deferral period. During a deferral period, accrued but unpaid
distributions will increase your tax basis in the convertible preferred
securities. If you sell the convertible preferred securities during a deferral
period, your increased tax basis will decrease the amount of any capital gain or
increase the amount of any capital loss that you may have otherwise realized on
the sale. A capital loss, except in certain limited circumstances, cannot be
applied to offset ordinary income. As a result, deferral of distributions could
result
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<PAGE> 16
in ordinary income, and a related tax liability for the holder, and a capital
loss that may only be used to offset a capital gain.
We do not currently intend to exercise our rights to defer interest
payments on the convertible debentures. However, if we do defer interest
payments, the market price of the convertible preferred securities would likely
be adversely affected. The convertible preferred securities may trade at a price
that does not fully reflect the value of accrued but unpaid interest on the
convertible debentures. If you sell the convertible preferred securities during
a deferral period, you may not receive the same return on investment as someone
who continues to hold the convertible preferred securities. Because of our right
to defer interest payments, the market price of the convertible preferred
securities may be more volatile than the market prices of other securities
without the deferral feature.
WE HAVE MADE ONLY LIMITED COVENANTS IN THE INDENTURE AND THE TRUST AGREEMENT.
The indenture governing the convertible debentures and the trust
agreement governing the trust do not require us to maintain any financial ratios
or specified levels of net worth, revenues, income, cash flow or liquidity. The
instruments do not protect holders of the convertible debentures or the
convertible preferred securities in the event we experience significant adverse
changes in our financial condition or results of operations. In addition,
neither the indenture nor the trust agreement limit our ability or the ability
of any subsidiary to incur additional indebtedness. Therefore, you should not
consider the provisions of these governing instruments as a significant factor
in evaluating whether we will be able to comply with our obligations under the
convertible debentures or the guarantee.
WE MAY REDEEM THE CONVERTIBLE DEBENTURES EARLIER THAN DECEMBER 31, 2005 IN
CERTAIN CIRCUMSTANCES.
As long as the fair market value of our common stock has been at least
125% of the conversion price of the convertible preferred securities for a
period of 20 consecutive trading days ending within five business days of the
date of notice of redemption, we have the option to redeem any or all of the
outstanding convertible debentures prior to maturity in the following
circumstances:
o on or after December 31, 2003 but before December 31, 2004, upon
payment of a redemption premium equal to % of the principal
amount to be redeemed, plus any accrued and unpaid interest on the
convertible debentures to the date of redemption; and
o on or after December 31, 2004 but before December 31, 2005, upon
payment of a redemption premium equal to % of the principal
amount to be redeemed, plus any accrued and unpaid interest on the
convertible debentures to the date of redemption.
WE MAY REDEEM THE CONVERTIBLE DEBENTURES BEFORE DECEMBER 31, 2030.
Under the following circumstances, we may redeem the convertible
debentures before their stated maturity without payment of premium:
o We may redeem the convertible debentures, in whole or in part, at
any time on or after December 31, 2005.
o We may redeem the convertible debentures in whole, but not in
part, within 180 days after certain occurrences at any time during
the life of the trust. These occurrences may include adverse tax,
investment company or bank regulatory developments.
You should assume that an early redemption may be attractive to us if we
are able to obtain capital at a lower cost than we must pay on the convertible
debentures or if it is otherwise in our interest to redeem the convertible
debentures. If the convertible debentures are redeemed, the trust must redeem
convertible preferred securities, having an aggregate liquidation amount equal
to the aggregate principal amount of convertible debentures redeemed, and you
may be required to reinvest your principal at a time when you may not be able to
earn a return that is as high as you were earning on the convertible preferred
securities.
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<PAGE> 17
WE CAN DISTRIBUTE THE CONVERTIBLE DEBENTURES TO YOU, WHICH MAY HAVE ADVERSE TAX
CONSEQUENCES FOR YOU; THIS RIGHT COULD ALSO ADVERSELY AFFECT THE MARKET PRICE OF
THE CONVERTIBLE PREFERRED SECURITIES.
The trust may be dissolved at any time before maturity of the convertible
debentures. If this happens, the trustees may distribute the convertible
debentures to you under the terms of the trust agreement.
We cannot predict the market prices for the convertible debentures that
may be distributed in exchange for convertible preferred securities upon
liquidation of the trust. The convertible preferred securities or the
convertible debentures that you may receive if the trust is liquidated, may
trade at a discount to the price that you paid to purchase the convertible
preferred securities. Because you may receive convertible debentures, your
investment decision with regard to the convertible preferred securities will
also be an investment decision with regard to the convertible debentures. You
should carefully review all of the information contained in this prospectus
regarding the convertible debentures.
Under current interpretations of United States federal income tax laws
supporting classification of the trust as a grantor trust for tax purposes, a
distribution of the convertible debentures to you upon the dissolution of the
trust would not be a taxable event to you. Nevertheless, if the trust is
classified for United States income tax purposes as an association taxable as a
corporation at the time it is dissolved, the distribution of the convertible
debentures would be a taxable event to you. In addition, if there is a change in
law, a distribution of the convertible debentures upon the dissolution of the
trust could be a taxable event to you.
THERE IS NO CURRENT PUBLIC MARKET FOR THE CONVERTIBLE PREFERRED SECURITIES AND
THEIR MARKET PRICES MAY BE SUBJECT TO SIGNIFICANT FLUCTUATIONS.
There is currently no public market for the convertible preferred
securities. Although we have applied to have the convertible preferred
securities included on the Nasdaq National Market, there is no guarantee that an
active or liquid trading market will develop for the convertible preferred
securities or that the quotation of the convertible preferred securities will
continue on the Nasdaq National Market. If an active trading market does not
develop, the market price and liquidity of the convertible preferred securities
will be adversely affected. Even if an active public market does develop, there
is no guarantee that the market price for the convertible preferred securities
will equal or exceed the price you pay for the convertible preferred securities.
Future trading prices of the convertible preferred securities may be
subject to significant fluctuations in response to prevailing interest rates,
our future operating results and financial condition, the market for similar
securities and general economic and market conditions. The initial public
offering price of the convertible preferred securities has been set at the
applicable liquidation amount of the convertible preferred securities and may be
greater than the market price of the security following the offering.
The market price for the convertible preferred securities, and the
convertible debentures that you may receive in a distribution, is also likely to
decline during any period that we are deferring interest payments on the
convertible debentures.
YOU MUST RELY ON THE PROPERTY TRUSTEE TO ENFORCE YOUR RIGHTS IF THERE IS AN
EVENT OF DEFAULT UNDER THE INDENTURE.
You may not be able to directly enforce your rights against us under the
indenture if an event of default occurs. If an event of default under the
indenture occurs and is continuing, this event will also be an event of default
under the trust agreement. In that case, you must rely on the enforcement by the
property trustee of its rights as holder of the convertible debentures against
us. The holders of a majority in liquidation amount of the convertible preferred
securities will have the right to direct the property trustee to enforce its
rights. If the property trustee does not enforce its rights following an event
of default and a request by the record holders to do so, any record holder may,
to the extent permitted by applicable law, take action directly against us to
enforce the property trustee's rights. If an event of default occurs under the
trust agreement that is attributable to our failure to pay interest or principal
on the convertible debentures, or if we default under the guarantee, you may
proceed directly against us. You will not be able to exercise directly any other
remedies available to the holders of the convertible debentures, unless the
property trustee fails to do so.
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<PAGE> 18
AS A HOLDER OF CONVERTIBLE PREFERRED SECURITIES YOU HAVE LIMITED VOTING RIGHTS.
Holders of convertible preferred securities have limited voting rights.
Your voting rights pertain primarily to amendments to the trust agreement. In
general, only we can replace or remove any of the trustees. However, if an event
of default under the trust agreement occurs and is continuing, the holders of at
least a majority in aggregate liquidation amount of the convertible preferred
securities, as the case may be, may replace the property trustee and the
Delaware trustee.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in or incorporated by reference into this
prospectus constitute forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. We intend such forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and are including this statement for
purposes of invoking these safe harbor provisions. You can identify these
statements from our use of the words "estimate," "project," "believe," "intend,"
"anticipate," "expect," "target" and similar expressions. These forward-looking
statements may include, among other things:
o statements relating to projected growth; leverage strategy;
anticipated improvements in earnings, earnings per share, and
other financial performance measures; and management's long term
performance goals;
o statements relating to the anticipated effects on results of
operations or financial condition from expected developments or
events;
o statements relating to our business and growth strategies,
including potential acquisitions and branch openings; and
o any other statements which are not historical facts.
Forward-looking statements involve known and unknown risks, uncertainties
and other important factors that could cause our actual results, performance or
achievements, or industry results, to differ materially from our expectations of
future results, performance or achievements expressed or implied by these
forward-looking statements. In addition, our past results of operations do not
necessarily indicate our future results. We discuss these and other
uncertainties in the "Risk Factors" section of this prospectus on page 11.
USE OF PROCEEDS
The trust will invest all of the proceeds from the sale of the
convertible preferred securities in the convertible debentures. We anticipate
that the net proceeds to us from the sale of the convertible debentures will be
approximately $ million after deducting offering expenses, estimated to be
$ , and deducting underwriting commissions.
We intend to use the net proceeds from the sale of the convertible
debentures for general corporate purposes, including, but not limited to,
capital contributions to the bank to support growth and for working capital, the
possible repurchase of shares of our common stock and acquisitions by either us
or the bank (although no agreements or understandings presently exist with
respect to an acquisition).
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Our common stock is quoted in the Nasdaq National Stock Market's National
Market under the symbol "SBSI." The following table sets forth the high and low
sales prices and cash dividends declared per share of common stock for the
periods indicated. All information has been adjusted for a two for one stock
split and stock dividends effected during the periods presented.
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<PAGE> 19
<TABLE>
<CAPTION>
Price Range
---------------------------
Dividends
High Low Declared
------------ ------------ ------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
First quarter ............... $ 9.75 $ 8.05 $ .05
Second quarter .............. 13.04 9.92 .05
Third quarter ............... 12.25 8.09 .05
Fourth quarter .............. 9.52 8.09 .05
YEAR ENDED DECEMBER 31, 1999
First quarter ............... $ 9.58 $ 8.16 $ .05
Second quarter .............. 8.81 8.09 .05
Third quarter ............... 11.25 8.39 .05
Fourth quarter .............. 12.06 8.75 .05
YEAR ENDED DECEMBER 31, 2000
First quarter ............... $ 9.44 $ 8.25 $ .05
Second quarter .............. 10.00 8.25 .05
Third quarter ............... 8.88 7.50 .05
Fourth quarter (through
October 12, 2000).......... 8.81 8.50
</TABLE>
As of September 29, 2000, there were approximately 1,100 holders of
record of our common stock. The last reported sales price of the common stock on
Nasdaq on October 12, 2000, was $8.50.
Holders of our common stock will be entitled to receive any cash
dividends the board of directors may declare. The declaration and payment of
future dividends to holders of our common stock will be at the discretion of our
board of directors and will depend upon our earnings and financial condition,
regulatory conditions and considerations and such other factors as our board of
directors may deem relevant.
As a holding company, Southside is ultimately dependent upon its
subsidiaries to provide funding for its operating expenses, debt service and
dividends. Various banking laws applicable to our banking subsidiary limit the
payment of dividends, management fees and other distributions by the bank to us
and may therefore limit our ability to make dividend payments.
MARKET FOR THE CONVERTIBLE PREFERRED SECURITIES
We have applied to have the convertible preferred securities designated
for inclusion in the Nasdaq National Market under the symbol "SBSIO." Although
the representative of the underwriters has informed us that it intends to make a
market in the convertible preferred securities, the representative is not
obligated to do so. If the underwriters begin to make a market in the
convertible preferred securities, any such market making may be discontinued at
any time. Thus, there is no assurance that an active and liquid trading market
will develop or, if developed, that such a market will be sustained. The
offering price and distribution rate have been determined by negotiations among
Southside and the underwriters, and the offering price of the convertible
preferred securities may not represent what the market price will be following
the offering.
ACCOUNTING TREATMENT
For financial reporting purposes, the trust will be treated as our
subsidiary, and the trust's financial statements will be included in our
consolidated financial statements. For financial reporting purposes, we will
record distributions payable on the convertible preferred securities as an
interest expense in our consolidated statements of operations. In our future
financial reports, we will:
o present the convertible preferred securities on our statements of
financial condition as a separate line item entitled "Guaranteed
Preferred Beneficial Interests in the Company's Convertible Junior
Subordinated Debentures;"
o include in a footnote to the financial statements disclosure that
the sole assets of the trust are the convertible debentures
specifying the principal amount, interest rate and maturity date
of convertible debentures held; and
o include, in a footnote to the financial statements, disclosure
that:
-- the trust is wholly owned,
-- the sole assets of the trust are the convertible
debentures, and
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<PAGE> 20
-- our obligations under the convertible debentures, the
indenture, the trust agreement and the guarantee, in total,
constitute a full and unconditional guarantee by us of the
trust's obligations under the convertible preferred
securities.
CAPITALIZATION
The following table sets forth (i) our consolidated capitalization at
June 30, 2000 and (ii) our consolidated capitalization giving effect to the
issuance of the convertible preferred securities hereby offered by the trust and
our receipt of the net proceeds from the corresponding sale of the convertible
subordinated debentures to the trust, as if the sale of the convertible
preferred securities occurred on June 30, 2000, and assuming the underwriters'
over-allotment option was not exercised. This data should be read in conjunction
with our consolidated financial statements and related notes.
<TABLE>
<CAPTION>
AT JUNE 30, 2000
----------------------------
HISTORICAL AS ADJUSTED
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt(1) ............................................... $ 192,244 $ 192,244
Guaranteed preferred beneficial interests in our junior
subordinated debentures .................................... $ 20,000 $ 20,000
Guaranteed preferred beneficial interests in our
subordinated convertible debentures ........................ $ -- $ 15,000
Shareholders' equity:
Common stock: ($1.25 par, 20,000,000 shares authorized,
7,824,034 shares issued and outstanding) ............... $ 9,780 $ 9,780
Paid-in capital ............................................ 27,640 27,640
Retained earnings .......................................... 18,767 18,767
Treasury stock (583,552 shares at cost) .................... (5,170) (5,170)
Accumulated other comprehensive loss ....................... (8,211) (8,211)
------------ ------------
Total shareholders' equity ............................. $ 42,806 $ 42,806
------------ ------------
Total capitalization ................................. $ 255,050 $ 270,050
============ ============
CAPITAL RATIOS(2):
Tier 1 leverage ratio(3) ............................... 6.42% 6.42%
Tier 1 risk-based capital ratio(4) ..................... 12.18% 12.18%
Total risk based capital ratio(4) ...................... 13.66% 16.39%
Ratio of equity to total assets ........................ 4.03% 3.97%
</TABLE>
----------
(1) Reflects Federal Home Loan Bank advances maturing more than one year from
June 30, 2000.
(2) The capital ratios, as adjusted, are computed including the total
estimated net proceeds from the sale of the preferred securities, in a
manner consistent with Federal Reserve regulations.
(3) The leverage ratio is Tier 1 capital divided by average quarterly assets,
after deducting intangible assets and net deferred tax assets in excess
of regulatory maximum limits.
(4) The convertible preferred securities have been structured to qualify as
Tier 1 capital. However, in calculating the amount of Tier 1 qualifying
capital, the convertible preferred securities, and our existing trust
preferred securities together with any outstanding cumulative preferred
stock of Southside that may be outstanding in the future, may only be
included up to the amount constituting 25% of Tier 1 core capital
elements (including the trust preferred securities). We will have $35
million of trust preferred securities and convertible preferred
securities, of which $17 million will initially be considered Tier 1
capital.
19
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below, insofar as it
relates to the five years ended December 31, 1999, are derived from our audited
consolidated financial statements that have been audited by
PricewaterhouseCoopers LLP. The selected consolidated financial data set forth
below at and for the six-month periods ended June 30, 2000 and 1999, are derived
from our unaudited consolidated financial statements. In our opinion, all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of our results as of and for the six-month periods indicated have
been included. This information is qualified by reference to our consolidated
financial statements included in this prospectus and this information should be
read in conjunction with our consolidated financial statements and related notes
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 22. Results for past periods are not necessarily indicative
of results that may be expected for future periods and results for the six-month
period ended June 30, 2000 are not necessarily indicative of results that may be
expected for any other interim period or the entire year ending December 31,
2000.
<TABLE>
<CAPTION>
AT OR FOR THE SIX MONTHS
ENDED JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------- ------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- -------- ---------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income ............................ $ 36,046 $ 28,246 $ 60,688 $ 43,677 $ 35,167 $ 31,772 $ 29,590
Total interest expense ........................... 21,092 17,026 36,016 24,747 16,205 14,397 12,837
---------- -------- ---------- -------- -------- -------- --------
Net interest income .............................. 14,954 11,220 24,672 18,930 18,962 17,375 16,753
Provision (credit) for loan losses ............... 783 653 1,456 1,215 1,005 500 (300)
---------- -------- ---------- -------- -------- -------- --------
Net interest income after provisions
for loan losses ................................ 14,171 10,567 23,216 17,715 17,957 16,875 17,053
---------- -------- ---------- -------- -------- -------- --------
Deposit services ................................. 4,006 3,151 6,780 5,353 4,001 2,821 2,752
Net gain (loss) on sales of securities
available for sale ............................. (459) 304 149 1,260 233 132 221
Other ............................................ 1,163 1,054 2,303 1,690 1,432 1,180 901
---------- -------- ---------- -------- -------- -------- --------
Total non-interest income ........................ 4,710 4,509 9,232 8,303 5,666 4,133 3,874
Total non-interest expense ....................... 12,530 10,943 22,524 19,443 16,928 15,366 14,682
---------- -------- ---------- -------- -------- -------- --------
Income before federal tax expense ................ 6,351 4,133 9,924 6,575 6,695 5,642 6,245
Income tax expense ............................... 1,440 764 2,000 1,224 1,689 1,437 1,713
---------- -------- ---------- -------- -------- -------- --------
Net income ....................................... $ 4,911 $ 3,369 $ 7,924 $ 5,351 $ 5,006 $ 4,205 $ 4,532
========== ======== ========== ======== ======== ======== ========
COMMON SHARE DATA:
Net income per common share:
Basic .......................................... $ 0.68 $ 0.46 $ 1.08 $ 0.72 $ 0.67 $ 0.56 $ 0.60
Diluted ........................................ 0.66 0.45 1.05 0.70 0.65 0.55 0.60
Book value per common share ...................... 5.91 5.48 5.17 6.29 5.34 4.83 4.42
Cash dividend declared per common share .......... 0.10 0.10 0.20 0.20 0.20 0.20 0.18
SELECTED FINANCIAL CONDITION DATA (AT END
OF PERIOD):
Total assets ..................................... $1,062,782 $959,048 $1,012,565 $876,329 $571,189 $482,755 $448,673
Loans, net of reserve for loan loss .............. 424,125 331,699 382,871 316,159 292,665 254,918 225,461
Mortgage-backed and related securities ........... 368,953 354,582 347,574 341,004 141,413 114,356 99,407
Investment securities ............................ 174,322 189,379 182,452 132,794 71,835 57,825 76,919
Deposits ......................................... 642,240 528,862 587,544 515,034 462,674 425,950 388,308
Long-term obligations ............................ 212,244 190,912 194,704 176,027 28,547 9,096 13,686
Shareholders' equity ............................. 42,806 40,054 37,672 46,413 39,946 36,484 33,352
SELECTED PERFORMANCE RATIOS:
Return on average assets ......................... 0.96% 0.74% 0.84% 0.78% 0.99% 0.92% 1.07%
Return on average shareholders' equity ........... 25.15 15.18 18.99 12.42 13.20 12.20 15.01
Net interest spread .............................. 2.70 2.20 2.30 2.46 3.44 3.50 3.70
Net interest margin (net interest and
dividend income to average interest earning
assets) ........................................ 3.40 2.90 3.01 3.26 4.34 4.38 4.53
Average interest earning assets to
average interest bearing liabilities ........... 116.34 117.23 117.40 120.37 125.35 125.67 124.79
Non-interest expense to average total assets ..... 2.45 2.42 2.38 2.83 3.35 3.37 3.48
Efficiency ratio (non-interest expense
to net Interest income and non-interest
income) ........................................ 62.16 70.81 66.73 74.86 69.39 71.88 71.95
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
AT OR FOR THE SIX MONTHS
ENDED JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------- ------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- -------- ---------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSET QUALITY RATIOS:
Non-accruing loans to total loans ................ 0.13% 0.12% 0.18% 0.14% 0.45% 0.59% 0.55%
Allowance for loan losses to non-accrual
Loans .......................................... 946.93 978.26 650.78 825.00 250.74 211.94 264.09
Allowance for loan losses to total loans ......... 1.18 1.21 1.18 1.11 1.14 1.26 1.45
Nonperforming assets to total assets ............. 0.18 0.21 0.18 0.23 0.54 0.61 0.61
Net charge-offs (recoveries) to average
loans .......................................... 0.13 0.10 0.13 0.34 0.32 0.23 (0.23)
CAPITAL RATIOS:
Shareholders' equity to total assets ............. 4.03 4.18 3.72 5.30 6.99 7.56 7.43
Average shareholders' equity to average
total assets ................................... 3.82 4.91 4.41 6.28 7.50 7.55 7.16
Total risk-based capital ratio ................... 13.66 14.01 13.96 15.25 12.89 13.74 13.79
Tier 1 risk-based capital ratio .................. 12.18 12.02 12.21 12.94 11.86 12.59 12.54
Tier 1 leverage ratio ............................ 6.42 6.09 6.20 6.76 7.25 7.63 7.52
RATIO OF EARNINGS TO FIXED CHARGES:
Excluding interest on deposits ................... 1.65 1.50 1.51 1.71 5.33 7.79 12.09
Including interest on deposits ................... 1.31 1.26 1.27 1.27 1.41 1.39 1.49
OTHER DATA AT END OF YEAR:
Number of branch offices ......................... 12 11 12 11 8 8 5
Number of deposit accounts ....................... 56,760 49,636 52,161 44,388 39,221 35,997 34,542
</TABLE>
----------
(1) The ratio of earnings to fixed charges excluding interest on deposits is
calculated by dividing income before taxes plus interest on borrowings
plus 33% of rental expense by interest expense on borrowings plus 33% of
rental expense.
(2) The ratio of earnings to fixed charges including interest on deposits is
calculated by dividing income before taxes plus total interest expense
plus 33% of rental expense by interest expense plus 33% of rental
expense.
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following presents management's discussion and analysis of our
financial condition and results of operations and should be read and reviewed in
conjunction with the financial statements and related notes included elsewhere
in this prospectus and in our latest annual report on Form 10-K. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ significantly from those anticipated in these
forward-looking statements as a result of various factors, including those
discussed in "Risk Factors" beginning on page 11 and "Special Note Regarding
Forward-Looking Statements" on page 17 in this prospectus. All share data has
been adjusted to give retroactive recognition to stock dividends.
GENERAL
Over the past five years, we have achieved significant growth in assets,
increased our deposit base, and increased earnings. For the five years ended
December 31, 1999:
o our loans, net of reserve for loan loss, grew at a 14.16% compound
annual rate;
o our net income grew at a 14.99% compound annual rate and our
earnings per share grew at a 15.02% compound annual rate;
o our annual return on average equity averaged 14.36%;
o our annual return on average assets averaged 0.92%;
o our net interest margin declined from 4.53% for the year ended
December 31, 1995 to 3.01% for the year ended December 31, 1999;
o our ratio of nonperforming assets to total assets declined from
0.61% to 0.18%; and
o our ratio of net charge-offs to average total loans averaged less
than 0.16%.
During the six months ended and as of June 30, 2000:
o our loans, net of reserve for loan losses, increased by $41.3
million, or 10.8%, from December 31, 1999;
o our earnings per share increased by 46.7%, as compared to the same
period during the prior year;
o our annualized return on average equity was 25.15%;
o our annualized return on average assets was 0.96%;
o our net interest margin increased to 3.40% for the six months
ended June 30, 2000 from 2.90% for the same period during 1999;
o our ratio of nonperforming assets to total assets was 0.18%; and
o our ratio of net charge-offs to average total loans was 0.14%.
A major contributor to our asset growth since 1995 has been strong growth
in all of our major loan categories. For the five year period ended December 31,
1999, commercial real estate loans increased by $43.1 million, one-to-four
family residential real estate loans increased $62.8 million, real estate
construction loans increased $13.9 million and commercial loans increased by
$35.5 million.
In May 1998, we implemented a leverage strategy designed to enhance our
profitability with acceptable levels of credit, interest rate and liquidity
risk. The leverage strategy consists of borrowing long and short-term funds from
the Federal Home Loan Bank and investing the funds in securities. Margin
compression resulted during the implementation phase of the leverage strategy.
While we experienced margin compression during 1998 and 1999, the leverage
strategy began to produce additional net income beginning during 1999. The net
interest margin reached a low of 2.88% during the first quarter ended March 31,
1999 and has begun to increase and for the six months ended June 30, 2000 our
net interest margin had increased to 3.40%.
In addition, growth of noninterest income to average assets from 0.92% in
1995 to 0.97% in 1999, has significantly contributed to our profitability over
this period. This increase is especially strong considering the leverage growth,
which did not produce any noninterest income.
22
<PAGE> 24
Our level of nonperforming assets reflects the bank's underwriting
policies and, combined with the growing economy, has resulted in low levels of
nonaccrual loans, and has reduced the costs of resolving nonperforming assets.
Over the five years ended December 31, 1999, nonaccruing loans to total loans
averaged 0.38%, net charge-offs to average total loans averaged 0.16%, and
nonperforming assets to total assets averaged 0.43%.
As of June 30, 2000, nonaccruing loans to total loans were 0.13%, net
charge-offs to average total loans were 0.14% and nonperforming assets to total
assets were 0.18%.
We fund our operations primarily through demand, savings and time
deposits and Federal Home Loan Bank borrowings.
LEVERAGE STRATEGY
In May 1998 we implemented a leverage strategy designed to enhance our
profitability with acceptable levels of credit, interest rate and liquidity
risk. The leverage strategy consists of borrowing long and short-term funds from
the Federal Home Loan Bank and investing the funds primarily in mortgage-backed
securities, and to a lesser extent, long-term municipal securities. Although
mortgage-backed securities often carry lower yields than traditional mortgage
loans and other types of loans we make, these securities generally increase the
overall quality of our assets by virtue of the securities' underlying insurance
or guarantees, are more liquid than individual loans and may be used to
collateralize our borrowings or other obligations. While our strategy of
investing a substantial portion of our assets in mortgage-backed and municipal
securities has resulted in lower interest rate spreads and margins, we believe
that the lower operating expenses and reduced credit and interest rate risk of
this strategy have enhanced our overall profitability.
While we may increase our leverage by approximately $20 to $30 million to
offset interest expense associated with this convertible preferred securities
offering, our balance sheet strategy going forward will be to gradually replace
a portion of our securities portfolio with higher yielding loans. On the
liability side, we intend to gradually replace a portion of the short-term
Federal Home Loan Bank borrowings with deposits. The intended net result is to
increase our net interest spread. Since completing the initial phase of our
leverage strategy during the second quarter of 1999, our net interest spread has
begun to increase. The leverage strategy is dynamic and requires ongoing
management. As interest rates, funding costs and security spreads change, our
determination of the proper securities to purchase and funding to obtain must be
re-evaluated.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Overview. Net income for the six months ended June 30, 2000 was $4.9
million as compared to $3.4 million for the same period in 1999, an increase of
$1.5 million or 45.8%. The increase in net income was primarily attributable to
an increase in net interest income due to a more favorable net interest spread
and the growth in earnings assets. Noninterest income, not including gains or
losses on sales of securities, also grew due to deposit services income. These
increases were partially offset by greater noninterest expense and losses on
sales of securities. Earnings per share of $0.66 represented an increase of
$0.21, or 46.7%, over the first six months of 1999.
Net Interest Income. Net interest income is the principal source of our
earnings stream and represents the difference or spread between interest and fee
income generated from interest earning assets and the interest expense paid on
deposits and borrowed funds. Fluctuations in interest rates as well as volume
and mix changes in interest earning assets and interest bearing liabilities
materially impact net interest income. Net interest income for the six months
ended June 30, 2000 was $15.0 million, an increase of $3.7 million or 33.3% when
compared to the same period in 1999. Average interest earning assets increased
$110.5 million or 12.9%, while the net interest spread increased from 2.21% at
June 30, 1999 to 2.68% at June 30, 2000. As interest rates increased during 1999
and 2000, our premium mortgage-backed securities increased in yield as
prepayment speeds decreased. This increase in yield, along with the increase in
average loans, combined to increase the net interest spread. Future increases in
the net interest spread will become more difficult due to competition and
long-term liabilities purchased at higher rates.
During the six months ended June 30, 2000, average loans, funded
primarily by the growth in average deposits and average Federal Home Loan Bank
advances, increased $80.6 million or 24.7%, compared to the same period in 1999.
The average yield on loans increased from 8.34% at June 30, 1999 to 8.40% at
June 30, 2000, reflective of an overall increase in rates.
23
<PAGE> 25
Average securities increased $28.3 million or 5.6% for the six months
ended June 30, 2000 when compared to the same period in 1999. This increase was
a direct result of our leverage strategy implemented in 1998. The overall yield
on average securities increased to 7.29% during the six months ended June 30,
2000 from 6.08% during the same period in 1999, due in part to decreased
prepayment speeds on mortgage-backed securities which led to decreased
amortization expense, combined with a restructuring of a portion of the
securities portfolio into higher yielding securities due to higher overall
interest rates.
Interest income from federal funds and other interest earning assets
increased $477,000 or 83.2% for the six months ended June 30, 2000 when compared
to 1999 as a result of the average balance increase of 7.1%. The average yield
increased from 5.27% in 1999 to 8.99% at June 30, 2000 due to higher rates and a
special dividend of $304,000 on the Federal Home Loan Bank stock we own.
Total interest expense increased $4.1 million or 23.9% to $21.1 million
during the six months ended June 30, 2000 as compared to $17.0 million during
the same period in 1999. The increase was attributable to an increase in average
interest bearing liabilities of $100.6 million or 13.8% and an increase in the
average yield on interest bearing liabilities from 4.71% at June 30, 1999 to
5.12% at June 30, 2000. Average interest bearing deposits increased $68.2
million or 17.4% while the average rate paid increased from 4.11% at June 30,
1999 to 4.54% at June 30, 2000.
During the second quarter ended June 30, 2000, we issued $54.4 million of
long-term brokered CD's with one-year call options and additional call options
every six months thereafter, until the CD matures. The average yield on these
CD's was 8.19% with an average life of 10.8 years. Obtaining this long-term
funding should enable the bank to take advantage of the higher interest rate
environment, primarily through the purchase of securities without incurring
significant additional interest rate risk. The options associated with these
CD's may provide the bank with valuable balance sheet opportunities in the
future. The higher cost associated with these callable CD's will have a negative
impact on our net interest spread during the next several quarters.
During the second quarter, the bank introduced a new Platinum Money
Market Deposit Account. This account pays a higher rate on larger deposit
balances than the bank's other money market account. As deposits shift to the
new money market account, the higher interest cost associated with this change
will have a negative impact on our net interest margin. The bank hopes to
attract new deposits due to the competitive rate of this account. While the
interest rate on this account is higher than our previous money market account,
the interest rate is lower than the rate for short-term borrowings from the
Federal Home Loan Bank. As new deposits are obtained, the higher cost Federal
Home Loan Bank funds may be replaced which should offset some of the negative
impact on our net interest margin.
Average short-term interest bearing liabilities, consisting primarily of
Federal Home Loan Bank advances and federal funds purchased, were $169.2
million, an increase of $25.4 million or 17.7% for the six months ended June 30,
2000 when compared to the same period in 1999. This increase reflects a
strategically planned increase in balance sheet leverage to achieve certain
Asset/Liability Management Committee objectives. The primary objective is to
enhance profitability while maintaining acceptable levels of capital, credit,
interest rate and liquidity risk. Average long-term interest bearing liabilities
consisting of Federal Home Loan Bank advances increased $6.9 million or 4.0%
during the six months ended June 30, 2000 as compared to $172.2 million at June
30, 1999. The advances were obtained from the Federal Home Loan Bank as part of
our balance sheet leverage strategy and partially to fund long-term loans.
Federal Home Loan Bank advances are collateralized by Federal Home Loan Bank
stock, securities and nonspecified real estate loans. We plan to gradually
replace short-term Federal Home Loan Bank advances with deposit growth and
long-term Federal Home Loan Bank advances. We expect that loan growth should
gradually replace a portion of the securities portfolio.
Average long term junior subordinated debentures remained the same at $20
million from June 30, 1999 to June 30, 2000.
Provision for Loan Losses. The provision for loan losses for the period
ended June 30, 2000 was $783,000 compared to $653,000 for June 30, 1999. For the
period ended June 30, 2000, the bank had net charge-offs of loans of $274,000,
an increase of 64.1% compared to June 30, 1999. For the period ended June 30,
1999, net charge-offs on loans were $167,000. The increase in net charge-offs
for the period ended June 30, 2000 occurred primarily as a
24
<PAGE> 26
result of the increase in the average loan portfolio. At June 30, 2000, our
review of the loan portfolio indicates that a loan loss reserve of $5.1 million
is adequate.
Noninterest Income. Noninterest income consists of revenues generated
from a broad range of financial services and activities including fee based
services. The following table sets forth the accounts from which noninterest
income was derived, gives totals for these accounts for the six months ended
June 30, 2000 and the comparable period ended June 30, 1999 and indicates the
percentage changes:
NONINTEREST INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
PERCENT
2000 1999 CHANGE
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Deposit Services ....................... $ 4,006 $ 3,151 27.1%
(Loss) Gain on Sales of Securities
Available for Sale .................. (459) 304 (251.0)
Trust Income ........................... 261 223 17.0
Other .................................. 902 831 8.5
-------- --------
Total Noninterest Income ............ $ 4,710 $ 4,509 4.5%
======== ========
</TABLE>
Noninterest income was $4.7 million for the six months ended June 30,
2000 compared to $4.5 million for the same period in 1999. Deposit services
income increased $855,000 or 27.1% for the six months ended June 30, 2000
compared to the same period in 1999. Deposit services income increased primarily
as a direct result of our overdraft privilege program implemented during 1997
and also due to increased numbers of deposit accounts and increased deposit
activity from June 30, 1999 to June 30, 2000. Trust income increased $38,000 or
17% for the six months ended June 30, 2000. Other noninterest income increased
$71,000 or 8.5% for the six months ended June 30, 2000 primarily as a result of
increases in other fee income. During the six months ended June 30, 2000, we had
losses on the sale of securities of $459,000 compared to gains on the sales of
securities of $304,000 for the same period in 1999. During the six months ended
June 30, 2000, the bank sold available for sale securities to reduce duration
and restructure a portion of the available for sale securities portfolio. The
resulting securities portfolio may have less interest rate risk in a rising
interest rate environment and may provide a higher average securities portfolio
yield.
Noninterest Expense. The following table sets forth the accounts from
which noninterest expense was derived, gives totals for these accounts for the
six months ended June 30, 2000 and the comparable period ended June 30, 1999 and
indicates the percentage changes:
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
PERCENT
2000 1999 CHANGE
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Salaries and Employee Benefits .............. $ 7,623 $ 6,549 16.4%
Net Occupancy Expense ....................... 1,557 1,360 14.5
Equipment Expense ........................... 311 219 42.0
Advertising, Travel and Entertainment ....... 781 634 23.2
Supplies .................................... 281 246 14.2
Postage ..................................... 201 191 5.2
Other ....................................... 1,776 1,744 1.8
---------- ----------
Total Noninterest Expense ................ $ 12,530 $ 10,943 14.5%
========== ==========
</TABLE>
Noninterest expense was $12.5 million for the six months ended June 30,
2000, compared to $10.9 million for the same period of 1999, representing an
increase of $1.6 million or 14.5%.
25
<PAGE> 27
Salaries and employee benefits increased $1.1 million or 16.4% during the
six months ended June 30, 2000 when compared to the same period in 1999. Direct
salary expense and payroll taxes increased $620,000 or 10.9% as a result of
personnel additions for the six months ended June 30, 2000 when compared to the
same period in 1999. Branch expansion combined with normal payroll increases
accounted for these increases and additions. Retirement expense increased
$48,000 or 15.0% for the six months ended June 30, 2000 when compared to the
same period in 1999. Health insurance expense increased $406,000 or 72.6% for
the six months ended June 30, 2000 when compared to the same period in 1999.
Net occupancy expense increased $197,000 or 14.5% for the six months
ended June 30, 2000 compared to the same period in 1999, largely due to higher
real estate taxes and depreciation expense.
Equipment expense increased $92,000 or 42.0% for the six months ended
June 30, 2000 compared to the same period in 1999 due to additional locations.
Advertising, travel and entertainment expense increased $147,000 or 23.2%
for the six months ended June 30, 2000 compared to the same period in 1999 due
to an increased advertising budget and additional expenses associated with
additional locations and growth in assets.
Income Taxes. Income tax expense was $1.4 million for the six months
ended June 30, 2000 and represented a $676,000 or 88.5% increase from the six
months ended June 30, 1999. The effective tax rate as a percentage of pre-tax
income was 22.7% for the six months ended June 30, 2000 as compared to 18.5% for
the six months ended June 30, 1999. The increase in the effective tax rate and
income tax expense for the six months ended June 30, 2000 was primarily a result
of higher taxable income.
Composition of Loans. Total average loans increased $80.6 million or
24.7% for the six months ended June 30, 2000 when compared to June 30, 1999. The
majority of the increase was in real estate loans. The increase in real estate
loans is due to a stronger real estate market and a strong commitment in
residential mortgage lending.
Total nonperforming assets at June 30, 2000 were $1.9 million, up $76,000
or 4.1 % from $1.8 million at December 31, 1999. Loans 90 days past due or more
increased $324,000 or 95.6% to $663,000. Of this total, 31% were 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 collateralized by other types of properties. Ten percent are multifamily
real estate properties, 21% are commercial real estate properties, 29% are
commercial loans and 9% are loans to individuals.
From December 31, 1999 to June 30, 2000, restructured loans increased
$33,000 or 7.4% to $481,000, nonaccrual loans decreased $166,000 or 23.6% to
$537,000. Repossessed assets decreased $115,000 or 55.0% to $94,000 and other
real estate remained unchanged at $140,000.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Overview. Net income for the year ended December 31, 1999 was $7.9
million as compared to $5.3 million for the same period in 1998, an increase of
$2.6 million or 48.1%. The increase in net income was primarily attributable to
an increase in interest income which was partially offset by an increase in
noninterest expense and provision for loan losses. Earnings per share of $1.05
represented an increase of $0.35, or 50.0% over the year ended December 31,
1998.
Net Interest Income. For the year ended December 31, 1999, net interest
income increased $5.7 million or 30.3% compared to the same period in 1998.
In May 1998, we implemented a leverage strategy designed to enhance
profitability with acceptable levels of credit, interest rate and liquidity
risk. The leverage strategy consists of borrowing long and short-term funds from
the Federal Home Loan Bank and investing the funds in securities. Margin
compression resulted during the implementation phase of the leverage strategy.
While we experienced margin compression during 1998 and 1999, the leverage
strategy began to produce additional net income beginning during 1999. The net
interest margin reached a low of 2.88% during the first quarter ended March 31,
1999 and has begun to increase. For the six months ended June 30, 2000, it had
increased to 3.40%.
26
<PAGE> 28
Interest income for the year ended December 31, 1999 increased $17.0
million or 38.9% to $60.7 million compared to the same period in 1998. The
increased interest income in 1999 was attributable to the increase in average
interest earning assets during the year which was partially offset by a decrease
in the average interest rate earned.
Average interest earning assets, totaling $889.6 million at December 31,
1999, increased $255.7 million or 40.3% over December 31, 1998 primarily as a
result of increases in average investment and mortgage-backed securities, and to
a lesser extent, average loans. During the year ended December 31, 1999, the mix
of our interest earning assets reflected a decrease in loans compared to the
prior year end as loans averaged 38.4% of total average interest earning assets
compared to 48.0% during 1998, a direct result of our leverage strategy.
Securities averaged 60.7% of the total and other interest earning asset
categories averaged 0.9% for December 31, 1999. During 1998 the comparable mix
was 51.5% in securities and 0.5% in the other interest earning asset categories.
The overall yield on investment, mortgage-backed and marketable equity
securities increased 45 basis points to 6.32% during 1999 compared to the same
period in 1998. This change was a result of overall higher interest rates,
decreased prepayment speeds on premium mortgage-backed securities which led to
decreased amortization expense and an increase for the year ended December 31,
1999 in the average tax-free municipal securities portfolio.
The average yield on average interest earning assets decreased 10 basis
points during the year ended December 31, 1999 as compared to 1998 primarily as
a result of the decrease in the average yield on loans and the increase in the
overall mix of earning assets with lower yielding securities. The average yield
on loans for the year ended December 31, 1999 decreased to 8.28% from 8.56% for
the year ended December 31, 1998. This decrease was reflective of the repricing
characteristics of the loans and the decrease in lending rates during 1999 due
to competitive pressures, the changing mix of the loan portfolio and a lower
average prime rate in 1999 compared to 1998. The U.S. prime interest rate
decreased 75 basis points during the latter part of 1998 beginning September
1998. Prime increased 75 basis points during 1999, but did not begin increasing
until June 1999, at which time prime increased 25 basis points. The final 25
basis point increase did not occur until November 1999. As a result, the prime
rate, which is used as a basis to price numerous loans, was on average lower in
1999 than in 1998.
Interest income on loans increased $2.1 million in 1999 or 8.2% compared
to 1998 due to the increase in average loans during 1999 which more than offset
the decrease in average yield on loans during 1999.
Interest income on securities increased $14.6 million in 1999 or 84.0%
compared to 1998 due to the increase in the average securities and the increase
in the average yield of securities during 1999.
The increase in interest expense for the year ended December 31, 1999 of
$11.3 million or 45.5% was attributable to an increase in average interest
bearing liabilities of $231.1 million or 43.9% along with the increase in the
average rate paid on interest bearing liabilities of five basis points. The
average rate paid increased due to an average increase in the ratio of the
higher interest bearing liabilities during 1999. Average time deposits increased
$25.7 million or 11.7% while the average rate paid decreased 23 basis points
along with an increase in average interest bearing demand deposits of $10.1
million or 8.1% and an increase in average savings deposits of $2.0 million or
11.5%. Average noninterest bearing demand deposits increased $31.7 million or
30.0% during 1999. The latter three categories, which are considered the lowest
cost deposits, comprised 54.3% of total average deposits during the year ended
December 31, 1999 compared to 53.0% during 1998 and 52.4% during 1997. The
increase in average total deposits is reflective of overall bank growth and
branch expansion and was the primary source of funding the increase in average
loans.
DEPOSIT AVERAGES BY CATEGORY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
------------------ ------------------ ------------------
AVG. AVG. AVG. AVG. AVG. AVG.
BALANCE RATE BALANCE RATE BALANCE RATE
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Noninterest Bearing Demand Deposits .... $137,499 N/A $105,779 N/A $ 94,005 N/A
Interest Bearing Demand Deposits ....... 135,122 2.72% 125,004 2.73% 117,496 2.78%
Savings Deposits ....................... 19,272 2.56 17,280 2.70 16,173 2.76
Time Deposits .......................... 246,110 5.03 220,421 5.26 206,873 5.32
-------- -------- --------
Total Deposits ...................... $538,003 3.08% $468,484 3.31% $434,547 3.39%
======== ======== ========
</TABLE>
27
<PAGE> 29
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999
------------------ ------------------
AVG. AVG. AVG. AVG.
BALANCE RATE BALANCE RATE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Noninterest Bearing Demand Deposits .... $148,848 N/A $127,886 N/A
Interest Bearing Demand Deposits ....... 146,391 2.85% 131,343 2.66%
Savings Deposits ....................... 21,715 2.57 18,871 2.56
Time Deposits .......................... 292,638 5.54 242,368 5.01
-------- --------
Total Deposits ...................... $609,592 3.43% $520,468 3.10%
======== ========
</TABLE>
Average long-term and short-term interest bearing liabilities other than
deposits increased $185.7 million or 122.5%, a direct result of our leverage
strategy. This increase contributed to the higher interest expense in 1999, as
well as providing the primary source of funding for the increase in average
investment, mortgage-backed and marketable equity securities.
Average long-term junior subordinated debentures increased $7.6 million
or 61.5%, a result of the sale of 2,000,000 preferred securities on May 18, 1998
at a liquidation amount of $10 per preferred security for an aggregate amount of
$20 million. The debentures have a distribution rate of 8.50% per annum payable
at the end of each calendar quarter. This increase in average long-term junior
subordinated debentures also contributed to the higher average rate paid in 1999
when compared to 1998.
Provision for Loan Losses. The provision for loan losses for the year
ended December 31, 1999 was $1.5 million compared to $1.2 million for the year
ended December 31, 1998. For the year ended December 31, 1999, the bank had net
charge-offs of loans of $445,000, a decrease of 56.4% compared to December 31,
1998. For the year ended December 31, 1998, net charge-offs on loans were $1.0
million. The decrease in net charge-offs for 1999 is reflective of the overall
economy in our primary market area. Net charge-offs for real estate loans,
commercial loans and loans to individuals all decreased. As of December 31,
1999, our review of the loan portfolio indicated that a loan loss reserve of
$4.6 million was adequate.
Noninterest Income. The following table sets forth the accounts from
which noninterest income was derived, gives totals for these accounts for the
year ended December 31, 1999 and the comparable year ended December 31, 1998 and
indicates the percentage changes:
NONINTEREST INCOME
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
PERCENT
1999 1998 CHANGE
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Deposit Services ..................... $ 6,780 $ 5,353 26.7%
Gain on Sales of Securities Available
For Sale .......................... 149 1,260 (88.2)
Trust Income ......................... 631 528 19.5
Other ................................ 1,672 1,162 43.9
---------- ----------
Total Noninterest Income .......... $ 9,232 $ 8,303 11.2%
========== ==========
</TABLE>
Total noninterest income for the year ended December 31, 1999 increased
11.2% or $929,000 compared to 1998. Securities gains decreased $1.1 million or
88.2% from 1998. Of the $149,000 in net securities gains from the available for
sale portfolio in 1999, there were $856,000 in realized gains and $707,000 in
realized losses. We sold securities out of the available for sale securities
portfolio to accomplish Asset/Liability Management Committee objectives of
obtaining an acceptable total rate of return on a risk adjusted basis on the
securities portfolio. 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 increase in deposit services income of $1.4 million or 26.7% was
a result of the
28
<PAGE> 30
introduction of a new overdraft privilege program in June 1997 and a new free
checking account program introduced during the first quarter of 1999, which
increased overdraft fees, increased numbers of deposit accounts and increased
deposit activity. Trust income increased $103,000 or 19.5% due to growth in the
trust department. Other noninterest income increased $510,000 or 43.9% primarily
as a result of increases in mortgage servicing release fees income of $289,000
and an increase in income from Countywide of $112,000.
Noninterest Expense. The following table sets forth the accounts which
comprise noninterest expense, gives totals for these accounts for the year ended
December 31, 1999 and the comparable year ended December 31, 1998 and indicates
the percentage changes:
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
PERCENT
1999 1998 CHANGE
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Salaries and Employee Benefits .............. $ 13,427 $ 11,318 18.6%
Net Occupancy Expense ....................... 2,842 2,370 19.9
Equipment Expense ........................... 537 457 17.5
Advertising, Travel and Entertainment ....... 1,322 1,124 17.6
Supplies .................................... 494 461 7.2
Postage ..................................... 419 352 19.0
Other ....................................... 3,483 3,361 3.6
---------- ----------
Total Noninterest Expense ................ $ 22,524 $ 19,443 15.8%
========== ==========
</TABLE>
Noninterest expense for the year ended December 31, 1999 increased $3.1
million or 15.8% when compared to the year ended December 31, 1998. Salaries and
employee benefits increased $2.1 million or 18.6% due to several factors. Direct
salary expense and payroll taxes increased $1.6 million or 16.2% as a result of
personnel additions to staff the three new branches opened in the second half of
1998, overall bank growth and pay increases. Retirement expense increased
$281,000 or 41.5% for the year ended December 31, 1999 due to increasing numbers
of employees covered by the retirement plan, increased contributions to our
employee stock ownership plan and additional deferred compensation expense
incurred during 1999. Health insurance expense increased $247,000 or 27.6% for
the year ended December 31, 1999 due to increased health claims.
Net occupancy expense increased $472,000 or 19.9% for the year ended
December 31, 1999 compared to the same period in 1998, largely due to higher
real estate taxes, depreciation expense and associated operating costs as a
result of the three new branches opened in the second half of 1998.
Equipment expense increased $80,000 or 17.5% for the year ended December
31, 1999 when compared to 1998 due to increased equipment usage at the three new
branch locations opened in the second half of 1998 and increased equipment costs
associated with equipment maintenance.
Advertising, travel and entertainment expense increased $198,000 or 17.6%
for the year ended December 31, 1999 compared to the same period in 1998. The
increase occurred due to increases in direct advertising during 1999 as a result
of the opening of the three new branches in 1998 and new products introduced in
1999. Donations also increased during the year ended December 31, 1999 and are
included in this total.
Postage expense increased $67,000 or 19.0% for the year ended December
31, 1999 compared to the same period in 1998, largely due to the increased
numbers of deposit accounts and increased volume.
Other expense increased $122,000 or 3.6% during the year ended December
31, 1999 compared to 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,
amortization of costs associated with our junior subordinated debentures
increased.
Income Taxes. Income tax expense was $2.0 million for the year ended
December 31, 1999 and represented a $776,000 or 63.4% increase from the year
ended December 31, 1998. The effective tax rate as a percentage of
29
<PAGE> 31
pre-tax income was 20.2% in 1999 and 18.6% in 1998. The increase in the
effective tax rate and income tax expense for 1999 was primarily a result of
higher taxable income.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Overview. Net income for the year ended December 31, 1998 was $5.3
million as compared to $5.0 million for the same period in 1997, an increase of
$345,000 or 6.9%. The increase in net income was primarily attributable to an
increase in noninterest income which was partially offset by an increase in
noninterest expense and provision for loan losses. Earnings per share of $0.70
represented an increase of $0.05, or 7.7% over the year ended December 31, 1997.
Net Interest Income. Net interest income decreased $32,000 or 0.2% for
the year ended December 31, 1998 compared to the same period in 1997. Interest
income for the year ended December 31, 1998 increased $8.5 million or 24.2% to
$43.7 million compared to the same period in 1997. The increased interest income
in 1998 was attributable to the increase in average interest earning assets
during the year.
Average interest earning assets, totaling $634.0 million for the year
ended December 31, 1998, increased $174.1 million or 37.8% over the period ended
December 31, 1997 primarily as a result of increases in average investment and
mortgage-backed securities and, to a lesser extent, average loans. During the
year ended December 31, 1998 the mix of our interest earning assets reflected a
decrease in loans compared to the prior year end as loans averaged 48.0% of
total average interest earning assets compared to 59.7% during 1997. Securities
averaged 51.5% of the total and other interest earning asset categories averaged
0.5% for December 31, 1998. During 1997 the comparable mix was 39.7% in
securities and 0.6% in the other interest earning asset categories.
The average yield on average interest earning assets decreased 70 basis
points during the year ended December 31, 1998 as compared to 1997 primarily as
a result of the decrease in the average yield on securities. The overall yield
on investment and mortgage-backed securities decreased 79 basis points to 5.87%
during 1998 compared to the same period in 1997. This decrease was a result of
overall lower interest rates, increased prepayment speeds on premium
mortgage-backed securities which led to increased amortization expense and an
increase for the year ended December 31, 1998 in the average tax-free municipal
securities portfolio. The increase in interest income on loans of $2.2 million
or 9.2% was the result of the increase in average loans during 1998. Interest
income on securities increased $6.3 million in 1998 or 56.2% compared to 1997
primarily due to the increase in the average securities during 1998.
The increase in interest expense for the year ended December 31, 1998 of
$8.5 million or 52.7% was attributable to an increase in average interest
bearing liabilities of $159.8 million or 43.6% along with the increase in the
average rate paid on interest bearing liabilities of 28 basis points. The
average rate paid increased due to an average increase in the ratio of the
higher interest bearing liabilities during 1998. During 1998 average time
deposits increased $13.5 million or 6.5% while the average rate paid decreased
six basis points along with an increase in average interest bearing demand
deposits of $7.5 million or 6.4% and an increase in average savings deposits of
$1.1 million or 6.8%. Average noninterest bearing demand deposits increased
$11.8 million or 12.5% during 1998. The latter three categories, which are
considered the lowest cost deposits, comprised 53.0% of total average deposits
during the year ended December 31, 1998 compared to 52.4% during 1997. The
increase in average total deposits is reflective of overall bank growth and
branch expansion and was the primary source of funding the increase in average
loans. Average long-term and short-term interest bearing liabilities other than
deposits increased $137.6 million or 521.9% which contributed to the higher
interest expense in 1998.
Provision for Loan Losses. The provision for loan losses for the years
ended December 31, 1998 and 1997 was $1.2 million and $1.0 million,
respectively. For the year ended December 31, 1998, we had net charge-offs of
loans of $1.0 million, an increase of 15.5% compared to the year ended December
31, 1997. For the year ended December 31, 1997, net charge-offs on loans were
$884,000. The increase in net charge-offs for 1998 occurred primarily as a
result of the increase in loans over the past four years which grew $118.7
million, $73.3 million of which were real estate loans. An increase in personal
bankruptcies caused the charge-offs for loans to individuals to remain
consistent with the charge off level realized during the year ended December 31,
1997.
Noninterest Income. Total noninterest income for the year ended December
31, 1998 increased 46.5% or $2.6 million compared to 1997. Securities gains
increased $1.0 million or 440.8% from 1997. Of the $1.3 million in net
securities gains from the available for sale portfolio in 1998, there were $1.3
million in realized gains and
30
<PAGE> 32
$61,000 in realized losses. We sold securities out of the available for sale
portfolio to accomplish Asset/Liability Management Committee objectives of
obtaining an acceptable total rate of return on a risk adjusted basis on the
securities portfolio. The increase in deposit services income of $1.4 million or
33.8% was a result of the introduction of a new overdraft privilege program,
increased numbers of deposit accounts and increased deposit activity. Trust
income increased $131,000 or 33.0% due to the growth in the trust department.
Other noninterest income increased $127,000 or 12.3% primarily as a result of
increases in mortgage servicing release fees income.
NONINTEREST INCOME
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
PERCENT
1998 1997 CHANGE
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Deposit Services ............................ $ 5,353 $ 4,001 33.8%
Gain on Sales of Securities Available
For Sale ................................. 1,260 233 440.8%
Trust Income ................................ 528 397 33.0%
Other ....................................... 1,162 1,035 12.3%
---------- ----------
Total Noninterest Income ................. $ 8,303 $ 5,666 46.5%
========== ==========
</TABLE>
Noninterest Expense. Noninterest expense for the year ended December 31,
1998 increased $2.5 million or 14.9% when compared to the year ended December
31, 1997. Salaries and employee benefits increased $1.4 million or 14.5% due to
several factors. Direct salary expense and payroll taxes increased $1.3 million
as a result of personnel additions to staff three new branches opened in 1998,
overall bank growth and pay increases. Retirement expense decreased $155,000 or
29.5% for the year ended December 31, 1998.
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
PERCENT
1998 1997 CHANGE
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Salaries and Employee Benefits .............. $ 11,318 $ 9,889 14.5%
Net Occupancy Expense ....................... 2,370 2,089 13.5%
Equipment Expense ........................... 457 414 10.4%
Advertising, Travel and Entertainment ....... 1,124 1,006 11.7%
Supplies .................................... 461 440 4.8%
Postage ..................................... 352 331 6.3%
Other ....................................... 3,361 2,759 21.8%
---------- ----------
Total Noninterest Expense ................ $ 19,443 $ 16,928 14.9%
========== ==========
</TABLE>
Net occupancy expense increased $281,000 or 13.5% for the year ended
December 31, 1998 compared to the same period in 1997, largely due to higher
real estate taxes, depreciation expense and associated operating costs as a
result of three new branches opened in 1998.
Equipment expense increased $43,000 or 10.4% for the year ended December
31, 1998 when compared to 1997 due to increased equipment usage at three new
branch locations opened in 1998 and increased equipment costs associated with
equipment maintenance.
Advertising, travel and entertainment expense increased $118,000 or 11.7%
for the year ended December 31, 1998 compared to the same period in 1997. The
increase occurred due to increases in direct advertising during 1998 as a result
of the opening of three new branches in 1998 and new products introduced in
1998. Donations also increased during the year ended December 31, 1998 and are
included in this total.
31
<PAGE> 33
Other expense increased $602,000 or 21.8% during the year ended December
31, 1998 compared to 1997. The increase was due primarily to consulting fees
paid in relation to the introduction of the overdraft privilege product,
increased ATM fees and telephone expense due to added locations. In addition,
trust and legal fees increased due to bank asset and transaction growth.
Income Taxes. Income tax expense was $1.2 million for the year ended
December 31, 1998 and represented a $465,000 or 27.5% decrease from the year
ended December 31, 1997. The effective tax rate as a percentage of pre-tax
income was 18.6% in 1998 and 25.2% in 1997. The decrease in the effective tax
rate for 1998 was primarily a result of lower pre-tax income due to the increase
in interest income from tax-free municipal securities.
AVERAGE BALANCES AND YIELDS
The following table presents average balance sheet amounts and average
yields for the periods ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
AVERAGE BALANCES AND YIELDS
SIX MONTHS ENDED,
--------------------------------------------------------------------------------
JUNE 30, 2000 JUNE 30, 1999
---------------------------------------- ------------------------------------
AVG AVG. AVG. AVG.
BALANCE INTEREST YIELD BALANCE INTEREST YIELD
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST EARNING ASSETS:
Loans(1)(2) .............................. $ 407,097 $ 16,999 8.40% $ 326,510 $ 13,498 8.34%
Securities:
Inv. Sec. (Taxable)(4) ............... 86,047 2,986 6.98% 66,116 1,849 5.64%
Inv. Sec. (Tax-Exempt)(3)(4) .......... 88,243 3,539 8.07% 89,934 3,324 7.45%
Mortgage-backed Sec.(4) ............... 359,850 12,818 7.17% 349,583 10,061 5.80%
Marketable Equity Sec ................. 18,953 912 9.68% 15,990 420 5.30%
Interest Earning Deposits ................ 629 29 7.03% 2,938 84 5.77%
Federal Funds Sold ....................... 3,696 109 5.93% 2,989 69 4.66%
---------- ---------- ---------- ----------
Total Interest Earning Assets ............ 964,515 37,392 7.80% 854,060 29,305 6.92%
---------- ----------
NONINTEREST EARNING ASSETS:
Cash and Due From Banks .................. 31,846 27,940
Bank Premises and Equipment .............. 21,194 19,380
Other Assets ............................. 15,307 14,911
Less: Reserve for Loan Loss .......... (4,809) (3,808)
---------- ----------
Total Assets .......................... $1,028,053 $ 912,483
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST BEARING LIABILITIES:
Savings Deposits ........................ $ 21,715 $ 277 2.57% $ 18,871 $ 240 2.56%
Time Deposits ........................... 292,638 8,058 5.54% 242,368 6,018 5.01%
Interest Bearing
Demand Deposits ...................... 146,391 2,077 2.85% 131,343 1,734 2.66%
Short-term Interest
Bearing Liabilities .................. 169,215 4,987 5.93% 143,766 3,573 5.01%
Long-term Interest Bearing
Liabilities-Federal Home Loan
Bank ................................. 179,100 4,843 5.44% 172,157 4,611 5.40%
Long-term Junior
Subordinated Debenture ............... 20,000 850 8.55% 20,000 850 8.57%
---------- ---------- ---------- ----------
Total Interest Bearing Liabilities ...... 829,059 21,092 5.12% 728,505 17,026 4.71%
---------- ----------
NONINTEREST BEARING LIABILITIES:
Demand Deposits .......................... 148,848 127,886
Other Liabilities ........................ 10,879 11,329
---------- ----------
Total Liabilities ........................ 988,786 867,720
SHAREHOLDERS' EQUITY ..................... 39,267 44,763
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS'
EQUITY ............................... $1,028,053 $ 912,483
========== ==========
NET INTEREST INCOME ...................... $ 16,300 $ 12,279
========== ==========
NET YIELD ON AVERAGE EARNING
ASSETS ................................... 3.40% 2.90%
========== ==========
</TABLE>
32
<PAGE> 34
----------
(1) Loans are shown net of unearned discount. Interest on loans includes fees
on loans which are not material in amount.
(2) Interest income includes taxable-equivalent adjustments of $197 and $18
for the periods ending June 30, 2000 and 1999, respectively.
(3) Interest income includes taxable-equivalent adjustments of $1,149 and
$1,041 for the periods ending June 30, 2000 and 1999, respectively.
(4) For the purpose of calculating the average yield, the average balance of
securities is presented at historical cost.
Note: For the six months ended June 30, 2000 and 1999, loans totaling $537 and
$414, respectively, were on nonaccrual status. The policy is to reverse
previously accrued but unpaid interest on nonaccrual loans, thereafter, interest
income is recorded to the extent received when appropriate.
33
<PAGE> 35
The following table presents average balance sheet amounts and average
yields for the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
AVERAGE BALANCES AND YIELDS
YEARS ENDED DECEMBER 31,
1999 1998
------------------------------------- -------------------------------------
AVG. AVG. AVG. AVG.
BALANCE INTEREST YIELD BALANCE INTEREST YIELD
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST EARNING ASSETS:
Loans(1)(2) ....................... $ 341,466 $ 28,290 8.28% $ 304,255 $ 26,059 8.56%
Securities:
Inv. Sec. (Taxable)(4) ............ 73,806 4,391 5.95% 22,974 1,316 5.73%
Inv. Sec. (Tax-Exempt)(3)(4) ...... 91,084 6,756 7.42% 69,270 5,270 7.61%
Mortgage-backed Sec.(4) ........... 358,258 22,080 6.16% 226,359 12,116 5.35%
Marketable Equity Securities ...... 17,180 911 5.30% 7,700 449 5.83%
Interest Earning Deposits ......... 2,936 175 5.96% 962 60 6.24%
Federal Funds Sold ................ 4,914 247 5.03% 2,462 137 5.56%
---------- ---------- ---------- ----------
Total Interest Earning Assets ..... 889,644 62,850 7.06% 633,982 45,407 7.16%
---------- ----------
NONINTEREST EARNING ASSETS:
Cash and Due From Banks ........... 29,548 23,754
Bank Premises and Equipment ....... 19,891 17,781
Other Assets ...................... 11,961 13,961
Less: Reserve for Loan Loss ... (4,040) (3,492)
---------- ----------
Total Assets ...................... $ 947,004 $ 685,986
========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
INTEREST BEARING LIABILITIES:
Savings Deposits ................. $ 19,272 493 2.56% $ 17,280 467 2.70%
Time Deposits .................... 246,110 12,372 5.03% 220,421 11,605 5.26%
Interest Bearing
Demand Deposits ............... 135,122 3,680 2.72% 125,004 3,413 2.73%
Short-term Interest
Bearing Liabilities ........... 162,287 8,535 5.26% 66,786 3,513 5.26%
Long-term Interest Bearing
Liabilities-Federal Home
Loan Bank ..................... 175,028 9,236 5.28% 84,836 4,701 5.54%
Long-term Junior
Subordinated Debenture ........ 20,000 1,700 8.50% 12,383 1,048 8.50%
---------- ---------- ---------- ----------
Total Interest Bearing
Liabilities ................... 757,819 36,016 4.75% 526,710 24,747 4.70%
NONINTEREST BEARING LIABILITIES:
Demand Deposits ................... 137,499 105,779
Other Liabilities ................. 9,956 10,417
---------- ----------
Total Liabilities ................. 905,274 642,906
SHAREHOLDERS' EQUITY .............. 41,730 43,080
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS'
EQUITY ........................... $ 947,004 $ 685,986
========== ==========
NET INTEREST INCOME ............... $ 26,834 $ 20, 660
========== ==========
NET YIELD ON AVERAGE
EARNING ASSETS ................... 3.02% 3.26%
========== ==========
</TABLE>
<TABLE>
<CAPTION>
AVERAGE BALANCES AND YIELDS
YEARS ENDED DECEMBER 31,
1997
-------------------------------------
AVG. AVG.
BALANCE INTEREST YIELD
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
INTEREST EARNING ASSETS:
Loans(1) .......................... $ 274,577 $ 23,851 8.69%
Securities:
Inv. Sec. (Taxable)(2) ............ 20,294 1,238 6.10%
Inv. Sec. (Tax-Exempt)(3)(2) ...... 38,768 3,049 7.86%
Mortgage-backed Sec.(2) ........... 120,977 7,729 6.39%
Marketable Equity Securities ...... 2,415 129 5.34%
Interest Earning Deposits ......... 602 34 5.65%
Federal Funds Sold ................ 2,285 129 5.65%
---------- ----------
Total Interest Earning Assets ..... 459,918 36,159 7.86%
----------
NONINTEREST EARNING ASSETS:
Cash and Due From Banks ........... 23,945
Bank Premises and Equipment ....... 14,693
Other Assets ...................... 10,518
Less: Reserve for Loan Loss ... (3,355)
----------
Total Assets ...................... $ 505,719
==========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
INTEREST BEARING LIABILITIES:
Savings Deposits ................. $ 16,173 446 2.76%
Time Deposits .................... 206,873 11,000 5.32%
Interest Bearing
Demand Deposits ............... 117,496 3,265 2.78%
Short-term Interest
Bearing Liabilities ........... 14,222 773 5.44%
Long-term Interest Bearing
Liabilities-Federal Home
Loan Bank ..................... 12,151 721 5.93%
Long-term Junior
Subordinated Debenture ........ -- -- --
---------- ----------
Total Interest Bearing
Liabilities ................... 366,915 16,205 4.42%
NONINTEREST BEARING LIABILITIES:
Demand Deposits ................... 94,005
Other Liabilities ................. 6,873
----------
Total Liabilities ................. 467,793
SHAREHOLDERS' EQUITY .............. 37,926
----------
TOTAL LIABILITIES AND
SHAREHOLDERS'
EQUITY ........................... $ 505,719
==========
NET INTEREST INCOME ............... $ 19,954
==========
NET YIELD ON AVERAGE
EARNING ASSETS ................... 4.34%
==========
</TABLE>
----------
(1) Loans are shown net of unearned discount. Interest on loans includes fees
on loans which are not material in amount.
(2) Interest income includes taxable-equivalent adjustments of $92, $8 and $4
as of December 31, 1999, 1998 and 1997, respectively.
(3) Interest income includes taxable-equivalent adjustments of $2,070, $1,722
and $988 as of December 31, 1999, 1998 and 1997, respectively.
(4) For the purpose of calculating the average yield, the average balance of
securities is presented at historical cost.
Note: For the years ended December 31, 1999, 1998 and 1997, loans totaling
$703, $432 and $1,344, respectively, were on nonaccrual status. The
policy is to reverse previously accrued but unpaid interest on nonaccrual
loans, thereafter, interest income is recorded to the extent received
when appropriate.
34
<PAGE> 36
ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
The following tables set forth the dollar amount of increase (decrease)
in interest income and interest expense resulting from changes in the volume of
interest earning assets and interest bearing liabilities and from changes in
yields:
CHANGES IN INTEREST INCOME AND EXPENSE VOLUME AND RATE VARIANCES
<TABLE>
<CAPTION>
AVERAGE AVERAGE
VOLUME YIELD INCREASE
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
YEARS ENDED JUNE 30, 2000 COMPARED TO 1999
INTEREST INCOME:
Loans(1)........................................ $ 6,768 $ 197 $ 6,965
Investment Securities (Taxable) ................ 1,273 1,003 2,276
Investment Securities (Tax-Exempt)(1) .......... (128) 542 414
Mortgage-backed Securities ..................... 565 4,923 5,488
Marketable Equity Securities ................... 181 806 987
Federal Funds Sold ............................. 37 43 80
Interest Earning Deposits ...................... 477 203 680
---------- ---------- ----------
Total Interest Income ........................ $ 9,173 $ 7,717 $ 16,890
---------- ---------- ----------
INTEREST EXPENSE:
Savings Deposits ............................... 73 -- 73
Time Deposits .................................. 2,694 1,375 4,069
Interest Bearing Demand Deposits ............... 477 203 680
Federal Funds Purchased and Other
Interest Bearing Liabilities ............... 1,390 1,434 2,824
Federal Home Loan Bank Advances ................ 377 64 441
Long-term Junior Subordinated Debentures ....... -- -- --
---------- ---------- ----------
Total Interest Expense ....................... 5,011 3,076 8,087
---------- ---------- ----------
Net Interest Earnings ........................ $ 4,162 $ 4,641 $ 8,803
========== ========== ==========
YEARS ENDED DECEMBER 31, 1999 COMPARED TO 1998
INTEREST INCOME:
Loans(1)........................................ $ 3,105 $ (874) $ 2,231
Investment Securities (Taxable) ................ 3,022 53 3,075
Investment Securities (Tax-Exempt)(1) .......... 1,621 (135) 1,486
Mortgage-backed Securities ..................... 8,505 1,459 9,964
Marketable Equity Securities ................... 499 (37) 462
Federal Funds Sold ............................. 122 (12) 110
Interest Earning Deposits ...................... 118 (3) 115
---------- ---------- ----------
Total Interest Income ........................ $ 16,992 $ 451 $ 17,443
---------- ---------- ----------
INTEREST EXPENSE:
Savings Deposits ............................... 52 (26) 26
Time Deposits .................................. 1,253 (486) 767
Interest Bearing Demand Deposits ............... 276 (9) 267
Federal Funds Purchased and Other
Interest Bearing Liabilities ............... 5,023 (1) 5,022
Federal Home Loan Bank Advances ................ 4,748 (213) 4,535
Long-term Junior Subordinated Debentures ....... 652 652
---------- ---------- ----------
Total Interest Expense ....................... 12,004 (735) 11,269
---------- ---------- ----------
Net Interest Earnings ........................ $ 4,988 $ 1,186 $ 6,174
========== ========== ==========
</TABLE>
35
<PAGE> 37
<TABLE>
<CAPTION>
AVERAGE AVERAGE
VOLUME YIELD INCREASE
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31, 1998 COMPARED TO 1997
INTEREST INCOME:
Loans(1)........................................ $ 2,546 $ (338) $ 2,208
Investment Securities (Taxable) ................ 145 (67) 78
Investment Securities (Tax-Exempt)(1) .......... 2,324 (103) 2,221
Mortgage-backed Securities ..................... 5,812 (1,425) 4,387
Marketable Equity Securities ................... 307 13 320
Federal Funds Sold ............................. 10 (2) 8
Interest Earning Deposits ...................... 23 3 26
---------- ---------- ----------
Total Interest Income ........................ $ 11,167 $ (1,919) $ 9,248
---------- ---------- ----------
INTEREST EXPENSE:
Savings Deposits ............................... 30 (9) 21
Time Deposits .................................. 712 (107) 605
Interest Bearing Demand Deposits ............... 206 (58) 148
Federal Funds Purchased and Other
Interest Bearing Liabilities ............... 2,764 (24) 2,740
Federal Home Loan Bank Advances ................ 4,024 (44) 3,980
Long-term Junior Subordinated Debentures ....... 1,048 1,048
---------- ---------- ----------
Total Interest Expense ....................... 8,784 (242) 8,542
---------- ---------- ----------
Net Interest Earnings ........................ $ 2,383 $ (1,677) $ 706
========== ========== ==========
</TABLE>
----------
(1) Interest yields which are nontaxable for federal income tax purposes are
presented on a taxable equivalent basis.
Note: Volume/yield variances (change in volume times change in yield) have been
allocated to amounts attributable to changes in volumes and to changes in
yields in proportion to the amounts directly attributable to those
changes.
LIQUIDITY
Liquidity management involves the ability to convert assets to cash with
a minimum of loss. We must be capable of meeting our obligations to our
customers at any time. This capability requires us to address the immediate cash
withdrawal requirements of depositors and other funds providers, the funding
requirements of all lines and letters of credit and the short-term credit needs
of customers. Liquidity is provided by short-term investments that can be
readily liquidated with a minimum risk of loss.
Cash, interest earning deposits, federal funds sold and short-term
investments with maturities or repricing characteristics of one year or less
continue to be an adequate percentage of total assets. At June 30, 2000 and
December 31, 1999, these investments were 13.0% of total assets, as compared
with 19.2% at December 31, 1998, and 18.7% at December 31, 1997. The percentage
decrease of these assets is due to the leverage strategy initially implemented
during 1998. Balance sheet growth due to the leverage strategy combined with
slower prepayments on some of our mortgage-backed securities has resulted in a
decrease in this percentage. Liquidity is further provided through the matching,
by time period, of rate sensitive interest earning assets with rate sensitive
interest bearing liabilities. We have three lines of credit for the purchase of
federal funds, consisting of two $15.0 million and one $10.0 million unsecured
lines of credit with Bank of America, Frost Bank and Texas Independent Bank,
respectively.
The Asset/Liability Management Committee of the bank closely monitors
various liquidity ratios, interest rate spreads and margins, interest rate shock
reports and market value of portfolio equity with rates shocked plus and minus
200 basis points to ensure us a satisfactory liquidity position. Market value of
portfolio equity is defined as the net present value of an institution's
existing assets, liabilities and off-balance sheet instruments. Market value of
portfolio equity analysis is the general measure used by regulatory authorities
for assessing an institution's interest rate risk. The extent to which assets
will gain or lose value in relation to the gains or losses of liabilities and/or
interest rate contracts determines the appreciation or depreciation in equity on
a market-value basis. Such market value analysis is intended to evaluate the
impact of immediate and sustained parallel interest-rate shifts of the current
yield curve upon the market value of the current balance sheet. In addition, the
bank utilizes a simulation model to determine the impact of net interest income
under several different interest rate scenarios. By utilizing this technology,
the bank attempts to determine changes that need to be made to the asset and
liability mixes to minimize the change in net interest income under these
various interest rate scenarios.
36
<PAGE> 38
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The primary objective of monitoring our interest rate sensitivity, or
risk, is to provide management the tools necessary to manage the balance sheet
to minimize adverse changes in net interest income as a result of changes in the
direction and level of interest rates. Federal Reserve monetary control efforts,
the effects of deregulation and legislative changes have been significant
factors affecting the task of managing interest rate sensitivity positions in
recent years.
The interest rate risk inherent in assets and liabilities may be
determined by analyzing the extent to which such assets and liabilities are
"interest rate sensitive" and by measuring an institution's interest rate
sensitivity "gap." An asset or liability is said to be interest rate sensitive
within a defined time period if it matures or reprices within that period. The
difference or mismatch between the amount of interest earning assets maturing or
repricing within a defined period and the amount of interest bearing liabilities
maturing or repricing within the same period is defined as the interest rate
sensitivity gap. An institution is considered to have a negative gap if the
amount of interest bearing liabilities maturing or repricing within a specified
time period exceeds the amount of interest earning assets maturing or repricing
within the same period. If more interest earning assets than interest bearing
liabilities mature or reprice within a specified period, then the institution is
considered to have a positive gap. Accordingly, in a rising interest rate
environment, in an institution with a negative gap, the cost of its rate
sensitive liabilities would theoretically rise at a faster pace than the yield
on its rate sensitive assets, thereby diminishing future net interest income. In
a falling interest rate environment, a negative gap would indicate that the cost
of rate sensitive liabilities would decline at a faster pace than the yield on
rate sensitive assets and improve net interest income. For an institution with a
positive gap, the reverse would be expected. The table on page 39 shows interest
sensitivity gaps for four different intervals as of December 31, 1999.
In an attempt to manage our exposure to changes in interest rates,
management closely monitors our exposure to interest rate risk. We have an
Asset/Liability Management Committee which meets regularly and reviews our
interest rate risk position and makes recommendations for adjusting this
position. In addition, our board of directors reviews on a monthly basis our
asset/liability position.
The following table provides information about our financial instruments
that are sensitive to changes in interest rates. Except for the effects of
prepayments and scheduled principal amortization on mortgage related assets, the
table presents principal cash flows and related weighted average interest rates
by the contractual term to maturity. Nonaccrual loans are not included in the
loan totals. All instruments are classified as other than trading.
37
<PAGE> 39
CASH FLOWS AND WEIGHTED AVERAGE INTEREST RATES FOR FINANCIAL INSTRUMENTS
EXPECTED MATURITY DATE
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
-------------------------------------------------------------------------------------------------------
FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
--------- --------- ------------ ------------ ------------ ------------ --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Loans........... $106,612 $ 58,077 $ 40,006 $ 31,374 $ 25,015 $ 73,316 $334,400 $323,068
8.52% 8.40% 8.23% 7.95% 7.86% 7.69% 8.18%
Adjustable Rate Loans...... 32,854 1,876 4,244 1,453 4,411 7,505 52,343 52,343
9.52% 9.20% 9.60% 9.59% 8.84% 9.44% 9.45%
Mortgage-backed
Securities................ 46,222 39,185 33,335 28,455 24,377 176,000 347,574 345,553
7.11% 7.08% 7.06% 7.04% 7.01% 6.79% 6.93%
Investments and Other
Interest Earning Assets... 29,624 9,057 4,803 3,192 4,369 150,585 201,630 199,811
5.31% 6.43% 6.74% 6.61% 7.59% 7.50% 7.10%
Total Interest
Earning
Assets.................... $215,312 $108,195 $ 82,388 $ 64,474 $ 58,172 $ 407,406 $935,947 $920,775
7.93% 7.77% 7.74% 7.52% 7.56% 7.26% 7.55%
Savings Deposits........... $ 2,704 $ 1,352 $ -- $ -- $ -- $ 16,226 $ 20,282 $ 18,423
2.57% 2.57% -- -- -- 2.57% 2.57%
NOW Deposits............... 9,779 4,890 -- -- -- 58,678 73,347 64,661
1.99% 1.99% -- -- -- 1.99% 1.99%
Money Market Deposits...... 10,038 5,018 -- -- -- 60,222 75,278 73,346
3.38% 3.38% -- -- -- 3.38% 3.38%
Certificates of Deposit.... 196,307 44,933 16,164 4,301 6,303 -- 268,008 267,765
5.02% 5.66% 5.86% 5.29% 5.46% -- 5.19%
Federal Home Loan Bank
Advances................... 182,169 40,864 29,287 36,417 11,409 55,780 355,926 348,392
5.35% 5.02% 5.22% 5.42% 5.34% 5.76% 5.37%
Other Borrowings........... 4,819 -- -- -- -- 20,000 24,819 24,819
4.69% -- -- -- -- 8.50% 7.76%
Total Interest Bearing
Liabilities............... $405,816 $ 97,057 $ 45,451 $ 40,718 $ 17,712 $ 210,906 $817,660 $797,406
5.03% 5.04% 5.45% 5.41% 5.38% 4.05% 4.83%
</TABLE>
Residential fixed rate loans are assumed to have annual prepayment rates
between 10% and 18% of the portfolio. Commercial and multi-family real estate
loans are assumed to prepay at an annualized rate between 6% and 18%. Consumer
loans are assumed to prepay at an annualized rate between 6% and 18%. Fixed and
adjustable rate mortgage-backed securities, including collateralized mortgage
obligations and real estate mortgage investment conduits, have annual payment
assumptions ranging from 10% to 30%. At December 31, 1999, the contractual
maturity of substantially all of our mortgage-backed or related securities was
in excess of ten years. The actual maturity of a mortgage-backed or related
security is less than its stated maturity due to regular principal payments and
prepayments of the underlying mortgages. Prepayments that are faster than
anticipated may shorten the life of the security and affect its yield to
maturity. The yield to maturity is based upon the interest income and the
amortization of any premium or discount related to the security. In accordance
with generally accepted accounting principles, premiums and discounts are
amortized over the estimated lives of the loans, which decrease and increase
interest income, respectively. The prepayment assumptions used to determine the
amortization period for premiums and discounts can significantly affect the
yield of the mortgage-backed or related security, and these assumptions are
reviewed periodically to reflect actual prepayments. Although prepayments of
underlying mortgages depend on many factors, including the type of mortgages,
the coupon rate, the age of mortgages, the geographical location of the
underlying real estate collateralizing the mortgages and general levels of
market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments. During periods of
falling mortgage interest rates, if the coupon rate of the underlying mortgages
exceeds the prevailing market interest rates offered for mortgage loans,
refinancing may increase and accelerate the prepayment of the underlying
mortgages and the related security. At December 31, 1999, of the $347.6 million
of mortgage-backed and related securities held by us, an aggregate of
38
<PAGE> 40
$342.7 million were secured by fixed-rate mortgage loans and an aggregate of
$4.9 million were secured by adjustable-rate mortgage loans.
We assume 80% of savings accounts, transaction accounts and money market
accounts at December 31, 1999, are core deposits and are, therefore, expected to
roll-off after five years. The remaining savings accounts are assumed to
roll-off over the first eighteen months. No roll-off rate is applied to
certificates of deposit. Fixed maturity deposits reprice at maturity.
In evaluating our exposure to interest rate risk, certain limitations
inherent in the method of analysis presented in the foregoing table must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable rate mortgages, have
features which restrict changes in interest rates, prepayment and early
withdrawal levels may deviate significantly from those assumed in calculating
the table. Finally, the ability of many borrowers to service their debt may
decrease in the event of an interest rate increase. We consider all of these
factors in monitoring our exposure to interest rate risk.
The following table sets forth certain information as of December 31,
1999 with respect to rate sensitive assets and liabilities and interest
sensitivity gap:
RATE SENSITIVE ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
1-3 MOS. 4-12 MOS. 1-5 YRS. OVER 5 YRS. TOTAL
---------- ---------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS (RSA)
Loans(1) .......................... $ 88,523 $ 70,432 $ 154,472 $ 73,316 $ 386,743
Securities ........................ 46,093 44,289 146,773 311,414 548,569
Other Interest Earning Assets ..... 635 635
--------- --------- --------- --------- ---------
Total Rate Sensitive Assets .... $ 135,251 $ 114,721 $ 301,245 $ 384,730 $ 935,947
========= ========= ========= ========= =========
RATE SENSITIVE LIABILITIES (RSL)
Interest Bearing Deposits ......... $ 85,227 $ 133,601 $ 82,961 $ 135,126 $ 436,915
Other Interest Bearing Liabilities 117,164 69,824 117,977 75,780 380,745
--------- --------- --------- --------- ---------
Total Rate Sensitive Liabilities $ 202,391 $ 203,425 $ 200,938 $ 210,906 $ 817,660
========= ========= ========= ========= =========
Gap(2) ............................ (67,140) (88,704) 100,307 173,824 118,287
Cumulative Gap .................... (67,140) (155,844) (55,537) 118,287
Cumulative Ratio of RSA to RSL .... .67 .62 .91 1.14 1.14
Gap/Total Earning Assets .......... (7.2%) (9.5%) 10.7% 18.6% 12.6%
</TABLE>
----------
(1) Amount is equal to total loans net of unearned discount less nonaccrual
loans at December 31, 1999.
(2) Gap equals total rate sensitive assets minus total rate sensitive
liabilities.
The Asset/Liability Management Committee of the bank closely monitors the
desired gap along with various liquidity ratios to ensure a satisfactory
liquidity position for us. Rates have fluctuated several hundred basis points
during the last five years. During this time, negotiable orders of withdrawal,
money market deposit accounts and savings rates have moved very little.
Therefore, when considering rate sensitivity, management does not consider
negotiable orders of withdrawal, money market deposit accounts and savings to be
one day interest rate sensitive. Management spreads these deposits into several
categories from zero to 10 years for purposes of internal evaluation. As a
result of reclassifying these deposits, management considers that we are
appropriately matched. Management continually evaluates the condition of the
economy, the pattern of market interest rates and other economic data to
determine the types of investments that should be made and at what maturities.
Using this analysis, management from time to time assumes calculated interest
sensitivity gap positions to maximize net interest income based upon anticipated
movements in the general level of interest rates. Regulatory authorities also
monitor the bank's gap position along with other liquidity ratios. In addition,
the bank utilizes a simulation model to determine the impact of net interest
income under several different interest rate scenarios. By utilizing this
technology, the bank can determine changes that need to be made to the asset and
liability mixes to minimize the change in net interest income under these
various interest rate scenarios.
39
<PAGE> 41
CAPITAL RESOURCES
The bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the bank
must meet specific capital guidelines that involve quantitative measures of the
bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Under the Federal Reserve'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. In April 1998, Southside formed a trust subsidiary for the
purpose of issuing $20 million of trust preferred securities. For regulatory
reporting purposes, these trust preferred securities are eligible for inclusion,
subject to certain limitations, in our Tier 1 Capital. A portion of the $20
million trust preferred securities is considered Tier 1 capital by the Federal
Reserve. The Federal Reserve also requires bank holding companies to comply with
the minimum leverage ratio guidelines. The leverage ratio is a ratio of a bank
holding company's Tier 1 capital to its total consolidated quarterly average
assets, less goodwill and certain other intangible assets. The guidelines
require a minimum average of three percent for bank holding companies that meet
certain specified criteria. Failure to meet minimum capital regulations can
initiate certain mandatory and possibly additional discretionary actions by
regulation that, if undertaken, could have a direct material effect on the
bank's financial statements. At June 30, 2000, we and the bank exceeded all
regulatory minimum capital requirements.
The Federal Deposit Insurance Act requires bank regulatory agencies to
take "prompt corrective action" with respect to Federal Deposit Insurance
Corporation-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.
We intend to maintain our 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 us or
the bank not exceed earnings for that year.
Total shareholders' equity at June 30, 2000 of $42.8 increased $5.1
million or 13.6% from December 31, 1999 and represented 4.0% of total assets at
June 30, 2000 compared to 3.7% at December 31, 1999. The increase in the percent
of shareholders' equity to total assets is a result of the decrease in the
unrealized losses in the securities portfolio and the increase in net income.
Net income for the six months ended June 30, 2000 of $4.9 million was the
major contributor to the increase in shareholders' equity at June 30, 2000 along
with a net decrease in unrealized losses of $1.4 million on securities available
for sale along with the issuance of $196,000 in common stock (25,702 shares)
through our dividend reinvestment plan and incentive stock option plan.
Decreases to shareholders' equity consisted of $727,000 in dividends paid and
the purchase of $626,000 in treasury stock (71,050 shares).
Total shareholders' equity at December 31, 1999, of $37.7 million
decreased 18.8% or $8.7 million from December 31, 1998 and represented 3.7% of
total assets at December 31, 1999 compared to 5.3% at December 31, 1998. The
decrease in the percent of shareholders' equity to total assets is a result of
the increase in the unrealized losses in the securities portfolio and the
increase in total assets.
Net income for 1999 of $7.9 million was the major contributor to the
increase in shareholders' equity at December 31, 1999 along with the issuance of
$456,000 in common stock (77,012 shares) through our dividend reinvestment plan
and incentive stock option plan. Decreases to shareholders' equity consisted of
a net increase in unrealized losses of $14.4 million on securities available for
sale, $1.4 million in dividends paid and the purchase of $1.4 million in
treasury stock (148,150 shares).
We purchased treasury stock pursuant to a common stock repurchase plan
instituted in late 1994. Under the repurchase plan, our board of directors
establishes, on a quarterly basis, total dollar limitations and price per share
40
<PAGE> 42
for stock to be repurchased. Our board of directors reviews this plan in
conjunction with our capital needs and those of the bank and may, at its
discretion, modify or discontinue the plan. During the third quarter of 1999, we
issued a 5% stock dividend, which had no net effect on shareholders' equity. Our
dividend policy requires that any cash dividend payments made by us not exceed
consolidated earnings for that year. Although we have a dividend reinvestment
program, shareholders should not anticipate a continuation of the cash dividend.
The payment of dividends will depend upon future earnings, our financial
condition, and other related factors.
Quantitative measures established by regulation to ensure capital
adequacy require the bank to maintain minimum amounts and ratios (set forth in
the table below) of Total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of June 30, 2000, that the bank
meets all capital adequacy requirements to which it is subject.
To be categorized as well capitalized, the bank must maintain minimum
Total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in
the following table:
REGULATORY CAPITAL RATIOS
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------------- ---------------------- --------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----------- -------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AS OF JUNE 30, 2000
Total Capital
(to Risk Weighted Assets)
Consolidated .......... $74,895 13.66% $ 43,869 8.00% N/A N/A
======= ========== ======== =========== =========== ===========
Bank Only ............. $73,714 13.34% $ 44,213 8.00% $ 55,266 10.00%
======= ========== ======== =========== =========== ===========
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated .......... $66,807 12.18% $ 21,934 4.00% N/A N/A
======= ========== ======== =========== =========== ===========
Bank Only ............. $68,905 12.47% $ 22,106 4.00% $ 33,159 6.00%
======= ========== ======== =========== =========== ===========
Tier 1 Capital
(to Average Assets)
Consolidated .......... $66,807 6.42% $ 41,655 4.00% N/A N/A
======= ========== ======== =========== =========== ===========
Bank Only ............. $68,905 6.62% $ 41,654 4.00% $ 52,067 5.00%
======= ========== ======== =========== =========== ===========
AS OF DECEMBER 31, 1999
Total Capital
(to Risk Weighted Assets)
Consolidated .......... $70,611 13.96% $ 40,473 8.00% N/A N/A
======= ========== ======== =========== =========== ===========
Bank Only ............. $67,687 13.25% $ 40,864 8.00% $ 51,080 10.00%
======= ========== ======== =========== =========== ===========
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated .......... $61,782 12.21% $ 20,237 4.00% N/A N/A
======= ========== ======== =========== =========== ===========
Bank Only ............. $63,343 12.40% $ 20,432 4.00% $ 30,648 6.00%
======= ========== ======== =========== =========== ===========
Tier 1 Capital
(to Average Assets)
Consolidated .......... $61,782 6.20% $ 39,876 4.00% N/A N/A
======= ========== ======== =========== =========== ===========
Bank Only ............. $63,343 6.35% $ 39,875 4.00% $ 49,844 5.00%
======= ========== ======== =========== =========== ===========
AS OF DECEMBER 31, 1998
Total Capital
(to Risk Weighted Assets)
Consolidated .......... $63,962 15.25% $ 33,548 8.00% N/A N/A
======= ========== ======== =========== =========== ===========
Bank Only ............. $57,290 13.66% $ 33,542 8.00% $ 41,927 10.00%
======= ========== ======== =========== =========== ===========
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated .......... $54,280 12.94% $ 16,774 4.00% N/A N/A
======= ========== ======== =========== =========== ===========
Bank Only ............. $53,990 12.88% $ 16,771 4.00% $ 25,622 6.00%
======= ========== ======== =========== =========== ===========
Tier 1 Capital
(to Average Assets)
(to Risk Weighted Assets)
Consolidated .......... $54,280 6.76% $ 32,108 4.00% N/A N/A
======= ========== ======== =========== =========== ===========
Bank Only ............. $53,990 6.73% $ 32,107 4.00% $ 40,134 5.00%
======= ========== ======== =========== =========== ===========
</TABLE>
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<PAGE> 43
The bank is subject to certain restrictions on the amounts of dividends
that it may declare without prior regulatory approval. At June 30, 2000
approximately $18.8 million of retained earnings were available for dividend
declaration without prior regulatory approval.
The table below summarizes our key equity ratios for the six months ended
June 30, 2000 and 1999 and for the years ended December 31, 1999, 1998 and 1997.
KEY EQUITY RATIOS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
---------------- ------------------------
2000 1999 1999 1998 1997
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Percentage of Net Income to:
Average Total Assets ........................... 0.96% 0.74% 0.84% 0.78% 0.99%
Average Shareholders' Equity ................... 25.15% 15.18% 18.99% 12.42% 13.20%
Percentage of Dividends Declared Per Common
Share to Net Income Per Common Share-Basic ..... 14.71% 21.74% 18.52% 27.78% 29.85%
Percentage of Dividends Declared Per Common
Share to Net Income Per Common Share-Diluted ... 15.15% 22.22% 19.05% 28.57% 30.77%
Percentage of Average Shareholders'
Equity to Average Total Assets ................. 3.82% 4.91% 4.41% 6.28% 7.50%
</TABLE>
YEAR 2000 ISSUE
The Year 2000 issue concerned 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 have produced
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. Similar to most financial services providers, we were subject to
the potential impact of the Year 2000 issue due to the nature of financial
information. We have passed the primary critical dates and are not aware of any
significant Year 2000 problems affecting us or the marketplace.
Year 2000 compliance costs incurred totaled approximately $79,000 during
1999 and $316,000 during 1998, 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 Year 2000 project
related efforts. We estimate there will be no additional significant Year 2000
compliance costs, which are expensed on a current period basis except for fixed
asset purchases.
OTHER ACCOUNTING ISSUES
On June 15, 1998, the Financial Accounting Standards Board issued
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities. 133." Financial Accounting Standards No. 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. Financial
Accounting Standards No. 133 requires that all derivative instruments be
recorded on the balance at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction.
In June 1999, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of Financial Accounting Standards
No. 133, an Amendment of Financial Accounting Standards Board Statement No.
133," which defers the effective date of Financial Accounting Standards No. 133
from fiscal years beginning after June 15, 1999 to fiscal years beginning after
June 15, 2000. Initial application should be as of the beginning of an entity's
fiscal quarter; on that date, hedging relationships must be designated and
documented pursuant to the provisions of Financial Accounting Standards No. 133,
as amended. Earlier application of all of the provisions is encouraged but
42
<PAGE> 44
is permitted only as of the beginning of any fiscal quarter that begins after
the issuance date of Financial Accounting Standards No. 133, as amended.
Additionally, Financial Accounting Standards No. 133, as amended, should not be
applied retroactively to financial statements of prior periods.
In June 2000, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 138, "Accounting for Derivative Instruments and Hedging
Activities, an Amendment of Financial Accounting Standards Board Statement No.
133", which addresses a limited number of issues causing implementation
difficulties for numerous entities that apply Financial Accounting Standards No.
133, as amended. Financial Accounting Standards No. 138 amends the accounting
and reporting standards of Financial Accounting Standards No. 133, as amended,
for certain derivative instruments, certain hedging activities and for decisions
made by the Financial Accounting Standards Board relating to the Derivatives
Implementation Group process. Our management anticipates that adoption of
Financial Accounting Standards No. 133, as amended, will not have a significant
effect on our results of operations or our financial position.
EFFECTS OF INFLATION
Our consolidated financial statements, and their related notes, have been
prepared in accordance with generally accepted accounting principles, that
require the measurement of financial position and operating results in terms of
historical dollars, without considering the change in the relative purchasing
power of money over time and due to inflation. The impact of inflation is
reflected in the increased cost of our operations. Unlike many industrial
companies, nearly all of our assets and liabilities are monetary. As a result,
interest rates have a greater impact on our performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
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<PAGE> 45
BUSINESS
WHO WE ARE
Southside Bancshares, Inc. is a bank holding company for Southside Bank
headquartered in Tyler, Texas. The bank is the largest independent bank based on
asset size headquartered in East Texas. Tyler has a metropolitan area population
of approximately 171,000 and is located 90 miles east of Dallas/Fort Worth,
Texas and 90 miles west of Shreveport, Louisiana.
At June 30, 2000, we had total assets of $1.1 billion, loans of $429.2
million, deposits of $642.2 million, and shareholders' equity of $42.8 million.
We had net income of $4.9 million and $3.4 million and diluted earnings per
share of $0.66 and $0.45 for the six months ended June 30, 2000 and 1999,
respectively. We had net income of $7.9 million and $5.3 million and diluted
earnings per share of $1.05 and $0.70 for the years ended December 31, 1999 and
1998, respectively. We have paid a cash dividend every year since 1970.
We have been, and intend to remain, a community-focused financial
institution offering a full range of financial services to individuals,
businesses and nonprofit organizations in the communities we serve. These
services include consumer and commercial loans, deposit accounts, trust
services, safe deposit services and brokerage services.
The bank's consumer loan services include one-to-four family residential
mortgage loans and home improvement loans, automobile loans and other
installment loans. The bank began offering home equity loans in January 1998
when a new Texas law first permitting such loans took effect. Commercial loan
services include short-term working capital loans for inventory and accounts
receivable, short and medium-term loans for equipment or other business capital
expansion and commercial real estate loans. The bank also offers construction
loans primarily for owner-occupied one-to-four family residential and commercial
real estate.
The bank offers a variety of deposit accounts having a wide range of
interest rates and terms, including savings, money market, interest and
noninterest bearing checking accounts, as well as certificate accounts. The
bank's trust services include investment, management, administration and
advisory services primarily for individuals and to a lesser extent, partnerships
and corporations. At June 30, 2000, the bank's trust department managed
approximately $193.8 million of trust assets. Through our 25% owned securities
brokerage affiliate, BSC Securities, L.C., the bank offers full retail
investment services to its customers. In early 1997, we formed a consumer
finance subsidiary, Countywide Loans, Inc., to provide basic financial services
such as small loans, check cashing and money orders to individuals, which at
June 30, 2000, had $1.1 million in loans outstanding.
OUR MARKET AREA
We consider our primary market area to be all of Smith and Gregg Counties
in East Texas, and to a lesser extent, portions of adjoining counties. During
1998 and 1999, we opened three branches in Gregg County and one branch in Smith
County. We plan to open two additional branches in Lindale and Whitehouse, both
in Smith County. The Lindale branch should open in temporary facilities before
the end of the year and the Whitehouse branch should open in late 2001. We
expect our presence in the Gregg County market area to increase in the future,
however presently, the city of Tyler in Smith County represents our primary
market area.
The principal economic activities in our market area include retail,
distribution, manufacturing, medical services, education and oil and gas
industries. Additionally, Tyler's industry base includes conventions and
tourism, as well as retirement relocation. All of these support a growing
regional system of medical service, retail and education centers. Tyler is home
to several nationally recognized health care systems. Tyler hospitals represent
all major specialties and employ over 6,500 individuals. In 1998, Target Stores
opened a multi-state distribution center in the greater Tyler area along
Interstate 20 that employs over 1,000 workers.
The bank serves our markets through twelve full service branch locations,
including seven branches located in grocery stores. The branches are located in
and around Tyler and Longview. Several longtime Longview banking veterans have
joined the bank to lead us in our expansion into the Longview market. Our
television and radio advertising has extended into this market area for several
years, providing the bank name recognition in the greater Longview area.
The bank also maintains four motor bank facilities and Countywide
maintains one location. The bank's customers may also access various banking
services through 21 ATMs owned by the bank and ATMs owned by others, through
debit cards, and through the bank's automated telephone, internet and electronic
banking products.
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<PAGE> 46
These products allow the bank's customers to apply for loans, access account
information and conduct various transactions from their telephones and
computers.
BUSINESS STRATEGY
Our goal is to be the premier financial institution in East Texas,
recognized for quality customer service and financial soundness. The bank
weathered the Texas economic downturn in the 1980's, which contributed in part
to the customer loyalty that we enjoy today.
Our business strategy is to operate the bank as a well capitalized,
profitable, independent, community-oriented financial institution. With that
focus, we have developed a niche in small business and consumer lending as well
as other small business and consumer financial services, including the addition
of Countywide, a consumer finance subsidiary of the bank, with total loans at
June 30, 2000 of $1.1 million.
Key aspects of our business strategy include:
o maintaining asset quality;
o providing a high level of customer service through convenient,
well-planned facilities and electronic delivery systems which take
advantage of technological advancements;
o continuing to manage our leverage strategy which is designed to
enhance profitability with acceptable levels of credit, interest
rate and liquidity risk;
o increasing market share within our existing market and expanding
into new markets;
o increasing the revenue of our existing financial subsidiaries and
adding new products and services which contribute to noninterest
income;
o controlling expenses; and
o attracting and retaining qualified and experienced management.
Asset Quality. We seek to maintain asset quality by managing credit
risk. Approximately 71.1% of the net loan portfolio at June 30, 2000 was
comprised of commercial real estate, construction, commercial business and
consumer loans. The other 28.9% of the loan portfolio at June 30, 2000 was
comprised of residential mortgage loans, which generally pose less credit risk
than other types of loans. The bank's nonperforming assets at that date was
equal to 0.2% of total assets. At December 31, 1999, 1998 and 1997, this ratio
was 0.2%, 0.2% and 0.5%, respectively.
Customer Service, Facilities and Technology. We enhanced our
infrastructure in Smith and Gregg Counties in order to improve customer service
and attract new customers. Since 1990, we added seven full service grocery store
branches, 19 ATMs, three traditional brick and mortar branches and three motor
bank facilities. We have introduced technological enhancements, including an
automated telephone system, home banker and business online products, corporate
cash management software and a bank internet website.
Leverage Strategy. We implemented a leverage strategy designed to
enhance profitability with acceptable levels of credit, interest rate and
liquidity risk. The leverage strategy consists of borrowing long and short-term
funds from the Federal Home Loan Bank and investing the funds primarily in
mortgage-backed securities, and to a lesser extent, long-term municipal
securities. Although mortgage-backed securities often carry lower yields than
traditional mortgage loans and other types of loans we make, these securities
generally increase the overall quality of our assets by virtue of the
securities' underlying insurance or guarantees, are more liquid than individual
loans and may be used to collateralize our borrowings or other obligations.
While our strategy of investing a substantial portion of our assets in
mortgage-backed and municipal securities has resulted in lower interest rate
spreads and margins, we believe that the lower operating expenses and reduced
credit and interest rate risk of this strategy have enhanced our overall
profitability.
While we may increase our leverage by approximately $20 to $30 million
to offset interest expense associated with this convertible preferred offering,
our balance sheet strategy going forward will be to gradually replace a portion
of our securities portfolio with higher yielding loans. On the liability side,
we intend to gradually replace a portion of the short-term Federal Home Loan
Bank borrowings with deposits. The intended net result is to increase our net
interest spread. Since completing the initial phase of our leverage strategy
during the second quarter of 1999, our net interest spread has begun to
increase. The leverage strategy is dynamic and requires ongoing management. As
interest rates, funding costs and security spreads change, our determination of
the proper securities to purchase and funding to obtain must be re-evaluated.
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<PAGE> 47
Expansion. We will consider opening new branches and establishing new
ATMs in desirable areas within our market area and adjoining counties to grow
our deposit base and to expand our ability to provide lending and other services
to new and existing customers. Also, to the extent that opportunities are
available, we will consider acquisitions within our market area and in
contiguous areas.
Noninterest Income. With a focus on reducing the dependence of earnings
on net interest income, we have expanded our sources and amounts of fee income.
Fee-generating services include retail brokerage, trust services and consumer
finance services. We also offer fee-based products such as proprietary credit
and debit cards and checking overdraft privilege. Noninterest income, excluding
gain or loss on sales of securities available for sale, increased $964,000 or
22.9% for the six months ended June 30, 2000 when compared to the same period in
1999. At June 30, 2000, the number of bank owned ATMs was 21.
Noninterest Expenses. Noninterest expenses are subject to ongoing
reviews of staffing levels, facilities and operations. Our efficiency ratio for
the six months ended June 30, 2000 was 62.2%, compared to 70.8% for the same
period in 1999. The efficiency ratio for the six months ended June 30, 2000 was
also lower than the ratios for the preceding four years. We seek to reduce the
efficiency ratio through additional revenue contribution from our new branches
and through continued monitoring of costs.
Experienced Management. Our executive officers each have broad
experience in the bank's operations. We have enjoyed continuity of management,
with the Chief Executive Officer serving in that capacity since the bank opened
in 1960 and the other executive officers each having served for over fifteen
years.
Our administrative offices are located at 1201 S. Beckman, Tyler, Texas
75701, and the telephone number is 903-531-7111. Our website can be found at
www.southside.com.
LENDING ACTIVITIES
Our main objective is to seek attractive lending opportunities in East
Texas, primarily in Smith and Gregg Counties. Substantially all of the bank's
loans are made to borrowers who live in and conduct business in East Texas.
Total loans as of June 30, 2000 increased $41.8 million or 10.8%, when compared
to December 31, 1999. Total loans as of December 31, 1999 increased $67.7
million or 21.2% while the average balance was up $37.2 million or 12.2% when
compared to December 31, 1998.
Real estate loans as of June 30, 2000 increased $27.5 million or 12.0%
when compared to December 31, 1999. Loans to individuals as of June 30, 2000
increased $8.7 million or 11.0% when compared to December 31, 1999. Commercial
loans as of June 30, 2000 increased $5.6 million or 7.0% when compared to
December 31, 1999. Real estate loans as of December 31, 1999 increased $56.9
million or 33.1% from December 31, 1998. Loans to individuals as of December 31,
1999 decreased $902,000 or 1.1% from December 31, 1998. Commercial loans as of
December 31, 1999 increased $11.7 million or 17.3% from December 31, 1998.
The increase in real estate loans is due to a stronger real estate market
and our increased commitment to residential mortgage lending. Commercial loans
increased as a result of commercial growth in our market area. Real estate and
commercial loans also increased due to the growth of loans made to
municipalities in Texas. Most of the loans to municipalities have tax pledges
supporting them in addition to collateral. Loans to municipalities increased
approximately $1.9 million during the six months ended June 30, 2000 and
increased approximately $4.1 million during the year ended December 31, 1999
compared to the year ended December 31, 1998. In the portfolio, loans dependent
upon private household income represent a significant concentration. Due to the
number of customers involved who work in all sectors of the local economy, we
believe the risk in this portion of the portfolio is adequately spread
throughout the economic community.
The aggregate amount of loans that the bank is permitted to make under
applicable bank regulations to any one borrower, including related entities, is
25% of unimpaired certified capital and surplus. Our legal lending limit at June
30, 2000 was $10 million and at December 31, 1999 was $7.5 million. The bank's
largest loan relationship at June 30, 2000 and at December 31, 1999 was
approximately $6.8 million.
The average yield on loans for the six months ended June 30, 2000
increased to 8.40% from 8.31% for the six months ended June 30, 1999, and for
the year ended December 31, 1999 decreased to 8.26% from 8.56% for the year
ended December 31, 1998. This decrease in 1999 was reflective of the repricing
characteristics of the loans and the decrease in lending rates during 1999 due
to competitive pressures, the changing mix of the loan portfolio and a lower
average prime rate in 1999 compared to 1998. The U.S. prime interest rate
decreased 75 basis points during the
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<PAGE> 48
latter part of 1998 beginning September 1998. Prime increased 75 basis points
during 1999, but did not begin increasing until June 1999, at which time prime
increased 25 basis points. The final 25 basis point increase did not occur until
November 1999. As a result, the prime rate, which is used as a basis to price
numerous loans, was on average lower in 1999 than in 1998.
Loan Portfolio Composition
The following table sets forth loan totals net of unearned discount by
category at June 30, 2000 and at December 31, 1999, 1998, 1997, 1996 and 1995:
LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------- ----------------------------------------------------
2000 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
Construction .......... $ 23,498 $ 18,489 $ 10,509 $ 10,299 $ 7,821 $ 4,558
One-to-Four
Family Residential... 123,957 112,699 93,215 76,243 62,356 49,909
Commercial
And Other ........... 108,762 97,556 68,140 55,802 57,198 54,436
Commercial Loans ........... 85,308 79,722 67,977 61,972 51,307 44,217
Loans to Individuals ....... 87,685 78,980 79,882 91,719 79,485 75,658
-------- -------- -------- -------- -------- --------
Total Loans ........... $429,210 $387,446 $319,723 $296,035 $258,167 $228,778
======== ======== ======== ======== ======== ========
</TABLE>
Real Estate Loans
Real estate loans represent our greatest concentration of loans. However,
we believe that the amount of risk associated with this group of loans is
mitigated in part due to the type of loans involved. At June 30, 2000, the
majority of our real estate loans were collateralized by properties located in
Smith and Gregg Counties. Of the $256.2 million in real estate loans as of that
date, $124.0 million or 48.4% are collateralized by residential dwellings that
are primarily owner occupied. Historically, the amount of losses suffered on
this type of loan has been significantly less than those loans collateralized by
other types of properties. Our loan policy requires appraisal prior to funding
any real estate loans and also outlines the requirements for appraisals on
renewals.
Management pursues an aggressive policy of reappraisal on any real estate
loan that becomes troubled and potential exposures are recognized and reserved
for as soon as they are identified. However, the potential slow pace of
absorption for certain types of properties could adversely affect the volume of
nonperforming real estate loans held by us.
Real estate loans are divided into three categories: one-to-four family
residential mortgage lending, construction loans and commercial real estate
loans.
One-to-Four Family Residential Mortgage Lending. Residential loan
originations are generated by our in-house originations staff, marketing
efforts, present customers, walk-in customers and referrals from real estate
agents, mortgage brokers and builders. We focus our lending efforts primarily on
the origination of loans secured by first mortgages on owner-occupied,
one-to-four family residences. Substantially, all of our one-to-four family
residential mortgage originations are secured by properties located in Smith and
Gregg Counties. Historically, we have sold a portion of our loan originations to
secondary market investors pursuant to ongoing purchase commitments.
Our fixed rate one-to-four family residential mortgage loans generally
have maturities ranging from seven to 30 years. These loans are either fully
amortizing with monthly payments sufficient to repay the total amount of the
loan or amortizing with a balloon feature, typically due in fifteen years or
less.
We review information concerning the income, financial condition,
employment and credit history when evaluating the creditworthiness of the
applicant.
In November 1997, Texas voters approved a change to the Texas
Constitution allowing home equity loans. We began offering this newly available
form of real estate lending beginning January 1, 1998 when the law became
effective. At June 30, 2000, these loans totaled $16.7 million.
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<PAGE> 49
Construction Loans. Our construction loans are secured by property
located primarily in our market area. Our emphasis for construction loans is
directed toward properties that will be owner occupied. Occasionally,
speculative construction loans are financed, but these typically have
substantial secondary sources of repayment. Construction loans to individuals
generally have fixed interest rates during the construction period. Construction
loans to individuals are typically made in connection with the granting of the
permanent loan on the property.
Commercial Real Estate Loans. In determining whether to originate
commercial real estate loans, we generally consider such factors as the
financial condition of the borrower and the debt service coverage of the
property. Commercial real estate loans are made at both fixed and adjustable
interest rates for terms generally up to 20 years. Commercial real estate loans
primarily include commercial office buildings, retail, medical and warehouse
facilities, hotels and churches. The majority of these loans, with the exception
of those for hotels and churches, are collateralized by owner occupied
properties.
Commercial Loans
Our commercial loans are diversified to meet most business needs. Loan
types include, short-term working capital loans for inventory and accounts
receivable and short and medium-term loans for equipment or other business
capital expansion. Management does not consider there to be any material
concentration of risk in any one industry type, other than medical, in this loan
category since no industry classification represents over 10% of loans. The
medical community represents a concentration of risk in our commercial loan and
commercial real estate loan portfolio. Risk in the medical community is
mitigated because it is spread among multiple practice type and multiple
specialties.
In our commercial loan underwriting, we assess the creditworthiness,
ability to repay, and the value and liquidity of the collateral being offered.
Terms are generally granted commensurate with the useful life of the collateral
offered.
Loans to Individuals
The bank is a major consumer lender in our market area and has been for
many years. The majority of consumer loans outstanding are those secured by
vehicles, including the indirect vehicle loan portfolio, which at June 30, 2000
was approximately $6.7 million and at December 31, 1999 was approximately $11.1
million. The indirect vehicle loans on our books were originated through
automobile dealers but underwritten directly by us using the same underwriting
guidelines used for our direct vehicle loans. However, due to market forces that
were contributing to declining profit margins on indirect vehicle loans, we
exited the indirect vehicle loan program effective January 2, 1998 to
concentrate on direct vehicle loans. Direct vehicle loans accounted for
approximately $59.5 million at June 30, 2000 and $62.4 million at December 31,
1999. Additionally, we make loans for a full range of other consumer purposes,
which may be secured or unsecured depending on the credit quality and purpose of
the loan.
At this point, the economy in the bank's trade territory appears stable.
One area of concern is the high nationwide personal bankruptcy rate. Management
expects this trend to have some adverse effect on our net charge-offs. Most of
our loans to individuals are collateralized, which management believes will
limit the exposure in this area should current bankruptcy trends continue.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. The underwriting
standards we employ for consumer loans include an application, a determination
of the applicant's payment history on other debts, with greatest weight being
given to payment history with us, and an assessment of the borrower's ability to
meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is a primary consideration, the underwriting
process also includes a comparison of the value of the collateral, if any, in
relation to the proposed loan amount.
Loan Maturities and Sensitivity to Changes in Interest Rates
The following table represents loan maturities and sensitivity to changes
in interest rates. The amounts of total loans outstanding at June 30, 2000,
which, based on remaining scheduled repayments of principal, are due in one year
or less, more than one year but less than five years and more than five years,
are shown in the following table. The amounts due after one year are classified
according to the sensitivity to changes in interest rates.
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<PAGE> 50
LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
<TABLE>
<CAPTION>
AFTER ONE
DUE IN ONE BUT WITHIN AFTER FIVE
YEAR OR LESS(1) FIVE YEARS YEARS(1)
---------------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Construction Loans............................... $ 20,175 $ 2,691 $ 632
Real Estate Loans-Other.......................... 96,281 112,945 23,493
Commercial Loans................................. 51,257 31,718 2,333
Loans to Individuals............................. 54,724 29,094 3,867
------------- ----------- ------------
Total Loans............................... $ 222,437 $ 176,448 $ 30,325
============= =========== ============
Loans with Maturities After One Year for Which:
Interest Rates are Fixed or Predetermined $ 190,877
Interest Rates are Floating or Adjustable $ 19,489
</TABLE>
----------
(1) The volume of commercial loans due within one year reflects our general
policy of limiting such loans to a short-term maturity. Loans are shown
net of unearned discount. Nonaccrual loans are reflected in the due after
five years column.
Loans to Affiliated Parties
In the normal course of business, the bank makes loans to certain of our
and its own, officers, directors, employees and their related interests. As of
June 30, 2000, these loans totaled $8.7 million or 20.3% of shareholders'
equity. As of December 31, 1999 and 1998, these loans totaled $8.8 million and
$9.1 million or 23.3% and 19.6% of shareholders' equity, respectively. These
loans are made in the normal course of business at normal credit terms,
including interest rate and collateral requirements and do not represent more
than normal credit risks contained in the rest of the loan portfolio for loans
of similar types.
Loan Loss Experience and Reserve for Loan Losses
The loan loss reserve is based on the most current review of the loan
portfolio. Management uses several different methods to establish and maintain
the review in the most current manner. First, the servicing officer has the
primary responsibility for updating significant changes in a customer's
financial position. Accordingly, each officer prepares status updates on any
credit deemed to be experiencing repayment difficulties which, in the officer's
opinion, would place the collection of principal or interest in doubt. Second,
one of our internal review officers is responsible for an ongoing review of our
entire loan portfolio with specific goals set for the volume of loans to be
reviewed on an annual basis. Third, the bank is regulated and examined by the
Federal Deposit Insurance Corporation and/or the Texas Department of Banking on
an annual basis.
At each review of a credit, a subjective analysis methodology is used
to grade the respective loan. Categories of grading vary in severity to include
loans that do not appear to have a significant probability of loss at the time
of review to grades that indicate a probability that the entire balance of the
loan will be uncollectible. If full collection of the loan balance appears
unlikely at the time of review, estimates or appraisals of the collateral
securing the debt are used to allocate the necessary reserves. A list of loans
that are graded as having more than the normal degree of risk associated with
them is maintained by the internal 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.
Industry experience shows that a portion of our loans will become
delinquent and a portion of the loans will require partial or entire charge-off.
Regardless of the underwriting criteria we utilize, losses may be experienced as
a result of various factors beyond our control, including, among other things,
changes in market conditions affecting the value of properties and problems
affecting the credit of the borrower. Our determination of the adequacy of
allowance for loan losses is based on various considerations, including an
analysis of the risk characteristics of various classifications of loans,
previous loan loss experience, specific loans which would have loan loss
potential, delinquency trends, estimated fair value of the underlying
collateral, current economic conditions, the views of our regulators (who have
the authority to require additional reserves), and geographic and industry loan
concentration.
In addition to maintaining an ongoing review of the loan portfolio, the
internal review officer maintains a history of the loans that have been
charged-off without first being identified as problems. This history is used to
determine the amount of nonspecifically allocated reserve necessary, in addition
to the portion that is specifically allocated by loan. The internal review
officer also uses the loan portfolio data collected to determine the allocation
of reserve for loan loss appropriate for the risk in each of our major loan
categories.
49
<PAGE> 51
As of June 30, 2000, our review of the loan portfolio indicates that a
loan loss reserve of $5.1 million is adequate.
The following table presents information regarding the average amount
of net loans outstanding, changes in the reserve for loan losses; and the ratio
of net loans charged-off to average loans outstanding.
LOAN LOSS EXPERIENCE AND RESERVE FOR LOAN LOSSES
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER
31,
--------------------- ----------
2000 1999 1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Average Net Loans Outstanding........... $ 407,097 $ 326,510 $ 341,466 $ 304,255 $ 274,577 $ 243,925 $ 209,141
========= ========= ========= ========= ========= ========= =========
Balance of Reserve for Loan Loss at
Beginning of Period................... 4,575 3,564 3,564 3,370 3,249 3,317 3,137
--------- --------- --------- --------- --------- --------- ---------
Loan Charge-Offs:
Real Estate-Construction.............. -- -- -- -- -- -- --
Real Estate-Other..................... -- -- -- (175) -- -- (36)
Commercial Loans...................... (45) (68) (114) (405) (525) (70) (61)
Loans to Individuals.................. (387) (249) (651) (769) (704) (768) (502)
--------- --------- --------- --------- --------- --------- ---------
Total Loan Charge-Offs.............. (432) (317) (765) (1,349) (1,229) (838) (599)
--------- --------- --------- --------- --------- --------- ---------
Recovery on Loans Previously Charged
Off:
Real Estate-Construction.............. -- -- -- -- 10 -- --
Real Estate-Other..................... 29 3 5 36 14 7 272
Commercial Loans...................... 29 49 106 90 133 78 546
Loans to Individuals.......... ....... $ 100 $ 98 $ 209 $ 202 $ 188 $ 185 $ 261
--------- --------- --------- --------- --------- --------- ---------
Total Recovery of Loans Previously
Charged Off......................... $ 158 $ 150 $ 320 $ 328 $ 345 $ 270 $ 1,079
--------- --------- --------- --------- --------- --------- ---------
Net Loan (Charge-Offs) Recoveries....... (274) (167) (445) (1,021) (884) (568) 480
Provision (Credit) for Loan Losses...... 784 653 1,456 1,215 1,005 500 (300)
--------- --------- --------- --------- --------- --------- ---------
Balance at End of Period................ $ 5,085 $ 4,050 $ 4,575 $ 3,564 $ 3,370 $ 3,249 $ 3,317
========= ========= ========= ========= ========= ========= =========
Ratio of Net Charge-Offs (Recoveries) to
Average Loans Outstanding............. $ 0.13% $ 0.10% $ 0.13% $ 0.34% $ 0.32% $ 0.23% $ (0.23%)
========= ========= ========= ========= ========= ========= =========
</TABLE>
ALLOCATION OF RESERVE FOR LOAN LOSS
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
-------------------------------- --------------------------------
2000 1999 1999 1998
-------------- -------------- -------------- --------------
% OF % OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ ----- ------ ----- ------ -----
(dollars in thousands)
Real Estate-
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Construction ........... $ 183 3.6% $ 82 2.0% $ 91 2.0% $ 52 1.5%
Real Estate-
Other .................. 1,929 37.9% 1,525 37.7% 1,804 39.4% 1,291 36.2%
Commercial
Loans .................. 1,596 31.4% 1,224 30.2% 1,558 34.1% 1,182 33.2%
Loans to
Individuals ............ 1,267 24.9% 1,212 29.9% 1,077 23.5% 1,017 28.5%
Unallocated ............. 110 2.2% 7 0.2% 45 1.0% 22 0.6%
------ ----- ------ ----- ------ ----- ------ -----
Balance at End of
Period ................. $5,085 100% $4,050 100% $4,575 100% $3,564 100%
====== ===== ====== ===== ====== ===== ====== =====
<CAPTION>
DECEMBER 31
--------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
% of % of % of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Real Estate-
Construction ........... $ 52 1.5% $ 39 1.2% $ 23 0.7%
Real Estate-
Other .................. 1,087 32.3% 1,059 32.6% 1,209 36.4%
Commercial
Loans .................. 1,181 35.0% 1,129 34.7% 1,059 31.9%
Loans to
Individuals ............ 1,040 30.9% 948 29.2% 934 28.2%
Unallocated ............. 10 0.3% 74 2.3% 92 2.8%
------ ----- ------ ----- ------ -----
Balance at End of
Period ................. $3,370 100% $3,249 100% $3,317 100%
====== ===== ====== ===== ====== =====
</TABLE>
NONPERFORMING ASSETS
Nonperforming assets consist of delinquent loans over 90 days past due,
nonaccrual loans, other real estate owned and restructured loans. Nonaccrual
loans are those loans which are more than 90 days delinquent and collection in
full of both the principal and interest is in doubt. Additionally, some loans
that are not delinquent may be placed on nonaccrual status due to doubts about
full collection of principal or interest. When a loan is categorized as
nonaccrual, the accrual of interest is discontinued and the accrued balance is
reversed for financial statement purposes. Other real estate owned represents
real estate taken in full or partial satisfaction of debts previously
contracted. The other real estate owned consists of commercial real estate. We
are actively marketing the property and it is not held for investment purposes.
Restructured loans represent loans that have been renegotiated to provide a
reduction or deferral of interest or principal because of deterioration in the
financial
50
<PAGE> 52
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 determining potential loan losses.
The following table of nonperforming assets is classified according to
bank regulatory call report guidelines:
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------- -----------------------------------------------
2000 1999 1998 1997 1996 1995
-------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans 90 Days Past Due:
Real Estate .................... $ 409 $ 233 $ 412 $ 454 $ 214 $ 266
Loans to Individuals ........... 64 58 44 232 170 203
Commercial ..................... 190 48 120 56 88 183
------ ------ ------ ------ ------ ------
$ 663 $ 339 $ 576 $ 742 $ 472 $ 652
------ ------ ------ ------ ------ ------
Loans on Nonaccrual:
Real Estate .................... $ 48 $ -- $ 2 $ 108 $ 646 $ 486
Loans to Individuals ........... 178 281 263 177 113 116
Commercial ..................... 311 422 167 1,059 774 654
------ ------ ------ ------ ------ ------
$ 537 $ 703 $ 432 $1,344 $1,533 $1,256
------ ------ ------ ------ ------ ------
Restructured Loans:
Real Estate .................... $ 170 $ 178 $ 197 $ 214 $ 230 $ 243
Loans to Individuals ........... 227 214 222 189 108 49
Commercial ..................... 84 56 54 32 62 44
------ ------ ------ ------ ------ ------
$ 481 $ 448 $ 400 $ 435 $ 400 $ 336
------ ------ ------ ------ ------ ------
Total Nonperforming Loans .......... $1,681 $1,490 $1,481 $2,521 $2,405 $2,244
Other Real Estate Owned ............ 140 140 195 364 273 273
Repossessed Assets ................. 94 209 326 206 262 240
------ ------ ------ ------ ------ ------
Total Nonperforming Assets ......... $1,915 $1,839 $2,002 $3,091 $2,940 $2,757
====== ====== ====== ====== ====== ======
Percentage of Total Assets ......... 0.2% 0.2% 0.2% 0.5% 0.6% 0.6%
Percentage of Loans and Leases,
Net of Unearned Income ......... 0.5% 0.5% 0.6% 1.0% 1.1% 1.2%
</TABLE>
Total nonperforming assets increased $76,000 between December 31, 1999
and June 30, 2000. Total nonperforming assets decreased $163,000 between
December 31, 1998 and December 31, 1999. Nonperforming assets as a percentage of
assets remained the same as the previous year at 0.2% and as a percentage of
loans decreased 0.1% to 0.5%. Nonperforming assets represent a drain on our
earning ability. Earnings losses are due both to the loss of interest income and
the costs associated with maintaining the other real estate owned, for taxes,
insurance and other operating expenses. In addition to the nonperforming assets,
at June 30, 2000 and December 31, 1999, in the opinion of management, we had
$459,000 and $201,000, respectively, of loans identified as potential problem
loans. A potential problem loan is a loan where information about possible
credit problems of the borrower is known, causing management to have serious
doubts about the ability of the borrower to comply with the present loan
repayment terms and may result in a future classification of the loan in one of
the nonperforming asset categories.
The following is a summary of our recorded investment in loans (primarily
nonaccrual loans) for which impairment has been recognized in accordance with
FAS114:
RECORDED INVESTMENT IN LOANS
<TABLE>
<CAPTION>
VALUATION CARRYING
TOTAL ALLOWANCE VALUE
----- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Commercial Loans .................. $311 $204 $107
Loans to Individuals .............. 178 24 154
Real Estate Loans ................. 48 2 46
---- ---- ----
Balance at June 30, 2000 .......... $537 $230 $307
==== ==== ====
Commercial Loans .................. $422 $225 $197
Loans to Individuals .............. 281 44 237
Real Estate Loans ................. -- -- --
---- ---- ----
Balance at December 31, 1999 ...... $703 $269 $434
==== ==== ====
Commercial Loans .................. $167 $ 32 $ 32
Loans to Individuals .............. $263 $ 49 $214
Real Estate Loans ................. 2 -- 2
---- ---- ----
Balance at December 31, 1998 ...... $432 $ 81 $351
==== ==== ====
</TABLE>
51
<PAGE> 53
For the six months ended June 30, 2000, the average recorded investment
in impaired loans was approximately $613,000. For the years ended December 31,
1999 and 1998, the average recorded investment in impaired loans was
approximately $565,000 and $665,000, respectively. During the years ended
December 31, 1999 and 1998, the amount of interest income reversed on impaired
loans placed on nonaccrual and the amount of interest income subsequently
recognized on the cash basis was not material.
The net amount of interest recognized on loans that were nonaccruing or
restructured during the six months ended June 30, 2000 and for the year ended
December 31, 1999, 1998 and 1997 was $52,000, $125,000, $94,000 and $110,000,
respectively. If these loans had been accruing interest at their original
contracted rates, related income would have been $67,000, $137,000, $113,000 and
$336,000 for the six months ended June 30, 2000 and for the years ended December
31, 1999, 1998 and 1997, respectively.
ALLOWANCE FOR LOSSES ON OTHER REAL ESTATE OWNED
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
---------------- -------------------------------
2000 1999 1998 1997
---------------- ----- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of year $ 61 $ 658 $ 672 $ 946
Acquisition of OREO ..... -- 61 -- --
Disposition of OREO ..... -- (658) (14) (274)
----- ----- ----- -----
Balance at end of year ..... $ 61 $ 61 $ 658 $ 672
===== ===== ===== =====
</TABLE>
SECURITIES ACTIVITY
Our securities portfolio plays a primary role in management of our
interest rate sensitivity and, therefore, is managed in the context of the
overall balance sheet. The securities portfolio generates a substantial
percentage of our interest income and serves as a necessary source of liquidity.
We account for debt and equity securities as follows:
o Held to Maturity. Debt securities that management has the positive
intent and ability to hold until maturity are classified as held
to maturity and are carried at their remaining unpaid principal
balance, net of unamortized premiums or unaccreted discounts.
Premiums are amortized and discounts are accreted using the level
interest yield method over the estimated remaining term of the
underlying security.
o Available for sale. Debt and equity securities that will be held
for indefinite periods of time, including securities that may be
sold in response to changes in market interest or prepayment
rates, needs for liquidity and changes in the availability of and
the yield of alternative investments are classified as available
for sale. These assets are carried at market value. Market value
is determined using published quotes as of the close of business.
Unrealized gains and losses are excluded from earnings and
reported net of tax as a separate component of shareholders'
equity until realized.
Management attempts to deploy investable funds into instruments that are
expected to increase the overall return of the portfolio given the current
assessment of economic and financial conditions, while maintaining acceptable
levels of capital, interest rate and liquidity risk.
52
<PAGE> 54
INVESTMENT SECURITIES, MORTGAGE-BACKED SECURITIES AND MARKETABLE EQUITY
SECURITIES
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------- --------------------------------------
2000 1999 1998 1997
-------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury ..................... $ 5,981 $ 9,467 $ 19,198 $ 19,956
U.S. Government Agencies .......... 10,789 21,168 21,377 631
Mortgage-backed Securities:
Direct Govt. Agency Issues ..... 198,221 232,855 229,707 93,981
Other Private Issues ........... 25,749 40,821 103,487 33,770
State and Political Subdivisions .. 44,245 55,543 90,533 47,658
Other Stocks and Bonds ............ 20,801 28,609 15,510 6,044
-------- -------- -------- --------
Total .................... $305,786 $388,463 $479,812 $202,040
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------- ---------------------------------------
2000 1999 1998 1997
-------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
HELD TO MATURITY:
U.S. Government Agencies .......... $ 47,262 $ 42,871 $ 347 $ 804
Mortgage-backed Securities:
Direct Govt. Agency Issues ... 69,825 14,967 7,810 13,662
Other Private Issues ......... 75,158 58,931 -- --
State and Political Subdivisions .. 54,996 43,048 -- --
Other Stocks and Bonds ............ 9,592 289 -- --
-------- -------- -------- ---------
Total .................... $256,833 $160,106 $ 8,157 $ 14,466
======== ======== ======== ========
</TABLE>
We invest in mortgage-backed and related securities, including mortgage
participation certificates, which are insured or guaranteed by U.S. Government
agencies and government sponsored enterprises, and collateralized mortgage
obligations and real estate mortgage investment conduits. Mortgage-backed
securities (which also are known as mortgage participation certificates or
pass-through certificates) represent a participation interest in a pool of
single-family or multi-family mortgages, the principal and interest payments on
which are passed from the mortgage originators, through intermediaries
(generally U.S. Government agencies and government sponsored enterprises) that
pool and repackage the participation interests in the form of securities, to
investors such as us. Such U.S. Government agencies and government sponsored
enterprises, which guarantee the payment of principal and interest to investors,
primarily include the Federal Home Loan Mortgage Corporation, the Federal
National Mortgage Association and the Government National Mortgage Association.
Mortgaged-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
characteristics of the underlying pool of mortgages, i.e., fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder. The term of a mortgaged-backed pass-through security thus approximates
the term of the underlying mortgages.
Our mortgaged-backed derivative securities include collateralized
mortgage obligations, which include securities issued by entities which have
qualified under the Internal Revenue Code as real estate mortgage investment
conduits. Collateralized mortgage obligations and real estate mortgage
investment conduits. (collectively collateralized mortgage obligations) have
been developed in response to investor concerns regarding the uncertainty of
cash flows associated with the prepayment option of the underlying mortgagor and
are typically issued by governmental agencies, government sponsored enterprises
and special purpose entities, such as trusts, corporations or partnerships,
established by financial institutions or other similar institutions. A
collateralized mortgage obligation can be collateralized by loans or securities
which are insured or guaranteed by Federal National Mortgage Association,
Federal Home Loan Mortgage Corporation or the Government National Mortgage
Association. In contrast to pass-through mortgage-backed securities, in which
cash flow is received pro rata by all security holders, the cash flow from the
mortgages underlying a collateralized mortgage obligation is segmented and paid
in accordance with a predetermined priority to investors holding various
collateralized mortgage obligation classes. By allocating the principal and
interest cash flows from the underlying collateral among the separate
collateralized mortgage obligation classes, different classes of bonds are
created, each with its own stated maturity, estimated average life, coupon rate
and prepayment characteristics.
53
<PAGE> 55
Like most fixed-income securities, mortgage-backed and related
securities are subject to interest rate risk. However, unlike most fixed-income
securities, the mortgage loans underlying a mortgage-backed or related security
generally may be prepaid at any time without penalty. The ability to prepay a
mortgage loan generally results in significantly increased price and yield
volatility (with respect to mortgage-backed and related securities) than is the
case with non-callable fixed income securities. Furthermore, mortgage-backed
derivative securities often are more sensitive to changes in interest rates and
prepayments than traditional mortgage-backed securities and are, therefore, even
more volatile.
Average securities increased $12.6 million or 2.3% during the period
from June 30, 2000 compared to December 31, 1999. Average securities increased
$214 million or 65.6% during the year ended December 31, 1999 compared to 1998.
Beginning in the second quarter of 1998 and continuing through the second
quarter ended June 30, 1999, we implemented our strategy to leverage the balance
sheet to offset the interest expense associated with the trust preferred
securities issued. The leverage strategy consists of borrowing long and short
term funds from the Federal Home Loan Bank and investing the funds primarily in
municipal and mortgage-backed securities. This accounted for the increase in
average securities. The mix of average securities between taxable and tax-exempt
securities changed to 84% taxable and 16% tax-exempt for the six months ended
June 30, 2000, compared to 83.1% taxable and 16.9% tax-exempt for the year ended
1999 and 78.8% taxable and 21.2% tax-exempt for the year ended 1998 due to tax
considerations. Average other interest earning assets, consisting primarily of
federal funds sold, decreased $3.3 million or 42.4% during the six months ended
June 30, 2000, and increased $4.4 million or 129.3% during the year ended
December 31, 1999 compared to 1998. The mix of taxable securities reflected a
slight decrease in mortgage-backed securities. Average mortgage-backed
securities represented 65.0% of the total securities portfolio as of June 30,
2000, and 66.3% of the total securities portfolio for 1999 compared to 69.4% for
1998.
The combined investment securities, mortgage-backed securities, and
marketable equity securities portfolio increased to $562.6 million on June 30,
2000, compared to $548.6 million on December 31, 1999, an increase of $14.1
million or 2.6%, and increased to $548.6 million on December 31, 1999, compared
to $488.0 million on December 31, 1998, an increase of $60.6 million or 12.4%.
Mortgage-backed securities increased $27.9 million during the first six months
of 2000 and increased $6.6 million or 1.9% during 1999 when compared to 1998.
State and political subdivisions increased $650,000 during the first six months
of 2000 and increased $8.1 million or 8.9% during 1999. U.S. Treasury securities
decreased $3.5 million during the first six months of 2000 and decreased during
1999 compared to 1998 by $9.7 million or 50.7%. U.S. government agency
securities decreased $6.0 million during the first six months of 2000, and
increased $42.3 million or 194.8% during 1999. Other stocks and bonds increased
$1.5 million during the first six months of 2000 and increased $13.4 million or
86.3% in 1999 compared to 1998 due to increased purchases of corporate bonds and
increases in Federal Home Loan Bank equity securities. During 1999, the two to
ten year treasury rates increased approximately 170 basis points and the 30 year
treasury rate increased 139 basis points. During the first half of 1999, as
rates began to increase, we sold a portion of its longer term municipal
securities and intermediate term mortgage-backed securities and replaced them
primarily with premium mortgage-backed collateral pools and agency floaters.
As rates continued to increase, we purchased additional premium
mortgage-backed securities balanced with discount mortgage-backed securities
primarily with intermediate term average lives. In the fourth quarter of 1999,
with rates up significantly, we purchased longer term municipals and U.S. agency
securities balanced with short-term agency securities and premium
mortgage-backed securities.
The market value of our securities portfolio at June 30, 2000 was
$558.4 million with a net unrealized loss on that date of $16.5 million. The net
unrealized loss is comprised of $19.1 million in unrealized losses and $2.6
million in unrealized gains. The market value of the securities portfolio at
December 31, 1999 was $544.7 million, which represents a net unrealized loss on
of $10.0 million. The net unrealized loss is comprised of $11.2 million in
unrealized losses and $1.2 million of unrealized gains. Net unrealized gains and
losses on securities available for sale, which is a component of shareholders'
equity on the consolidated balance sheet, can fluctuate significantly as a
result of changes in interest rates. Because we cannot predict the future
direction of interest rates, the effect on shareholders' equity in the future
cannot be determined; however, this risk is monitored closely through the use of
shock tests on the available for sale securities portfolio using an array of
interest rate assumptions.
During the six months ended June 30, 2000 and the year ended December
31, 1999, we transferred a total of $91.7 million and $132.4 million,
respectively, securities from available for sale to held to maturity due to
changes in market conditions and Asset/Liability Management Committee
objectives. Of the total transferred, $21.2 million and $66.3 million were
investment securities and $70.5 million and $66.1 million transferred were
mortgage-backed securities. The unrealized loss on the securities transferred
from available for sale to held to maturity was $2.6 million and $5.6 million,
net of tax, at the date of transfer. There were no securities transferred from
available for sale to held to maturity during the six months ended June 30, 2000
and for the years ended December 31, 1999 or
54
<PAGE> 56
1998 and there were no sales from the held to maturity portfolio during the six
months ended June 30, 2000 and for the years ended December 31, 1999 or 1998.
The maturities classified according to the sensitivity to changes in
interest rates of the June 30, 2000 securities portfolio and the weighted yields
are presented below. Tax-exempt obligations are shown on a taxable equivalent
basis. Mortgage-backed securities are classified according to repricing
frequency and cash flows from published estimates of principal prepayments.
MATURITIES AND SENSITIVITIES OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
MATURING OR REPRICING
------------------------------------------------------------------------------
AFTER 1 BUT AFTER 5 BUT
WITHIN 1 YR. WITHIN 5 YRS. WITHIN 10 YRS. AFTER 10 YRS.
----------------- ------------------ ---------------- ---------------------
Available for sale: AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
---------- ----- --------- ------- -------- ------ --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Treasury.......................... $ 5,981 5.43% $ % $ -- -- $ -- --
U.S. Government Agencies............... 4,907 6.70% % 5,882 7.37% -- --
Mortgage-backed Securities............. 53,196 7.64% 109,294 7.67% 48,773 7.60% 12,707 7.45%
State and Political Subdivisions....... 968 7.82% 2,174 8.27% 5,950 7.79% 35,153 7.99%
Other Stocks and Bonds................. 19,092 4.74% 1,457 7.90% -- -- 252 5.24%
-------- -------- -------- --------
Total.............................. $ 84,144 6.77% $112,925 7.68% $ 60,605 7.60% $ 48,112 7.83%
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
MATURING OR REPRICING
------------------------------------------------------------------------------
AFTER 1 BUT AFTER 5 BUT
WITHIN 1 YR. WITHIN 5 YRS. WITHIN 10 YRS. AFTER 10 YRS.
----------------- ------------------ --------------------------------------
Held to Maturity: AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
---------- ----- -------- ------- ------- ------ -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Agencies............... $ -- $ 11,803 6.43% $ -- $ 17,467 7.54%
Mortgage-backed Securities............. 18,504 7.35% 43,982 7.46% 17,992 7.46% 54,318 7.35%
State and Political Subdivisions....... 480 7.16% 1,450 7.34% 28,179 7.42% 49,438 8.26%
Other Stocks and Bonds................. 989 7.00% 2,465 6.25% 3,628 7.61% 6,137 6.42%
-------- -------- -------- --------
Total.............................. $ 19,973 7.33% $ 59,700 7.20% $ 49,799 7.45% $127,360 7.68%
======== ======== ======== ========
</TABLE>
DEPOSITS AND BORROWED FUNDS
Deposits provide us with our primary source of funds. The increase of
$54.7 million or 9.3% in total deposits during the six months ended June 30,
2000 provided us with funds for a portion of the growth in loans. Time deposits
increased $62.0 million or 23.1% during the six months ended June 30, 2000. Time
deposits increased $24.0 million or 9.8% during 1999 compared to 1998.
Noninterest bearing demand deposits decreased $4.9 million during the six months
ended June 30, 2000. Noninterest bearing demand deposits increased $28.2 million
or 23% during 1999. Interest bearing demand deposits decreased $4.6 million or
3.1% and savings deposits increased $2.3 million or 11.1% during the six months
ended June 30, 2000. Interest bearing deposits increased $17.7 million or 13.5%
and saving deposits increased $2.6 million or 14.9% during 1999. The latter
three categories, which are considered the lowest cost deposits, comprised 48.6%
of total deposits at June 30, 2000 compared to 54.4% at December 31, 1999 and
52.6% at December 31, 1998.
<TABLE>
<CAPTION>
DEPOSITS
JUNE 30, DECEMBER 31,
------------ ------------------------------------------
2000 1999 1998 1997
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Noninterest Bearing Demand Deposits ......... $ 145,699 $ 150,629 $ 122,440 $ 98,592
Interest Bearing Demand Deposits ............ 144,044 148,625 130,940 121,861
Savings Deposits ............................ 22,534 20,282 17,649 16,155
Time Deposits ............................... 329,963 268,008 244,005 226,066
------------ ------------ ------------ ------------
Total Deposits ....................... $ 642,240 $ 587,544 $ 515,034 $ 462,674
============ ============ ============ ============
</TABLE>
During the six months ended June 30, 2000, total time deposits of
$100,000 or more increased $54.8 million or 55.8% from December 31, 1999. During
the year ended December 31, 1999, total time deposits of $100,000 or more
increased $7.5 million or 8.3% from December 31, 1998. This increase was due to
overall bank growth which
55
<PAGE> 57
accounted for an increase of $19.1 million in time certificates of deposit at
year ended December 31, 1999, and more than offset the decrease in public funds
of $11.6 million at December 31, 1999.
MATURITY DISTRIBUTION OF TIME DEPOSITS GREATER THAN $100,000
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------------------- -------------------------------- ----------------------------------
TIME OTHER TIME OTHER TIME OTHER
CERTS. TIME CERTS. TIME CERTS. TIME
OF DEPOSIT DEPOSITS TOTAL OF DEPOSIT DEPOSITS TOTAL OF DEPOSIT DEPOSITS TOTAL
---------- --------- --------- ---------- --------- --------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Three months or
less ........... $ 24,212 $ 7,641 $ 31,853 $ 29,146 $ 11,256 $ 40,402 $ 20,201 $ 29,930 $ 50,131
Over three to six
months ......... 8,978 13,228 22,206 14,345 13,228 27,573 10,201 6,564 16,765
Over six to
twelve months... 76,321 -- 76,321 11,377 459 11,836 13,560 -- 13,560
Over twelve
months.......... 22,340 459 22,799 18,536 -- 18,536 10,380 -- 10,380
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total .......... $ 131,851 $ 21,328 $ 153,179 $ 73,404 $ 24,943 $ 98,347 $ 54,342 $ 36,494 $ 90,836
========= ========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
Short-term obligations, consisting primarily of Federal Home Loan Bank
advances and federal funds purchased, increased $62.4 million or 50.4% during
1999 when compared to 1998. This increase reflects a strategically planned
increase in balance sheet leverage to achieve certain Asset Liability Committee
objectives.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------- --------------------------------------
2000 1999 1998 1997
-------------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Federal Home Loan Bank Dallas Advances
Balance at end of period ............................. $ 144,009 $ 181,222 $ 118,000 $ 29,000
Average amount outstanding during the period(1) ...... 164,294 155,719 61,734 6,798
Maximum amount outstanding during the period ......... 185,097 186,500 135,000 29,000
Weighted average interest rate during the period(2) .. 5.93% 5.30% 5.30% 5.50%
Interest rate at end of period ....................... 6.54% 5.30% 5.00% 4.90%
</TABLE>
----------
(1) The average amount outstanding during the period was computed by dividing
the total month-end outstanding principal balances by the number of months
in the period.
(2) The weighted average interest rate during the period was computed by
dividing the actual interest expense (annualized) by average balance
outstanding during the period.
Long-term obligations primarily consisting of Federal Home Loan Bank
advances and trust preferred securities increased $18.7 million during 1999 to
$194.7 million or a 10.6% increase when compared to $176.0 million in 1998. The
advances were obtained from Federal Home Loan Bank as part of a strategically
planned increase in balance sheet leverage to achieve certain Asset Liability
Committee objectives. The Federal Home Loan Bank advances are collateralized by
Federal Home Loan Bank stock, nonspecified real estate loans and securities. On
May 18, 1998, through our wholly owned subsidiary, Southside Capital Trust I, we
sold 2,000,000 preferred securities at a liquidation amount of $10 per preferred
security for an aggregate amount of $20 million. These securities have a
distribution rate of 8.50% per annum payable at the end of each calendar
quarter.
BANKING INDUSTRY IN TEXAS
The banking industry is affected by general economic conditions such as
interest rates, inflation, recession, unemployment and other factors beyond our
control. During the mid to late 1980's, declining oil prices had an indirect
effect on our business, and the deteriorating real estate market caused a
significant portion of the increase in our nonperforming assets during that
period. During the early 1990's, the East Texas economy entered into a recovery
and growth period that continues to this day. During the last ten years the East
Texas economy has diversified, decreasing the overall impact of declining oil
prices, however the East Texas economy is still affected by the oil industry.
One area of concern continues to be the personal bankruptcy rate occurring
nationwide. Management expects this trend to have some effect on our net
charge-offs. Our management, however, cannot predict whether current economic
conditions will improve, remain the same or decline.
COMPETITION
The activities we and the bank engage in are highly competitive.
Financial institutions such as savings and loan associations, credit unions,
consumer finance companies, insurance companies, brokerage companies and other
financial institutions with varying degrees of regulatory restrictions compete
vigorously for a share of the financial
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<PAGE> 58
services market. Brokerage companies continue to become more competitive in the
financial services arena and pose an ever increasing challenge to banks.
Legislative changes also greatly affect the level of competition we face. During
1998 federal legislation allowed credit unions to expand their membership
criteria. This legislation allows credit unions to use their expanded membership
capabilities combined with tax free status to compete more fiercely for
traditional bank business. Because banks do not enjoy a tax free status, credit
unions will have a competitive advantage. Additionally, the Gramm-Leach-Bliley
Financial Services Modernization Act of 1999 expanded the types of activities in
which a bank holding company can engage. Currently, we must compete against some
institutions located in East Texas and elsewhere in our service area which have
capital resources and legal loan limits substantially in excess of those
available to us and the bank. We expect the competition to continue to increase.
EMPLOYEES
At June 30, 2000, we employed 355 full time equivalent persons. None of
the employees are represented by any unions or similar groups, and we have not
experienced any type of strike or labor dispute. We consider our relationship
with our employees to be good.
LITIGATION
We are party to legal proceedings arising in the normal conduct of
business. Our management believes that this litigation is not material to our
financial position or results of our operations or the operations of the bank.
PROPERTIES
We own the following properties:
o A two story building in Tyler, Texas, at 1201 South Beckham
Avenue and the property adjacent to the main bank building,
known as the Southside Bank Annex. These properties house the
executive offices of Southside Bancshares, Inc.
o Property and a building directly adjacent to the building
housing the Southside Bank Annex. The building is referred to
as the Operations Annex, where various back office lending and
accounts payable operations are located.
o Land and building located at 1010 East First Street in Tyler
where Motor Bank facilities are located.
o 2.21 acres of land located at the intersection of South
Broadway Avenue and Grande Boulevard in Tyler. The tract is
occupied by Southside Bank's South Broadway branch, which
currently provides a full line of banking services.
o Property on South Broadway Avenue near the South Broadway
branch where motor bank facilities are located.
o Twenty-one Automatic Teller Machines (ATM) facilities located
throughout Smith and Gregg Counties.
o Building located in the downtown square of Tyler which houses
Southside Bank's Downtown branch, providing a full line of
banking services.
o Gentry Parkway branch and motor bank facility at 2121 West
Gentry Parkway in Tyler.
o Property at 2001 Judson Road in Longview, Texas, where we
constructed a permanent branch facility complete with motor
bank facilities.
o Property on U.S. Highway 69 in Lindale, Texas, where we will
construct a permanent branch facility complete with motor bank
facilities.
o Property in Whitehouse, Texas, where we will construct a
permanent branch facility complete with motor bank facilities.
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<PAGE> 59
We completed expansion and remodeling of our annex building,
immediately across the parking lot from the bank headquarters during 1999. We
purchased property in Longview, Texas at 2001 Judson Road during 1998.
Construction of a permanent branch facility at this location began during 1999
and was completed during 2000. We began an addition to the operations annex
building located on the property of the bank's headquarters during 1999.
Completion is anticipated during the fourth quarter of 2000. We have purchased
property in Lindale on Highway 69, north of Interstate 20 on which we plan to
build a branch facility with motor bank facilities in the near future. During
the second quarter of 2000, we received approval from the Federal Deposit
Insurance Corporation to open a second full service branch in Lindale. We plan
to open this branch during the fourth quarter of 2000. We also acquired property
in Whitehouse, Texas in southern Smith County on which we plan to construct a
full service branch during 2001, pending regulatory approval.
SUPERVISION AND REGULATION
Banking is a complex, highly regulated industry. The primary goals of
the bank regulatory scheme are to maintain a safe and sound banking system and
to facilitate the conduct of sound monetary policy. In furtherance of these
goals, Congress has created several largely autonomous regulatory agencies and
enacted numerous laws that govern banks, bank holding companies and the banking
industry. The descriptions of and references to the statutes and regulations
below are brief summaries and do not purport to be complete. The descriptions
are qualified in their entirety by reference to the specific statutes and
regulations discussed.
SOUTHSIDE
As bank holding companies under the Bank Holding Company Act of 1956,
as amended, we and Southside Delaware are registered with and subject to
regulation by the Federal Reserve. We are both required to file annual and other
reports with, and furnish information to, the Federal Reserve, which makes
periodic inspections of us.
The Bank Holding Company Act provides that a bank holding company must
obtain the prior approval of the Federal Reserve for the acquisition of more
than five percent of the voting stock or substantially all the assets of any
bank or bank holding company. In addition, the Bank Holding Company Act
restricts the extension of credit to any bank holding company by its subsidiary
bank. The Bank Holding Company Act also provides that, with certain exceptions,
a bank holding company may not engage in any activities other than those of
banking or managing or controlling banks and other authorized subsidiaries or
own or control more than five percent of the voting shares of any company that
is not a bank. The Federal Reserve has deemed limited activities to be closely
related to banking and therefore permissible for a bank holding company.
Traditionally, the activities of bank holding companies have been
limited to the business of banking and activities closely related or incidental
to banking. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999,
which became effective on March 11, 2000, expands the types of activities in
which a bank holding company may engage. Subject to various limitations, the
Modernization Act generally permits a bank holding company to elect to become a
"financial holding company." A financial holding company may affiliate with
securities firms and insurance companies and engage in other activities that are
"financial in nature." Among the activities that are deemed "financial in
nature" are, in addition to traditional lending activities, securities
underwriting, dealing in or making a market in securities, sponsoring mutual
funds and investment companies, insurance underwriting and agency activities,
certain merchant banking activities and activities that the Federal Reserve
considers to be closely related to banking.
A bank holding company may become a financial holding company under the
Modernization Act if each of its subsidiary banks is "well capitalized" under
the Federal Deposit Insurance Corporation Improvement Act prompt corrective
action provisions, is well managed and has at least a satisfactory rating under
the Community Reinvestment Act. In addition, the bank holding company must file
a declaration with the Federal Reserve that the bank holding company wishes to
become a financial holding company. A bank holding company that falls out of
compliance with these requirements may be required to cease engaging in some of
its activities.
Any bank holding company that does not elect to become a financial
holding company remains subject to the current restrictions of the Bank Holding
Company Act. In a similar manner, a bank may establish one or more subsidiaries,
which subsidiaries may then engage in activities that are financial in nature.
However, applicable law and regulation provide that the amount of investment in
these activities generally are limited to 45% of the total assets of the bank,
and these investments are not aggregated with the bank for determining
compliance with capital adequacy guidelines. Further, the transactions between
the bank and this type of subsidiary are subject to a number of limitations.
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<PAGE> 60
Under the Modernization Act, the Federal Reserve serves as the primary
"umbrella" regulator of financial holding companies, with supervisory authority
over each parent company and limited authority over its subsidiaries. Expanded
financial activities of financial holding companies generally will be regulated
according to the type of such financial activity: banking activities by banking
regulators, securities activities by securities regulators and insurance
activities by insurance regulators. The Modernization Act also imposes
additional restrictions and heightened disclosure requirements regarding private
information collected by financial institutions. All implementing regulations
under the Modernization Act have not yet become effective in final form, and we
cannot predict the full sweep of the new legislation and have not yet determined
whether we will elect to become a financial holding company.
The Federal Reserve has cease-and-desist powers over bank holding
companies and their nonbanking subsidiaries where their actions would constitute
a serious threat to the safety, soundness or stability of a subsidiary bank.
Federal regulatory agencies also have authority to regulate debt obligations
(other than commercial paper) issued by bank holding companies. This authority
includes the power to impose interest ceilings and reserve requirements on such
debt obligations. A bank holding company and its subsidiaries are also
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit, lease or sale of property or furnishing of services.
Federal banking law generally provides that a bank holding company may
acquire or establish banks in any state of the United States, subject to certain
aging and deposit concentration limits. In addition, Texas banking laws permit a
bank holding company which owns stock of a bank located outside the State of
Texas to acquire a bank or bank holding company located in Texas. This type of
acquisition may occur only if the Texas bank to be directly or indirectly
controlled by the out-of-state bank holding company has existed and continuously
operated as a bank for a period of at least five years. In any event, a bank
holding company may not own or control banks in Texas the deposits of which
would exceed 20% of the total deposits of all federally-insured deposits in
Texas. We have no present plans to acquire or establish banks outside the State
of Texas but have not eliminated the possibility of doing so.
The Federal Reserve has promulgated capital adequacy regulations for
all bank holding companies with assets in excess of $150 million. The Federal
Reserve's capital adequacy regulations are based upon a risk based capital
determination, whereby a bank holding company's capital adequacy is determined
in light of the risk, both on- and off-balance sheet, contained in the company's
assets. Different categories of assets are assigned risk weightings and are
counted at a percentage of their book value.
The regulations divide capital between Tier 1 capital (core capital)
and Tier 2 capital. For a bank holding company, Tier 1 capital consists
primarily of common stock, related surplus, noncumulative perpetual preferred
stock, minority interests in consolidated subsidiaries and a limited amount of
qualifying cumulative preferred securities. Goodwill and certain other
intangibles are excluded from Tier 1 capital. Tier 2 capital consists of an
amount equal to the allowance for loan and lease losses up to a maximum of 1.25%
of risk weighted assets, limited other types of preferred stock not included in
Tier 1 capital, hybrid capital instruments and term subordinated debt.
Investments in and loans to unconsolidated banking and finance subsidiaries that
constitute capital of those subsidiaries are excluded from capital. The sum of
Tier 1 and Tier 2 capital constitutes qualifying total capital. The Tier 1
component must comprise at least 50% of qualifying total capital.
Every bank holding company has to achieve and maintain a minimum Tier 1
capital ratio of at least 4.0% and a minimum total capital ratio of at least
8.0%. In addition, banks and bank holding companies are required to maintain a
minimum leverage ratio of Tier 1 capital to average total consolidated assets
(leverage capital ratio) of at least 3.0% for the most highly-rated, financially
sound banks and bank holding companies and a minimum leverage ratio of at least
4.0% for all other banks. The Federal Deposit Insurance Corporation and the
Federal Reserve define Tier 1 capital for banks in the same manner for both the
leverage ratio and the risk-based capital ratio. However, the Federal Reserve
defines Tier 1 capital for bank holding companies in a slightly different
manner. As of June 30, 2000, our Tier 1 leverage capital ratio was 6.42%.
The guidelines also provide that banking organizations experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory level, without
significant reliance on intangible assets. The guidelines also indicate that the
Federal Reserve will continue to consider a "Tangible Tier 1 Leverage Ratio" in
evaluating proposals for expansion or new activities. The Tangible Tier 1
Leverage Ratio is the ratio of Tier 1 capital, less intangibles not deducted
from Tier 1 capital, to quarterly
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<PAGE> 61
average total assets. As of June 30, 2000, the Federal Reserve had not advised
us of any specific minimum Tangible Tier 1 Leverage Ratio applicable to us.
As a bank holding company that does not, as an entity, currently engage
in separate business activities of a material nature, our ability to pay cash
dividends depends upon the cash dividends we receive from the bank through
Southside Delaware. Our only sources of income are dividends paid by the bank.
We must pay all of our operating expenses from funds we receive from the bank.
Therefore, shareholders may receive dividends from us only to the extent that
funds are available after payment of our operating expenses. In addition, in
November 1985 the Federal Reserve adopted a policy statement concerning payment
of cash dividends, which generally prohibits bank holding companies from paying
dividends except out of operating earnings, and the prospective rate of earnings
retention appears consistent with the bank holding company's capital needs,
asset quality and overall financial condition.
THE BANK
The bank is subject to various requirements and restrictions under the
laws of the United States and the State of Texas, and to regulation, supervision
and regular examination by the Texas Department of Banking and the Federal
Deposit Insurance Corporation. The Texas Department of Banking and the Federal
Deposit Insurance Corporation have the power to enforce compliance with
applicable banking statutes and regulations. These requirements and restrictions
include requirements to maintain reserves against deposits, restrictions on the
nature and amount of loans that may be made and the interest that may be charged
thereon and restrictions relating to investments and other activities of the
bank.
Transactions with Affiliates. The bank may not engage in specified
transactions (including, for example, loans) with its affiliates unless the
terms and conditions of those transactions are substantially the same or at
least as favorable to the bank as those prevailing at the time for comparable
transactions with or involving other nonaffiliated entities. In the absence of
comparable transactions, any transaction between the bank and its affiliates
must be on terms and under circumstances, including credit standards, that in
good faith would be offered or would apply to nonaffiliated companies. In
addition, transactions referred to as "covered transactions" between the bank
and its affiliates may not exceed 10% of the bank's capital and surplus per
affiliate and an aggregate of 20% of its capital and surplus for covered
transactions with all affiliates. Certain transactions with affiliates, such as
loans, also must be secured by collateral of specific types and amounts. The
bank also is prohibited from purchasing low quality assets from an affiliate.
Every company under common control with the bank, including us and Southside
Delaware, are deemed to be affiliates of the bank.
Loans to Insiders. Federal law also constrains the types and amounts of
loans that the bank may make to its executive officers, directors and principal
shareholders. Among other things, these loans must be approved by the bank's
board of directors in advance, must be on terms and conditions as favorable to
the bank as those available to an unrelated person and are limited in amount.
Regulation of Lending Activities. Loans made by the bank are also
subject to numerous federal and state laws and regulations, including the
Truth-In-Lending Act, Federal Consumer Credit Protection Act, the Texas Consumer
Credit Code, the Texas Consumer Protection Code, the Equal Credit Opportunity
Act, the Real Estate Settlement Procedures Act and adjustable rate mortgage
disclosure requirements. Remedies to the borrower or consumer and penalties to
the bank are provided if the bank fails to comply with these laws and
regulations. The scope and requirements of these laws and regulations have
expanded significantly in recent years.
Branch Banking. Pursuant to the Texas Finance Code, all banks located
in Texas are authorized to branch statewide. Accordingly, a bank located
anywhere in Texas has the ability, subject to regulatory approval, to establish
branch facilities near any of our facilities and within our market area. If
other banks were to establish branch facilities near our facilities, it is
uncertain whether these branch facilities would have a material adverse effect
on our business.
In 1994 Congress adopted the Reigle-Neal Interstate Banking and
Branching Efficiency Act of 1994. That statute provides for nationwide
interstate banking and branching, subject to certain aging and deposit
concentration limits that may be imposed under applicable state laws. Current
Texas law permits interstate branching only through acquisition of a financial
institution that is at least five years old, and after the acquisition, the
resulting institution and its affiliates cannot hold more than 20% of the total
deposits in the state. Accordingly, a bank with its main office outside of Texas
generally cannot branch on a de novo basis into Texas. The new law permits
applicable regulatory authorities to approve de novo branching in Texas by
institutions located in states that would permit Texas institutions to branch on
a de novo basis into those states.
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<PAGE> 62
The Federal Deposit Insurance Corporation has adopted regulations under
the Riegle-Neal Act to prohibit an out-of-state bank from using the new
interstate branching authority primarily for the purpose of deposit production.
These regulations include guidelines to insure that interstate branches operated
by an out-of-state bank in a host state are reasonably helping to meet the
credit needs of the communities served by the out-of-state bank.
Governmental Monetary Policies. The commercial banking business is
affected not only by general economic conditions but also by the monetary
policies of the Federal Reserve. Changes in the discount rate on member bank
borrowings, control of borrowings, open market operations, the imposition of and
changes in reserve requirements against member banks, deposits and assets of
foreign branches, the imposition of and changes in reserve requirements against
certain borrowings by banks and their affiliates and the placing of limits on
interest rates which member banks may pay on time and savings deposits are some
of the instruments of monetary policy available to the Federal Reserve. Those
monetary policies influence to a significant extent the overall growth of all
bank loans, investments and deposits and the interest rates charged on loans or
paid on time and savings deposits. The nature of future monetary policies and
the effect of such policies on the future business and earnings of the bank,
therefore, cannot be predicted accurately.
Dividends. All dividends paid by the bank are paid to us, the sole
indirect shareholder of the bank, through Southside Delaware. The general
dividend policy of the bank is to pay dividends at levels consistent with
maintaining liquidity and preserving our applicable capital ratios and servicing
obligations. The dividend policy of the bank is subject to the discretion of the
board of directors of the bank and will depend upon such factors as future
earnings, financial conditions, cash needs, capital adequacy, compliance with
applicable statutory and regulatory requirements and general business
conditions.
The ability of the bank, as a Texas banking association, to pay dividends
is restricted under applicable law and regulations. The bank generally may not
pay a dividend reducing its capital and surplus without the prior approval of
the Texas Banking Commissioner. All dividends must be paid out of net profits
then on hand, after deducting expenses, including losses and provisions for loan
losses. The Federal Deposit Insurance Corporation has the right to prohibit the
payment of dividends by the bank where the payment is deemed to be an unsafe and
unsound banking practice. The bank is also subject to certain restrictions on
the payment of dividends as a result of the requirements that it maintain an
adequate level of capital in accordance with guidelines promulgated from time to
time by the Federal Deposit Insurance Corporation.
The exact amount of future dividends on the stock of the bank will be a
function of the profitability of the bank in general and applicable tax rates in
effect from year to year. The bank's ability to pay dividends in the future will
directly depend on the its future profitability, which cannot be accurately
estimated or assured.
Capital Adequacy. In 1990, the federal banking regulators promulgated
capital adequacy regulations to which all national and state banks, such as the
bank, are subject. These requirements are similar to the Federal Reserve
requirements promulgated with respect to bank holding companies discussed
previously.
Changes in Management. Any depository institution that has been chartered
less than two years, is not in compliance with the minimum capital requirements
of its primary federal banking regulator or is otherwise in a troubled condition
must notify its primary federal banking regulator of the proposed addition of
any person to the board of directors or the employment of any person as a senior
executive officer of the institution at least 30 days before such addition or
employment becomes effective. During this 30-day period, the applicable federal
banking regulatory agency may disapprove of the addition of employment of such
director or officer. The bank is not subject to any such requirements.
Enforcement Authority. The federal banking laws also contain civil and
criminal penalties available for use by the appropriate regulatory agency
against certain "institution-affiliated parties" primarily including management,
employees and agents of a financial institution, as well as independent
contractors such as attorneys and accountants and others who participate in the
conduct of the financial institution's affairs and who caused or are likely to
cause more than minimum financial loss to or a significant adverse affect on the
institution, who knowingly or recklessly violate a law or regulation, breach a
fiduciary duty or engage in unsafe or unsound practices. These practices can
include the failure of an institution to timely file required reports or the
submission of inaccurate reports. These laws authorize the appropriate banking
agency to issue cease and desist orders that may, among other things, require
affirmative action to correct any harm resulting from a violation or practice,
including restitution, reimbursement, indemnification or guarantees against
loss. A financial institution may also be ordered to restrict its growth,
dispose of certain assets or take other action as determined by the ordering
agency to be appropriate.
Annual Audits. Every bank with total assets in excess of $500 million,
such as the bank, must have an annual independent audit made of the bank's
financial statements by a certified public accountant to verify that the
financial
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<PAGE> 63
statements of the bank are presented in accordance with generally accepted
accounting principles and comply with such other disclosure requirements as
prescribed by the Federal Deposit Insurance Corporation.
Prompt Corrective Action. Banks are subject to restrictions on their
activities depending on their level of capital. The Federal Deposit Insurance
Corporation's "prompt corrective action" regulations divides banks into five
different categories, depending on their level of capital. Under these
regulations, a bank is deemed to be "well capitalized" if it has a total
risk-based capital ratio of 10% or more, a core capital ratio of six percent or
more and a leverage ratio of five percent or more, and if the bank is not
subject to an order or capital directive to meet and maintain a certain capital
level. Under these regulations, a bank is deemed to be "adequately capitalized"
if it has a total risk-based capital ratio of eight percent or more, a core
capital ratio of four percent or more and a leverage ratio of four percent or
more (unless it receives the highest composite rating at its most recent
examination and is not experiencing or anticipating significant growth, in which
instance it must maintain a leverage ratio of three percent or more). Under
these regulations, a bank is deemed to be "undercapitalized" if it has a total
risk-based capital ratio of less than eight, a core capital ratio of less than
four percent or a leverage ratio of less than percent. Under these regulations,
a bank is deemed to be "significantly undercapitalized" if it has a risk-based
capital ratio of less than six percent, a core capital ratio of less than three
percent and a leverage ratio of less than three percent. Under such regulations,
a bank is deemed to be "critically undercapitalized" if it has a leverage ratio
of less than or equal to two percent. In addition, the Federal Deposit Insurance
Corporation has the ability to downgrade a bank's classification (but not to
"critically undercapitalized") based on other considerations even if the bank
meets the capital guidelines.
If a state nonmember bank, such as the bank, is classified as
undercapitalized, the bank is required to submit a capital restoration plan to
the Federal Deposit Insurance Corporation. An undercapitalized bank is
prohibited from increasing its assets, engaging in a new line of business,
acquiring any interest in any company or insured depository institution, or
opening or acquiring a new branch office, except under certain circumstances,
including the acceptance by the Federal Deposit Insurance Corporation of a
capital restoration plan for the bank.
If a state nonmember bank is classified as undercapitalized, the Federal
Deposit Insurance Corporation may take certain actions to correct the capital
position of the bank. If a bank is classified as significantly undercapitalized,
the Federal Deposit Insurance Corporation would be required to take one or more
prompt corrective actions. These actions would include, among other things,
requiring sales of new securities to bolster capital, improvements in
management, limits on interest rates paid, prohibitions on transactions with
affiliates, termination of certain risky activities and restrictions on
compensation paid to executive officers. If a bank is classified as critically
undercapitalized, the bank must be placed into conservatorship or receivership
within 90 days, unless the Federal Deposit Insurance Corporation determines
otherwise.
The capital classification of a bank affects the frequency of
examinations of the bank and impacts the ability of the bank to engage in
certain activities and affects the deposit insurance premiums paid by the bank.
The Federal Deposit Insurance Corporation is required to conduct a full-scope,
on-site examination of every bank at least once every twelve months. An
exception to this rule provides that banks that have assets of less than $100
million, are categorized as "well capitalized," were found to be well managed
with a composite rating of "outstanding" and have not been subject to a change
in control during the last 12 months, need only be examined by the Federal
Deposit Insurance Corporation once every 18 months.
Banks also may be restricted in their ability to accept brokered
deposits, depending on their capital classification. "Well capitalized" banks
are permitted to accept brokered deposits, but all banks that are not well
capitalized are not permitted to accept such deposits. The Federal Deposit
Insurance Corporation may, on a case-by-case basis, permit banks that are
adequately capitalized to accept brokered deposits if the Federal Deposit
Insurance Corporation determines that acceptance of such deposits would not
constitute an unsafe or unsound banking practice with respect to the bank.
Risk Based Deposit Insurance Premiums. The Federal Deposit Insurance
Corporation assesses insurance premiums on a bank's deposits at a variable rate
depending on the probability that the deposit insurance fund will incur a loss
with respect to the bank. The Federal Deposit Insurance Corporation determines
the deposit insurance assessment rates on the basis of the bank's capital
classification and supervisory evaluations. Each of these categories has three
subcategories, resulting in nine assessment risk classifications. The three
subcategories with respect to capital are "well capitalized," "adequately
capitalized" and "less than adequately capitalized (that would include
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized" banks). The three subcategories with respect to supervisory
concerns are "healthy," "supervisory concern" and "substantial supervisory
concern." A bank is deemed "healthy" if it is financially sound with only a few
minor weaknesses. A bank is deemed subject to "supervisory concern" if it has
weaknesses that, if not corrected, could result in significant deterioration of
the bank and increased risk to the Bank Insurance Fund of the Federal Deposit
Insurance
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Corporation. A bank is deemed subject to "substantial supervisory concern" if it
poses a substantial probability of loss to the Bank Insurance Fund.
Deposit Insurance. The bank's deposits are insured up to $100,000 per
insured account by the Bank Insurance Fund. The bank's deposit insurance
assessments may increase depending upon the risk category and subcategory, if
any, to which the bank is assigned by the Federal Deposit Insurance Corporation.
Any increase in insurance assessments could have an adverse effect on the bank's
earnings.
Our management and the bank's management cannot predict what other
legislation might be enacted or what other regulations might be adopted or the
effects thereof.
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MANAGEMENT
The following table includes the names and ages of our directors and the
executive officers of Southside and the bank, and the positions held by each of
the officers as of September 30, 2000
<TABLE>
<CAPTION>
NAME AGE POSITIONS HELD
---- --- --------------
<S> <C> <C>
B.G. Hartley........................ 71 Chairman of the Board of Southside and Chairman of the
Board and Chief Executive Officer of the bank
Robbie N. Edmonson.................. 67 Vice Chairman of the Board and Chief Administrative Officer
of the bank
Sam Dawson.......................... 53 President, Secretary and Director of Southside and
President and Chief Operations Officer of the bank
Lee R. Gibson....................... 44 Executive Vice President and Chief Financial Officer of
Southside and Executive Vice President of the bank
Jeryl Story......................... 49 Senior Executive Vice President - Loan Administration and
Senior Lending Officer of the bank
Fred E. Bosworth.................... 83 Director of Southside
Herbert C. Buie..................... 70 Director of Southside
Rollins Caldwell.................... 78 Director of Southside
W.D. (Joe) Norton................... 64 Director of Southside
Michael D. Gollob................... 67 Director of Southside
Paul W. Powell...................... 66 Director of Southside
William Sheehy...................... 59 Director of Southside
</TABLE>
Officers of Southside and the bank are elected annually by the board of
directors of Southside and the bank, respectively. The business experience of
each executive officer of Southside and the bank and each director of Southside
is set forth below.
B.G. HARTLEY - Mr. Hartley became Chairman of the Board of Southside in
1983. He is also Chairman of the Board and Chief Executive Officer of the bank,
having served as the bank's Chief Executive Officer since its opening in 1960.
He is a member of the board of directors of the American Bankers Association and
East Texas Medical Center Regional Healthcare Systems, and he is Chairman of the
board of directors of the Texas Taxpayers and Research Association and Texas
Bankers General Agency, Inc. He is also a Trustee of the R. W. Fair Foundation.
He is a Trustee and a member of the Executive Committee of Texas College.
ROBBIE N. EDMONSON - Mr. Edmonson is Vice Chairman of Southside, having
served in that capacity since 1998. He joined the bank as Vice President in
1968, and currently is Vice Chairman of the board of directors.
SAM DAWSON - Mr. Dawson is President and Secretary of Southside, serving
since 1998. He joined the bank in 1974 and currently serves as its President and
Chief Operations Officer. He is a director of East Texas Medical Center
Hospital, Cancer Institute and ETMC Rehabilitation Hospital. He is also a
director of the Tyler Area Chamber of Commerce and the Texas Bankers
Association.
LEE R. GIBSON - Mr. Gibson serves as Executive Vice President and Chief
Financial Officer of Southside and Executive Vice President and Chief Financial
Officer of the bank. He became an officer of Southside in 1985 and of the Bank
during 1984 and is responsible for the management of the bank's investment
portfolio.
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JERYL STORY - Mr. Story was elected Senior Executive Vice President -
Loan Administration of the bank during 1996. He joined the bank in 1979 and is
responsible for all lending functions of the bank and is the Senior Lending
Officer.
FRED E. BOSWORTH - Mr. Bosworth is a director of Southside. Before
retiring in 1997, he has been Chairman of the Board of Bosworth & Associates,
Inc., an independent insurance agency, since 1982. He has been associated with
the insurance industry in various capacities since 1935.
HERBERT C. BUIE - Mr. Buie is a director of Southside. He has been
President of Tyler Packing Company, Inc., a meat processing firm. He was
initially employed by Tyler Packing in 1947, and acquired the corporation
several years later. He has served on the Board of Directors of the Church of
God, School of Theology, since 1979 and also serves on the Board of Directors of
the University of Texas Health Center and the Developmental Board of Directors
of the University of Texas-Tyler. He also serves on the Boards of Directors of
the East Texas Regional Food Bank and the Texas Chest Foundation.
ROLLINS CALDWELL - Mr. Caldwell is a director of Southside. He is a
private investor who served as President of Caldwell Welding Supply Company for
37 years. He currently is involved in equipment and real estate leasing.
W. D. (JOE) NORTON - Mr. Norton is a director of the Company. He has been
the owner of W. D. Norton, Inc., d/b/a Overhead Door, since 1988. He also owns
Norton Equipment Company. Mr. Norton served as President and principal
shareholder of Norton Companies of Texas, Inc., for 25 years. He is a Director
of the Tyler Area Chamber of Commerce.
WILLIAM SHEEHY - Mr. Sheehy has been a partner in the law firm of Wilson,
Sheehy, Knowles, Robertson and Cornelius since 1971, and a practicing attorney
since 1964. Mr. Sheehy serves as the bank's outside general counsel.
MICHAEL D. GOLLOB - Mr. Gollob is a senior officer and founder of the
certified public accounting firm of Gollob, Morgan, Peddy & Co. P.C. He is a
director of the bank and also serves on the Texas Prepaid Higher Education
Tuition Board.
PAUL W. POWELL - Mr. Powell is a director of the bank, Chairman of the
Board and Chief Executive Officer of the Robert M. Rogers Foundation, serves on
the Board of Regents at Baylor University and is Chairman of the Board of
Trinity Mother Frances Health System. He was Chairman and Chief Executive
Officer of the Southern Baptist Annuity Board and also was pastor of Green Acres
Baptist Church.
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DESCRIPTION OF THE TRUST
Southside Capital Trust II is a statutory business trust formed pursuant
to the Delaware Business Trust Act under a trust agreement executed by us, as
sponsor for the trust, and the trustees, and a certificate of trust has been
filed with the Delaware Secretary of State. The trust agreement will be amended
and restated in its entirety in the form filed as an exhibit to the registration
statement of which this prospectus is a part, as of the date the convertible
preferred securities are initially issued. The trust agreement will be qualified
under the Trust Indenture Act of 1939.
The holders of the convertible preferred securities issued pursuant to
the offering described in this prospectus will own all of the issued and
outstanding convertible preferred securities of the trust which have certain
prior rights over the other securities of the trust in certain circumstances as
specified in this prospectus. We will not initially own any of the convertible
preferred securities. We will acquire common securities in an amount equal to at
least 3% of the total capital of the trust and will initially own, directly or
indirectly, all of the issued and outstanding common securities. The common
securities, together with the convertible preferred securities, are called the
trust securities.
The trust exists exclusively for the purposes of:
o issuing the convertible preferred securities to the public for
cash;
o issuing its common securities to us in exchange for our
capitalization of the trust;
o investing the proceeds from the sale of the trust securities in an
equivalent amount of convertible debentures; and
o engaging in other activities that are incidental to those listed
above, such as receiving payments on the convertible debentures
and making distributions to security holders, furnishing notices
and other administrative tasks.
The rights of the holders of the trust securities are as set forth in the
trust agreement, the Delaware Business Trust Act and the Trust Indenture Act.
The trust agreement does not permit the trust to borrow money or make any
investment other than in the convertible debentures. Other than with respect to
the trust securities, Southside has agreed to pay for all debts and obligations
and all costs and expenses of the trust, including the fees and expenses of the
trustees and any income taxes, duties and other governmental charges, and all
costs and expenses related to these charges, to which the trust may become
subject, except for United States withholding taxes that are properly withheld.
The number of trustees of the trust will initially be five. Three of the
trustees will be persons who are employees or officers of or who are affiliated
with Southside. They are the administrative trustees. The fourth trustee will be
an entity that maintains its principal place of business in the State of
Delaware. It is the Delaware trustee. Initially, Wilmington Trust Company, a
Delaware banking corporation, will act as Delaware trustee. The fifth trustee,
called the property trustee, will also initially be Wilmington Trust Company.
The property trustee is the institutional trustee under the trust agreement and
acts as the indenture trustee called for under the applicable provisions of the
Trust Indenture Act. Also for purposes of compliance with the Trust Indenture
Act, Wilmington Trust Company will act as guarantee trustee and indenture
trustee under the guarantee agreement and the indenture. We, as holder of all of
the common securities, will have the right to appoint or remove any trustee
unless an event of default under the indenture has occurred and is continuing,
in which case only the holders of the convertible preferred securities may
remove the Delaware trustee or the property trustee. The trust has a term of
approximately 31 years but may terminate earlier as provided in the trust
agreement.
The property trustee will hold the convertible debentures for the benefit
of the holders of the trust securities and will have the power to exercise all
rights, powers and privileges under the indenture as the holder of the
convertible debentures. In addition, the property trustee will maintain
exclusive control of a segregated noninterest-bearing "payment account"
established with Wilmington Trust Company to hold all payments made on the
convertible debentures for the benefit of the holders of the trust securities.
The property trustee will make payments of distributions and payments on
liquidation, redemption and otherwise to the holders of the trust securities out
of funds from the payment account. The guarantee trustee will hold the guarantee
for the benefit of the holders of the
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convertible preferred securities. We will pay all fees and expenses related to
the trust and the offering of the convertible preferred securities, including
the fees and expenses of the trustees.
DESCRIPTION OF THE CONVERTIBLE PREFERRED SECURITIES
The convertible preferred securities will be issued pursuant to the trust
agreement. For more information about the trust agreement, see "Description of
the Trust" beginning on page 66. Wilmington Trust Company will act as property
trustee for the convertible preferred securities under the trust agreement for
purposes of complying with the provisions of the Trust Indenture Act. The terms
of the convertible preferred securities will include those stated in the trust
agreement and those made part of the trust agreement by the Trust Indenture Act.
GENERAL
The trust agreement authorizes the administrative trustees, on behalf of
the trust, to issue the trust securities, which are comprised of the convertible
preferred securities to be sold to the public and the common securities. We will
own all of the common securities issued by the trust. The trust is not permitted
to issue any securities other than the trust securities or incur any other
indebtedness.
The convertible preferred securities will represent preferred undivided
beneficial interests in the assets of the trust, and the holders of the
convertible preferred securities will be entitled to a preference over the
common securities upon an event of default with respect to distributions and
amounts payable on redemption or liquidation. The convertible preferred
securities will rank equally, and payments on the convertible preferred
securities will be made proportionally, with the common securities, except as
described under "--Subordination of Common Securities" on page 74.
The property trustee will hold legal title to the convertible debentures
in trust for the benefit of the holders of the trust securities. We will
guarantee the payment of distributions out of money held by the trust, and
payments upon redemption of the convertible preferred securities or liquidation
of the trust, to the extent described under "Description of the Guarantee" on
page 90. The guarantee agreement does not cover the payment of any distribution
or the liquidation amount when the trust does not have sufficient funds
available to make these payments.
DISTRIBUTIONS
Source of Distributions. The funds of the trust available for
distribution to holders of the convertible preferred securities will be limited
to payments made under the convertible debentures, which the trust will purchase
with the proceeds from the sale of the trust securities. Distributions will be
paid through the property trustee, which will hold the amounts received from our
interest payments on the convertible debentures in the payment account for the
benefit of the holders of the trust securities. If we do not make interest
payments on the convertible debentures, the property trustee will not have funds
available to pay distributions on the convertible preferred securities.
Payment of Distributions. Distributions on the convertible preferred
securities will be payable at the annual rate of % of the $10 stated
liquidation amount, payable quarterly on March 31, June 30, September 30 and
December 31 of each year, to the holders of the convertible preferred securities
on the relevant record dates. So long as the convertible preferred securities
are represented by a global security, as described below, the record date will
be the business day immediately preceding the relevant distribution date. The
first distribution date for the convertible preferred securities will be
December 31, 2000.
Distributions will accumulate from the date of issuance, will be
cumulative and will be computed on the basis of a 360-day year of twelve 30-day
months. If the distribution date is not a business day, then payment of the
distributions will be made on the next day that is a business day, without any
additional interest or other payment for the delay. However, if the next
business day is in the next calendar year, payment of the distribution will be
made on the business day immediately preceding the scheduled distribution date.
When we use the term "business day" we mean any day other than a Saturday, a
Sunday, a day on which banking institutions in New York, New York are authorized
or required by law, regulation or executive order to remain closed or a day on
which the corporate trust office of the property trustee or the indenture
trustee is closed for business.
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Extension Period. As long as no event of default under the indenture has
occurred and is continuing, we have the right to defer the payment of interest
on the convertible debentures at any time for a period not exceeding 20
consecutive quarters. We refer to this period of deferral as an "extension
period." No extension period may extend beyond December 31, 2030 or end on a
date other than an interest payment date, which dates are the same as the
distribution dates. If we defer the payment of interest, quarterly distributions
on the convertible preferred securities will also be deferred during any such
extension period. Any deferred distributions under the convertible preferred
securities will accumulate additional amounts at the annual rate of %,
compounded quarterly from the relevant distribution date. The term
"distributions" as used in this prospectus includes those accumulated amounts.
During an extension period, we may not:
o declare or pay any dividends or distributions on, or redeem,
purchase, acquire or make a liquidation payment with respect to,
any of our capital stock (other than stock dividends, non-cash
dividends in connection with the implementation of a shareholder
rights plan, purchases of common stock in connection with employee
benefit plans or in connection with the reclassification of any
class of our capital stock into another class of capital stock) or
allow any of our subsidiaries to do the same with respect to their
capital stock (other than the payment of dividends or
distributions to us);
o make any payment of principal, interest or premium on or repay,
repurchase or redeem any debt securities that rank equally with or
junior in interest to, the convertible debentures or allow any of
our subsidiaries to do the same;
o make any guarantee payments with respect to any other guarantee by
us of any other debt securities of any of our subsidiaries if the
guarantee ranks equally with or junior to the convertible
debentures (other than payments under the guarantee); or
o redeem, purchase or acquire less than all of the convertible
debentures or any of the convertible preferred securities.
After the termination of any extension period and the payment of all amounts
due, we may elect to begin a new extension period, subject to the above
requirements.
We do not currently intend to exercise our right to defer distributions
on the convertible preferred securities by deferring the payment of interest on
the convertible debentures.
CONVERSION RIGHTS
General. Convertible preferred securities will be convertible at any time
on or after December 31, 2000, and prior to the close of business on the
business day immediately preceding the date of repayment of such convertible
preferred securities, whether at stated maturity or upon redemption (either at
the option of Southside or pursuant to a Tax Event, an Investment Company Event
or a Capital Treatment Event), at the option of the holder thereof and in the
manner described below, into shares of common stock at an initial conversion
ratio of shares of common stock for each convertible preferred security
(equivalent to an initial conversion price of $ per share of common stock),
subject to adjustment as described below. The trust will covenant in the trust
agreement not to convert convertible debentures held by it except pursuant to a
notice of conversion delivered to the property trustee, as conversion agent, by
a holder of convertible preferred securities. A holder of a convertible
preferred security wishing to exercise its conversion right must deliver an
irrevocable notice of conversion, together, if the convertible preferred
security is in certificated form, with the certificate representing such
convertible preferred security, to the conversion agent, which will, on behalf
of such holder, exchange such convertible preferred security for a portion of
the convertible debentures and immediately convert such convertible debentures
into common stock. Holders may obtain copies of the required form of the
conversion notice from the conversion agent. In the event Cede & Co. receives a
conversion request from the conversion agent, DTC will redeem the amount of
interest credited to the applicable direct participant(s) in the convertible
preferred securities in accordance with its procedures.
Holders of convertible preferred securities at the close of business on a
distribution record date will be entitled to receive the distribution payable on
such convertible preferred securities on the corresponding distribution date
notwithstanding the conversion of such convertible preferred securities
following the distribution record date but prior to the distribution date;
provided, however, that if any convertible preferred securities are surrendered
for
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conversion during the period from the close of business on any record date
through and including the next succeeding distribution date (except any such
convertible preferred securities surrendered for conversion after such
convertible preferred securities have been called for redemption by Southside
during an extension period), the convertible preferred securities when
surrendered for conversion must be accompanied by payment in next day funds of
an amount equal to the distribution which the registered holder on such record
date is to receive. Except as described above, no distribution will be payable
by Southside on converted convertible preferred securities with respect to any
distribution date subsequent to the date of conversion and neither the trust nor
Southside will make, or be required to make, any payment, allowance or
adjustment for accumulated and unpaid distributions, whether or not in arrears,
on convertible preferred securities surrendered for conversion. Each conversion
will be deemed to have been effected immediately prior to the close of business
on the day on which the related conversion notice was received by the conversion
agent.
Shares of common stock issued upon conversion of convertible preferred
securities will be validly issued, fully paid and nonassessable. No fractional
shares of common stock will be issued as a result of conversion, but in lieu
thereof such fractional interest will be paid by us in cash based on the last
reported sale price of common stock on the date such convertible preferred
securities are surrendered for conversion.
Conversion Ratio Adjustments--General. The conversion ratio is subject to
adjustment if we take certain actions after the date of issuance of the
convertible preferred securities offered in this prospectus, including:
o issue shares of common stock as a dividend or a distribution with
respect to common stock,
o effect subdivisions, combinations and reclassification of common
stock,
o issue rights or warrants to all holders of common stock entitling
them (for a period not exceeding 45 days) to subscribe for or
purchase shares of common stock at less than the then current
market price (as defined below) of the common stock,
o distribute evidences of indebtedness, capital stock, cash or
assets (including securities, but excluding those rights,
warrants, dividends and distributions referred to above, and
dividends and distributions paid exclusively in cash) to all
holders of common stock,
o pay any dividends (and other distributions) on common stock
exclusively in cash, but not including cash dividends we pay out
of our retained earnings, and
o make a tender or exchange offer (other than an odd-lot offer) for
our common stock and pay a price in excess of 110% of the then
current market price of our common stock based on the closing
price on the trading day next succeeding the last date tenders or
exchanges may be made pursuant to such tender or exchange offer.
"Current Market Price" means, in general, the average of the daily
Closing Prices (as defined below) for the five consecutive trading days selected
by Southside commencing not more than 20 trading days before, and ending not
later than, the earlier of the day in question or, if applicable, the day before
the "ex" date with respect to the issuance or distribution in question.
"Closing Price" of any security on any day means the last reported sale
price, regular way, on such day or, if no sale takes place on such day, the
average of the reported closing bid and asked price on such day, regular way, in
either case as reported on the Nasdaq National Market, or, if such security is
not quoted or admitted to trading on the Nasdaq National Market, on the
principal national securities exchange on which such security is listed or
admitted to trading, or if such security is not listed or admitted to trading on
a national securities exchange, on the principal quotation system on which such
security is listed or admitted to trading or quoted, or, if not listed or
admitted to trading or quoted on any national securities exchange or quotation
system, the average of the closing bid and asked prices of such security in the
over-the-counter market on the day in question as reported by the National
Quotation Bureau Incorporated, or if not so available in such manner, as
otherwise determined in good faith by our board of directors.
From time to time, we may increase the conversion ratio of the
convertible debentures (and thus increase the conversion ratio of the
convertible preferred securities) by any amount selected by us for any period of
at least 20
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days, in which case we will give at least fifteen days' notice of such increase.
We may, at our option, make such increases in the conversion ratio, in addition
to those set forth above, as we deem advisable to avoid or diminish any income
tax to holders of common stock resulting from any dividend or distribution of
stock (or rights to acquire stock) or from any event treated as such for income
tax purposes. See "--Adjustment of Conversion Ratio" on page 98.
No adjustment of the conversion ratio will be made upon the issuance of
any shares of common stock pursuant to any present or future plan providing for
the reinvestment of dividends or interest payable on securities of Southside and
the investment of additional optional amounts in shares of common stock under
any such plan, or upon the issuance of any shares of common stock or options or
rights pursuant to any employee benefit plan or program, or pursuant to any
option, warrant, right or any exercisable, exchangeable or convertible security
outstanding as of the date on which the convertible debentures are first issued.
No adjustment of the conversion ratio will be made upon the issuance of rights
under any shareholder rights plan. The conversion ratio will be rounded to four
decimal places. No adjustment in the conversion ratio will be required unless
adjustment would require a change of at least one percent in the conversion
ratio then in effect; provided, however, that any adjustment that would not be
required to be made will be carried forward and taken into account in any
subsequent adjustment. If any action would require adjustment of the conversion
ratio pursuant to more than one of the provisions described above, only one
adjustment will be made with respect to that action and such adjustment will be
the amount of adjustment that has the highest absolute value to the holder of
the convertible preferred securities.
Conversion Ratio Adjustments--Merger, Consolidation or Sale of Assets of
Southside. In the event that Southside becomes a party to any transaction,
including, without limitation, and with certain exceptions:
o a recapitalization or reclassification of the common stock;
o consolidation of Southside with, or merger of Southside into, any
other person, or any merger of another person into Southside;
o any sale, transfer or lease of all or substantially all of the
assets of Southside; or
o any compulsory share exchange pursuant to which the common stock
is converted into the right to receive other securities, cash or
other property (each of the foregoing being referred to as a
"business consolidation transaction"),
then the holders of convertible preferred securities then outstanding will have
the right to convert the convertible preferred securities into the kind and
amount of securities, cash or other property receivable upon the consummation of
such business consolidation transaction by a holder of the number of shares of
common stock issuable upon conversion of such convertible preferred securities
immediately prior to such business consolidation transaction.
In the case of a business consolidation transaction, each convertible
preferred security would become convertible into the securities, cash or
property receivable by a holder of the number of shares of the common stock into
which such convertible preferred security was convertible immediately prior to
such business consolidation transaction. This change could substantially lessen
or eliminate the value of the conversion privilege associated with the
convertible preferred securities in the future. For example, if Southside were
acquired in a cash merger, each convertible preferred security would become
convertible solely into cash and would no longer be convertible into securities
which value would vary depending on the future prospects of Southside and other
factors.
Conversion ratio adjustments or omissions in making such adjustments may,
under certain circumstances, be deemed to be distributions that could be taxable
as dividends to holders of convertible preferred securities or to the holders of
common stock. See "--Adjustment of Conversion Ratio" on page 98.
Whenever the conversion ratio is adjusted as described above, we will
place on file with the property trustee and with the conversion agent a
statement signed by the appropriate officer of Southside showing in detail the
facts requiring such adjustment and the conversion ratio after such adjustment
and the property trustee or the conversion agent will exhibit the same from time
to time to any holder desiring to inspect the statement.
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REDEMPTION OR EXCHANGE
General. Subject to the prior approval of the Federal Reserve, if
required, we will have the right to redeem the convertible debentures:
o in whole at any time, or in part from time to time, on or after
September 30, 2005;
o at any time, in whole, within 180 days following the occurrence of
a Tax Event, an Investment Company Event or a Capital Treatment
Event, which terms we define below; or
o at any time, and from time to time, to the extent of any
convertible preferred securities we purchase, plus a proportionate
amount of the common securities we hold.
In addition, as long as the price of our common stock has been at least
125% of the conversion price of the convertible preferred securities for a
period of 20 consecutive trading days ending within five days of the date of
notice of redemption, we also have the option to redeem any or all of the
outstanding convertible debentures prior to maturity in the following
circumstances:
o on or after December 31, 2003 but before December 31, 2004 upon
payment of a redemption premium equal to % of the principal amount
to be redeemed, plus any accrued and unpaid interest on the
convertible debentures to the date of such redemption; and
o on or after December 31, 2004 but before December 31, 2005, upon
payment of a redemption premium equal to % of the principal amount
to be redeemed, plus any accrued and unpaid interest on the
convertible debentures to the date of such redemption.
Mandatory Redemption. Upon our repayment or redemption, in whole or in
part, of any convertible debentures, whether on December 31, 2030 or earlier,
the property trustee will apply the proceeds to redeem the same amount of the
trust securities, upon not less than 30 days' nor more than 60 days' notice, at
the redemption price. The redemption price will equal 100% of the aggregate
liquidation amount of the trust securities, plus premium, if any, plus
accumulated but unpaid distributions to the date of redemption. If less than all
of the convertible debentures are to be repaid or redeemed on a date of
redemption, then the proceeds from such repayment or redemption will be
allocated to redemption of convertible preferred securities and common
securities proportionately.
Distribution of Convertible Debentures in Exchange for Convertible
Preferred Securities. Upon prior approval of the Federal Reserve, if required,
we will have the right at any time to dissolve, wind-up or terminate the trust
and, after satisfaction of the liabilities of creditors of the trust as provided
by applicable law, including, without limitation, amounts due and owing the
trustees of the trust, cause the convertible debentures to be distributed
directly to the holders of trust securities in liquidation of the trust.
After the liquidation date fixed for any distribution of convertible
debentures in exchange for convertible preferred securities:
o those trust securities will no longer be deemed to be outstanding;
o certificates representing convertible debentures in a principal
amount equal to the liquidation amount of those convertible
preferred securities will be issued in exchange for the
convertible preferred securities;
o we will use our best efforts to list the convertible debentures on
the Nasdaq National Market or a national exchange;
o any certificates representing trust securities that are not
surrendered for exchange will be deemed to represent convertible
debentures with a principal amount equal to the liquidation amount
of those convertible preferred securities, accruing interest at
the rate provided for in the convertible debentures from the last
distribution date on the convertible preferred securities;
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o all rights of the trust security holders other than the right to
receive convertible debentures upon surrender of a certificate
representing trust securities will terminate.
We cannot assure you that the market prices for the convertible preferred
securities or the convertible debentures that may be distributed if a
dissolution and liquidation of the trust were to occur would be favorable. The
convertible preferred securities that an investor may purchase, or the
convertible debentures that an investor may receive on dissolution and
liquidation of the trust, may trade at a discount to the price that the investor
paid to purchase the convertible preferred securities.
Redemption upon a Tax Event, Investment Company Event or Capital
Treatment Event. If a Tax Event, an Investment Company Event or a Capital
Treatment Event occurs, we will have the right to redeem the convertible
debentures in whole, but not in part, and thereby cause a mandatory redemption
of all of the trust securities at the redemption price described above. If one
of these events occurs and we do not elect to redeem the convertible debentures,
or to dissolve the trust and cause the convertible debentures to be distributed
to holders of the trust securities, then the convertible preferred securities
will remain outstanding and additional interest may be payable on the
convertible debentures.
"Tax Event" means the receipt by the trust and us of an opinion of
counsel experienced in such matters stating that, as a result of any change or
prospective change in the laws or regulations of the United States or any
political subdivision or taxing authority of the United States, or as a result
of any official administrative pronouncement or judicial decision interpreting
or applying the tax laws or regulations, there is more than an insubstantial
risk that:
o interest payable by us on the convertible debentures is not, or
within 90 days of the date of the opinion will not be, deductible
by us, in whole or in part, for federal income tax purposes;
o the trust is, or will be within 90 days after the date of the
opinion, subject to federal income tax with respect to income
received or accrued on the convertible debentures; or
o the trust is, or will be within 90 days after the date of opinion,
subject to more than an immaterial amount of other taxes, duties,
assessments or other governmental charges.
"Investment Company Event" means the receipt by the trust and us of an
opinion of counsel experienced in such matters to the effect that the trust is
or will be considered an "investment company" that is required to be registered
under the Investment Company Act, as a result of a change in law or regulation
or a change in interpretation or application of law or regulation.
"Capital Treatment Event" means the receipt by the trust and us of an
opinion of counsel experienced in such matters to the effect that there is more
than an insubstantial risk of impairment of our ability to treat the convertible
preferred securities as Tier 1 capital for purposes of the current capital
adequacy guidelines of the Federal Reserve, as a result of any amendment to any
laws or any regulations.
For all of the events described above, we or the trust must request and
receive an opinion with regard to the event within a reasonable period of time
after we become aware of the possible occurrence of an event of this kind.
Redemption of Convertible Debentures in Exchange for Convertible
Preferred Securities We Purchase. Upon prior approval of the Federal Reserve, if
required, we will also have the right at any time, and from time to time, to
redeem convertible debentures in exchange for any convertible preferred
securities we may have purchased in the market. If we elect to surrender any
convertible preferred securities beneficially owned by us in exchange for
redemption of a like amount of convertible debentures, we will also surrender a
proportionate amount of common securities in exchange for convertible
debentures. Convertible preferred securities owned by other holders will not be
called for redemption at any time when we elect to exchange trust securities we
own to redeem convertible debentures.
The common securities we surrender will be in the same proportion to the
convertible preferred securities we surrender as is the ratio of common
securities purchased by us to the convertible preferred securities issued by the
trust. In exchange for the trust securities surrendered by us, the property
trustee will cause to be released to us for
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cancellation convertible debentures with a principal amount equal to the
liquidation amount of the trust securities, plus any accumulated but unpaid
distributions, if any, then held by the property trustee allocable to those
trust securities. After the date of redemption involving an exchange by us, the
trust securities we surrender will no longer be deemed outstanding and the
convertible debentures redeemed in exchange will be cancelled.
Redemption Procedures. Convertible preferred securities will be redeemed
at the redemption price with the applicable proceeds from our contemporaneous
redemption of the convertible debentures. Redemptions of the convertible
preferred securities will be made, and the redemption price will be payable, on
each redemption date only to the extent that the trust has funds available for
the payment of the redemption price.
Notice of any redemption will be mailed at least 30 days but not more
than 60 days before the date of redemption to each holder of trust securities to
be redeemed at its registered address. Unless we default in payment of the
redemption price on the convertible debentures, interest will cease to
accumulate on the convertible debentures called for redemption on and after the
date of redemption.
If the trust gives notice of redemption of its trust securities, then the
property trustee, to the extent funds are available, will irrevocably deposit
with the depositary for the trust securities funds sufficient to pay the
aggregate redemption price and will give the depositary for the trust securities
irrevocable instructions and authority to pay the redemption price to the
holders of the trust securities. If the convertible preferred securities are no
longer in book-entry only form, the property trustee, to the extent funds are
available, will deposit with the designated paying agent for such convertible
preferred securities funds sufficient to pay the aggregate redemption price and
will give the paying agent irrevocable instructions and authority to pay the
redemption price to the holders upon surrender of their certificates evidencing
the convertible preferred securities. Notwithstanding the foregoing,
distributions payable on or prior to the date of redemption for any trust
securities called for redemption will be payable to the holders of the trust
securities on the relevant record dates for the related distribution dates.
If notice of redemption has been given and we have deposited funds as
required, then on the date of the deposit all rights of the holders of the trust
securities called for redemption will cease, except the right to receive the
redemption price, but without interest on such redemption price after the date
of redemption. The trust securities will also cease to be outstanding on the
date of the deposit. If any date fixed for redemption of trust securities is not
a business day, then payment of the redemption price payable on that date will
be made on the next day that is a business day without any additional interest
or other payment in respect of the delay. However, if the next business day is
in the next succeeding calendar year, payment of the interest will be made on
the immediately preceding business day.
If payment of the redemption price in respect of trust securities called
for redemption is improperly withheld or refused and not paid by the trust, or
by us pursuant to the guarantee, distributions on the trust securities will
continue to accumulate at the applicable rate from the date of redemption
originally established by the trust for the trust securities to the date the
redemption price is actually paid. In this case, the actual payment date will be
considered the date fixed for redemption for purposes of calculating the
redemption price.
Payment of the redemption price on the convertible preferred securities
and any distribution of convertible debentures to holders of convertible
preferred securities will be made to the applicable recordholders as they appear
on the register for the convertible preferred securities on the relevant record
date. As long as the convertible preferred securities are represented by a
global security, the record date will be the business day immediately preceding
the redemption or liquidation date, as applicable.
If less than all of the trust securities are to be redeemed, then the
aggregate liquidation amount of the trust securities to be redeemed will be
allocated proportionately to those trust securities based upon the relative
liquidation amounts. The particular convertible preferred securities to be
redeemed will be selected by the property trustee from the outstanding
convertible preferred securities not previously called for redemption by a
method the property trustee deems fair and appropriate. This method may provide
for the redemption of portions equal to $10 or an integral multiple of $10 of
the liquidation amount of the convertible preferred securities. The property
trustee will promptly notify the registrar for the convertible preferred
securities in writing of the convertible preferred securities selected for
redemption and, in the case of any convertible preferred securities selected for
partial redemption, the liquidation amount to be redeemed.
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Subject to applicable law, and if we are not exercising our right to
defer interest payments on the convertible debentures, we may, at any time,
purchase outstanding convertible preferred securities.
SUBORDINATION OF COMMON SECURITIES
Payment of distributions on, and the redemption price of, the convertible
preferred securities and common securities will be made based on the liquidation
amount of these securities except to the extent of any redemption premium on the
convertible preferred securities as described on page 71. However, if an event
of default under the indenture has occurred and is continuing, no distributions
on or redemption of the common securities may be made unless payment in full in
cash of all accumulated and unpaid distributions on all of the outstanding
convertible preferred securities for all distribution periods terminating on or
before that time, or in the case of payment of the redemption price, payment of
the full amount of the redemption price on all of the outstanding convertible
preferred securities then called for redemption, has been made or provided for.
All funds available to the property trustee will first be applied to the payment
in full in cash of all distributions on, or the redemption price of, the
convertible preferred securities then due and payable.
In the case of the occurrence and continuance of any event of default
under the trust agreement resulting from an event of default under the
indenture, we, as holder of the common securities, will be deemed to have waived
any right to act with respect to that event of default under the trust agreement
until the effect of the event of default has been cured, waived or otherwise
eliminated. Until the event of default under the trust agreement has been so
cured, waived or otherwise eliminated, the property trustee will act solely on
behalf of the holders of the convertible preferred securities and not on our
behalf, and only the holders of the convertible preferred securities will have
the right to direct the property trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON TERMINATION
We will have the right at any time to dissolve, wind-up or terminate the
trust and cause convertible debentures to be distributed to the holders of the
trust securities. This right is subject, however, to us receiving approval of
the Federal Reserve, if required.
In addition, the trust will automatically terminate upon expiration of
its term and will terminate earlier on the first to occur of:
o our bankruptcy, dissolution or liquidation;
o the distribution of a like amount of the convertible debentures to
the holders of trust securities, if we have given written
direction to the property trustee to terminate the trust;
o redemption of all of the convertible preferred securities as
described under "--Redemption or Exchange--Mandatory Redemption"
on page 71,
o the entry of a court order for the dissolution of the trust; or
o the distribution of common stock upon conversion of all
outstanding convertible preferred securities.
With the exception of a redemption as described under "--Redemption or
Exchange--Mandatory Redemption" on page 71, if an early termination of the trust
occurs, the trust will be liquidated by the administrative trustees as
expeditiously as they determine to be possible. After satisfaction of
liabilities to creditors of the trust as provided by applicable law, the
trustees will distribute to the holders of trust securities, convertible
debentures:
o in an aggregate stated principal amount equal to the aggregate
stated liquidation amount of the trust securities;
o with an interest rate identical to the distribution rate on the
trust securities; and
o with accrued and unpaid interest equal to accumulated and unpaid
distributions on the trust securities.
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However, if the property trustee determines that the distribution is not
practical, then the holders of trust securities will be entitled to receive,
instead of convertible debentures, a proportionate amount of the liquidation
distribution. The liquidation distribution will be the amount equal to the
aggregate of the liquidation amount plus accumulated and unpaid distributions to
the date of payment. If the liquidation distribution can be paid only in part
because the trust has insufficient assets available to pay in full the aggregate
liquidation distribution, then the amounts payable directly by the trust on the
trust securities will be paid on a proportional basis, based on liquidation
amounts, to us, as the holder of the common securities, and to the holders of
the convertible preferred securities. However, if an event of default under the
indenture has occurred and is continuing, the convertible preferred securities
will have a priority over the common securities. See "-- Subordination of Common
Securities" on page 74.
Under current federal income tax law and interpretations and assuming
that the trust is treated as a grantor trust, as is expected, a distribution of
the convertible debentures should not be a taxable event to holders of the
convertible preferred securities. Should there be a change in law, a change in
legal interpretation, a Tax Event or another circumstance, however, the
distribution could be a taxable event to holders of the convertible preferred
securities. If we do not elect to redeem the convertible debentures prior to
maturity or to liquidate the trust and distribute the convertible debentures to
holders of the convertible preferred securities, the convertible preferred
securities will remain outstanding until the repayment of the convertible
debentures. See "Certain Federal Income Tax Consequences" on page 96 for more
information regarding a taxable distribution.
If we elect to dissolve the trust and thus cause convertible debentures
to be distributed to holders of the trust securities in liquidation of the
trust, we will continue to have the right to shorten the maturity of the
convertible debentures.
LIQUIDATION VALUE
The amount of the liquidation distribution payable on the convertible
preferred securities in the event of any liquidation of the trust is $10 per
convertible preferred security plus accumulated and unpaid distributions to the
date of payment, which may be in the form of a distribution of convertible
debentures having a liquidation value and accrued interest of an equal amount.
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an event of default under the
trust agreement with respect to the convertible preferred securities:
o the occurrence of an event of default under the indenture;
o a default by the trust in the payment of any distribution when it
becomes due and payable, and continuation of the default for a
period of 30 days;
o a default by the trust in the payment of any redemption price of
any of the trust securities when it becomes due and payable;
o a default in the performance, or breach, in any material respect,
of any covenant or warranty of the trustees in the trust
agreement, other than those defaults covered in the previous two
points, and continuation of the default or breach for a period of
60 days after there has been given, by registered or certified
mail, to the trustee(s) by the holders of at least 25% in
aggregate liquidation amount of the outstanding convertible
preferred securities, a written notice specifying the default or
breach and requiring it to be remedied and stating that the notice
is a "Notice of Default" under the trust agreement; or
o the occurrence of events of bankruptcy or insolvency with respect
to the property trustee and our failure to appoint a successor
property trustee within 60 days.
Within five business days after the occurrence of any event of default
actually known to the property trustee, the property trustee will transmit
notice of the event of default to the holders of the convertible preferred
securities, the administrative trustees and to us, unless the event of default
has been cured or waived. Southside and the
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administrative trustees are required to file annually with the property trustee
a certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the trust agreement.
If an event of default under the indenture has occurred and is
continuing, the convertible preferred securities will have preference over the
common securities upon termination of the trust. The existence of an event of
default under the trust agreement does not entitle the holders of convertible
preferred securities to accelerate the maturity thereof, unless the event of
default is caused by the occurrence of an event of default under the indenture
and both the indenture trustee and holders of at least 25% in principal amount
of the convertible debentures fail to accelerate the maturity thereof.
REMOVAL OF THE TRUSTEES
Unless an event of default under the indenture has occurred and is
continuing, we may remove any trustee at any time. If an event of default under
the indenture has occurred and is continuing, only the holders of a majority in
liquidation amount of the outstanding convertible preferred securities may
remove the property trustee or the Delaware trustee. The holders of the
convertible preferred securities have no right to vote to appoint, remove or
replace the administrative trustees. These rights are vested exclusively with us
as the holder of the common securities. No resignation or removal of a trustee
and no appointment of a successor trustee will be effective until the successor
trustee accepts the appointment in accordance with the trust agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an event of default under the indenture has occurred and is
continuing, for the purpose of meeting the legal requirements of the Trust
Indenture Act or of any jurisdiction in which any part of the trust property may
at the time be located, we will have the power to appoint at any time or times,
and upon written request of the property trustee will appoint, one or more
persons or entities either (1) to act as a co-trustee, jointly with the property
trustee, of all or any part of the trust property, or (2) to act as separate
trustee of any trust property. In either case these trustees will have the
powers that may be provided in the instrument of appointment, and will have
vested in them any property, title, right or power deemed necessary or
desirable, subject to the provisions of the trust agreement. In case an event of
default under the indenture has occurred and is continuing, the property trustee
alone will have power to make the appointment.
MERGER OR CONSOLIDATION OF TRUSTEES
Generally, any person or successor to any of the trustees may be a
successor trustee to any of the trustees, including a successor resulting from a
merger or consolidation. However, any successor trustee must meet all of the
qualifications and eligibility standards to act as a trustee.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST
The trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other person, except as
described below. For these purposes, if we consolidate or merge with another
entity, or transfer or sell substantially all of our assets to another entity,
in some cases that transaction may be considered to involve a replacement of the
trust, and the conditions set forth below would apply to such transaction. The
trust may, at our request, with the consent of the administrative trustees and
without the consent of the holders of the convertible preferred securities, the
property trustee or the Delaware trustee, undertake a transaction listed above
if the following conditions are met:
o the successor entity either (a) expressly assumes all of the
obligations of the trust with respect to the convertible preferred
securities, or (b) substitutes for the convertible preferred
securities other securities having substantially the same terms as
the convertible preferred securities (referred to as "successor
securities") so long as the successor securities rank the same in
priority as the convertible preferred securities with respect to
distributions and payments upon liquidation, redemption and
otherwise;
o we appoint a trustee of the successor entity possessing
substantially the same powers and duties as the property trustee
in its capacity as the holder of the convertible debentures;
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o the successor securities are listed or traded or will be listed or
traded on any national securities exchange or other organization
on which the convertible preferred securities are then listed, if
any;
o the merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not adversely affect the rights,
preferences and privileges of the holders of the convertible
preferred securities (including any successor securities) in any
material respect;
o the successor entity has a purpose substantially identical to that
of the trust;
o prior to the merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, we have received an opinion from
independent counsel that (a) any transaction of this kind does not
adversely affect the rights, preferences and privileges of the
holders of the convertible preferred securities (including any
successor securities) in any material respect, and (b) following
the transaction, neither the trust nor the successor entity will
be required to register as an "investment company" under the
Investment Company Act; and
o we own all of the common securities of the successor entity and
guarantee the obligations of the successor entity under the
successor securities at least to the extent provided by the
guarantee, the convertible debentures, the trust agreement and the
expense agreement.
Notwithstanding the foregoing, the trust may not, except with the consent of
every holder of the convertible preferred securities, enter into any transaction
of this kind if the transaction would cause the trust or the successor entity
not to be classified as a grantor trust for federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF TRUST AGREEMENT
Except as described below and under "Description of the
Guarantee--Amendments" on page 91 and as otherwise required by the Trust
Indenture Act and the trust agreement, the holders of the convertible preferred
securities will have no voting rights.
The trust agreement may be amended from time to time by us and the
trustees, without the consent of the holders of the convertible preferred
securities, in the following circumstances:
o with respect to acceptance of appointment by a successor trustee;
o to cure any ambiguity, correct or supplement any provisions in the
trust agreement that may be inconsistent with any other provision,
or to make any other provisions with respect to matters or
questions arising under the trust agreement, as long as the
amendment is not inconsistent with the other provisions of the
trust agreement and does not have a material adverse effect on the
interests of any holder of trust securities; or
o to modify, eliminate or add to any provisions of the trust
agreement if necessary to ensure that the trust will be classified
for federal income tax purposes as a grantor trust at all times
that any trust securities are outstanding or to ensure that the
trust will not be required to register as an "investment company"
under the Investment Company Act.
With the consent of the holders of a majority of the aggregate
liquidation amount of the outstanding trust securities, we and the trustees may
amend the trust agreement if the trustees receive an opinion of counsel to the
effect that the amendment or the exercise of any power granted to the trustees
in accordance with the amendment will not affect the trust's status as a grantor
trust for federal income tax purposes or the trust's exemption from status as an
"investment company" under the Investment Company Act. However, without the
consent of each holder of trust securities, the trust agreement may not be
amended to (a) change the amount or timing of any distribution on the trust
securities or otherwise adversely affect the amount of any distribution required
to be made in respect of the trust securities as of a specified date, or (b)
restrict the right of a holder of trust securities to institute suit for the
enforcement of the payment on or after that date.
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As long as the property trustee holds any convertible debentures, the
trustees will not, without obtaining the prior approval of the holders of a
majority in aggregate liquidation amount of all outstanding convertible
preferred securities:
o direct the time, method and place of conducting any proceeding for
any remedy available to the indenture trustee, or executing any
trust or power conferred on the property trustee with respect to
the convertible debentures;
o waive any past default that is waivable under the indenture;
o exercise any right to rescind or annul a declaration that the
principal of all the convertible debentures will be due and
payable; or
o consent to any amendment or termination of the indenture or the
convertible debentures, where the property trustee's consent is
required. However, where a consent under the indenture requires
the consent of each holder of the affected convertible debentures,
no consent will be given by the property trustee without the prior
consent of each holder of the convertible preferred securities.
The trustees may not revoke any action previously authorized or approved by a
vote of the holders of the convertible preferred securities except by subsequent
vote of the holders of the convertible preferred securities. The property
trustee will notify each holder of convertible preferred securities of any
notice of default with respect to the convertible debentures. In addition to
obtaining the foregoing approvals of the holders of the convertible preferred
securities, prior to taking any of the foregoing actions, the trustees must
obtain an opinion of counsel experienced in these matters to the effect that the
trust will not be classified as an association taxable as a corporation for
federal income tax purposes on account of the action.
Any required approval of holders of trust securities may be given at a
meeting or by written consent. The property trustee will cause a notice of any
meeting at which holders of the trust securities are entitled to vote, or of any
matter upon which action by written consent of the holders is to be taken, to be
given to each holder of record of trust securities.
No vote or consent of the holders of convertible preferred securities
will be required for the trust to redeem and cancel its convertible preferred
securities in accordance with the trust agreement.
Notwithstanding the fact that holders of convertible preferred securities
are entitled to vote or consent under any of the circumstances described above,
any of the convertible preferred securities that are owned by Southside, the
trustees or any affiliate of Southside or any trustee, will, for purposes of the
vote or consent, be treated as if they were not outstanding.
GLOBAL CONVERTIBLE PREFERRED SECURITIES
The convertible preferred securities will be represented by one or more
global convertible preferred securities registered in the name of The Depository
Trust Company, New York, New York (DTC), or its nominee. A global convertible
preferred security is a security representing interests of more than one
beneficial holder. Ownership of beneficial interests in the global convertible
preferred securities will be reflected in DTC participant account records
through DTC's book-entry transfer and registration system. Participants are
brokers, dealers, or others having accounts with DTC. Indirect beneficial
interests of other persons investing in the convertible preferred securities
will be shown on, and transfers will be effected only through, records
maintained by DTC participants. Except as described below, convertible preferred
securities in definitive form will not be issued in exchange for the global
convertible preferred securities.
No global convertible preferred security may be exchanged for convertible
preferred securities registered in the names of persons other than DTC or its
nominee unless:
o DTC notifies the indenture trustee that it is unwilling or unable
to continue as a depositary for the global convertible preferred
security and we are unable to locate a qualified successor
depositary;
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o we execute and deliver to the indenture trustee a written order
stating that we elect to terminate the book-entry system through
DTC; or
o there shall have occurred and be continuing an event of default
under the indenture.
Any global convertible preferred security that is exchangeable pursuant
to the preceding sentence will be exchangeable for definitive certificates
registered in the names as DTC directs. It is expected that the instructions
will be based upon directions received by DTC with respect to ownership of
beneficial interests in the global convertible preferred security. If
convertible preferred securities are issued in definitive form, the convertible
preferred securities will be in denominations of $10 and integral multiples of
$10 and may be transferred or exchanged at the offices described below.
Unless and until it is exchanged in whole or in part for the individual
convertible preferred securities represented thereby, a global convertible
preferred security may not be transferred except as a whole by DTC to a nominee
of DTC, by a nominee of DTC to DTC or another nominee of DTC or by DTC or any
nominee to a successor depositary or any nominee of the successor.
Payments on global convertible preferred securities will be made to DTC,
as the depositary for the global convertible preferred securities. If the
convertible preferred securities are issued in definitive form, distributions
will be payable by check mailed to the address of record of the persons entitled
to the distribution, and the transfer of the convertible preferred securities
will be registrable, and convertible preferred securities will be exchangeable
for convertible preferred securities of other denominations of a like aggregate
liquidation amount, at the corporate office of the property trustee, or at the
offices of any paying agent or transfer agent appointed by the administrative
trustees. In addition, if the convertible preferred securities are issued in
definitive form, the record dates for payment of distributions will be the 15th
day of the month in which the relevant distribution date occurs. For a
description of the terms of DTC arrangements relating to payments, transfers,
voting rights, redemptions and other notices and other matters, see "Book-Entry
Issuance" on page 93.
Upon the issuance of one or more global convertible preferred securities,
and the deposit of the global convertible preferred security with or on behalf
of DTC or its nominee, DTC or its nominee will credit, on its book-entry
registration and transfer system, the respective aggregate liquidation amounts
of the individual convertible preferred securities represented by the global
convertible preferred security to the designated accounts of persons that
participate in the DTC system. These participant accounts will be designated by
the dealers, underwriters or agents selling the convertible preferred
securities. Ownership of beneficial interests in a global convertible preferred
security will be limited to persons or entities having an account with DTC or
who may hold interests through participants. With respect to interests of any
person or entity that is a DTC participant, ownership of beneficial interests in
a global convertible preferred security will be shown on, and the transfer of
that ownership will be effected only through, records maintained by DTC or its
nominee. With respect to persons or entities who hold interests in a global
convertible preferred security through a participant, the interest and any
transfer of the interest will be shown only on the participant's records. The
laws of some states require that certain purchasers of securities take physical
delivery of securities in definitive form. These laws may impair the ability to
transfer beneficial interests in a global convertible preferred security.
So long as DTC or another depositary, or its nominee, is the registered
owner of the global convertible preferred security, the depositary or the
nominee, as the case may be, will be considered the sole owner or holder of the
convertible preferred securities represented by the global convertible preferred
security for all purposes under the trust agreement. Except as described in this
prospectus, owners of beneficial interests in a global convertible preferred
security will not be entitled to have any of the individual convertible
preferred securities represented by the global convertible preferred security
registered in their names, will not receive or be entitled to receive physical
delivery of any of the convertible preferred securities in definitive form and
will not be considered the owners or holders of the convertible preferred
securities under the trust agreement.
None of us, the property trustee, any paying agent or the securities
registrar for the convertible preferred securities will have any responsibility
or liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the global convertible preferred
security representing the convertible preferred securities or for maintaining,
supervising or reviewing any records relating to the beneficial ownership
interests.
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We expect that DTC or its nominee, upon receipt of any payment of the
liquidation amount or distributions in respect of a global convertible preferred
security, immediately will credit participants' accounts with payments in
amounts proportionate to their respective beneficial interest in the aggregate
liquidation amount of the global convertible preferred security as shown on the
records of DTC or its nominee. We also expect that payments by participants to
owners of beneficial interests in the global convertible preferred security held
through the participants will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of customers
in bearer form or registered in "street name." The payments will be the
responsibility of the participants.
PAYMENT AND PAYING AGENCY
Payments in respect of the convertible preferred securities will be made
to DTC, which will credit the relevant accounts of participants on the
applicable distribution dates, or, if any of the convertible preferred
securities are not held by DTC, the payments will be made by check mailed to the
address of the holder as listed on the register of holders of the convertible
preferred securities. The paying agent for the convertible preferred securities
will initially be the property trustee and any co-paying agent chosen by the
property trustee and acceptable to us and the administrative trustees. The
paying agent for the convertible preferred securities may resign as paying agent
upon 30 days' written notice to the administrative trustees, the property
trustee and us. If the property trustee no longer is the paying agent for the
convertible preferred securities, the administrative trustees will appoint a
successor to act as paying agent. The successor must be a bank or trust company
acceptable to us and the property trustee.
REGISTRAR, TRANSFER AGENT AND CONVERSION AGENT
The property trustee will act as the registrar, the transfer agent and
the conversion agent for the convertible preferred securities. Registration of
transfers of convertible preferred securities will be effected without charge by
or on behalf of the trust, but upon payment of any tax or other governmental
charges that may be imposed in connection with any transfer or exchange. The
trust and its registrar and transfer agent will not be required to register or
cause to be registered the transfer of convertible preferred securities after
they have been called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The property trustee undertakes to perform only the duties set forth in
the trust agreement. After the occurrence of an event of default that is
continuing, the property trustee must exercise the same degree of care and skill
as a prudent person exercises or uses in the conduct of its own affairs. The
property trustee is under no obligation to exercise any of the powers vested in
it by the trust agreement at the request of any holder of convertible preferred
securities unless it is offered reasonable indemnity against the costs, expenses
and liabilities that might be incurred. If no event of default under the trust
agreement has occurred and is continuing and the property trustee is required to
decide between alternative causes of action, construe ambiguous or inconsistent
provisions in the trust agreement or is unsure of the application of any
provision of the trust agreement, and the matter is not one on which holders of
convertible preferred securities are entitled to vote upon, then the property
trustee will take the action directed in writing by us. If the property trustee
is not so directed, then it will take the action it deems advisable and in the
best interests of the holders of the trust securities and will have no liability
except for its own bad faith, negligence or willful misconduct.
MISCELLANEOUS
The administrative trustees are authorized and directed to conduct the
affairs of and to operate the trust in such a way that:
o the trust will not be deemed to be an "investment company"
required to be registered under Investment Company Act;
o the trust will not be classified as an association taxable as a
corporation for federal income tax purposes; and
o the convertible debentures will be treated as indebtedness of the
Company for federal income tax purposes.
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In this regard, we and the administrative trustees are authorized to take
any action not inconsistent with applicable law, the certificate of trust or the
trust agreement, that we and the administrative trustees determine to be
necessary or desirable for these purposes.
The administrative trustees are required to use their best efforts to
maintain the listing of the convertible preferred securities on the Nasdaq
National Market or a national securities exchange, but this requirement will not
prevent us from redeeming all or a portion of the convertible preferred
securities in accordance with the trust agreement.
Holders of the convertible preferred securities have no preemptive or
similar rights. The trust agreement and the trust securities will be governed by
Delaware law.
DESCRIPTION OF THE CONVERTIBLE SUBORDINATED DEBENTURES
Concurrently with the issuance of the convertible preferred securities,
the trust will invest the proceeds from the sale of the trust securities in the
convertible debentures issued by us. The convertible debentures will be issued
as unsecured debt under the indenture between us and Wilmington Trust Company,
as indenture trustee. The indenture will be qualified under the Trust Indenture
Act.
The following discussion is subject to, and is qualified in its entirety
by reference to, the indenture and to the Trust Indenture Act. We urge
prospective investors to read the form of the indenture, which is filed as an
exhibit to the registration statement of which this prospectus forms a part.
GENERAL
The convertible debentures will be limited in aggregate principal amount
to $ , or $ if the underwriters' over-allotment option is exercised in full.
This amount represents the sum of the aggregate stated liquidation amounts of
the trust securities. The convertible debentures will bear interest at the
annual rate of % of the principal amount. The interest will be payable quarterly
on March 31, June 30, September 30 and December 31 of each year, beginning
December 31, 2000, to the person in whose name each convertible debenture is
registered at the close of business on the 15th day of the last month of the
calendar quarter. It is anticipated that, until the liquidation, if any, of the
trust, the convertible debentures will be held in the name of the property
trustee in trust for the benefit of the holders of the trust securities.
The amount of interest payable for any period will be computed on the
basis of a 360-day year of twelve 30-day months. If any date on which interest
is payable on the convertible debentures is not a business day, then payment of
interest will be made on the next day that is a business day without any
additional interest or other payment in respect of the delay. However, if the
next business day is in the next calendar year, payment of interest will be made
on the immediately preceding business day. Accrued interest that is not paid on
the applicable interest payment date will bear additional interest on the amount
due at the annual rate of %, compounded quarterly.
The convertible debentures will mature on December 31, 2030, the stated
maturity date. We may shorten this date once at any time to any date not earlier
than December 31, 2005, subject to the prior approval of the Federal Reserve, if
required.
We will give notice to the indenture trustee and the holders of the
convertible debentures, no more than 180 days and no less than 30 days prior to
the effectiveness of any change in the stated maturity date. We will not have
the right to redeem the convertible debentures from the trust until after
December 31, 2005, except if (a) a Tax Event, an Investment Company Event or a
Capital Treatment Event, which terms are defined on page 72, has occurred, or
(b) we pay a specific redemption premium, provided that our common stock price
exceeds the conversion price of the convertible preferred securities by at least
125% for a certain period of time, or (c) we repurchase convertible preferred
securities in the market, in which case we can elect to redeem convertible
debentures specifically in exchange for a like amount of convertible preferred
securities owned by us plus a proportionate amount of common securities.
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The convertible debentures will be unsecured and will rank junior to all
of our senior and subordinated debt, including indebtedness we may incur in the
future, and will be further subordinated to any debt of ours issued in
connection with trust preferred securities intended to qualify for "Tier 1"
capital treatment unless those debt securities are also convertible into our
common stock. Because we are a holding company, our right to participate in any
distribution of assets of any of our subsidiaries, upon any subsidiary's
liquidation or reorganization or otherwise, and thus the ability of holders of
the convertible debentures to benefit indirectly from any distribution by a
subsidiary, is subject to the prior claim of creditors of the subsidiary, except
to the extent that we may be recognized as a creditor of the subsidiary. The
convertible debentures will, therefore, be effectively subordinated to all
existing and future liabilities of our subsidiaries, and holders of convertible
debentures should look only to our assets for payment. The indenture does not
limit our ability to incur or issue secured or unsecured senior and junior debt.
See "--Subordination" on page 84.
The indenture does not contain provisions that afford holders of the
convertible debentures protection in the event of a highly leveraged transaction
or other similar transaction involving us, nor does it require us to maintain or
achieve any financial performance levels or to obtain or maintain any credit
rating on the convertible debentures.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
As long as no event of default under the indenture has occurred and is
continuing, we have the right under the indenture to defer the payment of
interest on the convertible debentures at any time for a period not exceeding 20
consecutive quarters. However, no extension period may extend beyond the stated
maturity of the convertible debentures or end on a date other than a date
interest is normally due. At the end of an extension period, we must pay all
interest then accrued and unpaid, together with interest thereon at the annual
rate of %, compounded quarterly. During an extension period, interest will
continue to accrue and holders of convertible debentures, or the holders of
convertible preferred securities if they are then outstanding, will be required
to accrue and recognize as income for federal income tax purposes the accrued
but unpaid interest amounts in the year in which such amounts accrued. See
"--Interest Income and Original Issue Discount" on page 96.
During an extension period, we may not:
o declare or pay any dividends or distributions on, or redeem,
purchase, acquire or make a liquidation payment with respect to,
any of our capital stock (other than stock dividends, non-cash
dividends in connection with the implementation of a shareholder
rights plan, purchases of common stock in connection with employee
benefit plans or in connection with the reclassification of any
class of our capital stock into another class of capital stock) or
allow any of our subsidiaries to do the same with respect to their
capital stock (other than payment of dividends or distributions to
us);
o make or allow any of our subsidiaries to make any payment of
principal, interest or premium on, or repay, repurchase or redeem
any debt securities issued by us that rank equally with or junior
to the convertible debentures;
o make or allow any of our subsidiaries to make any guarantee
payments with respect to any guarantee by us of the debt
securities of any of our subsidiaries if the guarantee ranks
equally with or junior to the convertible debentures (other than
payments under the guarantee); or
o redeem, purchase or acquire less than all of the convertible
debentures or any of the convertible preferred securities.
Prior to the termination of any extension period, so long as no event of
default under the indenture is continuing, we may further defer the payment of
interest subject to the above stated requirements. Upon the termination of any
extension period and the payment of all amounts then due, we may elect to begin
a new extension period at any time. We do not currently intend to exercise our
right to defer payments of interest on the convertible debentures.
We must give the property trustee, the administrative trustees and the
indenture trustee notice of our election of an extension period at least two
business days prior to the earlier of (a) the next date on which distributions
on the trust securities would have been payable except for the election to begin
an extension period, or (b) the date we are required to give notice of the
record date, or the date the distributions are payable, to the Nasdaq National
Market, or
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other applicable self-regulatory organization, or to holders of the convertible
preferred securities, but in any event at least one business day prior to the
record date.
Other than as described above, there is no limitation on the number of
times that we may elect to begin an extension period.
ADDITIONAL SUMS TO BE PAID AS A RESULT OF ADDITIONAL TAXES
If the trust is required to pay any additional taxes, duties, assessments
or other governmental charges as a result of the occurrence of a Tax Event, we
will pay as additional interest on the convertible debentures any amounts which
may be required so that the net amounts received and retained by the trust after
paying any additional taxes, duties, assessments or other governmental charges
will not be less than the amounts the trust would have received had the
additional taxes, duties, assessments or other governmental charges not been
imposed.
REDEMPTION
Subject to prior approval of the Federal Reserve, if required, we may
redeem the convertible debentures prior to maturity without payment of premium:
o on or after September 30, 2005, in whole at any time or in part
from time to time; or
o in whole at any time within 180 days following the occurrence of a
Tax Event, an Investment Company Event or a Capital Treatment
Event; or
o at any time, and from time to time, to the extent of any
convertible preferred securities we purchase, plus a proportionate
amount of the common securities we hold.
In each case, we will pay a redemption price equal to the accrued and unpaid
interest on the convertible debentures so redeemed to the date fixed for
redemption, plus 100% of the principal amount of the redeemed convertible
debentures.
In certain circumstances, we may also redeem the convertible debentures
prior to December 31, 2005 if we pay a redemption premium, as follows:
o on or after December 31, 2003 but before December 31, 2004, for an
amount equal to % of the principal amount to be redeemed, plus any
accrued and unpaid interest on the convertible debentures to the
date of such redemption; and
o on or after December 31, 2004 but before December 31, 2005, for an
amount equal to % of the principal amount to be redeemed, plus any
accrued and unpaid interest on the convertible debentures to the
date of such redemption.
Except in the special events described above, we will only have the right to
redeem prior to December 31, 2005, if the price of our common stock has been at
least 125% of the conversion price of the convertible preferred securities for a
period of 20 consecutive business days ending within five days of the date of
notice of redemption.
Notice of any redemption will be mailed at least 30 days but not more
than 60 days before the redemption date to each holder of convertible debentures
to be redeemed at its registered address. Redemption of less than all
outstanding convertible debentures must be effected proportionately, by lot or
in any other manner deemed to be fair and appropriate by the indenture trustee.
Unless we default in payment of the redemption price for the convertible
debentures, on and after the redemption date interest will no longer accrue on
the convertible debentures or the portions of the convertible debentures called
for redemption.
The convertible debentures will not be subject to any sinking fund.
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DISTRIBUTION UPON LIQUIDATION
As described above in "--Liquidation Distribution Upon Termination" on
page 74, under certain circumstances and with the Federal Reserve's approval,
convertible debentures may be distributed to the holders of the trust securities
in liquidation of the trust after satisfaction of liabilities to creditors of
the trust. If this occurs, we will use our best efforts to list the convertible
debentures on the Nasdaq National Market or other stock exchange or national
quotation system on which the convertible preferred securities are then listed,
if any. There can be no assurance as to the market price of any convertible
debentures that may be distributed to the holders of convertible preferred
securities.
RESTRICTIONS ON PAYMENTS
We are restricted from making certain payments (as described below) if we
have chosen to defer payment of interest on the convertible debentures, if an
event of default has occurred and is continuing under the indenture, or if we
are in default with respect to our obligations under the guarantee.
If any of these events occur, we will not:
o declare or pay any dividends or distributions on, or redeem,
purchase, acquire, or make a liquidation payment with respect to,
any of our capital stock (other than stock dividends, non-cash
dividends in connection with the implementation of a shareholder
rights plan, purchases of common stock in connection with employee
benefit plans or in connection with the reclassification of any
class of our capital stock into another class of capital stock) or
allow any of our subsidiaries to do the same with respect to their
capital stock (other than payment of dividends or distributions to
us);
o make or allow any of our subsidiaries to make any payment of
principal, interest or premium on, or repay or repurchase or
redeem any of our debt securities that rank equally with or junior
to the convertible debentures;
o make or allow any of our subsidiaries to make any guarantee
payments with respect to any guarantee by us of the debt
securities of any of our subsidiaries if the guarantee ranks
equally with or junior to the convertible debentures (other than
payments under the guarantee with respect to the convertible
preferred securities); or
o redeem, purchase or acquire less than all of the convertible
debentures or any of the convertible preferred securities.
SUBORDINATION
The convertible debentures are subordinated and junior in right of
payment to all of our senior and subordinated debt, as defined below. Upon any
payment or distribution of assets to creditors upon any liquidation,
dissolution, winding up or reorganization of Southside, whether voluntary or
involuntary in bankruptcy, insolvency, receivership or other proceedings in
connection with any insolvency or bankruptcy proceedings, the holders of our
senior and subordinated debt will first be entitled to receive payment in full
of principal and interest before the holders of convertible debentures will be
entitled to receive or retain any payment in respect of the convertible
debentures.
If the maturity of any convertible debentures is accelerated, the holders
of all of our senior and subordinated debt outstanding at the time of the
acceleration will also be entitled to first receive payment in full of all
amounts due to them, including any amounts due upon acceleration, before the
holders of the convertible debentures will be entitled to receive or retain any
principal or interest payments on the convertible debentures.
No payments of principal or interest on the convertible debentures may be
made if there has occurred and is continuing a default in any payment with
respect to any of our senior or subordinated debt or an event of default with
respect to any of our senior or subordinated debt resulting in the acceleration
of the maturity of the senior or subordinated debt, or if any judicial
proceeding is pending with respect to any default.
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The term "debt" means, with respect to any person, whether recourse is to
all or a portion of the assets of the person and whether or not contingent:
o every obligation of the person for money borrowed;
o every obligation of the person evidenced by bonds, debentures,
notes or other similar instruments, including obligations incurred
in connection with the acquisition of property, assets or
businesses;
o every reimbursement obligation of the person with respect to
letters of credit, bankers' acceptances or similar facilities
issued for the account of the person;
o every obligation of the person issued or assumed as the deferred
purchase price of property or services, excluding trade accounts
payable or accrued liabilities arising in the ordinary course of
business;
o every capital lease obligation of the person; and
o every obligation of the type referred to in the first five points
of another person and all dividends of another person the payment
of which, in either case, the first person has guaranteed or is
responsible or liable, directly or indirectly, as obligor or
otherwise.
The term "senior debt" means the principal of, and premium and interest,
including interest accruing on or after the filing of any petition in bankruptcy
or for reorganization relating to us, on, debt, whether incurred on or prior to
the date of the indenture or incurred after the date. However, senior debt will
not be deemed to include:
o any debt where it is provided in the instrument creating the debt
that the obligations are not superior in right of payment to the
convertible debentures or to other debt which is equal with, or
subordinated to, the convertible debentures, including our 8.50%
subordinated debentures due June 30, 2028, issued to Southside
Capital Trust I;
o any of our debt that when incurred and without regard to any
election under the federal bankruptcy laws, was without recourse
to us;
o any debt of ours to any of our subsidiaries;
o any debt to any of our employees;
o any debt that by its terms is subordinated to trade accounts
payable or accrued liabilities arising in the ordinary course of
business to the extent that payments made to the holders of the
debt by the holders of the convertible debentures as a result of
the subordination provisions of the indenture would be greater
than they otherwise would have been as a result of any obligation
of the holders to pay amounts over to the obligees on the trade
accounts payable or accrued liabilities arising in the ordinary
course of business as a result of subordination provisions to
which the debt is subject; and
o debt which constitutes subordinated debt.
The term "subordinated debt" means the principal of, and premium and
interest, including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to us, on, debt. Except as described
below, subordinated debt includes debt incurred on or prior to the date of the
indenture or thereafter incurred, which is by its terms expressly provided to be
junior and subordinate to other debt of ours. Subordinated debt will not be
deemed to include:
o any of our debt which when incurred and without regard to any
election under the federal bankruptcy laws was without recourse to
us;
o any debt of ours to any of our subsidiaries;
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o any debt to any of our employees;
o any debt which by its terms is subordinated to trade accounts
payable or accrued liabilities arising in the ordinary course of
business to the extent that payments made to the holders of the
debt by the holders of the convertible debentures as a result of
the subordination provisions of the indenture would be greater
than they otherwise would have been as a result of any obligation
of the holders to pay amounts over to the obligees on the trade
accounts payable or accrued liabilities arising in the ordinary
course of business as a result of subordination provisions to
which the debt is subject;
o debt which constitutes senior debt; and
o any debt of ours under debt securities (and guarantees in respect
of these debt securities) initially issued to any trust, or a
trustee of a trust, partnership or other entity affiliated with us
that is, directly or indirectly, our financing subsidiary in
connection with the issuance by that entity of preferred
securities or other securities which are intended to qualify for
"Tier 1" capital treatment, such as the approximately $20 million
of 8.50% junior subordinated debentures due June 30, 2028 issued
to Southside Capital Trust I.
We expect from time to time to incur additional indebtedness, and there
is no limitation under the indenture on the amount of indebtedness we may incur.
We had no consolidated senior or subordinated debt at June 30, 2000.
CONVERSION OF CONVERTIBLE DEBENTURES
The convertible debentures will be convertible into common stock at the
option of the holders thereof at any time on or after December 31, 2000, and
prior to 5 p.m. (Eastern time) on the business day immediately preceding the
date of repayment of such convertible debentures, whether at stated maturity or
upon redemption (either at the option of Southside or pursuant to a Tax Event,
an Investment Company Event or a Capital Treatment Event), at the conversion
ratio as adjusted, as applicable, as described under "--Conversion Rights" on
page 68. The trust will covenant not to convert convertible debentures held by
it except pursuant to a notice of conversion delivered to the conversion agent
by a holder of convertible preferred securities. Upon surrender of a convertible
preferred security to the conversion agent for conversion, the trust will
distribute $10 principal amount of the convertible debentures per convertible
preferred security to the conversion agent on behalf of the holder of the
convertible preferred securities so converted whereupon the conversion agent
will convert such convertible debentures to common stock on behalf of such
holder. Southside's delivery to the holders of the convertible debentures
(through the conversion agent) of the fixed number of shares of common stock
into which the debentures are convertible (together with the cash payment, if
any, in lieu of fractional shares) will be deemed to satisfy our obligation to
pay the principal amount of the convertible debentures so converted, and the
accrued and unpaid interest thereupon attributable to the period from the last
date to which interest has been paid or duly provided for; provided, however,
that if any debentures are converted after a record date for payment of interest
and on or before the related interest payment date, the interest payable on the
related interest payment date with respect to such convertible debentures will
be paid to the trust (which will distribute an equivalent amount to the holder
of such convertible preferred security on the related record date) or other
holder of convertible debentures, as the case may be, despite such conversion,
and the holder of the convertible debentures must deliver an amount equal to the
interest payable on the related interest payment date prior to receiving the
shares of common stock; provided, further that if any convertible debentures are
delivered for conversion during an extension period by a holder after receiving
a notice of redemption from the property trustee, we will be required to pay to
the trust or other holder of the converted debentures all accrued and unpaid
interest, if any, on such convertible debentures through the date of conversion
which amount will be simultaneously distributed to the holders of the
convertible preferred securities, if any, in respect of which such convertible
debentures were delivered. Except as provided above, neither the trust nor
Southside will make, or be required to make, any payment, allowance or
adjustment for accumulated and unpaid interest, whether or not in arrears, on
the convertible debentures surrendered for conversion.
PAYMENT AND PAYING AGENTS
Generally, payment of principal of and interest on the convertible
debentures will be made at the office of the indenture trustee in Wilmington,
Delaware. However, we have the option to make payment of any interest by (a)
check mailed to the address of the person entitled to payment at the address
listed in the register of holders of the convertible debentures, or (b) wire
transfer to an account maintained by the person entitled thereto as specified in
the register of holders of the convertible debentures, provided that proper
transfer instructions have been received by the applicable record date. Payment
of any interest on convertible debentures will be made to the person in whose
name the convertible debenture is registered at the close of business on the
regular record date for the interest payment, except in the case of defaulted
interest.
Any moneys deposited with the indenture trustee or any paying agent for
the convertible debentures, or then held by us in trust, for the payment of the
principal of or interest on the convertible debentures and remaining
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unclaimed for two years after the principal or interest has become due and
payable, will be repaid to us on December 31 of each year. If we hold any of
this money in trust, then it will be discharged from the trust to us and the
holder of the convertible debenture will thereafter look, as a general unsecured
creditor, only to us for payment.
REGISTRAR AND TRANSFER AGENT
The indenture trustee will act as the registrar and the transfer agent
for the convertible debentures. Convertible debentures may be presented for
registration of transfer, with the form of transfer endorsed thereon, or a
satisfactory written instrument of transfer, duly executed, at the office of the
registrar. Provided that we maintain a transfer agent in Wilmington, Delaware,
we may rescind the designation of any transfer agent or approve a change in the
location through which any transfer agent acts. We may at any time designate
additional transfer agents with respect to the convertible debentures.
If we redeem any of the convertible debentures, neither we nor the
indenture trustee will be required to (a) issue, register the transfer of, or
exchange any convertible debentures during a period beginning at the opening of
business 15 days before the day of the mailing of and ending at the close of
business on the day of the mailing of the relevant notice of redemption, or (b)
transfer or exchange any convertible debentures so selected for redemption,
except, in the case of any convertible debentures being redeemed in part, any
portion not to be redeemed.
MODIFICATION OF INDENTURE
We and the indenture trustee may, from time to time without the consent
of the holders of the convertible debentures, amend, waive our rights under or
supplement the indenture for purposes which do not materially adversely affect
the rights of the holders of the convertible debentures. Other changes may be
made by us and the indenture trustee with the consent of the holders of a
majority in principal amount of the outstanding convertible debentures. However,
without the consent of the holder of each outstanding convertible debenture
affected by the proposed modification, no modification may:
o extend the maturity date of the convertible debentures; or
o reduce the principal amount or the rate or extend the time of
payment of interest; or
o reduce the percentage of principal amount of convertible
debentures required to amend the indenture.
As long as any of the convertible preferred securities remain outstanding, no
modification of the indenture may be made that requires the consent of the
holders of the convertible debentures, no termination of the indenture may
occur, and no waiver of any event of default under the indenture may be
effective, without the prior consent of the holders of a majority of the
aggregate liquidation amount of the convertible preferred securities.
DEBENTURE EVENTS OF DEFAULT
The indenture provides that any one or more of the following events with
respect to the convertible debentures that has occurred and is continuing
constitutes an event of default under the indenture:
o our failure to pay any interest on the convertible debentures for
30 days after the due date, except where we have properly deferred
the interest payment;
o our failure to pay any principal on the convertible debentures
when due whether at maturity, upon redemption or otherwise;
o our failure to observe or perform in any material respect any
other covenants or agreements contained in the indenture for 90
days after written notice to us from the indenture trustee or the
holders of at least 25% in aggregate outstanding principal amount
of the convertible debentures; or
o our bankruptcy, insolvency or reorganization or dissolution of the
trust.
The holders of a majority of the aggregate outstanding principal amount
of the convertible debentures have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the
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indenture trustee. The indenture trustee, or the holders of at least 25% in
aggregate outstanding principal amount of the convertible debentures, may
declare the principal due and payable immediately upon an event of default under
the indenture. The holders of a majority of the outstanding principal amount of
the convertible debentures may rescind and annul the declaration and waive the
default if the default has been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the indenture trustee. The holders may not annul the
declaration and waive a default if the default is the non-payment of the
principal of the convertible debentures which has become due solely by the
acceleration. Should the holders of the convertible debentures fail to annul the
declaration and waive the default, the holders of at least 25% in aggregate
liquidation amount of the convertible preferred securities will have this right.
If an event of default under the indenture has occurred and is
continuing, the property trustee will have the right to declare the principal of
and the interest on the convertible debentures, and any other amounts payable
under the indenture, to be immediately due and payable and to enforce its other
rights as a creditor with respect to the convertible debentures.
We are required to file annually with the indenture trustee a certificate
as to whether or not we are in compliance with all of the conditions and
covenants applicable to us under the indenture.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF THE CONVERTIBLE PREFERRED SECURITIES
If an event of default under the indenture has occurred and is continuing
and the event is attributable to the failure by us to pay interest on or
principal of the convertible debentures on the date on which the payment is due
and payable, then a holder of convertible preferred securities may institute a
direct action against us to compel us to make the payment. We may not amend the
indenture to remove the foregoing right to bring a direct action without the
prior written consent of all of the holders of the convertible preferred
securities. If the right to bring a direct action is removed, the trust may
become subject to the reporting obligations under the Securities Exchange Act of
1934.
The holders of the convertible preferred securities will not be able to
exercise directly any remedies, other than those set forth in the preceding
paragraph, available to the holders of the convertible debentures unless there
has been an event of default under the trust agreement.
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
We may not consolidate with or merge into any other entity or convey or
transfer our properties and assets substantially as an entirety to any entity,
and no entity may be consolidated with or merged into us or sell, convey,
transfer or otherwise dispose of its properties and assets substantially as an
entirety to us, unless:
o if we consolidate with or merge into another person or convey or
transfer our properties and assets substantially as an entirety to
any person, the successor person is organized under the laws of
the United States or any state or the District of Columbia, and
the successor person expressly assumes by supplemental indenture
our obligations on the convertible debentures, and the ultimate
parent entity of the successor entity expressly assumes our
obligations under the guarantee, to the extent the convertible
preferred securities are then outstanding;
o immediately after the transaction, no event of default under the
indenture, and no event which, after notice or lapse of time, or
both, would become an event of default under the indenture, has
occurred and is continuing; and
o other conditions as prescribed in the indenture are met.
Under certain circumstances, if we consolidate or merge with another
entity, or transfer or sell substantially all of our assets to another entity,
such transaction may be considered to involve a replacement of the trust, and
the provisions of the trust agreement relating to a replacement of the trust
would apply to such transaction. See "----Mergers, Consolidations, Amalgamations
or Replacements of the Trust" on page 76.
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SATISFACTION AND DISCHARGE
The indenture will cease to be of further effect and we will be deemed to
have satisfied and discharged our obligations under the indenture when all
convertible debentures not previously delivered to the indenture trustee for
cancellation:
o have become due and payable;
o will become due and payable at their stated maturity within one
year or are to be called for redemption within one year, and we
deposit or cause to be deposited with the indenture trustee funds,
in trust, for the purpose and in an amount sufficient to pay and
discharge the entire indebtedness on the convertible debentures
not previously delivered to the indenture trustee for
cancellation, for the principal and interest due to the date of
the deposit or to the stated maturity or redemption date, as the
case may be.
We may still be required to provide officers' certificates, opinions of
counsel and pay fees and expenses due after these events occur.
GOVERNING LAW
The indenture and the convertible debentures will be governed by and
construed in accordance with Texas law.
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The indenture trustee is subject to all the duties and responsibilities
specified with respect to an indenture trustee under the Trust Indenture Act.
Subject to these provisions, the indenture trustee is under no obligation to
exercise any of the powers vested in it by the indenture at the request of any
holder of convertible debentures, unless offered reasonable security or
indemnity by the holder against the costs, expenses and liabilities which might
be incurred. The indenture trustee is not required to expend or risk its own
funds or otherwise incur personal financial liability in the performance of its
duties if the indenture trustee reasonably believes that repayment or adequate
indemnity is not reasonably assured to it.
MISCELLANEOUS
We have agreed, pursuant to the indenture, for so long as convertible
preferred securities remain outstanding:
o to maintain directly or indirectly 100% ownership of the common
securities of the trust, except that certain successors that are
permitted pursuant to the indenture may succeed to our ownership
of the common securities;
o not to voluntarily terminate, wind up or liquidate the trust
without prior approval of the Federal Reserve, if required;
o to use our reasonable efforts to cause the trust (a) to remain a
business trust (and to avoid involuntary termination, winding up
or liquidation), except in connection with a distribution of
convertible debentures, the redemption of all of the trust
securities of the trust or mergers, consolidations or
amalgamations, each as permitted by the trust agreement; and (b)
to otherwise continue not to be treated as an association taxable
as a corporation or partnership for federal income tax purposes;
o to use our reasonable efforts to cause each holder of trust
securities to be treated as owning an individual beneficial
interest in the convertible debentures; and
o fulfill all filing and reporting obligations under the Securities
Exchange Act, as applicable, to a company having a class of
securities registered under that Act.
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DESCRIPTION OF THE GUARANTEE
The guarantee agreement will be executed and delivered by us concurrently
with the issuance of the convertible preferred securities for the benefit of the
holders of the convertible preferred securities. The guarantee agreement will be
qualified as an indenture under the Trust Indenture Act. Wilmington Trust
Company, the guarantee trustee, will act as trustee for purposes of complying
with the provisions of the Trust Indenture Act, and will also hold the guarantee
for the benefit of the holders of the convertible preferred securities.
Prospective investors are urged to read the form of the guarantee agreement,
which has been filed as an exhibit to the registration statement of which this
prospectus forms a part.
GENERAL
We agree to pay in full on a subordinated basis, to the extent described
in the guarantee agreement, the guarantee payments (as defined below) to the
holders of the convertible preferred securities, as and when due, regardless of
any defense, right of set- off or counterclaim that the trust may have or assert
other than the defense of payment.
The following payments with respect to the convertible preferred
securities are called the "guarantee payments" and, to the extent not paid or
made by the trust and to the extent that the trust has funds available for those
distributions, will be subject to the guarantee:
o any accumulated and unpaid distributions required to be paid on
the convertible preferred securities;
o with respect to any convertible preferred securities called for
redemption, the redemption price; and
o upon a voluntary or involuntary dissolution, winding up or
termination of the trust (other than in connection with the
distribution of convertible debentures to the holders of
convertible preferred securities), the lesser of:
(a) the amount of the liquidation distribution; and
(b) the amount of assets of the trust remaining available for
distribution to holders of convertible preferred securities in
liquidation of the trust.
We may satisfy our obligations to make a guarantee payment by making a
direct payment of the required amounts to the holders of the convertible
preferred securities, or by causing the trust to pay the amounts to the holders.
The guarantee agreement is a guarantee, on a subordinated basis, of the
guarantee payments, but the guarantee only applies to the extent the trust has
funds available for those distributions. If we do not make interest payments on
the convertible debentures purchased by the trust, the trust will not have funds
available to make the distributions and will not pay distributions on the
convertible preferred securities.
STATUS OF THE GUARANTEE
The guarantee constitutes our unsecured obligation that ranks subordinate
and junior in right of payment to all of our senior and subordinated debt in the
same manner as the convertible debentures. We expect to incur additional
indebtedness in the future, although we have no specific plans in this regard
presently, and neither the indenture nor the trust agreement limits the amounts
of the obligations that we may incur.
The guarantee constitutes a guarantee of payment and not of collection.
If we fail to make guarantee payments when required, holders of convertible
preferred securities may institute a legal proceeding directly against us to
enforce their rights under the guarantee without first instituting a legal
proceeding against any other person or entity.
The guarantee will not be discharged except by payment of the guarantee
payments in full to the extent not paid by the trust or upon distribution of the
convertible debentures to the holders of the convertible preferred securities.
Because we are a bank holding company, our right to participate in any
distribution of assets of any
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subsidiary upon the subsidiary's liquidation or reorganization or otherwise is
subject to the prior claims of creditors of that subsidiary, except to the
extent we may be recognized as a creditor of that subsidiary. Our obligations
under the guarantee, therefore, will be effectively subordinated to all existing
and future liabilities of our subsidiaries, and claimants should look only to
our assets for payments under the guarantee.
AMENDMENTS
Except with respect to any changes that do not materially adversely
affect the rights of holders of the convertible preferred securities, in which
case no vote will be required, the guarantee may not be amended without the
prior approval of the holders of a majority of the aggregate liquidation amount
of the outstanding convertible preferred securities.
EVENTS OF DEFAULT; REMEDIES
An event of default under the guarantee agreement will occur upon our
failure to make any required guarantee payments or to perform any other
obligations under the guarantee. The holders of a majority in aggregate
liquidation amount of the convertible preferred securities will have the right
to direct the time, method and place of conducting any proceeding for any remedy
available to the guarantee trustee in respect of the guarantee and may direct
the exercise of any power conferred upon the guarantee trustee under the
guarantee agreement.
Any holder of convertible preferred securities may institute and
prosecute a legal proceeding directly against us to enforce its rights under the
guarantee without first instituting a legal proceeding against the trust, the
guarantee trustee or any other person or entity.
We are required to provide to the guarantee trustee annually a
certificate as to whether or not we are in compliance with all of the conditions
and covenants applicable to us under the guarantee agreement.
TERMINATION OF THE GUARANTEE
The guarantee will terminate and be of no further force and effect upon:
o full payment of the redemption price of the convertible preferred
securities;
o full payment of the amounts payable upon liquidation of the trust;
or
o distribution of the convertible debentures to the holders of the
convertible preferred securities.
If at any time any holder of the convertible preferred securities must
restore payment of any sums paid under the convertible preferred securities or
the guarantee, the guarantee will continue to be effective or will be reinstated
with respect to such amounts.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The guarantee trustee, other than during the occurrence and continuance
of our default in performance of the guarantee, undertakes to perform only those
duties as are specifically set forth in the guarantee. When an event of default
has occurred and is continuing, the guarantee trustee must exercise the same
degree of care and skill as a prudent person would exercise or use in the
conduct of his or her own affairs. Subject to those provisions, the guarantee
trustee is under no obligation to exercise any of the powers vested in it by the
guarantee at the request of any holder of any convertible preferred securities,
as the case may be, unless it is offered reasonable indemnity against the costs,
expenses and liabilities that might be incurred thereby.
EXPENSE AGREEMENT
We will, pursuant to the Agreement as to Expenses and Liabilities entered
into by us and the trust under the trust agreement, irrevocably and
unconditionally guarantee to each person or entity to whom the trust becomes
indebted or liable, the full payment of any costs, expenses or liabilities of
the trust, other than obligations of the trust to pay to the holders of the
convertible preferred securities or other similar interests in the trust of the
amounts due to the holders pursuant to the terms of the convertible preferred
securities or other similar interests, as the case may
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be. Third party creditors of the trust may proceed directly against us under the
expense agreement, regardless of whether they had notice of the expense
agreement.
GOVERNING LAW
Each guarantee will be governed by Texas law.
RELATIONSHIP AMONG THE CONVERTIBLE PREFERRED SECURITIES,
THE CONVERTIBLE DEBENTURES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
We irrevocably guarantee, as and to the extent described in this
prospectus, payments of distributions and other amounts due on the convertible
preferred securities to the extent the trust has funds available for the payment
of these amounts. We and the trust believe that, taken together, our obligations
under the convertible debentures, the indenture, the trust agreement, the
expense agreement and the guarantee agreement provide, in the aggregate, a full,
irrevocable and unconditional guarantee, on a subordinated basis, of payment of
distributions and other amounts due on convertible preferred securities. No
single document standing alone or operating in conjunction with fewer than all
of the other documents constitutes a guarantee. It is only the combined
operation of these documents that has the effect of providing a full,
irrevocable and unconditional guarantee of the obligations of the trust under
the convertible preferred securities.
If and to the extent that we do not make payments on the convertible
debentures, the trust will not pay distributions or other amounts due on the
convertible preferred securities. The guarantee does not cover payment of
distributions when the trust does not have sufficient funds to pay the
distributions. In this event, the remedy of a holder of convertible preferred
securities is to institute a legal proceeding directly against us for
enforcement of payment of the distributions to the holder. Our obligations under
the guarantee are subordinated and junior in right of payment to all of our
other indebtedness.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on
the convertible debentures, these payments will be sufficient to cover
distributions and other payments due on the convertible preferred securities
primarily because:
o the aggregate principal amount of the convertible debentures, will
be equal to the sum of the aggregate stated liquidation amount of
the trust securities;
o the interest rate and interest and other payment dates on the
convertible debentures will match the distribution rate and
distribution and other payment dates for the or convertible
preferred securities;
o we will pay for any and all costs, expenses and liabilities of the
trust, except the obligations of the trust to pay to holders of
the convertible preferred securities, the amounts due to the
holders pursuant to the terms of the convertible preferred
securities; and
o the trust will not engage in any activity that is not consistent
with the limited purposes of the trust.
ENFORCEMENT RIGHTS OF HOLDERS OF CONVERTIBLE PREFERRED SECURITIES
A holder of any convertible preferred security may institute a legal
proceeding directly against us to enforce its rights under the guarantee without
first instituting a legal proceeding against the guarantee trustee, the trust or
any other person. A default or event of default under any of our senior or
subordinated debt would not constitute a default or event of default under the
trust agreement. In the event, however, of payment defaults under, or
acceleration of, our senior or subordinated debt, the subordination provisions
of the indentures provide that no payments may be made in respect of the
convertible debentures until the obligations have been paid in full or any
payment default has been cured or waived. Failure to make required payments on
the convertible debentures would constitute an event of default under the trust
agreement.
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LIMITED PURPOSE OF THE TRUST
The convertible preferred securities evidence preferred undivided
beneficial interests in the assets of the trust. The trust exists for the
exclusive purposes of issuing the trust securities, investing the proceeds
thereof in the convertible debentures, and engaging in only those other
activities necessary, advisable or incidental thereto. A principal difference
between the rights of a holder of a convertible preferred security and the
rights of a holder of a convertible debenture is that a holder of a convertible
debenture is entitled to receive from us the principal amount of and interest
accrued on convertible debentures held, while a holder of convertible preferred
securities is entitled to receive distributions from the trust (or from us under
the guarantee) if and to the extent the trust has funds available for the
payment of the distributions.
RIGHTS UPON TERMINATION
Upon any voluntary or involuntary termination, winding-up or liquidation
of the trust involving the liquidation of the convertible debentures, the
holders of the convertible preferred securities will be entitled to receive, out
of assets held by the trust, the liquidation distribution in cash.
Upon our voluntary or involuntary liquidation or bankruptcy, the property
trustee, as holder of the convertible debentures, would be a subordinated
creditor of ours. Therefore, the property trustee would be subordinated in right
of payment to all of our senior and subordinated debt, but is entitled to
receive payment in full of principal and interest before any of our shareholders
receive payments or distributions. Since we are the guarantor under the
guarantee and have agreed to pay for all costs, expenses and liabilities of the
trust other than the obligations of the trust to pay to holders of the
convertible preferred securities the amounts due to the holders pursuant to the
terms of the convertible preferred securities, the positions of a holder of the
convertible preferred securities, and a holder of convertible debentures,
relative to our other creditors and to our shareholders in the event of
liquidation or bankruptcy are expected to be substantially the same.
BOOK-ENTRY ISSUANCE
GENERAL
DTC will act as securities depositary for the convertible preferred
securities and may act as securities depositary for all of the convertible
debentures in the event of the distribution of the convertible debentures to the
holders of the convertible preferred securities. Except as described below, the
convertible preferred securities will be issued only as registered securities in
the name of Cede & Co. (DTC's nominee). One or more global preferred securities
will be issued for the convertible preferred securities and will be deposited
with DTC.
DTC is a limited purpose trust company organized under New York banking
law, a "banking organization" within the meaning of the New York banking law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to Section 17A of the Securities Exchange Act of 1934. DTC
holds securities that its participants deposit with DTC. DTC also facilitates
the settlement among participants of securities transactions, such as transfers
and pledges, in deposited securities through electronic computerized book-entry
changes in participants' accounts, thereby eliminating the need for physical
movement of securities certificates. Direct participants include securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations. DTC is owned by a number of its direct participants and by
the New York Stock Exchange, the American Stock Exchange and the National
Association of Securities Dealers, Inc. Access to the DTC system is also
available to indirect participants, such as securities brokers and dealers,
banks and trust companies that clear through or maintain custodial relationships
with direct participants, either directly or indirectly. The rules applicable to
DTC and its participants are on file with the SEC.
Purchases of convertible preferred securities within the DTC system must
be made by or through direct participants, which will receive a credit for the
convertible preferred securities on DTC's records. The ownership interest of
each actual purchaser of each convertible preferred security ("beneficial
owner") is in turn to be recorded on the direct and indirect participants'
records. Beneficial owners will not receive written confirmation from DTC of
their purchases, but beneficial owners are expected to receive written
confirmations providing details of the transactions, as well as periodic
statements of their holdings, from the direct or indirect participants through
which
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the beneficial owners purchased convertible preferred securities. Transfers of
ownership interests in the convertible preferred securities, are to be
accomplished by entries made on the books of participants acting on behalf of
beneficial owners. Beneficial owners will not receive certificates representing
their ownership interest in convertible preferred securities, except if use of
the book-entry-only system for the convertible preferred securities is
discontinued.
DTC will have no knowledge of the actual beneficial owners of the
convertible preferred securities; DTC's records reflect only the identity of the
direct participants to whose accounts the convertible preferred securities are
credited, which may or may not be the beneficial owners. The participants will
remain responsible for keeping account of their holdings on behalf of their
customers.
The information in this section concerning DTC and DTC's book-entry
system has been obtained from sources that we believe to be accurate, but we and
the trusts assume no responsibility for the accuracy thereof. Neither we nor the
trusts have any responsibility for the performance by DTC or its participants of
their respective obligations as described in this prospectus or under the rules
and procedures governing their respective operations.
NOTICES AND VOTING
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct and
indirect participants to beneficial owners will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
Redemption notices will be sent to Cede & Co. as the registered holder of
the convertible preferred securities. If less than all of the convertible
preferred securities, are being redeemed, the amount to be redeemed will be
determined in accordance with the trust agreement.
Although voting with respect to the convertible preferred securities is
limited to the holders of record of the convertible preferred securities, in
those instances in which a vote is required, neither DTC nor Cede & Co. will
itself consent or vote with respect to the convertible preferred securities.
Under its usual procedures, DTC would mail an omnibus proxy to the property
trustee as soon as possible after the record date. The omnibus proxy assigns
Cede & Co.'s consenting or voting rights to those direct participants to whose
accounts the convertible preferred securities are credited on the record date.
DISTRIBUTION OF FUNDS
The property trustee will make distribution payments on the convertible
preferred securities to DTC. DTC's practice is to credit direct participants'
accounts on the relevant payment date in accordance with their respective
holdings shown on DTC's records unless DTC has reason to believe that it will
not receive payments on the payment date. Payments by participants to beneficial
owners will be governed by standing instructions and customary practices and
will be the responsibility of the participant and not of DTC, the property
trustee, the trust or us, subject to any statutory or regulatory requirements as
may be in effect from time to time. Payment of distributions to DTC is the
responsibility of the property trustee, disbursement of the payments to direct
participants is the responsibility of DTC, and disbursements of the payments to
the beneficial owners is the responsibility of direct and indirect participants.
SUCCESSOR DEPOSITARIES AND TERMINATION OF BOOK-ENTRY SYSTEM
DTC may discontinue providing its services with respect to any of the
convertible preferred securities at any time by giving reasonable notice to the
property trustee or us. If no successor securities depositary is obtained,
definitive certificates representing the convertible preferred securities are
required to be printed and delivered. We also have the option to discontinue use
of the system of book-entry transfers through DTC (or a successor depositary).
After an event of default under the indenture, the holders of a majority in
liquidation amount of the convertible preferred securities may determine to
discontinue the system of book-entry transfers through DTC. In these events,
definitive certificates for the convertible preferred securities will be printed
and delivered.
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DESCRIPTION OF CAPITAL STOCK
The following descriptions do not purport to be complete and are
subject to, and qualified in their entirety by reference to, the more complete
descriptions thereof set forth in our Articles of Incorporation and our By-laws,
as amended to date.
AUTHORIZATION
Our Articles of Incorporation authorize us to issue one class of
capital stock to be designated common stock. We are authorized to issue
20,000,000 shares of common stock at a par value of $1.25 per share.
OUTSTANDING SHARES
As of August 31, 2000, there were 7,239,482 shares of common stock
outstanding.
DIVIDEND RIGHTS
Holders of the common stock are entitled to receive such dividends as
may be declared by the board of directors out of funds legally available
therefor, and to receive pro rata any assets distributable to holders of the
common stock upon liquidation of Southside.
VOTING RIGHTS
Holders of our common stock are entitled to vote for the election of
directors and upon all other matters which may be submitted to a vote of the
shareholders generally. Each share entitles its holder to one vote in the
election of directors as well as all other matters to be voted on by
shareholders. However, holders of our common stock are not entitled to cumulate
their votes in the election of directors. Furthermore, holders of our common
stock do not have preemptive rights to purchase any securities under our
Articles of Incorporation.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following summary of the material United States federal income tax
consequences that may be relevant to the purchase, ownership and disposition of
convertible preferred securities insofar as it relates to matters of law and
legal conclusions, represents the opinion of Jenkens & Gilchrist, a Professional
Corporation, special tax counsel to Southside. The conclusions expressed herein
are based on the Internal Revenue Code of 1986, as amended, the Treasury
regulations promulgated thereunder and administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly on a retroactive basis.
The authorities on which this summary is based are subject to various
interpretations and the opinions of tax counsel are not binding on the Internal
Revenue Service or the courts, either of which could take a contrary position.
Moreover, no rulings have been or will be sought from the Internal Revenue
Service with respect to the transactions described herein. Accordingly, there
can be no assurance that the Internal Revenue Service will not challenge the
opinions expressed herein or that a court would not sustain such a challenge.
Nevertheless, tax counsel has advised that it is of the view that, if
challenged, the opinions expressed herein would be sustained by a court.
Unless otherwise stated, this summary deals only with convertible
preferred securities held as capital assets by United States Persons (defined
below) who purchase the convertible preferred securities upon original issuance
at their original offering price. As used herein, a "United States Person" means
a person that is (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, (iii) an estate,
the income of which is includible in its gross income for federal income tax
purposes without regard to its source, or trust, if (a) a court within the
United States is able to exercise primary supervision over the administration of
the trust and (b) one or more United States trustees have the authority to
control all substantial decisions of the trust or (iv) a person whose worldwide
income or gain is subject to United States federal income taxation on a net
income basis. The tax treatment of holders may vary depending on their
particular situation. This summary does not address all the tax consequences
that may be relevant to a particular holder or to holders who may be subject to
special tax treatment, such as banks, real estate investment trusts, regulated
investment companies, insurance companies, dealers in securities or currencies,
tax-exempt investors, persons holding convertible preferred securities as part
of a straddle, a "synthetic security," or as part of a hedging or conversion
transaction, or, except to the extent described below in "--United States Alien
Holders", foreign taxpayers. In addition, this summary does not include any
description of any alternative minimum tax consequences or the tax laws of any
state, local or foreign government that may be applicable to a holder of
convertible preferred securities.
CLASSIFICATION OF TRUST AND THE CONVERTIBLE DEBENTURES
In the opinion of tax counsel, under current law and assuming compliance
with the terms of the trust agreement, (i) the trust will be classified as a
grantor trust and not as an association taxable as a corporation for United
States federal income tax purposes, and (ii) the convertible debentures will be
classified as indebtedness of the Company. Accordingly, for United States
federal income tax purposes, each holder of the convertible preferred securities
will be treated as owning an undivided beneficial interest in the convertible
debentures held by the trust. As a result, each holder will be required to
include in its gross income its pro rata share of the interest income or
original issue discount that is paid or accrued on the convertible debentures.
See "--Interest Income and Original Issue Discount" below. This opinion is based
in part upon certain factual assumptions and upon certain factual
representations made by the Company, which representations tax counsel has
relied upon and assumed to be true, correct and complete. If such
representations are inaccurate, this opinion could be adversely affected.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Under applicable Treasury regulations, debt instruments such as the
subordinated debentures which are issued at face value will not be considered
issued with original issue discount, even if their issuer can defer payment of
interest, if the likelihood of any deferral is remote. Under the regulations,
the convertible debentures will not be considered to have been issued with
original issue discount. In such a case, stated interest on the convertible
debentures generally will be included in income by a holder as ordinary income
at the time such interest income is paid or accrued in accordance with such
holder's regular method of tax accounting.
The regulations have not yet been addressed in any rulings or other
interpretations by the Internal Revenue Service, and the Internal Revenue
Service could take the position that the likelihood of deferral of interest
payments is not remote. If the Internal Revenue Service were to assert
successfully that the stated interest on the convertible debentures was original
issue discount regardless of whether we exercise our right to defer payments of
interest on
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such debentures or, we exercise our right to defer payments of interest on the
convertible debentures, the convertible debentures will be treated as issued
with original issue discount at such time, and a holder would thereafter be
required to include the original issue discount on the convertible debentures in
ordinary income on a daily economic accrual basis, regardless of the holder's
method of tax accounting and in advance of receipt of the cash attributable to
such interest income. If we were to exercise our option to defer the payment of
stated interest on the convertible debentures, a holder would be required to
include original issue discount in gross income during an extension period even
though we would not make actual cash payments during such extension period.
Under the original issue discount economic accrual rules, a holder would accrue
an amount of interest income each year that approximates the stated interest
payments called for under the debentures, and actual cash payments of interest
on the debentures would not be reported separately as taxable income.
Because income on the convertible preferred securities will constitute
interest income for United States federal income tax purposes, corporate holders
of convertible preferred securities will not be entitled to a dividends-received
deduction in respect of such income.
DISTRIBUTION OF THE CONVERTIBLE DEBENTURES TO HOLDERS OF THE CONVERTIBLE
PREFERRED SECURITIES UPON TERMINATION OF THE TRUST
Under current United States federal income tax law, a distribution by the
trust of the convertible debentures as described under the caption "Description
of the Convertible Preferred Securities--Liquidation Distribution Upon
Termination" on page 74 will be nontaxable to the holders and will result in a
holder receiving a pro rata share of the convertible debentures held by the
Trust, with a holding period and aggregate tax basis equal to the holding period
and aggregate tax basis such holder had in the convertible preferred securities
before such distribution. A holder will account for interest in respect of the
convertible debentures received from the trust in the manner described above
under "Certain Federal Income Tax Consequences--Interest Income and Original
Issue Discount," on page 96 including any accrual of original issue discount (if
any) attributed to the convertible debentures upon the distribution.
SALES OR REDEMPTION OF THE CONVERTIBLE PREFERRED SECURITIES
Gain or loss will be recognized by a holder on the sale of convertible
preferred securities (including a redemption for cash or other consideration) in
an amount equal to the difference between the amount realized on the sale (or
redemption) and the holder's adjusted tax basis in the convertible preferred
securities sold or redeemed. A holder's adjusted tax basis in the convertible
preferred securities generally will be the holder's initial purchase price
increased by original issue discount (if any) previously includible in such
holder's gross income to the date of disposition and decreased by payments
received (other than payments of stated interest that are not treated as
original issue discount) on the convertible preferred securities. Gain or loss
recognized by a holder on convertible preferred securities held for more than
one year will generally be taxable as long-term capital gain or loss.
Convertible preferred securities constituting a capital asset which are acquired
by an individual and held for more than 12 months are accorded a maximum United
States federal capital gains tax rate of 20% (or a rate of 10%, if the
individual taxpayer is in the 15% tax bracket). Effective in 2001, the 20% rate
drops to 18% (and the 10% rate drops to 8%) for capital assets acquired after
the year 2000 and held more than five years; however, the requirement that the
capital asset be acquired after the year 2000 does not apply to the 8% rate. For
corporate holders, capital gain will be subject to tax at the ordinary income
tax rates applicable to corporations.
The convertible preferred securities might trade at a price that does not
fully reflect the value of accrued but unpaid interest with respect to the
underlying debentures. A holder that disposes of such holder's convertible
preferred securities between record dates for payments of distributions (and
consequently does not receive a distribution from the trust for the period prior
to such disposition) will nevertheless be required to include in income as
ordinary income accrued but unpaid interest on the convertible debentures
through the date of disposition and to add such amount to its adjusted tax basis
in its convertible preferred securities disposed of. Such holder will recognize
a capital loss on the disposition of its convertible preferred securities to the
extent the selling price (which might not fully reflect the value of accrued but
unpaid interest) is less than the holder's adjusted tax basis in the convertible
preferred securities (which would include accrued but unpaid interest). Subject
to certain limited exceptions, capital losses cannot be applied to offset
ordinary income for United States federal income tax purposes.
CONVERSION OF CONVERTIBLE PREFERRED SECURITIES
A holder of convertible preferred securities generally will not
recognize income, gain or loss upon the conversion of its convertible preferred
securities into our common stock. A holder will, however, recognize gain upon
the receipt of cash in lieu of a fractional share of common stock equal to the
amount of cash received less the
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holder's tax basis in such fractional share. A holder's tax basis in the common
stock received upon exchange and conversion should generally be equal to the
holder's tax basis in the convertible preferred securities delivered to the
conversion agent for exchange less the basis allocated to any fractional share
for which cash is received, and a holder's holding period in the common stock
received upon exchange and conversion will generally begin on the date that the
holder acquired the convertible preferred securities delivered to the conversion
agent for exchange.
ADJUSTMENT OF CONVERSION RATIO
Treasury regulations promulgated under Section 305 of the Internal
Revenue Code would treat holders of convertible preferred securities as having
received a constructive distribution from us in the event that the conversion
ratio of the convertible debentures were adjusted if (1) as a result of such
adjustment, the proportionate interest (measured by the quantum of common stock
into or for which the convertible debentures are convertible or exchangeable) of
the holders of the convertible preferred securities in the assets or earnings
and profits of Southside were increased, and (2) the adjustment was not made
pursuant to a bona fide, reasonable anti-dilution formula. An adjustment of the
conversion ratio would not be considered made pursuant to such a formula if the
adjustment was made to compensate for certain taxable distributions with respect
to the common stock. Thus, under certain circumstances, an increase in the
conversion ratio for the holders may result in deemed dividend income to holders
to the extent of the increase to their proportionate share of the current or
accumulated earnings and profits or assets of Southside. Holders of the
convertible preferred securities would be required to include their allocable
share of such deemed dividend income in gross income but would not receive any
cash related thereto.
OWNERSHIP OF COMMON STOCK
Distributions received by holders of common stock in respect of such
common stock (other than certain distributions of additional shares of common
stock or rights to acquire additional shares of common stock) will be treated as
ordinary dividend income to such holders to the extent such distributions are
considered to be paid by us out of our current or accumulated earnings and
profits, as determined under federal income tax principles. Corporate holders of
common stock may be entitled to a "dividends-received deduction" with respect to
such dividends.
To the extent that any such distribution exceeds our current or
accumulated earnings and profit, such distribution will be treated, first, as a
tax-free return of capital to a holder of common stock to the extent of such
holder's adjusted tax basis in the common stock and, thereafter, as capital
gain.
Distributions of additional shares of common stock, or rights to
acquire additional shares of common stock, that are received as part of a pro
rata distribution of such shares, or rights to acquire such shares, to all our
shareholders generally should not be subject to federal income tax. The tax
basis of such new shares or rights generally will be determined by allocating
the shareholder's adjusted tax basis in the "old" shares of common stock between
such "old" shares and the new shares or rights received by such shareholder,
based upon their relative fair market values on the date of the distribution.
A holder of common stock generally will recognize gain or loss on a
sale or other taxable disposition of common stock equal to the difference
between the amount realized by the shareholder on such sale or disposition and
the shareholder's adjusted tax basis in such common stock. Such gain or loss
generally will be capital gain or loss and generally will be considered
long-term capital gain or loss if the holder had held such common stock for more
than one year immediately prior to such sale or disposition.
EFFECT OF POSSIBLE CHANGES IN TAX LAWS
Congress and the Clinton Administration have considered certain
proposed tax law changes in the past that would, among other things, generally
deny corporate issuers a deduction for interest in respect of certain debt
obligations if the debt obligations have a maximum term in excess of 15 years
and are not shown as indebtedness on the issuer's applicable consolidated
balance sheet. Other proposed tax law changes would have denied interest
deductions if the term was in excess of 20 years. Although these proposed tax
law changes have not been enacted into law, there can be no assurance that tax
law changes will not be reintroduced into future legislation which, if enacted
after the date hereof, may adversely affect the federal income tax deductibility
of interest payable on the debentures.
98
<PAGE> 100
In addition, in a case filed in the U.S. Tax Court, Enron Corp. v.
Commissioner, Tax Court Docket No. 6149-98, the Internal Revenue Service
challenged the deductibility for federal income tax purposes of interest paid on
securities which are similar, but not identical to, the convertible preferred
securities. The parties filed a stipulation of settled issues, a portion of
which stipulated there shall be no adjustment for the interest deducted by the
taxpayer with respect to the securities. The Internal Revenue Service may also
challenge the deductibility of interest paid on the convertible debentures,
which, if such challenge were litigated resulting in the Internal Revenue
Service's position being sustained, would trigger a Tax Event and possibly a
redemption of the preferred securities.
Accordingly, there can be no assurance that a Tax Event will not occur.
A Tax Event would permit us, upon approval of the Federal Reserve, if then
required, to cause a redemption of the preferred securities before, as well as
after, December 31, 2005. See "Description of the Convertible Subordinated
Debentures--Redemption" on page 83 and "Description of the Convertible Preferred
Securities of the Trust--Redemption or Exchange--Redemption upon a Tax Event,
Investment Company Event or Capital Treatment Event" on page 72.
UNITED STATES ALIEN HOLDERS
For purposes of this discussion, a "United States Alien Holder" is any
corporation, individual, partnership, estate or trust that is, as to the United
States, a foreign corporation, a non-resident alien individual, a foreign
partnership, a foreign estate or a foreign trust. A "United States Alien Holder"
does not include, however, any person whose income or gain in respect of the
convertible preferred securities is effectively connected with the conduct of a
United States trade or business.
Under current United States federal income tax law payments by the trust
or any of its paying agents to any holder who or which is a United States Alien
Holder will not be subject to United States federal withholding tax, provided
that (a) the holder does not actually or constructively (as determined under
certain attribution rules prescribed by the Internal Revenue Code) own 10% or
more of the total combined voting power of all classes of stock of the Company
entitled to vote, (b) the holder is not a controlled foreign corporation that is
related to the Company through stock ownership, (c) the holder is not a bank
receiving interest described in section 881(c)(3)(A) of the Internal Revenue
Code, and (d) either (A) the holder certifies to the Trust or its agent, under
penalties of perjury, that it is not a United States holder and provides its
name and address or (B) a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business, and holds the convertible preferred securities in such
capacity, certifies to the Trust or its agent, under penalties of perjury, that
such statement has been received from the holder by it or by a Financial
Institution holding such security for the holder and furnishes the Trust or its
agent with a copy thereof. Recently issued Treasury regulations provide
alternative methods for satisfying the identification and certification
requirements described in the preceding sentence. These regulations generally
are effective for payments made after December 31, 2000, subject to certain
transition rules. United States Alien Holders are urged to consult their tax
advisors about these new regulations.
A United States Alien Holder of convertible preferred securities
generally will not be subject to United States federal withholding tax on any
gain realized upon the sale or other disposition of convertible preferred
securities. In the case of a United States Alien Holder who is an individual,
however, gain realized on the disposition of convertible preferred securities
may be subject to United States federal income tax if (i) such individual is
present in the United States for a period or periods aggregating 183 days or
more during the taxable year of the disposition and (ii) either (A) such
individual has a "tax home" in the United States or (B) the disposition is
attributable to an office or other fixed place of business maintained by such
individual in the United States.
INFORMATION REPORTING TO HOLDERS
The amount of interest paid or original issue discount accrued on the
convertible preferred securities will be reported to holders and the Internal
Revenue Service on Forms 1099, which forms should be mailed to such holders by
January 31 following each calendar year.
BACKUP WITHHOLDING
Payments made on, and proceeds from the sale of, convertible preferred
securities may be subject to a "backup" withholding tax of 31% unless the holder
complies with certain certification requirements. Any amounts withheld under the
backup withholding rules will be allowed as a credit against the holder's United
States federal income tax, provided the required information is provided to the
Internal Revenue Service on a timely basis.
99
<PAGE> 101
The federal income tax discussion set forth above is included for general
information purposes only and may not be applicable depending on a prospective
investor's particular situation. prospective investors should consult their own
tax advisors with respect to the tax consequences to them of the purchase,
ownership and disposition of the convertible preferred securities or the
distribution to them of the debentures, including the tax consequences under
state, local, foreign and other tax laws and the possible effects of changes in
united states federal or other tax laws.
ERISA CONSIDERATIONS
Employee benefit plans that are subject to the Employee Retirement Income
Security Act of 1974, or Section 4975 of the Internal Revenue Code, generally
may purchase convertible preferred securities, subject to the investing
fiduciary's determination that the investment in convertible preferred
securities satisfies ERISA's fiduciary standards and other requirements
applicable to investments by the plan.
We and/or any of our affiliates may be considered a "party in interest"
(within the meaning of ERISA) or a disqualified person" (within the meaning of
Section 4975 of the Internal Revenue Code) with respect to certain plans. These
plans generally include plans maintained or sponsored by, or contributed to by,
any such persons with respect to which we or any of our affiliates are a
fiduciary or plans for which we or any of our affiliates provide services. The
acquisition and ownership of preferred securities and convertible preferred
securities by a plan (or by an individual retirement arrangement or other plans
described in Section 4975(e)(1) of the Internal Revenue Code) with respect to
which we or any of our affiliates are considered a party in interest or a
disqualified person may constitute or result in a prohibited transaction under
ERISA or Section 4975 of the Internal Revenue Code, unless the convertible
preferred securities are acquired pursuant to and in accordance with an
applicable exemption.
As a result, plans with respect to which we or any of our affiliates or
any of its affiliates is a party in interest or a disqualified person should not
acquire convertible preferred securities unless the convertible preferred
securities are acquired pursuant to and in accordance with an applicable
exemption. Any other plans or other entities whose assets include plan assets
subject to ERISA or Section 4975 of the Internal Revenue Code proposing to
acquire convertible preferred securities should consult with their own counsel.
100
<PAGE> 102
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement among
Southside, the trust and the underwriters named below, for whom Stifel, Nicolaus
& Company, Incorporated is acting as representative, the underwriters have
severally agreed to purchase from the trust, and the trust has agreed to sell to
them, an aggregate of convertible preferred securities, in the amounts set forth
below opposite their respective names.
<TABLE>
<CAPTION>
Number of
Convertible
Underwriters Preferred Securities
------------ --------------------
<S> <C>
Stifel, Nicolaus & Company, Incorporated.....................
---------
Total............................................... 1,500,000
=========
</TABLE>
In the underwriting agreement, the obligations of the underwriters are
subject to approval of certain legal matters by their counsel and to various
other conditions. Under the terms and conditions of the underwriting agreement,
the underwriters are committed to accept and pay for all of the convertible
preferred securities if any are taken.
The underwriters propose to offer the convertible preferred securities
directly to the public at the public offering price set forth on the cover page
of this prospectus, and to certain securities dealers (who may include the
underwriters) at this price, less a concession not in excess of $ per
convertible preferred security. The underwriters may allow, and the selected
dealers may reallow, a concession not in excess of $ per convertible preferred
security to certain brokers and dealers. After the convertible preferred
securities are released for sale to the public, the offering price and other
selling terms may from time to time be changed by the underwriter.
The trust has granted to the underwriters an option, exercisable within
30 days after the date of this prospectus, to purchase up to 225,000 additional
convertible preferred securities at the same price per security to be paid by
the underwriters for the other securities being offered. If the underwriters
purchase any of the additional securities under the applicable option, each
underwriter will be committed to purchase the additional securities in
approximately the same proportion allocated to them in the table above. The
underwriters may exercise the option only for the purpose of covering
over-allotments, if any, made in connection with the distribution of the
convertible preferred securities being offered.
If the underwriters exercise their option to purchase additional
convertible preferred securities, the trust will issue and sell to us additional
common securities and we will issue and sell to the trust additional convertible
debentures in an aggregate principal amount equal to the total aggregate
liquidation amount of the additional convertible preferred securities being
purchased under the option and the additional common securities sold to us.
The table below shows the price and proceeds on a per security and
aggregate basis. The proceeds to be received by the trust, as shown in the table
below, do not reflect estimated expenses of $ payable by Southside.
<TABLE>
<CAPTION>
Per Convertible
Preferred
Security Total
--------------- -----
<S> <C> <C>
Public Offering Price ...................................... $10.00 $
Proceeds to Southside Capital Trust II ..................... $10.00 $
</TABLE>
In view of the fact that the proceeds of the sale of the convertible
preferred securities will be used by the trust to purchase the convertible
debentures from us, we have agreed to pay the underwriter $ per convertible
preferred security, or a total of $ , as compensation for arranging the
investment in the convertible debentures. Should the underwriters exercise the
over-allotment option, an aggregate of $ will be paid to the underwriters for
arranging the investment in the convertible debentures.
101
<PAGE> 103
The offering of the convertible preferred securities is made for delivery
when, as and if accepted by the underwriters and subject to prior sale and to
withdrawal, cancellation or modification of the offering without notice. The
underwriters reserve the right to reject any order for the purchase of the
convertible preferred securities.
Southside and the trust have agreed to indemnify the several underwriters
against several liabilities, including liabilities under the Securities Act of
1933.
The convertible preferred securities are expected to be approved for
inclusion on the Nasdaq National Market, and trading is expected to commence on
or prior to delivery of the securities. The representative has advised the trust
that it presently intends to make a market in the securities after the
commencement of trading on the Nasdaq National Market, but no assurances can be
made as to the liquidity of the securities or that an active and liquid market
will develop or, if developed, that the market will continue. The offering price
and distribution rate have been determined by negotiations among representatives
of Southside and the underwriters, and the offering price of the securities may
not be indicative of the market price following the offering. The representative
will have no obligation to make a market in the securities, however, and may
cease market-making activities, if commenced, at any time.
In connection with the offering, the underwriters may engage in
transactions that are intended to stabilize, maintain or otherwise affect the
price of the securities during and after the offering, such as the following:
o the underwriters may over-allot or otherwise create a short
position in the securities for their own account by selling more
securities than have been sold to them;
o the underwriters may elect to cover any short position by
purchasing securities in the open market or by exercising the
over-allotment option;
o the underwriters may stabilize or maintain the price of the
securities by bidding;
o the underwriters may engage in passive market making transactions;
and
o the underwriters may impose penalty bids, under which selling
concessions allowed to syndicate members or other broker-dealers
participating in the offering are reclaimed if securities
previously distributed in the offering are repurchased in
connection with stabilization transactions or otherwise.
The effect of these transactions may be to stabilize or maintain the
market price at a level above that which might otherwise prevail in the open
market. The imposition of a penalty bid may also affect the price of the
securities to the extent that it discourages resales. No representation is made
as to the magnitude or effect of any such stabilization or other transactions.
Such transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.
In connection with this offering, some underwriters who are qualified
market makers in the Nasdaq National Market may engage in passive market making
transactions in our common stock in the Nasdaq National Market in accordance
with Rule 103 of Regulation M. Rule 103 permits passive market making during the
period when Regulation M would otherwise prohibit market making activity by the
participants in this offering. Passive market making may occur during the five
business days before the pricing of this offering, before the commencement of
offers or sales of the convertible preferred securities. Passive market makers
must comply with applicable volume and price limitations and must be identified
as a passive market maker. In general, a passive market maker must display its
bid at a price not in excess of the highest independent bid for the security. If
all independent bids are lowered below the passive market maker's bid, however,
the bid must then be lowered when purchase limits are exceeded. Net purchases by
a passive market maker on each day are limited to a specified percentage of the
passive market maker's average daily trading volume in our common stock during a
specified period and must be discontinued when such limit is reached.
Underwriters and dealers are not required to engage in passive market making and
may end passive market making activities at any time.
Because the National Association of Securities Dealers, Inc. may view the
convertible preferred securities as interests in a direct participation program,
the offer and sale of the securities is being made in compliance with the
provisions of Rule 2810 under the National Association of Security Dealers
Conduct Rules. The underwriters have
102
<PAGE> 104
advised us that they will not make any sales to any accounts over which they
exercise discretionary authority without the prior specific written approval of
the customer.
Subject to certain exceptions, we and our executive officers and
directors have agreed not to sell or otherwise dispose of any securities similar
to those offered by this prospectus, or any of our shares of common stock or our
other securities convertible into common stock, or permit the registration of
any shares of our common stock, for a period of 90 days after the date of this
prospectus (other than securities sold pursuant to this prospectus) without the
prior written consent of Stifel, Nicolaus & Company, Incorporated.
Certain of the underwriters and their affiliates have, from time to time,
performed investment banking and other services for us and our affiliates in the
ordinary course of business and have received fees from us for their services.
LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the
convertible preferred securities, the enforceability of the trust agreement and
the creation of the trust will be passed upon by Richards, Layton & Finger,
special Delaware counsel to Southside and the trust. The validity of the
guarantee, the convertible debentures and the common stock to be issued by us
upon conversion of the convertible debentures will be passed upon for Southside
by Jenkens & Gilchrist. Certain legal matters will be passed upon for the
underwriters by Lewis, Rice & Fingersh, L.C. Certain matters relating to the
federal income tax considerations will be passed upon for us by Jenkens &
Gilchrist.
EXPERTS
The financial statements as of December 31, 1999 and 1998 and for each of
the three years in the period ended December 31, 1999, included in this
prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
WHERE CAN YOU FIND INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and we file reports, proxy statements and
other information with the Securities and Exchange Commission. Our reports,
proxy statements and other information is available to the public on the
Internet at the website of the SEC located at http://www.sec.gov. You can also
inspect and copy this information at the public reference facilities of the SEC
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the SEC located at 75 Park Place, Room 1400, New York, New York 10007
and Suite 1400, Citicorp Center, 14th Floor, 500 West Madison Street, Chicago,
Illinois 60661. Copies of this material can also be obtained at prescribed rates
by writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information.
We and the trust have filed with the SEC a registration statement on Form
S-2 of which this prospectus is a part, under the Securities Act of 1933, as
amended, for the convertible preferred securities, the convertible debentures,
the guarantee, and the common stock to be issued by us upon conversion of the
convertible debentures. This prospectus does not contain all of the information
set forth in the registration statement. Certain documents filed by us with the
SEC have been incorporated in this prospectus by reference. See "Documents
Incorporated by Reference" at page 105. For further information about us, the
trust, the convertible preferred securities, the convertible debentures, and the
common stock to be issued by us upon conversion of the convertible debentures,
please review the registration statement, including the exhibits and the
documents incorporated by reference. The registration statement may be inspected
for free at the principal office of the SEC in Washington, D.C., and copies of
all or part of it may be obtained from the SEC by paying the prescribed fees.
No separate financial statements of the trust have been included in this
prospectus. We do not consider that these financial statements would be material
to holders of convertible preferred securities because (i) all of the voting
securities of the trust will be owned by us, a reporting company under the
Exchange Act, (ii) the trust has no independent operations other than the sole
purpose of issuing securities representing undivided beneficial interests in the
assets of the trust and investing the proceeds thereof in convertible debentures
issued by us and (iii) our obligations to provide certain indemnities in respect
of and be responsible for certain costs, expenses, debts and liabilities of the
trust under the indenture and pursuant to the trust agreement, the guarantee,
the convertible
103
<PAGE> 105
debentures and the expense agreement, taken together, constitute a full and
unconditional guarantee of payments due on the convertible preferred securities.
The trust is not currently subject to the information reporting
requirements of the Exchange Act and we do not expect that the trust will file
reports, proxy statements or other information under the Exchange Act with the
SEC.
104
<PAGE> 106
DOCUMENTS INCORPORATED BY REFERENCE
We "incorporate by reference" into this prospectus the information in
documents we file with the SEC, which means that we can disclose important
information to you through these documents. The information incorporated by
reference is an important part of this prospectus. Some information contained in
this prospectus updates the information incorporated by reference and some
information that we file subsequently with the SEC will automatically update
this prospectus. We incorporate by reference the documents listed below:
(a) our Annual Report on Form 10-K for the year ended December 31,
1999 filed with the SEC on March 14, 2000;
(b) our Quarterly Report on Form 10-Q for the quarter ended March 31,
2000, filed with the SEC on May 11, 2000; and
(c) our Quarterly Report on Form 10-Q for the quarter ended June 30,
2000, filed with the SEC on August 11, 2000.
We also incorporate by reference any filings we make with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after
the initial filing of the registration statement that contains this prospectus
and before the time that all of the securities offered in this prospectus are
sold.
You may request, and we will provide, a copy of these filings at no cost
by writing or calling Lee Gibson, our Executive Vice President at Southside
Bancshares, Inc., 1201 S. Beckham, Tyler, Texas 75701, (903) 531-7111.
105
<PAGE> 107
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements of
Southside Bancshares, Inc. and Subsidiaries
<TABLE>
<S> <C>
Consolidated Balance Sheet (unaudited) - June 30, 2000............................ F-2
Consolidated Statements of Income (unaudited) - six months ended June 30, 2000
and 1999....................................................................... F-3
Consolidated Statements of Shareholder's Equity (unaudited) - six months ended
June 30, 2000.................................................................. F-4
Consolidated Statements of Cash Flow (unaudited) - six months ended June 30, 2000
and 1999....................................................................... F-5
Notes to Consolidated Financial Statements (unaudited) - six months ended June
30, 2000....................................................................... F-7
Report of Independent Accountants................................................. F-9
Consolidated Balance Sheets - December 31, 1999 and 1998.......................... F-10
Consolidated Statements of Income - years ended December 31, 1999, 1998 and 1997.. F-11
Consolidated Statements of Shareholders' Equity - years ended December 31, 1999,
1998 and 1997.................................................................. F-12
Consolidated Statements of Cash Flow - years ended December 31, 1999, 1998 and
1997........................................................................... F-14
Notes to Consolidated Financial Statements - December 31, 1999, 1998 and 1997..... F-16
</TABLE>
F-1
<PAGE> 108
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 2000 1999
----------- -----------
<S> <C> <C>
Cash and due from banks .................................... $ 33,898 $ 41,131
----------- -----------
Cash and cash equivalents ............................... 33,898 41,131
Investment securities:
Available for sale ...................................... 62,472 96,244
Held to maturity ........................................ 111,850 86,208
----------- -----------
Total Investment securities ........................... 174,322 182,452
Mortgage-backed and related securities:
Available for sale ...................................... 223,970 273,676
Held to maturity ........................................ 144,983 73,898
----------- -----------
Total Mortgage-backed securities ...................... 368,953 347,574
Marketable equity securities:
Available for sale ...................................... 19,344 18,543
Loans:
Loans, net of unearned discount ......................... 429,210 387,446
Less: Reserve for loan losses .......................... (5,085) (4,575)
----------- -----------
Net Loans ............................................. 424,125 382,871
Premises and equipment, net ................................ 21,695 21,306
Interest receivable ........................................ 8,256 7,563
Deferred tax asset ......................................... 5,559 6,244
Other assets ............................................... 6,630 4,881
----------- -----------
TOTAL ASSETS .......................................... $ 1,062,782 $ 1,012,565
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing ..................................... $ 145,699 $ 150,629
Interest bearing ........................................ 496,541 436,915
----------- -----------
Total Deposits ........................................ 642,240 587,544
Short-term obligations:
Federal funds purchased ................................. 10,275 75
FHLB Dallas advances .................................... 144,008 181,222
Other obligations ....................................... 2,346 4,744
----------- -----------
Total Short-term obligations ......................... 156,629 186,041
Long-term obligations:
FHLB Dallas advances .................................... 192,244 174,704
Guaranteed Preferred Beneficial Interest in the Company's
Junior Subordinated Debentures .......................... 20,000 20,000
----------- -----------
Total Long-term obligations .......................... 212,244 194,704
Other liabilities .......................................... 8,863 6,604
----------- -----------
TOTAL LIABILITIES ..................................... 1,019,976 974,893
----------- -----------
Shareholders' equity:
Common stock: ($1.25 par, 20,000,000 shares authorized,
7,824,034 and 7,798,332 shares issued and outstanding) 9,780 9,748
Paid-in capital ......................................... 27,640 27,472
Retained earnings ....................................... 18,767 14,583
Treasury stock (583,552 and 512,502 shares at cost) ..... (5,170) (4,544)
Accumulated other comprehensive loss .................... (8,211) (9,587)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ........................... 42,806 37,672
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........... $ 1,062,782 $ 1,012,565
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 109
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
---------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income
Loans ................................................... $ 8,655 $ 6,821 $ 16,802 $ 13,480
Investment securities ................................... 2,653 2,263 5,376 4,132
Mortgage-backed and related securities .................. 6,542 5,195 12,818 10,061
Other interest earning assets ........................... 663 363 1,050 573
-------- -------- -------- --------
Total interest income ............................... 18,513 14,642 36,046 28,246
Interest expense
Time and savings deposits ............................... 5,601 4,029 10,412 7,992
Short-term obligations .................................. 2,444 1,987 4,987 3,573
Long-term obligations ................................... 2,917 2,755 5,693 5,461
-------- -------- -------- --------
Total interest expense .............................. 10,962 8,771 21,092 17,026
-------- -------- -------- --------
Net interest income ........................................ 7,551 5,871 14,954 11,220
Provision for loan losses .................................. 378 328 783 653
-------- -------- -------- --------
Net interest income after provision for loan losses ........ 7,173 5,543 14,171 10,567
-------- -------- -------- --------
Noninterest income
Deposit services ........................................ 2,043 1,702 4,006 3,151
(Loss) gain on sales of securities available for sale ... (186) 74 (459) 304
Other ................................................... 661 509 1,163 1,054
-------- -------- -------- --------
Total noninterest income ............................ 2,518 2,285 4,710 4,509
-------- -------- -------- --------
Noninterest expense
Salaries and employee benefits .......................... 3,965 3,354 7,623 6,549
Net occupancy expense ................................... 784 684 1,557 1,360
Equipment expense ....................................... 157 109 311 219
Advertising, travel & entertainment ..................... 441 360 781 634
Supplies ................................................ 133 120 281 246
Postage ................................................. 106 98 201 191
Other ................................................... 922 898 1,776 1,744
-------- -------- -------- --------
Total noninterest expense ........................... 6,508 5,623 12,530 10,943
-------- -------- -------- --------
Income before federal tax expense .......................... 3,183 2,205 6,351 4,133
Provision for federal tax expense .......................... 714 441 1,440 764
-------- -------- -------- --------
Net Income ................................................. $ 2,469 $ 1,764 $ 4,911 $ 3,369
======== ======== ======== ========
Earnings Per Common Share-Basic ............................ $ .34 $ .24 $ .68 $ .46
======== ======== ======== ========
Earnings Per Common Share-Diluted .......................... $ .33 $ .24 $ .66 $ .45
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 110
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(in thousands, except share amounts)
<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, 1999 ............. $ $ 9,748 $ 27,472 $ 14,583 $ (4,544) $ (9,587) $ 37,672
Net Income ............................... 4,911 4,911 4,911
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment (see
disclosure) ........................... 1,376 1,376 1,376
--------
Comprehensive income ..................... $ 6,287
========
Common stock issued (25,702 shares) ...... 32 164 196
Dividends paid on common stock ........... (727) (727)
Purchase of 71,050 shares of
Treasury stock ......................... (626) (626)
FAS 109 - Incentive Stock Options ........ 4 4
-------- -------- -------- -------- -------- --------
Balance at June 30, 2000 ................. $ 9,780 $ 27,640 $ 18,767 $ (5,170) $ (8,211) $ 42,806
======== ======== ======== ======== ======== ========
Disclosure of reclassification amount:
Unrealized holding gains arising during
period ................................ $ 1,073
Less: reclassification adjustment for
losses included in net income ......... (303)
--------
Net unrealized gains on securities ....... $ 1,376
========
Balance at December 31, 1998 ............. $ $ 9,214 $ 24,198 $ 11,391 $ (3,158) $ 4,768 $ 46,413
Net Income ............................... 3,369 3,369 3,369
Other comprehensive loss, net of tax
Unrealized losses on securities, net of
reclassification adjustment (see
disclosure) ........................... (8,481) (8,481) (8,481)
--------
Comprehensive loss ....................... $ (5,112)
========
Common stock issued (17,459 shares) ...... 44 168 212
Dividends paid on common stock ........... (696) (696)
Purchase of 42,611 shares of
Treasury stock ......................... (781) (781)
FAS 109 - Incentive Stock Options ........ 18 18
-------- -------- -------- -------- -------- --------
Balance at June 30, 1999 ................. $ 9,258 $ 24,384 $ 14,064 $ (3,939) $ (3,713) $ 40,054
======== ======== ======== ======== ======== ========
Disclosure of reclassification amount:
Unrealized holding losses arising during
period ................................ $ (8,280)
Less: reclassification adjustment for
gains included in net income .......... 201
--------
Net unrealized losses on securities ...... $ (8,481)
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 111
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income .................................................................... $ 4,911 $ 3,369
Adjustments to reconcile net cash provided by operations:
Depreciation ................................................................. 871 720
Amortization of premium ...................................................... 710 2,993
Accretion of discount and loan fees .......................................... (1,027) (774)
Provision for loan losses .................................................... 783 653
FAS 109 - incentive stock options ............................................ 4 18
Increase in interest receivable .............................................. (693) (768)
(Increase) decrease in other receivables and prepaids ........................ (1,864) 667
Increase in deferred tax asset ............................................... (24) (183)
Increase in interest payable ................................................. 302 409
Gain on sale of assets ....................................................... (14)
Gain on sale of other real estate owned ...................................... (1)
Loss (gain) on sales of securities available for sale ........................ 459 (304)
Decrease in other payables ................................................... (441) (467)
--------- ---------
Net cash provided by operating activities .................................. 3,991 6,318
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale ............... 41,569 41,960
Proceeds from sales of mortgage-backed securities available for sale .......... 114,485 89,209
Proceeds from maturities of investment securities available for sale .......... 1,475 11,500
Proceeds from maturities of mortgage-backed securities available for sale ..... 18,483 50,816
Proceeds from maturities of investment securities held to maturity ............ 190 347
Proceeds from maturities of mortgage-backed securities held to maturity ....... 2,762 1,482
Purchases of investment securities available for sale ......................... (30,671) (116,523)
Purchases of mortgage-backed securities available for sale .................... (152,660) (163,719)
Purchases of investment securities held to maturity ........................... (3,829)
Purchases of mortgage-backed securities held to maturity ...................... (3,110)
Purchases of marketable equity securities available for sale .................. (801) (3,850)
Net increase in loans ......................................................... (42,470) (16,591)
Purchases of premises and equipment ........................................... (1,260) (2,216)
Proceeds from sales of premises and equipment ................................. 14
Proceeds from sales of other real estate owned ................................ 64
Proceeds from sales of repossessed assets ..................................... 548 561
--------- ---------
Net cash used in investing activities ...................................... (55,289) (106,946)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 112
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (continued)
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
2000 1999
-------- --------
<S> <C> <C>
FINANCING ACTIVITIES:
Net (decrease) increase in demand and savings accounts ........................ $ (9,549) $ 17,315
Net increase (decrease) in certificates of deposit ............................ 64,245 (3,487)
Net increase in federal funds purchased ....................................... 10,200 8,107
Net (decrease) increase in FHLB Dallas advances ............................... (19,674) 68,385
Proceeds from the issuance of common stock .................................... 196 212
Purchase of treasury stock .................................................... (626) (781)
Dividends paid ................................................................ (727) (696)
-------- --------
Net cash provided by financing activities ................................ 44,065 89,055
-------- --------
Net decrease in cash and cash equivalents ...................................... (7,233) (11,573)
Cash and cash equivalents at beginning of period ............................... 41,131 41,372
-------- --------
Cash and cash equivalents at end of period ..................................... $ 33,898 $ 29,799
======== ========
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION:
Interest paid ................................................................. $ 21,394 $ 16,618
Income taxes paid ............................................................. $ 1,750 $ 700
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of OREO and other repossessed assets through foreclosure .......... $ 433 $ 398
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 113
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated balance sheet as of June 30, 2000, and the related consolidated
statements of income, shareholders' equity and cash flow for the six month
period ended June 30, 2000 and 1999 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.
At the annual shareholders' meeting on April 20, 2000, the shareholders of
Southside Bancshares, Inc. approved increasing the authorized shares of common
stock from 6 million to 20 million and a two-for-one stock split effective
May 20, 2000 for shareholders of record April 21, 2000. All share amounts have
been adjusted to give retroactive recognition to the two-for-one stock split.
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" (FAS 128) has been
adjusted to give retroactive recognition to stock dividends and is calculated
as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
2000 1999
------ ------
<S> <C> <C>
Basic net earnings per share
Net income .......................................... $4,911 $3,369
Weighted average shares outstanding ................. 7,255 7,316
------ ------
$ .68 $ .46
====== ======
Diluted net earnings per share
Net income .......................................... $4,911 $3,369
Weighted average shares outstanding plus
assumed conversions .............................. 7,453 7,524
------ ------
$ .66 $ .45
====== ======
Calculation of weighted average shares outstanding plus
assumed conversions
Weighted average shares outstanding ................. 7,255 7,316
Effect of dilutive securities options ............... 198 208
------ ------
7,453 7,524
====== ======
</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>
Six Months Ended June 30, 2000
-------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
---------- ------------- ----------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period $ 1,626 $ (553) $ 1,073
Less: reclassification adjustment for losses
realized in net income .................... (459) 156 (303)
------- ------- -------
Net unrealized gains ......................... 2,085 (709) 1,376
------- ------- -------
Other comprehensive income ....................... $ 2,085 $ (709) $ 1,376
======= ======= =======
</TABLE>
F-7
<PAGE> 114
<TABLE>
<CAPTION>
Quarter Ended June 30, 2000
-------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
---------- ------------- ----------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period ..... $ 2,375 $ (808) $ 1,567
Less: reclassification adjustment for losses
realized in net income ......................... (186) 63 (123)
------- ------- -------
Net unrealized gains .............................. 2,561 (871) 1,690
------- ------- -------
Other comprehensive income ............................ $ 2,561 $ (871) $ 1,690
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 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 .... $(12,546) $ 4,266 $ (8,280)
Less: reclassification adjustment for gains
realized in net income ......................... 304 (103) 201
-------- -------- --------
Net unrealized losses ............................. (12,850) 4,369 (8,481)
-------- -------- --------
Other comprehensive losses ............................ $(12,850) $ 4,369 $ (8,481)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended June 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 .... $(8,291) $ 2,819 $(5,472)
Less: reclassification adjustment for gains
realized in net income ......................... 74 (25) 49
------- ------- -------
Net unrealized losses ............................. (8,365) 2,844 (5,521)
------- ------- -------
Other comprehensive losses ............................ $(8,365) $ 2,844 $(5,521)
======= ======= =======
</TABLE>
F-8
<PAGE> 115
Report of Independent Accountants
To the Shareholders and Board of Directors
Southside Bancshares, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flow present
fairly, in all material respects, the financial position of Southside
Bancshares, Inc. and its subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Dallas, Texas
February 25, 2000
F-9
<PAGE> 116
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
-------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks........................................................... $ 41,131 $ 41,372
Investment securities:
Available for sale............................................................. 96,244 132,447
Held to maturity............................................................... 86,208 347
-------------- -------------
Total Investment securities.................................................. 182,452 132,794
Mortgage-backed and related securities:
Available for sale............................................................. 273,676 333,194
Held to maturity............................................................... 73,898 7,810
-------------- -------------
Total Mortgage-backed securities and related securities...................... 347,574 341,004
Marketable equity securities:
Available for sale............................................................. 18,543 14,171
Loans:
Loans, net of unearned discount................................................ 387,446 319,723
Less: reserve for loan losses.................................................. (4,575) (3,564)
-------------- -------------
Net Loans.................................................................... 382,871 316,159
Premises and equipment, net....................................................... 21,306 19,166
Other real estate owned, net...................................................... 140 195
Interest receivable............................................................... 7,563 6,065
Deferred tax asset................................................................ 6,244
Other assets...................................................................... 4,741 5,403
-------------- -------------
TOTAL ASSETS................................................................. $ 1,012,565 $ 876,329
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing............................................................ $ 150,629 $ 122,440
Interest bearing............................................................... 436,915 392,594
-------------- -------------
Total Deposits............................................................... 587,544 515,034
Short-term obligations:
Federal funds purchased........................................................ 75 4,168
FHLB Dallas Advances........................................................... 181,222 118,000
Other obligations.............................................................. 4,744 1,523
-------------- -------------
Total Short-term obligations................................................. 186,041 123,691
Long-term obligations:
FHLB Dallas Advances........................................................... 174,704 156,027
Guaranteed Preferred Beneficial Interest in the Company's
Junior Subordinated Debentures................................................. 20,000 20,000
-------------- -------------
Total Long-term obligations.................................................. 194,704 176,027
Deferred tax liability............................................................ 1,184
Other liabilities................................................................. 6,604 13,980
-------------- -------------
TOTAL LIABILITIES............................................................ 974,893 829,916
-------------- -------------
Commitments and Contingencies (Note 14 and 15)
Shareholders' equity:
Common stock: ($1.25 par, 20,000,000 shares authorized,
7,798,332 and 7,371,550 shares issued)...................................... 9,748 9,214
Paid-in capital................................................................ 27,472 24,198
Retained earnings.............................................................. 14,583 11,391
Treasury stock (512,502 and 364,352 shares at cost)............................ (4,544) (3,158)
Accumulated other comprehensive (loss) income.................................. (9,587) 4,768
-------------- -------------
TOTAL SHAREHOLDERS' EQUITY.................................................. 37,672 46,413
-------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................................. $ 1,012,565 $ 876,329
============== =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-10
<PAGE> 117
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Interest income
Loans..................................................................... $ 28,198 $ 26,051 $ 23,847
Investment securities..................................................... 9,077 4,864 3,299
Mortgage-backed and related securities.................................... 22,080 12,116 7,729
Marketable equity securities.............................................. 911 449 129
Other interest earning assets............................................. 422 197 163
----------- ----------- ----------
Total interest income............................................... 60,688 43,677 35,167
----------- ----------- ----------
Interest expense
Deposits.................................................................. 16,545 15,485 14,711
Short-term obligations.................................................... 8,535 3,513 773
Long-term obligations..................................................... 10,936 5,749 721
------------ ----------- ----------
Total interest expense.............................................. 36,016 24,747 16,205
----------- ----------- ----------
Net interest income.......................................................... 24,672 18,930 18,962
Provision for loan losses.................................................... 1,456 1,215 1,005
----------- ----------- ----------
Net interest income after provision for loan losses.......................... 23,216 17,715 17,957
----------- ----------- ----------
Noninterest income
Deposit services.......................................................... 6,780 5,353 4,001
Gain on sales of securities available for sale............................ 149 1,260 233
Trust income.............................................................. 631 528 397
Other..................................................................... 1,672 1,162 1,035
----------- ----------- ----------
Total noninterest income............................................ 9,232 8,303 5,666
----------- ----------- ----------
Noninterest expense
Salaries and employee benefits............................................ 13,427 11,318 9,889
Net occupancy expense..................................................... 2,842 2,370 2,089
Equipment expense......................................................... 537 457 414
Advertising, travel & entertainment....................................... 1,322 1,124 1,006
Supplies.................................................................. 494 461 440
Postage................................................................... 419 352 331
Other..................................................................... 3,483 3,361 2,759
----------- ----------- ----------
Total noninterest expense........................................... 22,524 19,443 16,928
----------- ----------- ----------
Income before federal tax expense............................................ 9,924 6,575 6,695
----------- ----------- ----------
Provision (benefit) for federal tax expense
Current................................................................... 2,033 1,496 1,914
Deferred.................................................................. (33) (272) (225)
----------- ----------- ----------
Total income taxes.................................................. 2,000 1,224 1,689
----------- ----------- ----------
Net Income................................................................... $ 7,924 $ 5,351 $ 5,006
=========== =========== ==========
Net Income Per Common Share
Basic..................................................................... $ 1.08 $ .72 $ .67
Diluted................................................................... $ 1.05 $ .70 $ .65
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE> 118
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share amounts)
<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, 1998................ $ $ 9,214 $ 24,198 $ 11,391 $ (3,158) $ 4,768 $ 46,413
Net Income.................................. 7,924 7,924 7,924
Other comprehensive loss, net of tax
Unrealized losses on securities, net of
reclassification adjustment (see
disclosure below)........................ (14,352) (14,352) (14,352)
Minimum pension liability adjustment........ (3) (3) (3)
---------
Comprehensive loss.......................... $ (6,431)
=========
Common stock issued (77,012 shares)......... 96 360 456
FAS109 - Incentive Stock Options (ISO's).... 29 29
Dividends paid on common stock.............. (1,409) (1,409)
Purchase of 148,150 shares of
treasury stock........................... (1,386) (1,386)
Stock dividend.............................. 438 2,885 (3,323)
-------- --------- --------- ---------- ---------- ----------
Balance at December 31, 1999................ $ 9,748 $ 27,472 $ 14,583 $ (4,544) $ (9,587) $ 37,672
========= =========- ========== ========= ========= =========
Disclosure of reclassification amount:
Unrealized holding losses arising during
period................................... $ (14,254)
Less: reclassification adjustment for
gains included in net income............. 98
---------
Net unrealized losses on securities......... $ (14,352)
=========
Balance at December 31, 1997................ $ $ 8,740 $ 21,290 $ 10,414 $ (1,820) $ 1,322 $ 39,946
Net Income.................................. 5,351 5,351 5,351
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment (see
disclosure below)........................ 3,396 3,396 3,396
Minimum pension liability adjustment........ 50 50 50
---------
Comprehensive income........................ $ 8,797
=========
Common stock issued (42,320 shares)......... 53 294 347
FAS109 - Incentive Stock Options (ISO's).... 42 42
Dividends paid on common stock.............. (1,359) (1,359)
Purchase of 142,852 shares of
treasury stock........................... (1,398) (1,398)
Exercise of 12,000 shares of ISO's.......... (22) 60 38
Stock dividend.............................. 421 2,572 (2,993)
-------- --------- --------- ---------- ---------- ----------
Balance at December 31, 1998................ $ 9,214 $ 24,198 $ 11,391 $ (3,158) $ 4,768 $ 46,413
========= =========- ========== ========= ========= =========
Disclosure of reclassification amount:
Unrealized holding gains arising during
period................................... $ 4,228
Less: reclassification adjustment for
gains included in net income............. 832
---------
Net unrealized gains on securities.......... $ 3,396
=========
</TABLE>
(continued)
F-12
<PAGE> 119
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
(in thousands, except share amounts)
<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, 1996................ $ $ 8,290 $ 18,501 $ 9,628 $ (777) $ 842 $ 36,484
Net Income.................................. 5,006 5,006 5,006
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment (see
disclosure below)........................ 445 445 445
Minimum pension liability adjustment........ 35 35 35
---------
Comprehensive income........................ $ 5,486
=========
Common stock issued (36,860 shares)......... 46 280 326
FAS109 - Incentive Stock Options (ISO's).... 43 43
Dividends paid on common stock.............. (1,316) (1,316)
Purchase of 130,928 shares of
treasury stock........................... (1,154) (1,154)
Exercise of 23,400 shares of ISO's.......... (34) 111 77
Stock dividend.............................. 404 2,466 (2,870)
-------- --------- --------- ---------- ---------- ----------
Balance at December 31, 1997................ $ 8,740 $ 21,290 $ 10,414 $ (1,820) $ 1,322 $ 39,946
========= ========== ========== ========= ========= =========
Disclosure of reclassification amount:
Unrealized holding gains arising during
period................................... $ 599
Less: reclassification adjustment for
gains included in net income............. 154
---------
Net unrealized gains on securities.......... $ 445
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
<PAGE> 120
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................................................... $ 7,924 $ 5,351 $ 5,006
Adjustments to reconcile net cash provided by operations:
Depreciation .............................................................. 1,474 1,397 1,215
Amortization of premium.................................................... 4,657 5,229 1,589
Accretion of discount and loan fees........................................ (1,774) (660) (780)
Provision for loan losses.................................................. 1,456 1,215 1,005
FAS109-Incentive stock options............................................. 29 42 43
Gain on sale of securities available for sale.............................. (149) (1,260) (233)
Gain on sale of assets..................................................... (86) (51) (12)
Gain on sale of other real estate owned.................................... (129) (32)
Increase in interest receivable............................................ (1,498) (2,147) (618)
Decrease (increase) in other assets........................................ 331 (2,270) 923
Increase in deferred tax asset............................................. (33) (87) (225)
Increase in interest payable............................................... 702 558 598
(Decrease) increase in other payables...................................... (4,862) 7,883 167
----------- ----------- ----------
Net cash provided by operating activities.............................. 8,042 15,168 8,678
INVESTING ACTIVITIES:
Proceeds from sale of investment securities available for sale............. 81,700 62,413 31,037
Proceeds from sale of mortgage-backed securities available for sale........ 111,969 46,515 37,247
Proceeds from maturities of investment securities available for sale....... 26,093 10,322 16,366
Proceeds from maturities of mortgage-backed securities available for sale.. 89,702 79,121 33,389
Proceeds from maturities of investment securities held to maturity......... 3,347 457 936
Proceeds from maturities of mortgage-backed securities held to maturity.... 2,357 5,899 10,214
Purchases of investment securities available for sale...................... (149,299) (130,138) (61,370)
Purchases of mortgage-backed securities available for sale................. (222,610) (333,304) (108,788)
Purchases of investment securities held to maturity........................ (21,708)
Purchases of mortgage-backed securities held to maturity................... (2,258)
Purchases of marketable equity securities available for sale............... (4,372) (10,913) (1,038)
Net increase in loans...................................................... (69,299) (26,521) (39,900)
Purchases of premises and equipment........................................ (4,200) (3,096) (5,153)
Proceeds from sale of premises and equipment............................... 672 212 17
Proceeds from sale of repossessed assets................................... 1,290 1,617 1,015
Proceeds from sale of other real estate owned.............................. 356 275 98
----------- ----------- ----------
Net cash used in investing activities.................................. (156,260) (297,141) (85,930)
</TABLE>
(continued)
F-14
<PAGE> 121
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (continued)
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Net increase in demand and savings accounts................................ $ 47,765 $ 41,944 $ 24,443
Net increase in certificates of deposit.................................... 24,745 10,416 12,281
Proceeds from FHLB advances................................................ 258,100 404,800 58,900
Repayment of FHLB advances................................................. (176,201) (188,320) (10,449)
Issuance of guaranteed preferred beneficial interest
in the company's junior subordinated debentures......................... 20,000
Net (decrease) increase in federal funds purchased......................... (4,093) 284 (916)
Proceeds from the issuance of common stock................................. 456 347 326
Purchase of treasury stock................................................. (1,386) (1,398) (1,154)
Sale of treasury stock..................................................... 38 77
Dividends paid............................................................. (1,409) (1,359) (1,316)
----------- ----------- ----------
Net cash provided by financing activities............................ 147,977 286,752 82,192
----------- ----------- ----------
Net (decrease) increase in cash and cash equivalents....................... (241) 4,779 4,940
Cash and cash equivalents at beginning of year............................. 41,372 36,593 31,653
----------- ----------- ----------
Cash and cash equivalents at end of year................................... $ 41,131 $ 41,372 $ 36,593
=========== =========== ==========
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION:
Interest paid.............................................................. $ 35,315 $ 24,189 $ 15,701
Income taxes paid.......................................................... $ 1,725 $ 1,763 $ 1,990
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of other real estate owned and other repossessed
assets through foreclosure............................................. $ 1,131 $ 1,812 $ 1,148
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-15
<PAGE> 122
NOTES TO FINANCIAL STATEMENTS Southside Bancshares, Inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
The significant accounting and reporting policies of Southside Bancshares,
Inc. (the "Company"), and its wholly owned subsidiaries, Southside
Delaware Financial Corporation, Southside Bank (the "Bank") and the
nonbank subsidiary, are summarized below.
Organization and Basis of Presentation. The consolidated financial
statements include the accounts of the Company, Southside Delaware
Financial Corporation, Southside Bank and the nonbank subsidiary, which
did not conduct any business in 1999. Southside Bank offers a full range
of financial services to commercial, industrial, financial and individual
customers. All significant intercompany accounts and transactions are
eliminated in consolidation. The preparation of these consolidated
financial statements in conformity with generally accepted accounting
principles requires the use of management's estimates. These estimates are
subjective in nature and involve matters of judgment. Actual amounts could
differ from these estimates.
Cash Equivalents. Cash equivalents, for purposes of reporting cash flow,
include cash and amounts due from banks.
Loans. All loans are stated at principal outstanding net of unearned
income. Interest income on installment loans is recognized primarily using
the level yield method. Interest income on other loans is credited to
income based primarily on the principal outstanding at contract rates of
interest. Loans receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or pay-off are reported
at their outstanding principal adjusted for any charge-offs, the reserve
for loan losses, and any deferred fees or costs on originated loans and
unamortized premiums or discounts on purchased loans. A loan is considered
impaired, based on current information and events, if it is probable that
the Company will be unable to collect the scheduled payments of principal
or interest when due according to the contractual terms of the loan
agreement. Substantially all of the Company's impaired loans are
collateral-dependent, and as such, are measured for impairment based on
the fair value of the collateral.
Loan Fees. The Company treats loan fees, net of direct costs, as an
adjustment to the yield of the related loan over its term.
Reserve for Loan Losses. A reserve for loan losses is provided through
charges to income in the form of a provision for loan losses. Loans which
management believes are uncollectible are charged against this account
with subsequent recoveries, if any, credited to the account. The amount of
the reserve for loan losses is determined by management's evaluation of
the quality and inherent risks in the loan portfolio, economic conditions
and other factors which warrant current recognition.
Nonaccrual Loans. A loan is placed on nonaccrual when principal or
interest is contractually past due 90 days or more unless, in the
determination of management, the principal and interest on the loan are
well collateralized 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
classified as nonaccrual, accrued interest receivable on the loan is
reversed and the future accrual of interest is suspended. Payments of
contractual interest are recognized as income only to the extent that full
recovery of the principal balance of the loan is reasonably certain.
Other Real Estate Owned. Other Real Estate Owned includes real estate
acquired in full or partial settlement of loan obligations. Other Real
Estate Owned is carried at the lower of (1) the recorded amount of the
loan for which the foreclosed property previously served as collateral or
(2) the fair market value of the property. Prior to foreclosure, the
recorded amount of the loan is written down, if necessary, to the
appraised fair market value of the real estate to be acquired, less
selling costs, by charging the reserve for loan losses. Any subsequent
reduction in fair market value is charged to results of operations through
the Reserve for Losses on Other Real Estate account. Costs of maintaining
and operating foreclosed properties are expensed as incurred. Expenditures
to complete or improve foreclosed properties are capitalized only if
expected to be recovered; otherwise, they are expensed.
F-16
<PAGE> 123
Securities. The Company uses the specific identification method to
determine the basis for computing realized gain or loss. The Company
accounts for debt and equity securities as follows:
Held to Maturity (HTM). Debt securities that management has the
positive intent and ability to hold until maturity are classified as
held to maturity and are carried at their remaining unpaid principal
balance, net of unamortized premiums or unaccreted discounts. Premiums
are amortized and discounts are accreted using the level interest
yield method over the estimated remaining term of the underlying
security.
Available for Sale (AFS). Debt and equity securities that will be held
for indefinite periods of time, including securities that may be sold
in response to changes in market interest or prepayment rates, needs
for liquidity and changes in the availability of and the yield of
alternative investments are classified as available for sale. These
assets are carried at market value. Market value is determined using
published quotes as of the close of business. Unrealized gains and
losses are excluded from earnings and reported net of tax in
Accumulated Other Comprehensive Income until realized.
Premises and Equipment. Bank premises and equipment are stated at cost,
net of accumulated depreciation. Depreciation is computed on a straight
line basis over the estimated useful lives of the related assets. Useful
lives are estimated to be twenty to forty years for premises and three to
ten years for equipment. Maintenance and repairs are charged to income as
incurred while major improvements and replacements are capitalized.
Income Taxes. The Company files a consolidated Federal income tax return.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of changes in tax rates is
recognized in income in the period the change occurs.
Stock Options. The Financial Accounting Standards Board (FASB) published
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS123) on January 1, 1996 which encourages,
but does not require, companies to recognize compensation expense for
grants of stock, stock options and other equity instruments to employees
based on new fair value accounting rules. Companies that choose not to
adopt the new rules will continue to apply existing rules, but will be
required to disclose pro forma net income and earnings per share under the
new method. The Company elected to provide the pro forma disclosures for
1997, 1998 and 1999.
Recent Accounting Pronouncements. On June 15, 1998, the FASB issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS133). FAS133 is
effective for all fiscal quarters of all fiscal years beginning after June
15, 2000. FAS133 requires that all derivative instruments be recorded on
the balance at their fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Management of
the Company anticipates that the adoption of FAS133 will not have a
significant effect on the Company's results of operations or its financial
position.
General. Certain prior period amounts have been reclassified to conform
to current year presentation.
F-17
<PAGE> 124
2. EARNINGS PER SHARE
Earnings per share on a basic and diluted basis as required by Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS128),
has been adjusted to give retroactive recognition to stock dividends and
is calculated as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Basic net earnings per share
Net income......................................................... $ 7,924 $ 5,351 $ 5,006
Weighted average shares outstanding................................ 7,308 7,412 7,486
------------- ------------- -------------
$ 1.08 $ .77 $ .67
============= ============ =============
Diluted net earnings per share
Net income......................................................... $ 7,924 $ 5,351 $ 5,006
Weighted average shares outstanding plus
assumed conversions............................................. 7,544 7,696 7,718
------------- ------------- -------------
$ 1.05 $ .70 $ .65
============= ============= =============
Calculation of weighted average shares outstanding plus
assumed conversions
Weighted average shares outstanding................................ 7,308 7,412 7,486
Effect of dilutive securities options.............................. 236 284 232
------------- ------------- -------------
7,544 7,696 7,718
============= ============= =============
</TABLE>
F-18
<PAGE> 125
3. COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (FAS130). This statement, which
the Company adopted January 1, 1998, establishes standards for the
reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. The new standard requires
that all items that are required to be recognized under generally accepted
accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. Reclassification of financial statements for earlier
periods provided for comparative purposes is required.
The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 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...... $ (21,597) $ 7,343 $ (14,254)
Less: reclassification adjustment for gains
realized in net income........................... 149 (51) 98
--------------- -------------- ---------------
Net unrealized losses............................... (21,746) 7,394 (14,352)
Minimum pension liability adjustment.................... (5) 2 (3)
--------------- -------------- ---------------
Other comprehensive loss................................ $ (21,751) $ 7,396 $ (14,355)
=============== ============== ===============
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 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....... $ 6,405 $ (2,177) $ 4,228
Less: reclassification adjustment for gains
realized in net income........................... 1,260 (428) 832
--------------- -------------- ---------------
Net unrealized gains................................ 5,145 (1,749) 3,396
Minimum pension liability adjustment.................... 76 (26) 50
--------------- -------------- ---------------
Other comprehensive income.............................. $ 5,221 $ (1,775) $ 3,446
=============== ============== ===============
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
--------------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
--------------- -------------- ---------------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period....... $ 907 $ (308) $ 599
Less: reclassification adjustment for gains
realized in net income........................... 233 (79) 154
--------------- -------------- ---------------
Net unrealized gains................................ 674 (229) 445
Minimum pension liability adjustment.................... 52 (17) 35
--------------- -------------- ---------------
Other comprehensive income.............................. $ 726 $ (246) $ 480
=============== ============== ===============
</TABLE>
4. CASH AND DUE FROM BANKS
The Company is required to maintain cash reserve balances with the Federal
Reserve Bank. The reserve balances were $250,000 and $1,223,000 as of December
31, 1999 and 1998, respectively.
F-19
<PAGE> 126
5. INVESTMENT, MORTGAGE-BACKED AND MARKETABLE EQUITY SECURITIES
The amortized cost and estimated market value of investment, mortgage-backed
and marketable equity securities as of December 31, 1999 and 1998 were (in
thousands):
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
------------------------------------------------
Gross Gross Estimated
December 31, Amortized Unrealized Unrealized Market
1999 Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury ....................... $ 9,502 $ $ 35 $ 9,467
U.S. Government Agencies ............ 21,430 262 21,168
Mortgage-backed Securities:
Direct Govt. Agency Issues ........ 236,240 404 3,789 232,855
Other Private Issues .............. 41,400 144 723 40,821
State and Political Subdivisions .... 57,180 485 2,122 55,543
Other Stocks and Bonds .............. 28,841 2 234 28,609
-------- -------- -------- --------
Total ............................. $394,593 $ 1,035 $ 7,165 $388,463
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
HELD TO MATURITY
------------------------------------------------
Gross Gross Estimated
December 31, Amortized Unrealized Unrealized Market
1999 Cost Gains Losses Value
--------- -------- -------- --------
<S> <C> <C> <C> <C>
U.S. Government Agencies ............ $ 42,871 $ 201 $ 873 $ 42,199
Mortgage-backed Securities:
Direct Govt. Agency Issues ........ 14,967 21 295 14,693
Other Private Issues .............. 58,931 1,748 57,183
State and Political Subdivisions..... 43,048 1,154 41,894
Other Stocks and Bonds .............. 289 7 296
-------- -------- -------- --------
Total ............................. $160,106 $ 229 $ 4,070 $156,265
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
------------------------------------------------
Gross Gross Estimated
December 31, Amortized Unrealized Unrealized Market
1998 Cost Gains Losses Value
--------- -------- -------- --------
<S> <C> <C> <C> <C>
U.S. Treasury ....................... $ 19,137 $ 64 $ 3 $ 19,198
U.S. Government Agencies ............ 21,402 16 41 21,377
Mortgage-backed Securities:
Direct Govt. Agency Issues ........ 227,804 2,342 439 229,707
Other Private Issues .............. 102,577 1,261 351 103,487
State and Political Subdivisions..... 86,055 4,591 113 90,533
Other Stocks and Bonds .............. 15,484 26 15,510
-------- -------- -------- --------
Total ............................. $472,459 $ 8,300 $ 947 $479,812
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
HELD TO MATURITY
------------------------------------------------
Gross Gross Estimated
December 31, Amortized Unrealized Unrealized Market
1998 Cost Gains Losses Value
--------- -------- -------- --------
<S> <C> <C> <C> <C>
U.S. Government Agencies .......... $ 347 $ $ $ 347
Mortgage-backed Securities:
Direct Govt. Agency Issues....... 7,810 79 79 7,810
------ ------ ------ ------
Total ........................... $8,157 $ 79 $ 79 $8,157
====== ====== ====== ======
</TABLE>
F-20
<PAGE> 127
Interest income recognized on securities for the years presented (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
U.S. Treasury .......................... $ 707 $ 562 $ 461
U.S. Government Agencies ............... 3,322 614 578
Mortgage-backed Securities ............. 22,080 12,116 7,729
State and Political Subdivisions ....... 4,698 3,548 2,067
Other Stocks and Bonds ................. 1,261 589 322
------- ------- -------
Total interest income on securities .... $32,068 $17,429 $11,157
======= ======= =======
</TABLE>
During the year ended December 31, 1999, the Company transferred a total of
$132.4 million securities from AFS to HTM due to changes in market conditions
and in connection with certain ALCO goals. Of the total transferred, $66.3
million were investment securities and $66.1 million were mortgage-backed
securities. The unrealized loss on the securities transferred from AFS to HTM
was $5.6 million, net of tax, at the date of transfer. There were no securities
transferred from AFS to HTM during the year ended December 31, 1998. There were
no sales from the HTM portfolio during the years ended December 31, 1999 or
1998.
Of the $149,000 in net securities gains on sales from the AFS portfolio in 1999,
there were $856,000 in realized gains and $707,000 in realized losses. Of the
$1,260,000 in net securities gains on sales from the AFS portfolio in 1998,
there were $1,321,000 in realized gains and $61,000 in realized losses. The
$233,000 in net securities gains on sales from the AFS portfolio in 1997 were
comprised of $376,000 in realized gains and $143,000 in realized losses.
The scheduled maturities of AFS and HTM securities as of December 31, 1999 are
presented below. Mortgage-backed securities are presented in total by category.
<TABLE>
<CAPTION>
Amortized Aggregate
Cost Fair Value
--------- ---------
(in thousands)
<S> <C> <C>
Available for sale securities:
Due in one year or less ................... $ 28,559 $ 28,539
Due after one year through five years ..... 12,070 12,062
Due after five years through ten years .... 15,828 15,908
Due after ten years ....................... 60,496 58,278
--------- ---------
116,953 114,787
Mortgage-backed securities ................... 277,640 273,676
--------- ---------
Total .................................. $ 394,593 $ 388,463
========= =========
Held to maturity securities:
Due in one year or less ................... $ 450 $ 450
Due after one year through five years ..... 9,359 9,345
Due after five years through ten years .... 19,409 19,303
Due after ten years ....................... 56,990 55,291
--------- ---------
86,208 84,389
Mortgage-backed securities ................... 73,898 71,876
--------- ---------
Total .................................. $ 160,106 $ 156,265
========= =========
</TABLE>
Investment securities with book values of $436,357,000 and $306,409,000 were
pledged as of December 31, 1999 and 1998, respectively, to collateralize
advances, public and trust deposits or for other purposes as required by law.
F-21
<PAGE> 128
6. LOANS AND RESERVE FOR POSSIBLE LOAN LOSSES
Loans in the accompanying consolidated balance sheets are classified as follows
(in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
-------- --------
<S> <C> <C>
Real Estate Loans:
Construction .......................... $ 18,489 $ 10,509
1-4 family residential ................ 112,699 93,215
Other ................................. 97,556 68,140
Commercial loans .......................... 79,804 68,117
Loans to individuals ...................... 82,747 84,059
-------- --------
Total loans ............................... 391,295 324,040
Less: Unearned income ................ 3,849 4,317
Reserve for loan losses ........ 4,575 3,564
-------- --------
Net loans ................................. $382,871 $316,159
======== ========
</TABLE>
The following is a summary of the Reserve for Loan Losses for the years ended
December 31, 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year ............... $ 3,564 $ 3,370 $ 3,249
Provision for loan losses ........... 1,456 1,215 1,005
Loans charged off ................... (765) (1,349) (1,229)
Recoveries of loans charged off ..... 320 328 345
------- ------- -------
Balance at end of year ..................... $ 4,575 $ 3,564 $ 3,370
======= ======= =======
</TABLE>
Nonaccrual loans at December 31, 1999 and 1998 were $703,000 and $432,000,
respectively. Loans with terms modified in troubled debt restructuring at
December 31, 1999 and 1998 were $448,000 and $473,000, respectively.
For the years ended December 31, 1999 and 1998, the average recorded investment
in impaired loans was approximately $565,000 and $665,000, respectively. During
the years ended December 31, 1999 and 1998, the amount of interest income
reversed on impaired loans placed on nonaccrual and the amount of interest
income subsequently recognized on the cash basis was not material.
The amount of interest recognized on nonaccrual or restructured loans was
$125,000, $94,000 and $110,000 for the years ended December 31, 1999, 1998 and
1997, respectively. If these loans had been accruing interest at their original
contracted rates, related income would have been $137,000, $113,000 and $336,000
for the years ended December 31, 1999, 1998 and 1997, respectively.
The following is a summary of the Company's recorded investment in loans
(primarily nonaccrual loans) for which impairment has been recognized in
accordance with FAS114 (in thousands):
<TABLE>
<CAPTION>
Valuation Carrying
Total Allowance Value
----- --------- -----
<S> <C> <C> <C>
Commercial Loans ................ $422 $225 $197
Loans to Individuals ............ 281 44 237
---- ---- ----
Balance at December 31, 1999 .... $703 $269 $434
==== ==== ====
</TABLE>
F-22
<PAGE> 129
<TABLE>
<CAPTION>
Valuation Carrying
Total Allowance Value
----- --------- --------
<S> <C> <C> <C>
Real Estate Loans ............... $ 2 $ $ 2
Commercial Loans ................ 167 32 135
Loans to Individuals ............ 263 49 214
---- ---- ----
Balance at December 31, 1998 .... $432 $ 81 $351
==== ==== ====
</TABLE>
7. BANK PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
(in thousands)
<S> <C> <C>
Bank premises .................... $22,347 $20,675
Furniture and equipment .......... 12,290 10,435
------- -------
34,637 31,110
Less accumulated depreciation .... 13,331 11,944
------- -------
Total ................... $21,306 $19,166
======= =======
</TABLE>
Depreciation expense was $1,474,000, $1,397,000 and $1,215,000 for the years
ended December 31, 1999, 1998 and 1997, respectively. Rent expense was $424,000,
$198,000 and $159,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Future minimum rental commitments under noncancelable leases are (in thousands):
<TABLE>
<S> <C>
2000 $ 298
2001 270
2002 181
2003 142
2004 27
Thereafter 0
-----
$ 918
=====
</TABLE>
8. OTHER REAL ESTATE OWNED
The following is a summary of the Allowance for Losses on Other Real Estate
Owned (OREO) for the periods presented (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Balance at beginning of year .... $ 658 $ 672 $ 946
Acquisition of OREO ......... 61
Disposition of OREO ......... (658) (14) (274)
----- ----- -----
Balance at end of year .......... $ 61 $ 658 $ 672
===== ===== =====
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, income from OREO
properties exceeded the provision and other expenses by $58,000, $28,000 and
$23,000, respectively.
F-23
<PAGE> 130
9. INTEREST BEARING DEPOSITS
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
(in thousands)
<S> <C> <C>
Savings deposits ........................ $ 20,282 $ 17,649
Money Market demand deposits ............ 75,278 60,264
NOW demand deposits ..................... 73,347 70,676
Certificates and other time deposits
of $100,000 or more ................... 98,347 90,836
Certificates and other time
deposits under $100,000 ............... 169,661 153,169
-------- --------
Total .......................... $436,915 $392,594
======== ========
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, interest expense on time
deposits of $100,000 or more was $3,805,000, $3,369,000 and $2,922,000,
respectively.
At December 31, 1999, the scheduled maturities of certificates and other time
deposits are as follows (in thousands):
<TABLE>
<S> <C>
2000 $ 196,307
2001 44,933
2002 16,164
2003 4,301
2004 and thereafter 6,303
-----------
$ 268,008
===========
</TABLE>
The aggregate amount of demand deposits that has been reclassified as loans were
$.9 million and $.5 million for December 31, 1999 and 1998, respectively.
F-24
<PAGE> 131
10. SHORT-TERM BORROWINGS
Information related to short-term borrowings is provided in the table below.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Federal funds purchased
Balance at end of period ................................ $ 75 $ 4,168 $ 3,884
Average amount outstanding during the period (1) ........ 4,660 3,700 2,695
Maximum amount outstanding during the period ............ 24,068 25,364 12,384
Weighted average interest rate during the period (2) .... 5.1% 5.7% 5.7%
Interest rate at end of period .......................... 4.3% 5.1% 7.8%
Securities sold under agreements to repurchase
Balance at end of period ................................ $ $ $
Average amount outstanding during the period (1) ........ 59 3,649
Maximum amount outstanding during the period ............ 7,150 13,027
Weighted average interest rate during the period (2) .... 5.6% 5.2%
Interest rate at end of period
Federal Home Loan Bank ("FHLB") Dallas Advances
Balance at end of period ................................ $181,222 $118,000 $ 29,000
Average amount outstanding during the period (1) ........ 155,719 61,734 6,798
Maximum amount outstanding during the period ............ 186,500 135,000 29,000
Weighted average interest rate during the period (2) .... 5.3% 5.3% 5.5%
Interest rate at end of period .......................... 5.3% 5.0% 4.9%
Treasury tax and loan funds
Balance at end of period ................................ $ 4,744 $ 1,523 $ 1,647
Average amount outstanding during the period (1) ........ 1,907 1,293 1,080
Maximum amount outstanding during the period ............ 4,747 3,154 2,850
Weighted average interest rate during the period (2) .... 4.0% 4.2% 5.2%
Interest rate at end of period .......................... 4.7% 4.1% 5.3%
</TABLE>
(1) The average amount outstanding during the period was computed by dividing
the total month-end outstanding principal balances by the number of months
in the period.
(2) The weighted average interest rate during the period was computed by
dividing the actual interest expense (annualized) by average balance
outstanding during the period.
The Company has three lines of credit for the purchase of federal funds. Two
$15.0 million and one $10.0 million unsecured lines of credit have been
established with Bank of America, Frost Bank and Texas Independent Bank,
respectively.
F-25
<PAGE> 132
11. LONG TERM OBLIGATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
FHLB Dallas Advances
Balance at end of period ................................ $174,704 $156,027 $ 28,547
Average amount outstanding during the period (1) ........ 175,028 84,836 12,151
Maximum amount outstanding during the period ............ 174,870 156,238 28,547
Weighted average interest rate during the period (2) .... 5.3% 5.5% 5.9%
Interest rate at end of period .......................... 5.4% 5.3% 6.0%
</TABLE>
(1) The average amount outstanding during the period was computed by dividing
the total month-end outstanding principal balances by the number of months
in the period.
(2) The weighted average interest rate during the period was computed by
dividing the actual interest expense (annualized) by average balance
outstanding during the period.
Maturities of fixed rate FHLB Dallas Long-term advances based on scheduled
repayments at December 31, 1999 are:
<TABLE>
<CAPTION>
Under Due Due Over 1999
1 Year 1-5 Years 6-10 Years 10 Years Total
------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total Long-term Obligations........ $ 947 $ 138,277 $ 35,112 $ 368 $ 174,704
============ ============= ============ ============ ============
</TABLE>
FHLB Dallas advances are collateralized by FHLB Dallas stock, nonspecified real
estate loans and mortgage-backed securities.
In April 1998, the Company formed a wholly-owned non-banking subsidiary
Southside Capital Trust (the "Trust Issuer"). The Trust Issuer was created under
the Business Trust Act of Delaware for the sole purpose of issuing and selling
Preferred Securities and Common Securities and using proceeds from the sale of
the Preferred Securities and Common Securities to acquire Junior Subordinated
Debentures (the "Debentures") issued by the Company. Accordingly, the Debentures
are the sole assets of the Trust Issuer and payments under the Debentures are
the sole revenue of the Trust Issuer. All of the Common Securities are owned by
the Company.
The Company's obligations under the Debentures and related documents, taken
together, constitute a full and unconditional guarantee by the Company of the
Trust Issuer's obligations under the Preferred Securities. Although the
Debentures are treated as debt of the Company, they currently qualify for Tier 1
capital treatment subject to a limitation that the securities included as Tier 1
capital not exceed 25% of total Tier 1 capital. The Securities are callable by
the Company on or about June 30, 2003, or earlier in the event the deduction of
related interest for federal income taxes is prohibited, treatment as Tier 1
capital is no longer permitted or certain other contingencies arise. The
Preferred Securities must be redeemed upon maturity of the Debentures in year
2028.
On May 18, 1998, the Company, through the Trust Issuer, sold 2,000,000 Preferred
Securities at a liquidation amount of $10 per Preferred Security for an
aggregate amount of $20,000,000. It has a distribution rate of 8.50% per annum
payable at the end of each calendar quarter.
F-26
<PAGE> 133
12. EMPLOYEE BENEFITS
Southside Bank has a deferred compensation agreement with eight of its executive
officers, which generally provides for payment of an aggregate amount of $3.4
million over a maximum period of fifteen years after retirement or death.
Deferred compensation expense was $211,000, $147,000 and $43,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
The Company provides accident and health insurance for substantially all
employees through an insurance program funded by the Company. Health insurance
benefits are offered to retired employees who pay a premium based on cost as
determined by a third party administrator. Substantially all of the Company's
employees may become eligible for those benefits if they reach normal retirement
age after fifteen years of employment with the Company. The cost of health care
benefits was $1,122,000, $802,000 and $792,000 for the years ended December 31,
1999, 1998 and 1997, respectively. There were five retirees and four retirees
participating in the health insurance plan as of December 31, 1999 and 1998,
respectively.
The Company has an Employee Stock Ownership Plan which covers substantially all
employees. Contributions to the plan are at the sole discretion of the Board of
Directors. Contributions to the plan for the year ended December 31, 1999 were
$100,000. There were no contributions to the plan for the year ended December
31, 1998 and 1997. At December 31, 1999 and 1998, 193,256 and 195,902 shares of
common stock were owned by the Employee Stock Ownership Plan, respectively. The
number of shares have been adjusted as a result of stock dividends. These shares
are treated as externally held shares for dividend and earnings per share
calculations.
The Company has an Officers Long-term Disability Income Plan, (the "Disability
Plan"), which covers officers of the Company and Southside Bank in the event
they become disabled as defined under its terms. Individuals are automatically
covered under the plan if they (a) have been elected as an officer, (b) have
been an employee of the Company and Southside Bank for three years and (c)
receive earnings of $50,000 or more on an annual basis. The Disability Plan
provides, among other things, under its terms that should a covered individual
become totally disabled he would receive 66-2/3%, not to exceed $10,000 per
month, of their current salary. The benefits paid out of this plan are limited
by the benefits paid to the individual under the terms of other Company
sponsored benefit plans.
The Company and Southside Bank have a defined benefit pension plan pursuant to
which participants are entitled to benefits based on final average monthly
compensation and years of credited service determined in accordance with plan
provisions. All employees of the Company and Southside Bank who have worked 1000
hours or more in their first twelve months of employment or during any plan year
thereafter are eligible to participate. Employees are vested upon the earlier of
five years credited service or the employee attaining 60 years of age. Benefits
are payable monthly commencing on the later of age 65 or the participant's date
of retirement. Eligible participants may retire at reduced benefit levels after
reaching age 55. The Company contributes amounts to the pension fund sufficient
to satisfy funding requirements of the Employee Retirement Income Security Act.
Plan assets included 132,284 shares of Southside Bancshares, Inc. stock
purchased at fair market value as of December 31, 1999 and 1998. The number of
shares have been adjusted as a result of stock dividends.
F-27
<PAGE> 134
<TABLE>
<CAPTION>
December 31, December 31,
Change in Projected Benefit Obligation 1999 1998
------------ ------------
(in thousands)
<S> <C> <C>
Benefit obligation at end of prior year ........... $ 13,926 $ 11,853
Service cost ...................................... 714 578
Interest cost ..................................... 957 856
Actuarial (gain) loss ............................. (1,371) 1,107
Benefits paid ..................................... (604) (468)
Expenses paid ..................................... (74)
-------- --------
Benefit obligation at end of year .............. $ 13,548 $ 13,926
======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31,
Change in Plan Assets 1999 1998
------------ ------------
(in thousands)
<S> <C> <C>
Fair value of plan assets at end of prior year .... $ 12,113 $ 10,233
Actual return ..................................... 1,891 2,064
Employer contribution ............................. 791 284
Benefits paid ..................................... (604) (468)
Expenses paid ..................................... (74)
-------- --------
Fair value of plan assets at end of year ....... $ 14,117 $ 12,113
======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31,
Reconciliation of Funded Status 1999 1998
------------ ------------
(in thousands)
<S> <C> <C>
Funded status ..................................... $ 569 $(1,813)
Unrecognized net (gain) loss ...................... (1,127) 1,076
Unrecognized net transition asset ................. (185) (231)
------- -------
Accrued benefit cost ........................... $ (743) $ (968)
======= =======
</TABLE>
The weighted average discount rate and rate of increase in future compensation
levels used in determining actuarial present value of the projected benefit
obligation was 7.75% and 4.50% and 6.75% and 4.50% at December 31, 1999 and
1998, respectively. The assumed long-term rate of return on plan assets was 9.0%
at December 31, 1999 and 1998.
Net periodic pension cost for the years ended December 31, 1999, 1998 and 1997
included the following components (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Service cost .............................. $ 714 $ 578 $ 510
Interest cost ............................. 957 856 778
Expected return on assets ................. (1,068) (900) (806)
Transition asset recognition .............. (46) (46) (46)
Net loss recognition ...................... 9 9
------- ------- -------
Net periodic benefit cost ................. $ 566 $ 497 $ 436
======= ======= =======
</TABLE>
F-28
<PAGE> 135
The Company has a nonfunded supplemental retirement plan (restoration plan) for
its employees whose benefits under the principal retirement plan are reduced
because of compensation deferral elections or limitations under federal tax
laws. The expense for this plan for the years ended December 31, 1999, 1998 and
1997 was $83,000, $34,000 and $45,000, respectively.
<TABLE>
<CAPTION>
December 31, December 31,
Change in Projected Benefit Obligation 1999 1998
------------ ------------
(in thousands)
<S> <C> <C>
Benefit obligation at end of prior year .... $ 405 $ 510
Service cost ............................... 13
Interest cost .............................. 46 29
Actuarial loss (gain) ...................... 227 (77)
Benefits paid .............................. (56) (57)
----- -----
Benefit obligation at end of year ....... $ 635 $ 405
===== =====
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31,
Change in Plan Assets 1999 1998
------------ ------------
(in thousands)
<S> <C> <C>
Fair value of plan assets at end of prior year .... $ $
Employer contribution ............................. 56 57
Benefits paid ..................................... (56) (57)
---- ----
Fair value of plan assets at end of year ....... $ 0 $ 0
==== ====
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31,
Reconciliation of Funded Status 1999 1998
------------ ------------
(in thousands)
<S> <C> <C>
Funded status .............................. $(635) $(405)
Unrecognized net loss ...................... 260 53
Unrecognized net transition obligation ..... 21 24
----- -----
Accrued benefit cost ....................... (354) (328)
Additional minimum liability ............... (79) (77)
----- -----
Accrued benefit liability .................. (433) (405)
Intangible asset ........................... 21 24
Accumulated other comprehensive income ..... 58 53
----- -----
Net amount recognized ...................... $(354) $(328)
===== =====
</TABLE>
The weighted average discount rate and rate of increase in future compensation
levels used in determining actuarial present value of the projected benefit
obligation was 7.75% and 4.50% and 6.75% and 4.50% at December 31, 1999 and
1998, respectively. The assumed long-term rate of return on plan assets was 9.0%
at December 31, 1999 and 1998.
Net periodic postretirement benefit cost for the years ended December 31, 1999,
1998 and 1997 includes the following components (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998 1997
------ ---- -------
<S> <C> <C> <C>
Service cost ......................... $13 $ $
Interest cost ........................ 46 28 37
Transition obligation recognition .... 3 3 3
Net loss recognition ................. 21 3
--- --- ---
Net periodic benefit cost ............ $83 $31 $43
=== === ===
</TABLE>
F-29
<PAGE> 136
Incentive Stock Options
In April 1993, the Company adopted the Southside Bancshares, Inc. 1993 Incentive
Stock Option Plan ("the Plan"), a stock-based incentive compensation plan. The
Company applies APB Opinion 25 and related Interpretations in accounting for the
Plan and discloses the pro forma information required by FAS123.
Under the Plan, the Company is authorized to issue shares of Common Stock
pursuant to "Awards" granted in the form of incentive stock options (intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as amended).
Awards may be granted to selected employees and directors of the Company or any
subsidiary. At December 31, 1999 and 1998, there were 280,444 options and
421,514 options available for grant, respectively.
The Plan provides that the exercise price of any stock option may not be less
than the fair market value of the Common Stock on the date of grant. The Company
granted incentive stock options in 1997, 1998 and 1999. These stock options have
contractual terms of 10 years. All options vest on a graded schedule, 20% per
year for 5 years, beginning on the first anniversary date of the grant date. In
accordance with APB 25, the Company has not recognized any compensation cost for
these stock options.
A summary of the status of the Company's stock options as of December 31, 1999,
1998 and 1997 and the changes during the year ended on those dates is presented
below:
<TABLE>
<CAPTION>
---------------------------- --------------------------- -------------------------- --------------------------
1999 1998 1997
---------------------------- --------------------------- -------------------------- --------------------------
# SHARES OF WEIGHTED # SHARES OF WEIGHTED # SHARES OF WEIGHTED
UNDERLYING AVERAGE UNDERLYING AVERAGE UNDERLYING AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
PRICES PRICES PRICES
---------------------------- ------------ ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of the year 751,396 $6.19 623,868 $5.45 486,508 $4.44
---------------------------- ------------ ------------- ------------ ------------ ------------ ------------
Granted 150,150 $8.40 319,020 $10.36 166,768 $7.67
---------------------------- ------------ ------------- ------------ ------------ ------------ ------------
Exercised 44,850 $8.84 25,764 $9.59 27,090 $7.58
---------------------------- ------------ ------------- ------------ ------------ ------------ ------------
Forfeited 9,080 $8.38 165,728 $11.90 2,318 $7.67
---------------------------- ------------ ------------- ------------ ------------ ------------ ------------
Expired 0 N/A 0 N/A 0 N/A
---------------------------- ------------ ------------- ------------ ------------ ------------ ------------
Outstanding at end of year
847,616 $6.72 751,396 6.19 623,868 $5.45
---------------------------- ------------ ------------- ------------ ------------ ------------ ------------
Exercisable at end of year
386,185 $5.48 306,808 $4.59 195,983 $3.97
---------------------------- ------------ ------------- ------------ ------------ ------------ ------------
Weighted-average FV of
options granted during the
year $2.39 $3.36 $2.36
---------------------------- ------------ ------------- ------------ ------------ ------------ -------------
</TABLE>
The fair value of each stock option granted is estimated on the date of grant
using the minimum value method of option pricing with the following
weighted-average assumptions for grants in 1999, 1998 and 1997, respectively:
dividend yield of 2.19%, 1.34%, and 2.25%; risk-free interest rates of 6.05%,
5.18%, and 6.52%; the expected lives of 6 years; the expected volatility is
22.25%.
F-30
<PAGE> 137
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
NUMBER WEIGHTED AVG. NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED AVG EXERCISABLE WEIGHTED AVG.
EXERCISE PRICES AT 12/31/99 CONTR. LIFE EXERCISE PRICE AT 12/31/99 EXERCISE PRICE
--------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 2.85 to $6.17 391,004 5.30 $ 4.95 294,346 $ 4.69
$ 7.67 to $8.69 456,612 5.70 $ 5.40 91,839 $ 5.18
---------------- ------- ---- ------ -------- -------
$ 2.85 to $8.69 847,616 5.50 $ 5.19 386,185 $ 4.81
</TABLE>
Pro Forma Net Income and Net Income Per Common Share
Had the compensation cost for the Company's stock-based compensation plans been
determined consistent with the requirements of FAS123, the Company's net income
and net income per common share for 1999, 1998, and 1997 would approximate the
pro forma amounts below (in thousands, except per share amounts, net of taxes):
<TABLE>
<CAPTION>
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
12/31/99 12/31/99 12/31/98 12/31/98 12/31/97 12/31/97
---------- ----------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
FAS123 Charge....................... $ $ 316 $ $ 184 $ $ 136
Net Income.......................... $ 7,924 $ 7,608 $ 5,351 $ 5,167 $ 5,006 $ 4,870
Net Income per Common
Share-Basic...................... $ 1.08 $ 1.04 $ .72 $ .70 $ .67 $ .65
Net Income per Common
Share-Diluted.................... $ 1.05 $ 1.01 $ .70 $ .67 $ .65 $ .63
</TABLE>
The effects of applying FAS123 in this pro forma disclosure are not indicative
of future amounts.
13. SHAREHOLDERS' EQUITY
Cash dividends declared and paid were $.20 per share for the years ended
December 31, 1999, 1998 and 1997. Future dividends will depend on the Company's
earnings, financial condition and other factors which the Board of Directors of
the Company considers to be relevant. The Company's dividend policy requires
that any dividend payments made by the Company not exceed consolidated earnings
for that year. Retained earnings not available for the payment of dividends at
December 31, 1999 were $14.6 million.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators regarding components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of Total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as
F-31
<PAGE> 138
defined). Management believes, as of December 31, 1999, that the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum Total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------ ------------------------- ---------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- -------- ---------- ----------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital
(to Risk Weighted Assets)........ $ 70,611 13.96% > or = $40,473 > or = 8.0% > or = $ 50,592 > or = 10.0%
Tier 1 Capital
(to Risk Weighted Assets)........ $ 61,782 12.21% > or = 20,237 > or = 4.0% > or = $ 30,355 > or = 6.0%
Tier 1 Capital
(to Average Assets) (1).......... $ 61,782 6.20% > or = 39,876 > or = 4.0% > or = $ 49,845 > or = 5.0%
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets)........ $ 63,962 14.86% > or = 34,435 > or = 8.0% > or = $ 43,044 > or = 10.0%
Tier 1 Capital
(to Risk Weighted Assets)........ $ 54,280 12.61% > or = 17,218 > or = 4.0% > or = $ 25,827 > or = 6.0%
Tier 1 Capital
(to Average Assets) (1).......... $ 54,280 6.76% > or = 32,108 > or = 4.0% > or = $ 40,135 > or = 5.0%
</TABLE>
(1) Refers to quarterly average assets as calculated by bank regulatory
agencies.
Payment of dividends by the Bank is limited under regulation. The amount that
can be paid in any calendar year without prior approval of the Bank's regulatory
agencies cannot exceed the lesser of net profits (as defined) for that year plus
the net profits for the preceding two calendar years, or retained earnings.
The table below summarizes key equity ratios for the Company for the years ended
December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Percentage of Net Income to:
Average Total Assets............................................... .84% .78% .99%
Average Shareholders' Equity....................................... 18.99% 12.42% 13.20%
Percentage of Dividends Declared Per Common
Share to Net Income Per Common Share-Basic......................... 18.43% 27.78% 29.85%
Percentage of Dividends Declared Per Common
Share to Net Income Per Common Share-Diluted....................... 19.05% 28.78% 30.77%
Percentage of Average Shareholders'
Equity to Average Total Assets..................................... 4.41% 6.28% 7.50%
</TABLE>
F-32
<PAGE> 139
14. DIVIDEND REINVESTMENT AND COMMON STOCK REPURCHASE PLAN
The Company has a Dividend Reinvestment Plan funded by stock authorized, but not
yet issued. Proceeds from the sale of the common stock will be used for general
corporate purposes and could be directed to the Company's subsidiaries. For the
year ended December 31, 1999, 34,296 shares were sold under this plan at an
average price of $9.25 per share, reflective of other trades at the time of each
sale. For the year ended December 31, 1998, 34,296 shares were sold under this
plan at an average price of $9.87 per share, reflective of other trades at the
time of each sale.
The Company instituted a Common Stock Repurchase Plan in late 1994. Under the
repurchase plan, the Board of Directors establishes, on a quarterly basis, total
dollar limitations and price per share for stock to be repurchased. The Board
reviews this plan in conjunction with the capital needs of the Company and
Southside Bank and may, at its discretion, modify or discontinue the plan.
During 1999, 148,150 shares of treasury stock were purchased under this plan at
a cost of $1,386,000. During 1998, 142,852 shares of treasury stock were
purchased under this plan at a cost of $1,398,000.
15. INCOME TAXES
The provisions for federal income taxes included in the accompanying statements
of income consist of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current tax provision.................................................. $ 2,033 $ 1,496 $ 1,914
Deferred tax benefit................................................... (33) (272) (225)
------------ ------------ ------------
Provision for tax expense charged to operations........................ $ 2,000 $ 1,224 $ 1,689
============ ============ ============
</TABLE>
Deferred income taxes result from temporary differences in the recognition of
revenues and expenses for tax and book purposes. These differences and the tax
effect of each of the major categories are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Provision for loan losses.............................................. $ (551) $ (204) $ (323)
Provision for OREO losses.............................................. 202 83
Depreciation........................................................... 45 (6) 29
Retirement and other benefit plans..................................... (4) (211) (60)
FHLB Dallas Stock dividends............................................ 308 149 40
Loan origination costs................................................. 11
Other.................................................................. (33) (5)
------------ ------------ ------------
Deferred tax benefit................................................... $ (33) $ (272) $ (225)
============ ============ ============
</TABLE>
F-33
<PAGE> 140
The components of the net deferred tax asset (liability) as of December 31, 1999
and 1998 are summarized below (in thousands):
<TABLE>
<CAPTION>
Assets Liabilities
------------ ------------
<S> <C> <C>
Allowance for Losses on OREO...................................................... $ 101 $
Reserve for Loan Losses........................................................... 1,280
Retirement and Other Benefit Plans................................................ 875
Unrealized losses on securities available for sale................................ 4,919
Loan Origination Costs............................................................ (148)
Premises and Equipment............................................................ (250)
FHLB Dallas Stock Dividends....................................................... (602)
Other............................................................................. 69
------------ ------------
Gross deferred tax assets (liabilities)........................................ 7,244 (1,000)
------------ ------------
Net deferred tax asset at December 31, 1999................................. $ 6,244
============
</TABLE>
<TABLE>
<CAPTION>
Assets Liabilities
------------ ------------
<S> <C> <C>
Allowance for Losses on OREO...................................................... $ 308 $
Reserve for Loan Losses........................................................... 729
Retirement and Other Benefit Plans................................................ 868
Unrealized gains on securities available for sale................................. (2,474)
Loan Origination Costs............................................................ (148)
Premises and Equipment............................................................ (187)
FHLB Dallas Stock Dividends....................................................... (294)
Other............................................................................. 14
------------ ------------
Gross deferred tax assets (liabilities)........................................ 1,905 (3,089)
------------ ------------
Net deferred tax liability at December 31, 1998............................. $ (1,184)
============
</TABLE>
A reconciliation of tax at statutory rates and total tax expense is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
Percent Percent Percent
of of of
Pre-Tax Pre-Tax Pre-Tax
Amount Income Amount Income Amount Income
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Calculated Tax Expense............................. $ 3,374 34.0% $ 2,236 34.0% $ 2,276 34.0%
Increase (Decrease) in Taxes from:
Tax Exempt Interest................................ (1,661) (16.7%) (1,210) (18.4%) (706) (10.5%)
Other Net.......................................... 287 2.9% 198 3.0% 119 1.7%
-------- -------- -------- -------- -------- --------
Provision for Tax Expense Charged to
Operations...................................... $ 2,000 20.2% $ 1,224 18.6% $ 1,689 25.2%
======== ======== ======== ======== ======== ========
</TABLE>
F-34
<PAGE> 141
16. COMMITMENTS AND CONTINGENCIES
In the normal course of business the Company buys and sells securities. There
were no commitments to purchase securities at December 31, 1999. At December 31,
1998, the Company had commitments to purchase $8,294,000 in securities.
The Company, or its subsidiaries, is involved with various litigation which
resulted in the normal course of business. Management of the Company, after
consulting with its legal counsel, believes that any liability resulting from
litigation will not have a material effect on the financial position and results
of operations and the liquidity of the Company or its subsidiaries.
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business the Company is a party to certain financial
instruments, with off-balance-sheet risk, to meet the financing needs of its
customers. These off-balance-sheet instruments include commitments to extend
credit and standby letters of credit. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
reflected in the financial statements. The contract or notional amounts of these
instruments reflect the extent of involvement and exposure to credit loss the
Company has in these particular classes of financial instruments.
Commitments to extend credit are agreements to lend to a customer provided that
the terms established in the contract are met. Commitments generally have fixed
expiration dates and may require payment of fees. Since some commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Standby letters of credit are
conditional commitments issued to guarantee the performance of a customer to a
third party. These guarantees are primarily issued to support public and private
borrowing arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan commitments to
customers.
The Company had outstanding unused commitments to extend credit of $52,178,000
and $29,810,000 at December 31, 1999 and 1998, respectively. The Company had
outstanding standby letters of credit of $259,000 and $246,000 at December 31,
1999 and 1998, respectively.
The Company applies the same credit policies in making commitments and standby
letters of credit as it does for on-balance-sheet instruments. The Company
evaluates each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary, upon extension of credit is based
on management's credit evaluation of the borrower. Collateral held varies but
may include real estate, accounts receivable, inventory, property, plant, and
equipment.
18. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
The economy of the Company's market area, East Texas, is directly tied to the
oil and gas industry. Oil prices have had an indirect effect on the Company's
business. Although the Company has a diversified loan portfolio, a significant
portion of its loans are collateralized by real estate. Repayment of these loans
is in part dependent upon the economic conditions in the market area. Part of
the risk associated with real estate loans has been mitigated since 49.3% of
this group represents loans collateralized by residential dwellings that are
primarily owner occupied. Losses on this type of loan have historically been
less than those on speculative properties. Many of the remaining real estate
loans are collateralized primarily with owner occupied commercial real estate.
The Mortgage-backed Securities held by the Company consist solely of Government
agency pass-through securities which are either directly or indirectly backed by
the full faith and credit of the United States Government.
F-35
<PAGE> 142
19. RELATED PARTY TRANSACTIONS
Loan activity of executive officers, directors, and their affiliates for the
years ended December 31, 1999 and 1998 were (in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
<S> <C> <C>
Beginning Balance of Loans.............................................. $ 6,428 $ 6,160
Additional Loans...................................................... 2,936 3,917
Payments.............................................................. (3,599) (3,649)
----------------- ----------------
Ending Balance of Loans................................................. $ 5,765 $ 6,428
================= ================
</TABLE>
Other indebtedness of officers and employees as of December 31, 1999 and 1998
was $3,031,000 and $2,656,000, respectively.
The Company incurred legal costs of $150,000, $176,000 and $148,000 during the
years ended December 31, 1999, 1998 and 1997, respectively, from a law firm of
which an outside director of the Company is a partner. The Company paid
approximately $54,000, $49,000 and $55,000 in insurance premiums during the
years ended December 31, 1999, 1998 and 1997, respectively, to companies of
which two outside directors are officers. During 1999 there were no
architectural fees paid to outside directors. The Company paid approximately
$5,000 and $50,000 in architectural fees during the years ended December 31,
1998 and 1997, respectively, to a company of which an outside director is an
officer.
20. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" (FAS107), requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other estimation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. Such techniques and assumptions, as they apply
to individual categories of the Company's financial instruments, are as follows:
Cash and due from banks: The carrying amounts for cash and due from
banks is a reasonable estimate of those assets' fair value.
Investment, mortgage-backed and marketable equity securities: Fair
values for these securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are
based on quoted market prices for similar securities.
Loans receivable: For adjustable rate loans that reprice frequently and
with no significant change in credit risk, the carrying amounts are a
reasonable estimate of those assets' fair value. The fair value of
other types of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities. Nonperforming loans are estimated using discounted cash
flow analyses or underlying value of the collateral where applicable.
Deposit liabilities: The fair value of demand deposits, savings
accounts, and certain money market deposits is the amount on demand at
the reporting date, that is, the carrying value. Fair values for fixed
rate certificates of deposits are estimated using a discounted cash
flow calculation that applies interest rates currently being offered
for deposits of similar remaining maturities.
F-36
<PAGE> 143
Federal funds purchased and securities sold under agreement to
repurchase: Federal funds purchased and securities sold under agreement
to repurchase generally have an original term to maturity of one day
and thus are considered short-term borrowings. Consequently, their
carrying value is a reasonable estimate of fair value.
Commitments to extend credit: The carrying amounts of commitments to
extend credit and standby letters of credit are a reasonable estimate
of those assets' fair value.
FHLB Dallas Advances: The fair value of these advances is estimated by
discounting the future cash flows using rates at which advances would
be made to borrowers with similar credit ratings and for the same
remaining maturities.
The following table presents the Company's assets, liabilities, and unrecognized
financial instruments at both their respective carrying amounts and fair value
(dollars in thousands).
<TABLE>
<CAPTION>
At December 31, 1999 At December 31, 1998
-------------------------------- --------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks.................... $ 41,131 $ 41,131 $ 41,372 $ 41,372
Investment securities:
Available for sale....................... 96,244 96,244 132,447 132,447
Held to maturity......................... 86,208 84,389 347 347
Mortgage-backed and related securities:
Available for sale....................... 273,676 273,676 333,194 333,194
Held to maturity......................... 73,898 71,876 7,810 7,810
Marketable equity securities:
Available for sale....................... 18,543 18,543 14,171 14,171
Loans, net.................................... 382,871 375,411 316,159 321,238
Financial liabilities:
Retail deposits............................ $ 587,544 $ 542,250 $ 515,034 $ 515,968
Federal funds purchased.................... 75 75 4,168 4,168
FHLB Dallas advances....................... 355,926 348,392 274,027 261,240
Junior subordinated debentures............. 20,000 20,000 20,000 20,000
Off-balance sheet liabilities:
Commitments to extend credit............... 46,007 46,007 24,643 24,643
Standby letters of credit.................. 259 259 246 246
Credit card arrangements................... 6,171 6,171 5,167 5,167
</TABLE>
As discussed earlier, the fair value estimate of financial instruments for which
quoted market prices are unavailable is dependent upon the assumptions used.
Consequently, those estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. Accordingly, the aggregate fair value amounts
presented in the above fair value table do not necessarily represent the
underlying value of the Company.
F-37
<PAGE> 144
21. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
<TABLE>
<CAPTION>
1999
-------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income......................................... $ 16,706 $ 15,736 $ 14,642 $ 13,604
Net interest income..................................... 7,034 6,418 5,871 5,349
Income before provision for income taxes................ 3,280 2,511 2,205 1,928
Provision for income taxes.............................. 699 537 441 323
Net income.............................................. 2,581 1,974 1,764 1,605
Net income per share
Basic............................................... .35 .27 .24 .22
Diluted............................................. .34 .26 .24 .21
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income......................................... $ 12,661 $ 11,325 $ 10,138 $ 9,553
Net interest income..................................... 5,152 4,396 4,533 4,849
Income before provision for income taxes................ 2,031 1,653 1,330 1,561
Provision for income taxes.............................. 425 248 176 375
Net income.............................................. 1,606 1,405 1,154 1,186
Net income per share
Basic............................................... .22 .19 .15 .16
Diluted............................................. .21 .18 .15 .16
</TABLE>
F-38
<PAGE> 145
22. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Southside Bancshares, Inc. (parent company
only) was as follows (dollars in thousands):
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
----------------- ------------------
ASSETS 1999 1998
----------------- ------------------
<S> <C> <C>
Cash and due from banks.................................................... $ 2,648 $ 6,329
Investment in bank subsidiary at equity in
underlying net assets................................................... 53,810 58,794
Investment in nonbank subsidiary at equity in
underlying net assets................................................... 15 15
Other assets............................................................... 1,240 1,285
----------------- ------------------
TOTAL ASSETS....................................................... $ 57,713 $ 66,423
================= =================
LIABILITIES
Junior subordinated debentures............................................. $ 20,000 $ 20,000
Other liabilities.......................................................... 41 10
----------------- -----------------
TOTAL LIABILITIES.................................................. 20,041 20,010
----------------- -----------------
SHAREHOLDERS' EQUITY
Common stock ($1.25 par, 20,000,000 shares authorized:
7,798,332 and 7,371,550 and shares issued)............................. 9,748 9,214
Paid-in capital............................................................ 27,472 24,198
Retained earnings.......................................................... 14,583 11,391
Treasury stock (512,502 and 364,352 shares)................................ (4,544) (3,158)
Net unrealized gains on securities available for sale ..................... (9,587) 4,768
----------------- -----------------
TOTAL SHAREHOLDERS' EQUITY......................................... 37,672 46,413
----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......................... $ 57,713 $ 66,423
================= =================
</TABLE>
F-39
<PAGE> 146
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1999 1998 1997
------------ ------------ ------------
INCOME (in thousands)
<S> <C> <C> <C>
Dividends from subsidiary.............................................. $ $ 586 $ 2,066
------------ ------------ ------------
TOTAL INCOME...................................................... 586 2,066
------------ ------------ ------------
EXPENSE
Interest expense....................................................... 1,700 1,048
Salaries and employee benefits......................................... 100
Taxes other than income................................................ 27 41
Other.................................................................. 348 171 70
------------ ------------ -------------
TOTAL EXPENSE..................................................... 2,148 1,246 111
------------ ------------ -------------
(Loss) income before federal income tax expense........................ (2,148) (660) 1,955
Benefit for federal income tax expense................................. 730 424 37
------------ ------------ -------------
(Loss) income before equity in undistributed
earnings of subsidiaries............................................ (1,418) (236) 1,992
Equity in undistributed earnings of subsidiaries....................... 9,342 5,587 3,014
------------ ------------ ------------
NET INCOME........................................................ $ 7,924 $ 5,351 $ 5,006
============ ============ ============
</TABLE>
CONDENSED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1999 1998 1997
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income........................................................... $ 7,924 $ 5,351 $ 5,006
Adjustments to reconcile net income
to cash provided by operations:
Equity in undistributed earnings of subsidiaries................... (9,342) (5,587) (3,014)
(Increase) decrease in other assets................................ 45 (1,283)
Decrease in other liabilities...................................... 31 (2) (40)
------------ ------------ ------------
Net cash (used in) provided by operating activities........... (1,342) (1,521) 1,952
INVESTING ACTIVITIES:
Investments in subsidiaries.......................................... (10,000) (10)
------------ ------------ ------------
Net cash used in investing activities......................... (10,000) (10)
FINANCING ACTIVITIES:
Purchase of treasury stock........................................... (1,386) (1,398) (1,154)
Proceeds from sale of treasury stock................................. 38 77
Proceeds from issuance of Common Stock............................... 456 347 326
Dividends paid....................................................... (1,409) (1,359) (1,316)
Proceeds from the issuance of junior
subordinated debentures............................................ 20,000
------------ ------------ ------------
Net cash provided by (used in) financing activities........... (2,339) 17,628 (2,067)
Net increase (decrease) in cash and cash equivalents................. (3,681) 6,107 (125)
Cash and cash equivalents at beginning of year....................... 6,329 222 347
------------ ------------ ------------
Cash and cash equivalents at end of year............................. $ 2,648 $ 6,329 $ 222
============ ============ ============
</TABLE>
F-40
<PAGE> 147
================================================================================
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................... 3
Southside Bancshares....................................... 3
Southside Capital Trust II................................. 4
The Offering............................................... 5
Summary of Recent Developments............................. 9
Risk Factors............................................... 11
Special Note Regarding Forward-Looking Statements.......... 17
Use of Proceeds............................................ 17
Price Range of Common Stock and Dividends.................. 17
Market for the Preferred Securities........................ 18
Accounting Treatment....................................... 18
Capitalization............................................. 19
Selected Consolidated Financial Data....................... 20
Management's Discussion and Analysis of
Operating Results and Financial Information............. 22
Year 2000 Issue............................................ 42
Other Accounting Issues.................................... 42
Effects of Inflation....................................... 43
Business................................................... 44
Supervision and Regulation................................. 58
Management................................................. 64
Description of the Trust................................... 66
Description of the Convertible Preferred
Securities............................................... 67
Description of the Convertible Subordinated
Debentures.............................................. 81
Description of the Guarantee............................... 90
Relationship Among the Convertible
Preferred Securities, the Convertible
Debentures and the Guarantee............................ 92
Book-Entry Issuance........................................ 93
Description of Capital Stock............................... 95
Certain Federal Income Tax Consequences.................... 96
ERISA Considerations....................................... 100
Underwriting............................................... 101
Legal Matters.............................................. 103
Experts.................................................... 103
Where You Can Find Information............................. 103
Documents Incorporated by Reference........................ 105
Index to Consolidated Financial Statements................. F-1
</TABLE>
----------
o You should only rely on the information contained or incorporated by
reference in this prospectus. We have not, and our underwriters have not,
authorized any person to provide you with different information. If
anyone provides you with different or inconsistent information, you
should not rely on it.
o We are not, and our underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted.
o You should assume that the information appearing in this prospectus is
accurate as of the date on the front cover of this prospectus only.
o This prospectus does not constitute an offer to sell, or the solicitation
of an offer to buy, any securities other than the securities to which it
relates.
1,500,000 Convertible Preferred Securities
SOUTHSIDE CAPITAL TRUST II
% Cumulative Convertible Trust
Preferred Securities
(Liquidation Amount
$10 per Convertible Preferred Security)
Fully, irrevocably and unconditionally
guaranteed on a subordinated basis,
as described in this prospectus, by
[LOGO]
SOUTHSIDE BANCSHARES, INC.
$15,000,000
% Convertible
Junior Subordinated Debentures of
SOUTHSIDE BANCSHARES, INC.
----------
PROSPECTUS
, 2000
Stifel, Nicolaus & Company
Incorporated
================================================================================
<PAGE> 148
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the offering described in this
registration statement which will be paid by Southside Bancshares, Inc., are set
forth in the chart below. With the exception of the filing fees for the
Securities and Exchange Commission and National Association of Securities
Dealers, Inc., all amounts shown are estimates.
<TABLE>
<CAPTION>
AMOUNT
---------
<S> <C>
SEC registration fee $4,554
---------
NASD filing fee 2,225
---------
Nasdaq National Market listing fee *
Trustee fees and expenses *
Legal fees and expenses *
Accounting fees and expenses *
Printing and mailing expenses *
Blue Sky fees and expenses *
Miscellaneous *
---------
TOTAL $ *
=========
</TABLE>
----------
* To be provided by amendment filed at a later date.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Texas Business Corporations Act permits, and in some cases requires,
corporations to indemnify officers, directors, agents and employees who have
been, or are threatened to be, made a party to litigation. The indemnification
applies to judgements, fines, settlements and reasonable expenses under certain
circumstances. Under the Texas Business Corporation Act, reasonable expenses
incurred by a director or officer may be paid or reimbursed by us before a final
conclusion of the proceeding, after we receive certain assurances from the
director or officer. Specifically, the director or officer must provide to us a
written statement of his or her good faith belief that he or she has met the
standard of conduct necessary for indemnification. The other assurance we must
receive is a written undertaking, by or on behalf of the director or officer, to
repay the amount reimbursed if it is ultimately determined that the director or
officer is not entitled to indemnification by us. If a director or officer is
wholly successful in defending the proceeding in which he or she is a party, the
Texas Business Corporation Act requires us to indemnify him or her against
reasonable expenses incurred in connection with the proceeding if he or she is
named as a defendant as a result of being one of our directors or officers.
We have purchased director and officer liability insurance that insures
our directors and officers against liabilities in connection with the
performance of their duties.
II-1
<PAGE> 149
Under the trust agreement of Southside Capital Trust II, we will agree to
indemnify each of the trustees, or any predecessor trustee, of the trust. We
will also agree to hold each of the trustees harmless against any loss, damage,
claim, liability or expense incurred without negligence or bad faith on the part
of the trust, that arises out of or in connection with the acceptance or
administration of the trust agreement. The indemnification includes the costs
and expenses incurred by the trust in defending itself against any claim or
liability in connection with the exercise or performance of any of its powers or
duties under the trust agreement.
II-2
<PAGE> 150
ITEM 16. EXHIBITS.
REGULATION S-K
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
------- --------
<S> <C>
1 Form of Underwriting Agreement.**
4.1 Form of Indenture with respect to Southside Bancshares, Inc.'s
8.50% Junior Subordinated Debentures (filed as exhibit 4.1 to the
Registrant's Form S-2 filed with the Securities and Exchange
Commission on May 13, 1998, and incorporated herein).
4.2 Form of 8.50% Junior Subordinated Debenture (included as an
exhibit to the Form of Indenture filed as Exhibit 4.1 to the
Registrant's Form S-2 filed with the Securities and Exchange
Commission on May 13, 1998, and incorporated herein).
4.3 Certificate of Trust of Southside Capital Trust I (included as an
exhibit to the Form of Amended and Restated Trust Agreement filed
as Exhibit 4.5 to the Registrant's Form S-2 filed with the
Securities and Exchange Commission on May 13, 1998, and
incorporated herein).
4.4 Form of Trust Agreement of Southside Capital Trust I (included as
an exhibit to the Form of Amended and Restated Trust Agreement
filed as Exhibit 4.5 to the Registrant's Form S-2 filed with the
Securities and Exchange Commission on May 13, 1998, and
incorporated herein).
4.5 Form of Amended and Restated Trust Agreement of Southside Capital
Trust I (filed as exhibit 4.5 to the Registrant's Form S-2 filed
with the Securities and Exchange Commission on May 13, 1998, and
incorporated herein).
4.6 Form of Certificate for 8.50% Trust Preferred Security of
Southside Capital Trust I (included as an exhibit to the Form of
Amended and Restated Trust Agreement filed as Exhibit 4.5 to the
Registrant's Form S-2 filed with the Securities and Exchange
Commission on May 13, 1998, and incorporated herein).
4.7 Form of Guarantee Agreement for Southside Capital Trust I (filed
as exhibit 4.7 to the Registrant's Form S-2 filed with the
Securities and Exchange Commission on May 13, 1998, and
incorporated herein).
4.8 Form of Agreement as to Expenses and Liabilities (included as an
exhibit to Exhibit 4.5 to the Registrant's Form S-2 filed with
the Securities and Exchange Commission on May 13, 1998, and
incorporated herein).
4.9 Form of Indenture with respect to Southside Bancshares, Inc.'s
___% Convertible Subordinated Debentures.*
4.10 Form of ___% Convertible Subordinated Debenture.*
4.11 Certificate of Trust of Southside Capital Trust II.*
4.12 Form of Trust Agreement of Southside Capital Trust II.*
4.13 Form of Amended and Restated Trust Agreement of Southside Capital
Trust II.*
</TABLE>
II-3
<PAGE> 151
<TABLE>
<S> <C>
4.14 Form of Certificate for ___% Trust Preferred Security of
Southside Capital Trust II.*
4.15 Form of Guarantee Agreement for Southside Capital Trust II.*
4.16 Form of Agreement as to Expenses and Liabilities.*
5.1 Opinion of Jenkens & Gilchrist, a Professional Corporation, as to
the validity of the Guarantee, the issuance of the ___%
Convertible Subordinated Debentures to be issued by Southside
Capital Trust II and the common stock to be issued upon
conversion of the convertible preferred securities.**
5.2 Opinion of Richards, Layton & Finger, special Delaware counsel,
as to the enforceability of the Trust Agreement and Trust
Preferred Securities to be issued by Southside Capital Trust
II.**
8.1 Tax Opinion of Jenkens & Gilchrist, a Professional Corporation.**
10.1 Deferred Compensation Plan for B.G. Hartley effective February
13, 1984, as amended June 28, 1990, December 15, 1994, November
20, 1995 December 21,1999 (filed as Exhibit 10(a)(i) to the
Registrant's Form 10-K for the year ended December 31, 1999, and
incorporated herein).
10.2 Deferred Compensation Plan for Robbie N. Edmonson effective
February 13, 1984, as amended June 28, 1990 and March 16, 1995
(filed as Exhibit 10(a)(ii) to the Registrant's Form 10-K for the
year ended December 31, 1995, and incorporated herein).
10.3 Officers Long-term Disability Income Plan effective June 25, 1990
(filed as Exhibit 10(b) to the Registrant's Form 10-K for the
year ended December 31, 1990, and incorporated herein).
10.4 Retirement Plan Restoration Plan for the subsidiaries of SoBank,
Inc. (now named Southside Bancshares, Inc.)(filed as Exhibit
10(c) to the Registrant's Form 10-K for the year ended December
31, 1992, and incorporated herein).
10.5 Incentive Stock Option Plan effective April 1, 1993 of SoBank,
Inc. (now named Southside Bancshares, Inc.) (filed as Exhibit
10(d) to the Registrant's Form 10-K for the year ended December
31, 1994, and incorporated herein).
10.6 Form of Deferred Compensation Agreements dated June 30, 1994 with
each of Titus Jones and Andy Wall as amended November 13, 1995.
(filed as Exhibit 10(e) to the Registrant's Form 10-K for the
year ended December 31, 1995 and incorporated herein).
10.7 Form of Deferred Compensation Agreements dated June 30, 1994 with
each of Sam Dawson, Lee Gibson and Jeryl Story as amended October
15, 1997 and Form of Deferred Compensation Agreement dated
October 15, 1997 with Lonny Uzzell (filed as Exhibit 10(f) to the
Registrant's Form 10-K for the year ended December 31, 1997, and
incorporated herein).
12 Statements re: calculation of ratios.*
23.1 Consent of PricewaterhouseCoopers LLP.**
23.2 Consent of Jenkens & Gilchrist, a Professional Corporation (set
forth in Exhibit 5.1 to this Registration Statement).**
23.3 Consent of Richards, Layton & Finger (included in Exhibit 5.2 to
this Registration Statement).**
24 Power of Attorney (included on signature page).
25.1 Form T-1: Statement of Eligibility of Wilmington Trust Company to
act as trustee under the Indenture .**
25.2 Form T-1: Statement of Eligibility of Wilmington Trust Company to
act as trustee under the Amended and Restated Trust Agreement.**
</TABLE>
II-4
<PAGE> 152
25.3 Form T-1: Statement of Eligibility of Wilmington Trust Company to
act as trustee under the Guarantee Agreement for Southside
Capital Trust II.**
27 Financial Data Schedule.*
----------
* Filed herewith.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS.
Each of the undersigned registrants hereby undertakes:
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrants pursuant to Item 15 of this registration statement,
or otherwise, the registrants have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrants of expenses incurred or paid by a director, officer or
controlling person of the registrants in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrants will, unless
in the opinion of their counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by them is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(b) (1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrants pursuant to Rule 424 (b) (1) or (4)
or 497 (h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 153
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Southside
Bancshares, Inc. certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Tyler, State of Texas, on October 13, 2000.
SOUTHSIDE BANCSHARES, INC.
By: /s/ LEE R. GIBSON
----------------------------------
Lee R. Gibson
Executive Vice President and CFO
----------------------------------
II-6
<PAGE> 154
POWER OF ATTORNEY
Each individual whose signature appears below hereby designates and
appoints B.G. Hartley and Lee R. Gibson, and each of them, either one of whom
may act without joinder of the other, as his true and lawful attorney-in-fact
and agents (the "Attorneys-in-Fact") with full power of substitution and
resubstitution, for such person and in such person's name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, which amendments may make such
changes in this Registration Statement as either Attorney-in-Fact deems
appropriate, and any registration statement relating to the same offering filed
pursuant to Rule 462(b) under the Securities Act of 1933 and requests to
accelerate the effectiveness of such registration statements, and to file each
such amendment with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto such
Attorneys-in-Fact and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as such person might or could do
in person, hereby ratifying and confirming all that such Attorneys-in-Fact or
either of them, or their substitute or substitutes, may lawfully do or cause to
be done by virtue hereof. Pursuant to the requirements of the Securities Act of
1933, this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ B.G. HARTLEY
---------------------------- Chairman of the Board of Directors October 13, 2000
B.G. Hartley and Chief Executive Officer --------------------
/s/ ROBBIE N. EDMONSON
---------------------------- Vice Chairman and Director October 13, 2000
Robbie N. Edmonson --------------------
/s/ SAM DAWSON
---------------------------- President, Chief Operating Officer, October 13, 2000
Sam Dawson and Director --------------------
---------------------------- Director , 2000
Fred E. Bosworth --------------------
/s/ HERBERT C. BUIE
---------------------------- Director October 13, 2000
Herbert C. Buie --------------------
/s/ ROLLINS CALDWELL
---------------------------- Director October 13, 2000
Rollins Caldwell --------------------
---------------------------- Director , 2000
W.D. (Joe) Norton --------------------
---------------------------- Director , 2000
William Sheehy --------------------
/s/ MICHAEL D. GOLLOB
---------------------------- Director October 13, 2000
Michael D. Gollob --------------------
---------------------------- Director , 2000
Paul W. Powell --------------------
</TABLE>
II-7
<PAGE> 155
Pursuant to the requirements of the Securities Act of 1933, Southside
Capital Trust II certifies that it has reasonable grounds to believe it meets
all of the requirements for filing on Form S-2 and has duly caused this
Registration Statement to be filed on its behalf by the undersigned, thereunto
duly authorized, in the City of Tyler, State of Texas on October 13, 2000.
SOUTHSIDE CAPITAL TRUST II
By: SOUTHSIDE BANCSHARES, INC.
By: /s/ LEE R. GIBSON
----------------------------------
Lee R. Gibson
Executive Vice President and CFO
----------------------------------
II-8
<PAGE> 156
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1 Form of Underwriting Agreement.**
4.1 Form of Indenture with respect to Southside Bancshares, Inc.'s
8.50% Junior Subordinated Debentures (filed as exhibit 4.1 to the
Registrant's Form S-2 filed with the Securities and Exchange
Commission on May 13, 1998, and incorporated herein).
4.2 Form of 8.50% Junior Subordinated Debenture (included as an
exhibit to the Form of Indenture filed as Exhibit 4.1 to the
Registrant's Form S-2 filed with the Securities and Exchange
Commission on May 13, 1998, and incorporated herein).
4.3 Certificate of Trust of Southside Capital Trust I (included as an
exhibit to the Form of Amended and Restated Trust Agreement filed
as Exhibit 4.5 to the Registrant's Form S-2 filed with the
Securities and Exchange Commission on May 13, 1998, and
incorporated herein).
4.4 Form of Trust Agreement of Southside Capital Trust I (included as
an exhibit to the Form of Amended and Restated Trust Agreement
filed as Exhibit 4.5 to the Registrant's Form S-2 filed with the
Securities and Exchange Commission on May 13, 1998, and
incorporated herein).
4.5 Form of Amended and Restated Trust Agreement of Southside Capital
Trust I (filed as exhibit 4.5 to the Registrant's Form S-2 filed
with the Securities and Exchange Commission on May 13, 1998, and
incorporated herein).
4.6 Form of Certificate for 8.50% Trust Preferred Security of
Southside Capital Trust I (included as an exhibit to the Form of
Amended and Restated Trust Agreement filed as Exhibit 4.5 to the
Registrant's Form S-2 filed with the Securities and Exchange
Commission on May 13, 1998, and incorporated herein).
4.7 Form of Guarantee Agreement for Southside Capital Trust I (filed
as exhibit 4.7 to the Registrant's Form S-2 filed with the
Securities and Exchange Commission on May 13, 1998, and
incorporated herein).
4.8 Form of Agreement as to Expenses and Liabilities (included as an
exhibit to Exhibit 4.5 to the Registrant's Form S-2 filed with
the Securities and Exchange Commission on May 13, 1998, and
incorporated herein).
4.9 Form of Indenture with respect to Southside Bancshares, Inc.'s
___% Convertible Subordinated Debentures.*
4.10 Form of ___% Convertible Subordinated Debenture.*
4.11 Certificate of Trust of Southside Capital Trust II.*
4.12 Form of Trust Agreement of Southside Capital Trust II.*
4.13 Form of Amended and Restated Trust Agreement of Southside Capital
Trust II.*
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<PAGE> 157
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<S> <C>
4.14 Form of Certificate for ___% Trust Preferred Security of
Southside Capital Trust II.*
4.15 Form of Guarantee Agreement for Southside Capital Trust II.*
4.16 Form of Agreement as to Expenses and Liabilities.*
5.1 Opinion of Jenkens & Gilchrist, a Professional Corporation, as to
the validity of the Guarantee, the issuance of the ___%
Convertible Subordinated Debentures to be issued by Southside
Capital Trust II and the common stock to be issued upon
conversion of the convertible preferred securities.**
5.2 Opinion of Richards, Layton & Finger, special Delaware counsel,
as to the enforceability of the Trust Agreement and Trust
Preferred Securities to be issued by Southside Capital Trust
II.**
8.1 Tax Opinion of Jenkens & Gilchrist, a Professional Corporation.**
10.1 Deferred Compensation Plan for B.G. Hartley effective February
13, 1984, as amended June 28, 1990, December 15, 1994, November
20, 1995 December 21,1999 (filed as Exhibit 10(a)(i) to the
Registrant's Form 10-K for the year ended December 31, 1999, and
incorporated herein).
10.2 Deferred Compensation Plan for Robbie N. Edmonson effective
February 13, 1984, as amended June 28, 1990 and March 16, 1995
(filed as Exhibit 10(a)(ii) to the Registrant's Form 10-K for the
year ended December 31, 1995, and incorporated herein).
10.3 Officers Long-term Disability Income Plan effective June 25, 1990
(filed as Exhibit 10(b) to the Registrant's Form 10-K for the
year ended December 31, 1990, and incorporated herein).
10.4 Retirement Plan Restoration Plan for the subsidiaries of SoBank,
Inc. (now named Southside Bancshares, Inc.)(filed as Exhibit
10(c) to the Registrant's Form 10-K for the year ended December
31, 1992, and incorporated herein).
10.5 Incentive Stock Option Plan effective April 1, 1993 of SoBank,
Inc. (now named Southside Bancshares, Inc.) (filed as Exhibit
10(d) to the Registrant's Form 10-K for the year ended December
31, 1994, and incorporated herein).
10.6 Form of Deferred Compensation Agreements dated June 30, 1994 with
each of Titus Jones and Andy Wall as amended November 13, 1995.
(filed as Exhibit 10(e) to the Registrant's Form 10-K for the
year ended December 31, 1995 and incorporated herein).
10.7 Form of Deferred Compensation Agreements dated June 30, 1994 with
each of Sam Dawson, Lee Gibson and Jeryl Story as amended October
15, 1997 and Form of Deferred Compensation Agreement dated
October 15, 1997 with Lonny Uzzell (filed as Exhibit 10(f) to the
Registrant's Form 10-K for the year ended December 31, 1997, and
incorporated herein).
12 Statements re: calculation of ratios.*
23.1 Consent of PricewaterhouseCoopers LLP.**
23.2 Consent of Jenkens & Gilchrist, a Professional Corporation (set
forth in Exhibit 5.1 to this Registration Statement).**
23.3 Consent of Richards, Layton & Finger (included in Exhibit 5.2 to
this Registration Statement).**
24 Power of Attorney (included on signature page).
25.1 Form T-1: Statement of Eligibility of Wilmington Trust Company to
act as trustee under the Indenture .**
25.2 Form T-1: Statement of Eligibility of Wilmington Trust Company to
act as trustee under the Amended and Restated Trust Agreement.**
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<PAGE> 158
25.3 Form T-1: Statement of Eligibility of Wilmington Trust Company to
act as trustee under the Guarantee Agreement for Southside
Capital Trust II.**
27 Financial Data Schedule.*
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* Filed herewith.
** To be filed by amendment.
