<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 June 30, 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 7,240,482 shares of Common Stock,
par value $1.25, outstanding at July 21, 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>
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.
1
<PAGE> 3
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.
2
<PAGE> 4
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.
3
<PAGE> 5
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.
4
<PAGE> 6
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.
5
<PAGE> 7
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>
6
<PAGE> 8
<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>
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Six months ended June 30, 2000 compared to June 30, 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 and six months
ended June 30, 2000 compared to the same periods in 1999. Net income for the
quarter and six months ended June 30, 2000 was $2.5 million and $4.9 million as
compared to $1.8 million and $3.4 million for the same periods 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 quarter and six months ended June 30, 2000 was $7.6
million and $15.0 million, an increase of $1.7 million or 28.6% for the quarter
and $3.7 million or 33.3% for the six months 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 2.2% at June 30, 1999 to 2.7% at June 30,
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. 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 FHLB Dallas advances, increased $80.6
million or 24.7%, compared to the same period in 1999. The average yield on
loans increased from 8.3% at June 30, 1999 to 8.4% at June 30, 2000, reflective
of an overall increase in rates.
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 the leverage strategy implemented in 1998. The overall yield on
Average Securities increased to 7.3% during the six months ended June 30, 2000
from 6.1% 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
$.5 million 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 5.3% in 1999 to 9.0% at June 30, 2000 due to higher rates and a
special FHLB Dallas dividend of $300,000 on the FHLB Dallas stock the Company
owns.
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 4.7% at June 30, 1999 to 5.1% at June
30, 2000. Average Interest Bearing Deposits increased $68.2 million or 17.4%
while the average rate paid increased from 4.1% at June 30, 1999 to 4.5% at June
30, 2000.
During the second quarter ended June 30, 2000, the Company issued $54.4 million
of long-term brokered CD's with one-year continuous discrete call options. The
average yield on these CD's was 8.19% with an average life of 10.8 years.
Obtaining this long-term funding enabled the Bank to take advantage of the
higher interest rate environment, primarily through the purchase of securities
without incurring additional interest rate risk. The options associated with
these CD's should provide the Bank with valuable balance sheet opportunities in
the future. The higher cost associated with these callable CD's may have a
negative impact on the Company's 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 the Company's net interest margin. The Bank hopes to attract
new deposits due to the competitive rate of this account.
8
<PAGE> 10
Average Short-term Interest Bearing Liabilities, consisting primarily of FHLB
Dallas advances and Federal Funds Purchased, increased $25.4 million or 17.7% 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 $6.9 million or 4.0%
compared to $172.2 million at June 30, 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 June 30, 1999 to June 30, 2000.
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)
Six Months Ended June 30, 2000 Six Months Ended June 30, 1999
------------------------------------ ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING
ASSETS:
Loans(3) $407,097 $ 16,999 8.4% $326,510 $ 13,498 8.3%
Investment Securities(1)(2) 174,290 6,525 7.5% 156,050 5,173 6.7%
Mortgage-backed Securities(2) 359,650 12,818 7.2% 349,583 10,061 5.8%
Other Interest Earning
Assets 23,478 1,050 9.0% 21,917 573 5.3%
-------- -------- -------- -------- -------- --------
TOTAL INTEREST EARNING
ASSETS $964,515 $ 37,392 7.8% $854,060 $ 29,305 6.9%
======== ======== ======== ======== ======== ========
INTEREST BEARING LIABILITIES:
Deposits $460,744 $ 10,412 4.5% $392,582 $ 7,992 4.1%
Fed Funds Purchased and
Other Interest Bearing
Liabilities 4,921 141 5.8% 8,322 196 4.7%
Short Term Interest Bearing
Liabilities - FHLB Dallas 164,294 4,846 5.9% 135,444 3,377 5.0%
Long Term Interest Bearing
Liabilities - FHLB Dallas 179,100 4,843 5.4% 172,157 4,611 5.4%
Long Term Junior
Subordinated Debentures 20,000 850 8.5% 20,000 850 8.5%
-------- -------- -------- -------- -------- --------
TOTAL INTEREST BEARING
LIABILITIES $829,059 $ 21,092 5.1% $728,505 $ 17,026 4.7%
======== ======== ======== ======== ======== ========
NET INTEREST SPREAD 2.7% 2.2%
======== ========
</TABLE>
(1) Interest income includes taxable-equivalent adjustments of $1,149 and
$1,041 as of June 30, 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 $197 and $18 as
of June 30, 2000 and 1999, respectively.
Noninterest Income
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 $.9 million or 27.1% for the six months ended June 30, 2000. Deposit
services income increased primarily as a direct result of the overdraft
privilege program and also due to
9
<PAGE> 11
increased numbers of deposit accounts and increased deposit activity from June
30, 1999 to June 30, 2000. Other noninterest income increased $.1 million or
10.3% for the six months ended June 30, 2000 primarily as a result of increases
in trust income and other fee income. During the six months ended June 30, 2000,
the Company had losses on the sale of securities of $.5 million compared to
gains on the sales of securities of $.3 million for the same period in 1999.
During the six months ended June 30, 2000, Southside Bank (the "Bank") sold
available for sale securities to reduce duration and restructure a portion of
the available for sale securities portfolio.
The market value of the entire 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.
Noninterest Expense
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%.
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 $.6 million 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 this increase. 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 $.4 million or 72.6% for the six months ended
June 30, 2000 when compared to the same period in 1999.
Net occupancy expense increased $.2 million 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.
Provision for Income Taxes
The provision for the income tax expense for the six months ended June 30, 2000
was 22.7% compared to 18.5% for the six months ended June 30, 1999. The increase
in the effective tax rate and income tax expense is primarily a result of higher
taxable income.
Capital Resources
Total shareholders' equity for the Company at June 30, 2000, of $42.8 million
was up $5.1 million from December 31, 1999, and represented 4.0% of total assets
at June 30, 2000 compared to 3.7% of total assets at December 31, 1999.
Increases to shareholders' equity during the six months ended June 30, 2000 were
net income of $4.9 million and common stock (25,702 shares) issued through the
Company's dividend reinvestment and incentive stock option plans of $.2 million
and a decrease of $1.4 million in net unrealized losses on securities available
for sale. Decreases to shareholders' equity consisted of $.7 million in
dividends paid to shareholders and the purchase of 71,050 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. A portion of the $20 million trust preferred securities is considered
Tier 1 capital by the Federal Reserve Bank. 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
10
<PAGE> 12
additional discretionary actions by regulation, that if undertaken, could have a
direct material effect on the Bank's financial statements. At June 30, 2000, the
Company and the 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 the 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 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 June 30, 2000, these investments were 13.0% 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 the 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 $80.6 million or
24.7% from the six months ended June 30, 1999 to June 30, 2000. The majority of
the increase is in Real Estate Loans. The increase in Real Estate Loans is due
to a stronger real estate market, interest rates and a strong commitment in
residential mortgage lending.
Loan Loss Experience and Reserve for Loan Losses
The loan loss reserve is based on the most current review of the loan portfolio
at that time. An internal loan review officer of the Company is responsible for
an ongoing review of the Bank's entire loan portfolio with specific goals set
for the volume of loans to be reviewed on an annual basis.
A list of loans which are graded as having more than the normal degree of risk
associated with them are maintained by the internal loan review officer. This
list is updated on a periodic basis but no less than quarterly by the servicing
officer in order to properly allocate necessary reserves and keep management
informed on the status of attempts to correct the deficiencies noted in the
credit.
While management is aware of certain risk factors within segments of the loan
portfolio, reserve allocations have been made on an individual loan basis. An
additional reserve is maintained on the remainder of the portfolio of at risk
loans that is based on tracking of the Company's loan losses on loans that have
not been previously identified as problems.
11
<PAGE> 13
For the second quarter and six months ended June 30, 2000, loan charge-offs were
$211,000 and $432,000 and recoveries were $75,000 and $158,000, respectively,
resulting in net charge-offs of $136,000 and $274,000. For the second quarter
and six months ended June 30, 1999, loan charge-offs were $185,000 and $317,000,
and recoveries were $78,000 and $150,000, respectively, resulting in net
charge-offs of $107,000 and $167,000.
The increase of net charge-offs for the six months ended June 30, 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 $.8
million for the six months ended June 30, 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 is past due 90 days or more, unless, in the determination
of management, the principal and interest on the loan are well secured and in
the process of collection. In addition, a loan is placed on nonaccrual when, in
the opinion of management, the future collectibility of interest and principal
is in serious doubt. When a loan is categorized as nonaccrual, the accrual of
interest is discontinued and any remaining accrued interest is reversed in that
period; thereafter, interest income is recorded only when actually received.
Restructured loans represent loans which have been renegotiated to provide a
reduction or deferral of interest or principal because of deterioration in the
financial position of the borrowers. Categorization of a loan as nonperforming
is not in itself a reliable indicator of potential loan loss. Other factors,
such as the value of collateral securing the loan and the financial condition of
the borrower must be considered in judgments as to potential loan loss.
Other Real Estate Owned (OREO) represents real estate taken in full or partial
satisfaction of debts previously contracted. The OREO consists primarily of raw
land and oil and gas interests. The Company is actively marketing all properties
and none are being held for investment purposes.
Total nonperforming assets at June 30, 2000 were $1,915,000, up $76,000 or 4.1 %
from $1,839,000 at December 31, 1999. Loans 90 days past due or more increased
$324,000 or 95.6% to $663,000. Of this total, 31% 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. Eleven percent are multi-family real estate
properties, 31% are commercial real estate properties and 29% are commercial
loans. Restructured loans increased $33,000 or 7.4% to $481,000. From December
31, 1999 to June 30, 2000, nonaccrual loans decreased $166,000 or 23.6% to
$537,000. Repossessed assets decreased $115,000 or 55.0%. Other real estate
remained unchanged at $140,000.
Expansion
During the second quarter of 2000, the Company received approval from the FDIC
to open a second full service branch in Lindale. The Company plans to open this
branch during the third quarter of 2000.
The Company acquired property in Whitehouse, Texas in southern Smith County on
which it plans to construct a full service branch during 2001, pending
regulatory approval.
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
12
<PAGE> 14
differ from those that have been estimated. Other factors that could cause
actual results to differ materially from forward-looking statements include, but
are not limited to general economic conditions, either nationally or in the
State of Texas, legislation or regulatory changes which adversely affect the
businesses in which the Company is engaged, changes in the interest rate
environment which reduce interest margins, significant increases in competition
in the banking and financial services industry, changes in consumer spending,
borrowing and saving habits, technological changes, the Company's ability to
increase market share and control expenses, the effect of compliance with
legislation or regulatory changes, the effect of changes in accounting policies
and practices and the costs and effects of unanticipated litigation.
13
<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
(a) An annual meeting of shareholders was held on April 20, 2000.
(b) The election of four directors (term expiring at the 2003
Annual Meeting) were as follows:
<TABLE>
<CAPTION>
FOR WITHHELD
--- --------
<S> <C> <C>
Herbert C. Buie 2,403,261 1,846
Robbie N. Edmonson 2,403,261 1,846
W. D. (Joe) Norton 2,403,261 1,846
Michael D. Gollob 2,403,261 1,846
</TABLE>
Directors continuing until the 2001 Annual Meeting are as
follows:
Fred E. Bosworth
B. G. Hartley
Paul W. Powell
Directors continuing until the 2002 Annual Meeting are as
follows:
Rollins Caldwell
Sam Dawson
William Sheehy
(c) The matters voted upon and the results of the voting were as
follows:
The shareholders voted 2,363,059 shares in the affirmative,
20,619 shares in the negative, and 21,429 abstentions to
approve a charter amendment to increase the authorized but
unissued common stock to 20,000,000 shares, to reduce the par
value of the common stock and to initiate a two-for-one stock
split.
ITEM 5. OTHER INFORMATION
Not Applicable
14
<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No.
-------
<S> <C>
3(a)(iii) - Articles of Amendment effective May 20,
2000 to Articles of Incorporation of
Southside Bancshares, Inc. (filed as Exhibit
3(a)(iii) to the Registrant's Form 10Q for
the quarter ended June 30, 2000, and filed
herewith.).
27 - Financial Data Schedule for the six months ended
June 30, 2000.
</TABLE>
(b) Reports on Form 8-K - None
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHSIDE BANCSHARES, INC.
(Registrant)
BY: /s/ B. G. HARTLEY
-----------------------------------------
B. G. Hartley, Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
DATE: 08-11-00
------------
/s/ LEE R. GIBSON
-----------------------------------------
Lee R. Gibson, Executive Vice
President (Principal Financial
and Accounting Officer)
DATE: 08-11-00
------------
16
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No Description
---------- -----------
<S> <C>
27 Financial Data Schedule for the six months ended June 30, 2000.
3(a)(iii) - Articles of Amendment effective May 20, 2000 to Articles of
Incorporation of Southside Bancshares, Inc. (filed as Exhibit
3(a)(iii) to the Registrant's Form 10Q for the quarter ended
June 30, 2000, and filed herewith.).
</TABLE>
