<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
---------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM to
--------- ----------
Commission file number 0-12247
-------------------------
SOUTHSIDE BANCSHARES, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 75-1848732
------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1201 S. Beckham, Tyler, Texas 75701
-------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) 903-531-7111
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
--- ---
The number of shares outstanding of each of the issuer's classes of
capital stock, as of the latest practicable date, was 7,232,838 shares of Common
Stock, par value $1.25, outstanding at April 27, 2000.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 2000 1999
----------- -----------
<S> <C> <C>
Cash and due from banks ............................................................ $ 38,485 $ 41,131
Federal funds sold ................................................................. 9,325
----------- -----------
Cash and cash equivalents ....................................................... 47,810 41,131
Investment securities:
Available for sale .............................................................. 55,747 96,244
Held to maturity ................................................................ 111,514 86,208
----------- -----------
Total Investment securities ................................................... 167,261 182,452
Mortgage-backed and related securities:
Available for sale .............................................................. 193,429 273,676
Held to maturity ................................................................ 146,416 73,898
----------- -----------
Total Mortgage-backed securities .............................................. 339,845 347,574
Marketable equity securities:
Available for sale .............................................................. 18,758 18,543
Loans:
Loans, net of unearned discount ................................................. 403,897 387,446
Less: Reserve for loan losses .................................................. (4,842) (4,575)
----------- -----------
Net Loans ..................................................................... 399,055 382,871
Premises and equipment, net ........................................................ 21,077 21,306
Interest receivable ................................................................ 6,716 7,563
Deferred tax asset ................................................................. 6,511 6,244
Other assets ....................................................................... 5,456 4,881
----------- -----------
TOTAL ASSETS .................................................................. $ 1,012,489 $ 1,012,565
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing ............................................................. $ 155,095 $ 150,629
Interest bearing ................................................................ 440,063 436,915
----------- -----------
Total Deposits ................................................................ 595,158 587,544
Short-term obligations:
Federal funds purchased ......................................................... 250 75
FHLB Dallas advances ............................................................ 160,084 181,222
Other obligations ............................................................... 3,020 4,744
----------- -----------
Total Short-term obligations ................................................. 163,354 186,041
Long-term obligations:
FHLB Dallas advances ............................................................ 174,459 174,704
Guaranteed Preferred Beneficial Interest in the Company's
Junior Subordinated Debentures .................................................. 20,000 20,000
----------- -----------
Total Long-term obligations .................................................. 194,459 194,704
Other liabilities .................................................................. 20,560 6,604
----------- -----------
TOTAL LIABILITIES ............................................................. 973,531 974,893
----------- -----------
Shareholders' equity:
Common stock: ($1.25 par, 20,000,000 shares authorized,
7,807,592 and 7,798,332 shares issued and outstanding) ...................... 9,759 9,748
Paid-in capital ................................................................. 27,542 27,472
Retained earnings ............................................................... 16,660 14,583
Treasury stock (576,102 and 512,502 shares at cost) ............................. (5,102) (4,544)
Accumulated other comprehensive loss ............................................ (9,901) (9,587)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ................................................... 38,958 37,672
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................... $ 1,012,489 $ 1,012,565
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE> 3
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
2000 1999
--------- --------
<S> <C> <C>
Interest income
Loans ...................................................... $ 8,147 $ 6,659
Investment securities ...................................... 2,723 1,869
Mortgage-backed and related securities ..................... 6,276 4,866
Other interest earning assets .............................. 387 210
-------- --------
Total interest income .................................. 17,533 13,604
Interest expense
Time and savings deposits .................................. 4,811 3,963
Short-term obligations ..................................... 2,543 1,586
Long-term obligations ...................................... 2,776 2,706
-------- --------
Total interest expense ................................. 10,130 8,255
-------- --------
Net interest income ........................................... 7,403 5,349
Provision for loan losses ..................................... 405 325
-------- --------
Net interest income after provision for loan losses ........... 6,998 5,024
-------- --------
Noninterest income
Deposit services ........................................... 1,963 1,449
(Loss) gain on sales of securities available for sale ...... (273) 230
Other ...................................................... 502 545
-------- --------
Total noninterest income ............................... 2,192 2,224
-------- --------
Noninterest expense
Salaries and employee benefits ............................. 3,658 3,195
Net occupancy expense ...................................... 773 676
Equipment expense .......................................... 154 110
Advertising, travel & entertainment ........................ 340 274
Supplies ................................................... 148 126
Postage .................................................... 95 93
Other ...................................................... 854 846
-------- --------
Total noninterest expense .............................. 6,022 5,320
-------- --------
Income before federal tax expense ............................. 3,168 1,928
Provision for federal tax expense ............................. 726 323
-------- --------
Net Income .................................................... $ 2,442 $ 1,605
======== ========
Earnings Per Common Share - Basic ............................. $ .34 $ .22
======== ========
Earnings Per Common Share - Diluted ........................... $ .33 $ .21
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 4
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Compre-
hensive
Income Common Paid in Retained Treasury
(Loss) Stock Capital Earnings Stock
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999 ...................... $ $ 9,748 $ 27,472 $ 14,583 $ (4,544)
Net Income ........................................ 2,442 2,442
Other comprehensive income, net of tax
Unrealized losses on securities, net of
reclassification adjustment (see
disclosure) .................................... (314)
--------
Comprehensive income .............................. $ 2,128
========
Common stock issued (9,260 shares) ................ 11 71
Dividends paid .................................... (365)
Purchase of 63,600 shares of
Treasury stock .................................. (558)
FAS 109 - Incentive Stock Options ................. (1)
-------- -------- -------- --------
Balance at March 31, 2000 ......................... $ 9,759 $ 27,542 $ 16,660 $ (5,102)
======== ======== ======== ========
Disclosure of reclassification amount:
Unrealized holding losses arising during
period ......................................... $ (494)
Less: reclassification adjustment for
losses included in net income .................. (180)
--------
Net unrealized losses on securities ............... $ (314)
========
Balance at December 31, 1998 ...................... $ $ 9,214 $24,198 $ 11,391 $ (3,158)
Net Income ........................................ 1,605 1,605
Other comprehensive loss, net of tax
Unrealized losses on securities, net of
reclassification adjustment (see
disclosure) .................................... (2,960)
--------
Comprehensive loss ................................ $ (1,355)
========
Common stock issued (7,662 shares) ................ 10 17
Dividends declared on common stock ................ (348)
Purchase of 69,222 shares of
Treasury stock .................................. (637)
FAS 109 - Incentive Stock Options ................. 14
-------- -------- -------- --------
Balance at March 31, 1999 ......................... $ 9,224 $ 24,229 $ 12,648 $ (3,795)
======== ======== ======== ========
Disclosure of reclassification amount:
Unrealized holding losses arising during
period ......................................... $ (2,808)
Less: reclassification adjustment for
gains included in net income ................... 152
--------
Net unrealized losses on securities ............... $ (2,960)
========
<CAPTION>
Accumulated
Other
Compre- Total
hensive Share-
Income holders'
(Loss) Equity
------------- ----------
<S> <C> <C>
Balance at December 31, 1999 ...................... $ (9,587) $37,672
Net Income ........................................ 2,442
Other comprehensive income, net of tax
Unrealized losses on securities, net of
reclassification adjustment (see
disclosure) .................................... (314) (314)
Comprehensive income ..............................
Common stock issued (9,260 shares) ................ 82
Dividends paid .................................... (365)
Purchase of 63,600 shares of
Treasury stock .................................. (558)
FAS 109 - Incentive Stock Options ................. (1)
-------- -------
Balance at March 31, 2000 ......................... $ (9,901) $38,958
======== =======
Disclosure of reclassification amount:
Unrealized holding gains arising during
period .........................................
Less: reclassification adjustment for
losses included in net income ..................
Net unrealized gains on securities ................
Balance at December 31, 1998 ...................... $ 4,768 $46,413
Net Income ........................................ 1,605
Other comprehensive loss, net of tax
Unrealized losses on securities, net of
reclassification adjustment (see
disclosure) .................................... (2,960) (2,960)
Comprehensive loss ................................
Common stock issued (7,662 shares) ................ 27
Dividends declared on common stock ................ (348)
Purchase of 69,222 shares of
Treasury stock .................................. (637)
FAS 109 - Incentive Stock Options ................. 14
-------- -------
Balance at March 31, 1999 ......................... $ 1,808 $44,114
======== =======
Disclosure of reclassification amount:
Unrealized holding losses arising during
period ........................................
Less: reclassification adjustment for
gains included in net income ..................
Net unrealized losses on securities ..............
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 5
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income .................................................................. $ 2,442 $ 1,605
Adjustments to reconcile net cash provided by operations:
Depreciation ............................................................... 434 357
Amortization of premium .................................................... 382 1,565
Accretion of discount and loan fee ......................................... (522) (306)
Provision for loan losses .................................................. 405 325
FAS 109 - incentive stock options .......................................... (1) 14
Decrease in interest receivable ............................................ 847 530
Increase in other receivables and prepaids ................................. (629) (529)
Increase in deferred tax asset ............................................. (105) (77)
(Decrease) increase in interest payable .................................... (181) 119
Gain on sale of assets ..................................................... (14)
Gain on sale of other real estate owned .................................... (1)
Loss (gain) on sales of securities available for sale ...................... 273 (230)
Increase in other payables ................................................. 12,413 7,694
-------- --------
Net cash provided by operating activities ................................ 15,758 11,052
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale ............. 24,890 26,645
Proceeds from sales of mortgage-backed securities available for sale ........ 55,421 8,702
Proceeds from maturities of investment securities available for sale ........ 295 1,190
Proceeds from maturities of mortgage-backed securities available for sale ... 10,285 27,770
Proceeds from maturities of investment securities held to maturity .......... 95 347
Proceeds from maturities of mortgage-backed securities held to maturity ..... 1,234 868
Purchases of investment securities available for sale ....................... (6,366) (45,381)
Purchases of mortgage-backed securities available for sale .................. (56,604) (80,193)
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 ................ (215) (2,565)
Net increase in loans ....................................................... (16,766) (2,757)
Purchases of premises and equipment ......................................... (205) (403)
Proceeds from sales of premises and equipment ............................... 14
Proceeds from sales of other real estate owned .............................. 64
Proceeds from sales of repossessed assets ................................... 231 336
-------- --------
Net cash provided by (used) in investing activities ...................... 5,356 (65,363)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 6
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (continued)
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
2000 1999
---------- ---------
<S> <C> <C>
FINANCING ACTIVITIES:
Net increase (decrease) in demand and savings accounts ...................... $ 2,199 $ (1,150)
Net increase (decrease) in certificates of deposit .......................... 5,415 (6,950)
Net increase (decrease) in federal funds purchased .......................... 175 (1,923)
Net (decrease) increase in FHLB Dallas advances ............................. (21,383) 54,689
Proceeds from the issuance of common stock .................................. 82 27
Purchase of treasury stock .................................................. (558) (637)
Dividends paid .............................................................. (365)
-------- --------
Net cash (used) in provided by financing activities .................... (14,435) 44,056
Net increase (decrease) in cash and cash equivalents ......................... 6,679 (10,255)
Cash and cash equivalents at beginning of period ............................. 41,131 41,372
-------- --------
Cash and cash equivalents at end of period ................................... $ 47,810 $ 31,117
======== ========
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION:
Interest paid ............................................................... $ 10,311 $ 8,137
Income taxes paid ........................................................... $ 600
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of OREO and other repossessed assets through foreclosure ........ $ 177 $ 174
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 7
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated balance sheet as of March 31, 2000, and the related
consolidated statements of income, shareholders' equity and cash flow for the
three month period ended March 31, 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>
Three Months Ended March 31,
----------------------------
2000 1999
--------- --------
<S> <C> <C>
Basic net earnings per share
Net income .......................................... $2,442 $1,605
Weighted average shares outstanding ................. 7,280 7,335
------ ------
$ .34 $ .22
====== ======
Diluted net earnings per share
Net income .......................................... $2,442 $1,605
Weighted average shares outstanding plus
assumed conversions .............................. 7,477 7,554
------ ------
$ .33 $ .21
====== ======
Calculation of weighted average shares outstanding
plus assumed conversions
Weighted average shares outstanding ................. 7,280 7,335
Effect of dilutive securities options ............... 197 219
------ ------
7,477 7,554
====== ======
</TABLE>
3. Comprehensive Income
The components of accumulated comprehensive income (loss) as required by
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" (FAS 130) are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000
---------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
---------- ------------ ----------
<S> <C> <C> <C>
Unrealized losses on securities:
Unrealized holding losses arising during period $(749) $ 255 $(494)
Less: reclassification adjustment for losses
realized in net income ................... (273) 93 (180)
----- ----- -----
Net unrealized loss ......................... (476) 162 (314)
----- ----- -----
Other comprehensive loss ........................ $(476) $ 162 $(314)
===== ===== =====
</TABLE>
6
<PAGE> 8
<TABLE>
<CAPTION>
Three Months Ended March 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 $(4,255) $ 1,447 $(2,808)
Less: reclassification adjustment for gains
realized in net income .................... 230 (78) 152
------- ------- -------
Net unrealized losses ........................ (4,485) 1,525 (2,960)
------- ------- -------
Other comprehensive loss ......................... $(4,485) $ 1,525 $(2,960)
======= ======= =======
</TABLE>
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Three months ended March 31, 2000 compared to
March 31, 1999.
The following is a discussion of the consolidated financial condition, changes
in financial condition, and results of operations of Southside Bancshares, Inc.
(the "Company"), and should be read and reviewed in conjunction with the
financial statements, and the notes thereto, in this presentation and in the
Company's latest report on Form 10-K.
The Company reported an increase in net income for the quarter ended March 31,
2000 compared to the same period in 1999. Net income for the three months ended
March 31, 2000 was $2.4 million compared to $1.6 million for the same period in
1999.
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.
Net Interest Income
Net interest income for the three months ended March 31, 2000 was $7.4 million,
an increase of $2.1 million or 38.4% for the quarter when compared to the same
period in 1999. Average interest earning assets increased $128.2 million or
15.6%, while the net interest spread increased from 2.2% at March 31, 1999 to
2.7% at March 31, 2000. As interest rates increased during 1999 and 2000, the
Company's 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.
During the three months ended March 31, 2000, Average Loans, funded by the
growth in average deposits and average FHLB Dallas advances, increased $74.1
million or 22.9%, compared to the same period in 1999. The average yield on
loans decreased slightly from 8.4% at March 31, 1999 to 8.3% at March 31, 2000,
reflective of the change in the overall mix of loans for the two quarters.
Average Securities increased $46.3 million or 9.6% for the three months ended
March 31, 2000 when compared to the same period in 1999. The overall yield on
Average Securities increased to 7.2% during the three months ended March 31,
2000 from 6.1% during the same period in 1999, primarily due to decreased
prepayment speeds on mortgage-backed securities which lead to decreased
amortization expense, combined with higher overall interest rates.
Interest income from federal funds and other interest earning assets increased
$.2 million or 84.3% for the three months ended March 31, 2000 when compared to
1999 as a result of the average balance increase of 47.3%. The average yield
increased from 5.2% in 1999 to 6.5% at March 31, 2000 due to higher rates.
Total interest expense increased $1.9 million or 22.7% to $10.1 million during
the three months ended March 31, 2000 as compared to $8.3 million during the
same period in 1999. The increase was attributable to an increase in Average
Interest Bearing Liabilities of $109.3 million or 15.3% and an increase in the
average yield on interest bearing liabilities from 4.7% at March 31, 1999 to
5.0% at March 31, 2000. Average Interest Bearing Deposits increased $56.4
million or 14.4% while the average rate paid increased from 4.1% at March 31,
1999 to 4.3% at March 31, 2000. Average Short-term Interest Bearing Liabilities,
consisting primarily of FHLB Dallas advances and Federal Funds Purchased,
increased $48.0 million or 36.2% as 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 ("ALCO") objectives.
Average Long-term Interest Bearing Liabilities consisting of FHLB Dallas
advances increased $4.9 million or 2.9% compared to $169.6 million at March 31,
1999. The advances were obtained from FHLB Dallas as part of the Company's
balance sheet leverage strategy and partially to fund long-term loans. FHLB
Dallas advances are collateralized by FHLB Dallas stock, securities and
nonspecified real estate loans. The Company plans to gradually replace
short-term FHLB Dallas advances with deposit growth and long-term FHLB advances.
Loan growth should gradually replace a portion of the securities portfolio.
Average Long Term Junior Subordinated Debentures remained the same at $20
million from March 31, 1999 to March 31, 2000 as a result of the issuance of the
Preferred Securities.
8
<PAGE> 10
The analysis below shows average interest earning assets and interest bearing
liabilities together with the average yield on the interest earning assets and
the average cost of the interest bearing liabilities.
<TABLE>
<CAPTION>
SUMMARY OF INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES
-------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
VOLUME INTEREST YIELD VOLUME INTEREST YIELD
--------------------------------------------------------------------
(Dollars in thousands)
Three Months Ended March 31, 2000 Three Months Ended March 31, 1999
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING
ASSETS:
Loans (3) $397,288 $ 8,237 8.3% $323,186 $ 6,667 8.4%
Investment Securities (1)(2) 176,045 3,285 7.5% 142,052 2,364 6.7%
Mortgage-backed Securities (2) 354,823 6,276 7.1% 342,509 4,866 5.8%
Other Interest Earning
Assets 24,108 387 6.5% 16,362 210 5.2%
-------- ------- -------- ------
TOTAL INTEREST EARNING
ASSETS $952,264 $18,185 7.7% $824,109 $14,107 6.9%
======== ======= ======== ======
INTEREST BEARING LIABILITIES:
Deposits $447,358 $ 4,811 4.3% $390,922 $ 3,963 4.1%
Fed Funds Purchased and
Other Interest Bearing
Liabilities 4,389 62 5.7% 11,500 138 4.9%
Short Term Interest Bearing
Liabilities - FHLB Dallas 175,967 2,481 5.7% 120,878 1,448 4.9%
Long Term Interest Bearing
Liabilities - FHLB Dallas 174,542 2,351 5.4% 169,645 2,281 5.5%
Long Term Junior
Subordinated Debentures 20,000 425 8.5% 20,000 425 8.5%
-------- ------- -------- ------
TOTAL INTEREST BEARING
LIABILITIES $822,256 $10,130 5.0% $712,945 $ 8,255 4.7%
======== ======= ======== =======
NET INTEREST SPREAD 2.7% 2.2%
==== ===
</TABLE>
(1) Interest income includes taxable-equivalent adjustments of $562 and
$495 as of March 31, 2000 and 1999, respectively.
(2) For the purpose of calculating the average yield, the average balance
of securities is presented at historical cost.
(3) Interest income includes taxable-equivalent adjustments of $90 and $8
as of March 31, 2000 and 1999, respectively.
Noninterest Income
Noninterest income was unchanged at $2.2 million for the three months ended
March 31, 2000 compared to $2.2 million for the same period in 1999. Deposit
services income increased $.5 million or 35.5% for the three months ended March
31, 2000. Deposit services income increased as a direct result of the overdraft
privilege program, increased numbers of deposit accounts and increased deposit
activity from March 31, 1999 to March 31, 2000. Other noninterest income
decreased $43,000 or 7.9% for the three months ended March 31, 2000 primarily as
a result of decreases in mortgage servicing release fees income. During the
first quarter ended March 31, 2000, the Company had losses on the sale of
securities of $.3 million compared to gains on the sales of securities of $.2
million for the same period in 1999. During the first quarter ended March 31,
2000, Southside sold available for sale securities to reduce duration. Sales of
securities available for sale were the result of changes in economic conditions
and a change in the mix of the securities portfolio.
The market value of the entire securities portfolio at March 31, 2000 was $522.7
million with a net unrealized loss on that date of $18.1 million. The net
unrealized loss is comprised of $19.7 million in unrealized losses and $1.6
million in unrealized gains.
9
<PAGE> 11
Noninterest Expense
Noninterest expense was $6.0 million for the three months ended March 31, 2000,
compared to $5.3 million for the same period of 1999, representing an increase
of $.7 million or 13.2%.
Salaries and employee benefits increased $.5 million or 14.5% during the three
months ended March 31, 2000 when compared to the same period in 1999. Direct
salary expense and payroll taxes increased $.4 million or 13.0% as a result of
personnel additions for the three months ended March 31, 2000 when compared to
the same period in 1999. Retirement expense increased $10,000 or 6.3% for the
three months ended March 31, 2000 when compared to the same period in 1999.
Health insurance expense increased $.1 million or 34.8% for the three months
ended March 31, 2000 when compared to the same period in 1999.
Net occupancy expense increased $.1 million or 14.3% for the three months ended
March 31, 2000 compared to the same period in 1999, largely due to higher real
estate taxes and depreciation expense.
Equipment expense increased $44,000 or 40.0% for the three months ended March
31, 2000 compared to the same period in 1999 due to additional locations.
Advertising, travel and entertainment expense increased $66,000 or 24.1% for the
quarter ended March 31, 2000 compared to the same period in 1999.
Provision for Income Taxes
The provision for the income tax expense for the three months ended March 31,
2000 was 22.9% compared to 16.8% of net income before taxes for the three months
ended March 31, 1999. The increase is due to higher pretax income.
Capital Resources
Total shareholders' equity for the Company at March 31, 2000, of $39.0 million
was up $1.3 million from December 31, 1999, and represented 3.8% of total assets
at March 31, 2000 compared to 3.7% of total assets at December 31, 1999.
Increases to shareholders' equity during the three months ended March 31, 2000
were net income of $2.4 million and common stock (9,260 shares) issued through
the Company's dividend reinvestment plan of $82,000. Decreases to shareholders'
equity consisted of an increase of $.3 million in net unrealized losses on
securities available for sale, $.4 million in dividends paid to shareholders and
the purchase of 63,600 shares of treasury stock for $.6 million.
Under the Federal Reserve Board's risk-based capital guidelines for bank holding
companies, the minimum ratio of total capital to risk-adjusted assets (including
certain off-balance sheet items, such as standby letters of credit) is currently
eight percent. The minimum Tier 1 capital to risk-adjusted assets is four
percent. The Federal Reserve Board also requires bank holding companies to
comply with the minimum leverage ratio guidelines. The leverage ratio is a ratio
of bank holding company's Tier 1 capital to its total consolidated quarterly
average assets, less goodwill and certain other intangible assets. The
guidelines require a minimum average of three percent for bank holding companies
that meet certain specified criteria. Failure to meet minimum capital
regulations can initiate certain mandatory and possibly additional discretionary
actions by regulation, that if undertaken, could have a direct material effect
on Southside Bank's (the "Bank") financial statements. At March 31, 2000, the
Company and Southside Bank exceeded all regulatory minimum capital requirements.
The Federal Reserve Deposit Insurance Act requires bank regulatory agencies to
take "prompt corrective action" with respect to FDIC-insured depository
institutions that do not meet minimum capital requirements. A depository
institution's treatment for purposes of the prompt corrective action provisions
will depend on how its capital levels compare to various capital measures and
certain other factors, as established by regulation.
It is management's intention to maintain the Company's capital at a level
acceptable to all regulatory authorities and future dividend payments will be
determined accordingly. Regulatory authorities require that any dividend
payments made by either the Company or Southside Bank not exceed earnings for
that year.
Liquidity and Interest Rate Sensitivity
Liquidity management involves the ability to convert assets to cash with a
minimum of loss. The Company must be capable of meeting its obligations to its
customers at any time. This means addressing (1) the immediate cash withdrawal
requirements of depositors and other funds providers; (2) the funding
requirements of all lines and letters
10
<PAGE> 12
of credit; and (3) 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 a substantial percentage of total assets. At March 31, 2000,
these investments were 16.5% of Total Assets. Liquidity is further provided
through the matching, by time period, of rate sensitive interest earning assets
with rate sensitive interest bearing liabilities. 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. Interest rate sensitivity
management seeks to avoid fluctuating net interest margins and to enhance
consistent growth of new interest income through periods of changing interest
rates. Through this process, market value volatility is also a key
consideration.
The Asset Liability Management Committee of Southside Bank closely monitors
various liquidity ratios, interest rate spreads and margins, interest rate shock
reports and market value of portfolio equity (MVPE) with rates shocked plus and
minus 200 basis points to ensure a satisfactory liquidity position for the
Company. 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.
Composition of Loans
The Company's main objective is to seek attractive lending opportunities in East
Texas and adjoining counties. Total Average Loans increased $74.1 million or
22.9% from the three months ended March 31, 1999 to March 31, 2000. The majority
of the increase is in Real Estate Loans and Commercial Loans. The increase in
Real Estate Loans is due to a stronger real estate market, interest rates and an
increased commitment in residential mortgage lending. Commercial Loans increased
as a result of commercial growth in the Company's market area.
Loan Loss Experience and Reserve for Loan Losses
The loan loss reserve is based on the most current review of the loan portfolio
at that time. An internal loan review officer of the Company is responsible for
an ongoing review of Southside Bank's entire loan portfolio with specific goals
set for the volume of loans to be reviewed on an annual basis.
A list of loans which are graded as having more than the normal degree of risk
associated with them are maintained by the internal loan review officer. This
list is updated on a periodic basis but no less than quarterly by the servicing
officer in order to properly allocate necessary reserves and keep management
informed on the status of attempts to correct the deficiencies noted in the
credit.
While management is aware of certain risk factors within segments of the loan
portfolio, reserve allocations have been made on an individual loan basis. An
additional reserve is maintained on the remainder of the portfolio of at risk
loans that is based on tracking of the Company's loan losses on loans that have
not been previously identified as problems.
For the three months ended March 31, 2000, loan charge-offs were $221,000 and
recoveries were $83,000, resulting in net charge-offs of $138,000. For the three
months ended March 31, 1999, net charge-offs were $60,000.
The increase in net charge-offs for the three months ended March 31, 2000
occurred primarily as a result of the increase in the average loan portfolio.
As a result of these and other factors, the necessary provision expense was
estimated at $.4 million for the three months ended March 31, 2000.
Nonperforming Assets
The categories of nonperforming assets consist of delinquent loans over 90 days
past due, nonaccrual and restructured loans, other real estate owned and
repossessed assets. Delinquent loans over 90 days past due represent loans for
which the payment of principal or interest has not been received in a timely
manner. The full collection of both the principal and interest is still expected
but is being withheld due to negotiation or other items expected to be resolved
in the near future. Generally, a loan is categorized as nonaccrual when
principal or interest
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<PAGE> 13
is past due 90 days or more, unless, in the determination of management, the
principal and interest on the loan are well secured and in the process of
collection. In addition, a loan is placed on nonaccrual when, in the opinion of
management, the future collectibility of interest and principal is in serious
doubt. When a loan is categorized as nonaccrual, the accrual of interest is
discontinued, and any remaining accrued interest is reversed in that period;
thereafter, interest income is recorded only when actually received.
Restructured loans represent loans which have been renegotiated to provide a
reduction or deferral of interest or principal because of deterioration in the
financial position of the borrowers. Categorization of a loan as nonperforming
is not in itself a reliable indicator of potential loan loss. Other factors,
such as the value of collateral securing the loan and the financial condition of
the borrower must be considered in judgments as to potential loan loss.
Other Real Estate Owned (OREO) represents real estate taken in full or partial
satisfaction of debts previously contracted. The OREO consists primarily of raw
land and oil and gas interests. The Company is actively marketing all properties
and none are being held for investment purposes.
Total nonperforming assets at March 31, 2000 were $1,895,000, up $56,000 or 3.0%
from $1,839,000 at December 31, 1999. Loans 90 days past due or more increased
$185,000 or 54.6% to $524,000. The majority of the 90 day past due loans are
collateralized by residential dwellings that are primarily owner occupied.
Historically, the amount of losses suffered on this type of loan have been
significantly less than those on other properties. Repossessed assets decreased
$54,000 or 25.8% to $155,000. Restructured loans decreased $2,000 or .4% to
$446,000. From December 31, 1999 to March 31, 2000, nonaccrual loans decreased
$73,000 or 10.4% to $630,000.
Expansion
During the first quarter of 2000, the Company made application to open a second
full service branch in Lindale. The Company plans to open this branch during
2000. The Company is completing construction of the new Longview branch on
Judson Road and expects to open this location during the latter half of the
second quarter.
Year 2000 Compliance (Y2K)
The Y2K 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. The Company, similar to most financial services providers, was
significantly subject to the potential impact of the Y2K issue due to the nature
of financial information. The Company has passed the primary critical dates and
is not aware of any significant Y2K problems affecting the Company or the
marketplace.
Y2K compliance costs incurred were approximately $395,000, the majority of
which was related to hardware and software acquisitions. This figure does not
include the implicit costs associated with the reallocation of internal staff
hours to Y2K project related efforts. Management currently estimates no
additional significant Y2K compliance costs, which are expensed on a current
period basis except for fixed asset purchases.
Forward-Looking Information
Certain statements of other than historical fact that are contained in this
document and in written material, press releases and oral statements issued by
or on behalf of the Company may be considered to be "forward-looking statements"
as that term is defined in the Private Securities Litigation Reform Act of 1995.
These statements may include words such as "expect," "estimate," "project,"
"anticipate," "should," "intend," "probability," "risk," "target," "objective"
and similar expressions. Forward-looking statements are subject to significant
risks and uncertainties and the Company's actual results may differ materially
from the results discussed in the forward-looking statements. For example,
certain market risk disclosures are dependent on choices about key model
characteristics and assumptions and are subject to various limitations. See
"Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations." By their nature, certain of the market risk disclosures
are only estimates and could be materially different from what actually occurs
in the future. As a result, actual income gains and losses could materially
differ from those that have been estimated. Other factors that could cause
actual results to differ materially from forward-looking statements include, but
are not limited to general economic conditions, either nationally or in the
State of Texas, legislation or regulatory changes which adversely affect the
businesses in which the Company is engaged, changes in the interest rate
environment which reduce interest
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<PAGE> 14
margins, significant increases in competition in the banking and financial
services industry, changes in consumer spending, borrowing and saving habits,
technological changes, the Company's ability to increase market share and
control expenses, the effect of compliance with legislation or regulatory
changes, the effect of changes in accounting policies and practices and the
costs and effects of unanticipated litigation.
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<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No.
27 - Financial Data Schedule for the three months ended
March 31, 2000.
(b) Reports on Form 8-K - None
14
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHSIDE BANCSHARES, INC.
(Registrant)
BY: /s/ B. G. HARTLEY
------------------------------------
B. G. Hartley, Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
DATE: 05-10-00
-----------------------
/s/ LEE R. GIBSON
------------------------------------
Lee R. Gibson, Executive Vice
President (Principal Financial
and Accounting Officer)
DATE: 05-10-00
-----------------------
15
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No Description
- ---------- -----------
<S> <C>
27 Financial Data Schedule for the three months ended March 31, 2000.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 38,485
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 9,325
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 267,934
<INVESTMENTS-CARRYING> 257,930
<INVESTMENTS-MARKET> 254,854
<LOANS> 403,897
<ALLOWANCE> 4,842
<TOTAL-ASSETS> 1,012,489
<DEPOSITS> 595,158
<SHORT-TERM> 163,354
<LIABILITIES-OTHER> 20,560
<LONG-TERM> 194,459
0
0
<COMMON> 9,759
<OTHER-SE> 29,199
<TOTAL-LIABILITIES-AND-EQUITY> 1,012,489
<INTEREST-LOAN> 8,147
<INTEREST-INVEST> 8,999
<INTEREST-OTHER> 387
<INTEREST-TOTAL> 17,533
<INTEREST-DEPOSIT> 4,811
<INTEREST-EXPENSE> 10,130
<INTEREST-INCOME-NET> 7,403
<LOAN-LOSSES> 405
<SECURITIES-GAINS> (273)
<EXPENSE-OTHER> 6,022
<INCOME-PRETAX> 3,168
<INCOME-PRE-EXTRAORDINARY> 3,168
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,442
<EPS-BASIC> .34
<EPS-DILUTED> .33
<YIELD-ACTUAL> 3.40
<LOANS-NON> 630
<LOANS-PAST> 524
<LOANS-TROUBLED> 446
<LOANS-PROBLEM> 157
<ALLOWANCE-OPEN> 4,575
<CHARGE-OFFS> 221
<RECOVERIES> 83
<ALLOWANCE-CLOSE> 4,842
<ALLOWANCE-DOMESTIC> 4,842
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 26
</TABLE>
