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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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, 2003
--------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM to
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Commission file number 0-12247
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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)
903-531-7111
----------------------------------------------------
(Registrant's telephone number, including area code)
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 .
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No .
The number of shares outstanding of each of the issuer's classes of capital
stock as of April 30, 2003 was 8,415,373 shares of Common Stock, par value
$1.25.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share amounts) March 31, December 31,
2003 2002
---- ----
ASSETS
Cash and due from banks ....................................... $ 47,232 $ 49,607
Federal funds sold ............................................ 10,525 --
Investment securities available for sale ...................... 112,905 151,509
Mortgage-backed and related securities available for sale ..... 492,089 489,015
Marketable equity securities available for sale ............... 22,545 22,391
Loans:
Loans, net of unearned discount ............................ 573,399 582,241
Less: Reserve for loan losses ............................. (6,499) (6,195)
----------- -----------
Net Loans ................................................ 566,900 576,046
Premises and equipment, net ................................... 29,929 30,100
Interest receivable ........................................... 7,725 8,930
Other assets .................................................. 36,895 21,588
----------- -----------
TOTAL ASSETS ............................................. $ 1,326,745 $ 1,349,186
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing ........................................ $ 200,047 $ 193,305
Interest bearing ........................................... 625,338 621,181
----------- -----------
Total Deposits ........................................... 825,385 814,486
Short-term obligations:
Federal funds purchased .................................... -- 15,850
FHLB Dallas advances ....................................... 120,849 153,422
Other obligations .......................................... 2,500 2,500
----------- -----------
Total Short-term obligations ............................ 123,349 171,772
Long-term obligations:
FHLB Dallas advances ....................................... 228,698 231,140
Junior subordinated convertible debentures ................. 13,923 14,225
Junior subordinated debentures ............................. 20,000 20,000
----------- -----------
Total Long-term obligations ............................. 262,621 265,365
Deferred tax liability ........................................ 2,817 3,631
Other liabilities ............................................. 28,506 11,765
----------- -----------
TOTAL LIABILITIES ........................................ 1,242,678 1,267,019
----------- -----------
Shareholders' equity:
Common stock: ($1.25 par, 20,000,000 shares authorized,
9,644,763 and 9,557,598 shares issued) .................... 12,056 11,947
Paid-in capital ............................................ 44,595 44,050
Retained earnings .......................................... 32,489 29,805
Treasury stock (1,230,087 and 1,198,787 shares at cost) .... (13,257) (12,714)
Accumulated other comprehensive income ..................... 8,184 9,079
----------- -----------
TOTAL SHAREHOLDERS' EQUITY .............................. 84,067 82,167
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .............. $ 1,326,745 $ 1,349,186
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
1
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data) Three Months Ended
March 31,
--------------------
2003 2002
------- -------
Interest income
Loans .......................................... $ 9,018 $ 9,591
Investment securities .......................... 1,305 1,874
Mortgage-backed and related securities ......... 5,187 5,857
Marketable equity securities ................... 150 171
Other interest earning assets .................. 14 16
------- -------
Total interest income ...................... 15,674 17,509
Interest expense
Deposits ....................................... 3,499 4,283
Short-term obligations ......................... 1,534 1,203
Long-term obligations .......................... 3,182 3,986
------- -------
Total interest expense ..................... 8,215 9,472
------- -------
Net interest income ............................... 7,459 8,037
Provision for loan losses ......................... 529 450
------- -------
Net interest income after provision for loan losses 6,930 7,587
------- -------
Noninterest income
Deposit services ............................... 2,977 2,480
Gain on sales of securities available for sale . 2,191 244
Mortgage servicing release fees income ......... 675 392
Trust income ................................... 231 254
Bank owned life insurance income ............... 191 169
Other .......................................... 304 205
------- -------
Total noninterest income ................... 6,569 3,744
------- -------
Noninterest expense
Salaries and employee benefits ................. 5,919 5,178
Net occupancy expense .......................... 973 937
Equipment expense .............................. 173 184
Advertising, travel and entertainment .......... 484 396
ATM and bank analysis fees ..................... 212 208
Supplies ....................................... 145 188
Professional fees .............................. 206 147
Postage ........................................ 136 118
Other .......................................... 1,197 911
------- -------
Total noninterest expense .................. 9,445 8,267
------- -------
Income before federal tax expense ................. 4,054 3,064
Provision for federal tax expense ................. 697 298
------- -------
Net Income ........................................ $ 3,357 $ 2,766
======= =======
Earnings per common share - basic ................. $ 0.40 $ 0.34
======= =======
Earnings per common share - diluted ............... $ 0.34 $ 0.28
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
2
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(in thousands, except per share amounts) Accumulated Other
Compre- Total
Compre- hensive Share-
hensive Common Paid-in Retained Treasury Income holders'
Income Stock Capital Earnings Stock (Loss) Equity
------ ----- ------- -------- ----- ------ ------
Balance at December 31, 2002 .............. $ $ 11,947 $ 44,050 $ 29,805 $(12,714) $ 9,079 $ 82,167
Net Income ................................ 3,357 3,357 3,357
Other comprehensive loss, net of tax
Unrealized losses on securities, net of
reclassification adjustment (see Note 3) (895) (895) (895)
--------
Comprehensive income ...................... $ 2,462
========
Common stock issued (87,165 shares) ....... 109 471 580
Dividends paid on common stock ............ (673) (673)
Purchase of 31,300 shares of
common stock ............................ (543) (543)
Tax benefit of incentive stock options .... 74 74
-------- -------- -------- -------- -------- --------
Balance at March 31, 2003 ................. $ 12,056 $ 44,595 $ 32,489 $(13,257) $ 8,184 $ 84,067
======== ======== ======== ======== ======== ========
Balance at December 31, 2001 .............. $ $ 10,917 $ 35,195 $ 25,133 $ (8,511) $ 5,851 $ 68,585
Net Income ................................ 2,766 2,766 2,766
Other comprehensive loss, net of tax
Unrealized losses on securities, net of
reclassification adjustment (see Note 3) (1,232) (1,232) (1,232)
--------
Comprehensive income ...................... $ 1,534
========
Common stock issued (38,624 shares) ....... 48 255 303
Dividends paid on common stock ............ (546) (546)
Purchase of 64,100 shares of
common stock ............................ (853) (853)
Tax benefit of incentive stock options .... 57 57
-------- -------- -------- -------- -------- --------
Balance at March 31, 2002 ................. $ 10,965 $ 35,507 $ 27,353 $ (9,364) $ 4,619 $ 69,080
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(in thousands)
Three Months Ended
March 31,
-----------------------
2003 2002
--------- ---------
OPERATING ACTIVITIES:
Net income ............................................................. $ 3,357 $ 2,766
Adjustments to reconcile net cash provided by operations:
Depreciation ........................................................... 587 557
Amortization of premium ................................................ 3,040 2,738
Accretion of discount and loan fees .................................... (110) (148)
Provision for loan losses .............................................. 529 450
Tax benefit of incentive stock options ................................. 74 57
Decrease in interest receivable ........................................ 1,205 203
(Increase) decrease in other assets .................................... (15,163) 437
Increase in deferred tax asset ......................................... (353) (96)
(Decrease) increase in interest payable ................................ (232) 150
Increase in other liabilities .......................................... 16,973 5,014
Gain on sale of available for sale securities .......................... (2,191) (244)
Gain on sale of assets ................................................. (4) (12)
Impairment of other real estate owned .................................. 62 --
Gain on sale of other real estate owned ................................ -- (28)
--------- ---------
Net cash provided by operating activities ............................ 7,774 11,844
INVESTING ACTIVITIES:
Net increase in federal funds sold ...................................... (10,525) --
Proceeds from sales of investment securities available for sale ......... 39,773 37,511
Proceeds from sales of mortgage-backed securities available for sale .... 104,551 25,530
Proceeds from maturities of investment securities available for sale .... 28,165 5,295
Proceeds from maturities of mortgage-backed securities available for sale 61,653 62,659
Purchases of investment securities available for sale ................... (27,641) (33,740)
Purchases of mortgage-backed securities available for sale .............. (173,066) (100,805)
Purchases of marketable equity securities available for sale ............ (154) (620)
Net decrease in loans ................................................... 8,225 919
Purchases of premises and equipment ..................................... (418) (2,870)
Proceeds from sale of premises and equipment ............................ 6 19
Proceeds from sale of other real estate owned ........................... -- 79
Proceeds from sale of repossessed assets ................................ 186 515
--------- ---------
Net cash provided by (used in) investing activities .................. 30,755 (5,508)
The accompanying notes are an integral part of these consolidated financial
statements.
4
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (continued)
(UNAUDITED)
(in thousands)
Three Months Ended
March 31,
---------------------
2003 2002
-------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in demand and savings accounts .................... $ 15,065 $ (2,662)
Net (decrease) increase in certificates of deposit ........................ (4,166) 11,243
Net decrease in federal funds purchased ................................... (15,850) (22,575)
Net decrease in FHLB Dallas advances ...................................... (35,015) (9,091)
Net decrease in junior subordinated convertible debentures ................ (302) (45)
Proceeds from the issuance of common stock ................................ 580 303
Purchase of common stock .................................................. (543) (853)
Dividends paid ............................................................ (673) (546)
-------- --------
Net cash used in financing activities ................................ (40,904) (24,226)
Net decrease in cash and cash equivalents .................................. (2,375) (17,890)
Cash and cash equivalents at beginning of period ........................... 49,607 52,681
-------- --------
Cash and cash equivalents at end of period ................................. $ 47,232 $ 34,791
======== ========
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
Interest paid ............................................................. $ 8,447 $ 9,322
Income taxes paid ......................................................... $ 100 $ 500
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of other repossessed assets and real estate through foreclosure $ 393 $ 759
The accompanying notes are an integral part of these consolidated financial
statements.
5
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated balance sheet as of March 31, 2003, and the related
consolidated statements of income, shareholders' equity and cash flow for the
three month periods ended March 31, 2003 and 2002 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. All share data has been adjusted to give retroactive
recognition to stock splits and stock dividends.
2. Earnings Per Share
Earnings per share on a basic and diluted basis has been adjusted to give
retroactive recognition to stock splits and stock dividends and is calculated as
follows (in thousands, except per share amounts):
Three Months Ended March 31,
----------------------------
2003 2002
------- -------
Basic Earnings and Shares:
Net income .......................................... $ 3,357 $ 2,766
======= =======
Weighted-average basic shares outstanding ........ 8,380 8,194
======= =======
Basic Earnings Per Share:
Net income .......................................... $ 0.40 $ 0.34
======= =======
Diluted Earnings and Shares:
Net income .......................................... $ 3,357 $ 2,766
Add: Applicable dividend on convertible debentures 201 244
------- -------
Adjusted net income .............................. $ 3,558 $ 3,010
======= =======
Weighted-average basic shares outstanding ........ 8,380 8,194
Add: Stock options .............................. 625 573
Convertible debentures ..................... 1,560 1,868
------- -------
Weighted-average diluted shares outstanding ...... 10,565 10,635
======= =======
Diluted Earnings Per Share:
Net income .......................................... $ 0.34 $ 0.28
======= =======
6
3. Comprehensive Income (Loss)
The components of other comprehensive loss are as follows:
Three Months Ended March 31, 2003
----------------------------------
Tax Net-
Before-Tax (Expense) of-Tax
Amount Benefit Amount
------- ------- -------
Unrealized losses on securities:
Unrealized holding gains arising during period $ 835 $ (284) $ 551
Less: reclassification adjustment for gains
included in net income .................. 2,191 (745) 1,446
------- ------- -------
Net unrealized losses on securities ......... (1,356) 461 (895)
------- ------- -------
Other comprehensive loss ........................ $(1,356) $ 461 $ (895)
======= ======= =======
Three Months Ended March 31, 2002
----------------------------------
Tax Net-
Before-Tax (Expense) of-Tax
Amount Benefit Amount
------- ------- -------
Unrealized losses on securities:
Unrealized holding losses arising during period $(1,622) $ 551 $(1,071)
Less: reclassification adjustment for gains
included in net income ................... 244 (83) 161
------- ------- -------
Net unrealized losses on securities .......... (1,866) 634 (1,232)
------- ------- -------
Other comprehensive loss ......................... $(1,866) $ 634 $(1,232)
======= ======= =======
4. Incentive Stock Options
In April 1993, the Company adopted the Southside Bancshares, Inc. 1993 Incentive
Stock Option Plan ("the Plan"), a stock-based incentive compensation plan. The
Company applies APB Opinion 25 and related Interpretations in accounting for the
Plan and discloses the pro forma information required by FAS 148.
Under the Plan, the Company is authorized to issue shares of Common Stock
pursuant to "Awards" granted in the form of incentive stock options (intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as amended).
Awards may be granted to selected employees and directors of the Company or any
subsidiary. At March 31, 2003, there were no stock options available for grant.
At March 31, 2002, there were 22,489 stock options available for grant.
The Plan provides that the exercise price of any stock option may not be less
than the fair market value of the Common Stock on the date of grant. There were
27,500 incentive stock options granted in 2003. There were no incentive stock
options granted in 2002. These stock options have contractual terms of 10 years.
All options vest on a graded schedule, 20% per year for 5 years, beginning on
the first anniversary date of the grant date. In accordance with APB 25, the
Company has not recognized any compensation cost for these stock options.
7
A summary of the status of the Company's stock options as of March 31, 2003 and
2002 and the changes during the quarter ended on those dates is presented below:
2003 2002
---- ----
WEIGHTED WEIGHTED
# SHARES OF AVERAGE # SHARES OF AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES
------- ------ ------- ------
Outstanding at beginning
of the year .......... 1,049,750 $ 6.29 1,160,070 $ 6.22
Granted .............. 27,500 $ 16.10 -- --
Exercised ............ (45,408) $ 3.51 (26,620) $ 5.28
Forfeited ............ (4,074) $ 6.65 (2,585) $ 6.69
Expired .............. -- -- -- --
Outstanding at end of
quarter .............. 1,027,768 $ 6.67 1,130,865 $ 6.25
Exercisable at end
of quarter ........... 715,214 $ 6.20 678,223 $ 5.78
Weighted-average FV of
options granted
during the quarter ... $ 4.91 N/A
The fair value of each stock option granted is estimated on the date of grant
using the Black-Scholes method of option pricing with the following
weighted-average assumptions for grants in 2003: dividend yield of 1.93%;
risk-free interest rate of 4.93%; the expected life of 6 years; the expected
volatility is 28.90%.
The following table summarizes information about stock options outstanding at
March 31, 2003:
Options Outstanding Options Exercisable
------------------- -------------------
WEIGHTED AVG.
REMAINING
CONTRACT
RANGE OF NUMBER LIFE WEIGHTED AVG. NUMBER WEIGHTED AVG.
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
$ 4.07 to $ 6.70 684,202 4.9 $ 5.96 504,435 $ 5.70
$ 7.26 to $ 16.10 343,566 6.2 $ 8.08 210,779 $ 7.40
- ----------------- --------- ----- ------- ------- -------
$ 4.07 to $ 16.10 1,027,768 5.4 $ 6.67 715,214 $ 6.20
========= =======
Pro Forma Net Income and Net Income Per Common Share
Had the compensation cost for the Company's stock-based compensation plans been
determined consistent with the requirements of FAS 148, the Company's net income
and net income per common share for the three month periods ending March 31,
2003 and 2002 would approximate the pro forma amounts below (in thousands,
except per share amounts, net of taxes):
Quarter Ended March 31,
-----------------------
As Pro As Pro
Reported Forma Reported Forma
2003 2003 2002 2002
--------- --------- --------- ---------
FAS148 Charge ....... $ -- $ 40 $ -- $ 51
Net Income .......... $ 3,357 $ 3,317 $ 2,766 $ 2,715
Net Income per Common
Share-Basic ....... $ 0.40 $ 0.40 $ 0.34 $ 0.33
Net Income per Common
Share-Diluted ..... $ 0.34 $ 0.33 $ 0.28 $ 0.28
The effects of applying FAS148 in this pro forma disclosure are not indicative
of future amounts.
8
5. Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 143, "Accounting for Asset Retirement Obligations" (FAS
143). FAS 143 requires liability recognition for retirement obligations
associated with tangible long-lived assets. The obligations included within the
scope of FAS 143 are those for which a company faces a legal obligation for
settlement. The initial measurement of the asset retirement obligation is to be
at fair value. The asset retirement cost equal to the fair value of the
retirement obligation is to be capitalized as part of the cost of the related
long-lived asset and amortized to expense over the useful life of the asset. FAS
143 is effective for all fiscal years beginning after June 15, 2002. The
adoption of FAS 143 did not have a material impact on the Company's consolidated
financial statements.
In April 2002, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 145, "Rescission of FAS 4, 44, and 64, Amendment of FAS
13, and Technical Corrections" (FAS 145). This statement updates, clarifies and
simplifies existing accounting pronouncements with respect to the accounting for
gains and losses from the extinguishments of debt. FAS 4 required all gains and
losses from extinguishments of debt to be aggregated and, if material,
classified as an extraordinary item, net of related tax effect. As a result of
the rescission of FAS 4, the criteria in APB Opinion No. 30 will now be used to
classify those gains and losses. The provisions of this statement are applicable
to transactions occurring after January 1, 2003. The adoption of FAS 145 did not
have a material impact on the Company's consolidated financial statements.
In June 2002, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" (FAS 146). This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The principal
difference between this Statement and Issue 94-3 relates to its requirements for
recognition of a liability for a cost associated with an exit or disposal
activity. This Statement requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred. Under
Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized
at the date of an entity's commitment to an exit plan. A fundamental conclusion
reached by the Board in this Statement is that an entity's commitment to a plan,
by itself, does not create a present obligation to others that meets the
definition of a liability. Therefore, this Statement eliminates the definition
and requirements for recognition of exit costs in Issue 94-3. This Statement
also establishes that fair value is the objective for initial measurement of the
liability. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of FAS 146
did not have a material impact on the Company's consolidated financial
statements.
In October 2002, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 147, "Acquisitions of Certain Financial Institutions"
(FAS 147). This statement is an amendment of FAS Statements No. 72 and 144 and
FAS Interpretation No. 9. FAS Statement No. 72, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions", and FASB Interpretation No. 9,
"Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a
Similar Institution Is Acquired in a Business Combination Accounted for by the
Purchase Method", provided interpretive guidance on the application of the
purchase method to acquisitions of financial institutions. Except for
transactions between two or more mutual enterprises, this Statement removes
acquisitions of financial institutions from the scope of both FAS 72 and
Interpretation 9 and requires that those transactions be accounted for in
accordance with FAS 141, "Business Combinations", and FAS 142, "Goodwill and
Other Intangible Assets." Thus, the requirement in paragraph 5 of FAS 72 to
recognize (and subsequently amortize) any excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable intangible
assets acquired as an unidentifiable intangible asset no longer applies to
acquisitions within the scope of this Statement. In addition, this Statement
amends FAS 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," to include in its scope long-term customer-relationship intangible
assets of financial institutions such as depositor- and borrower-relationship
intangible assets and credit cardholder intangible assets. Consequently, those
intangible assets are subject to the same undiscounted cash flow recoverability
test and impairment loss recognition and measurement provisions that FAS 144
requires for other long-lived assets that are held and used. The adoption of FAS
147 did not have a material impact on the Company's consolidated financial
statements.
9
In December 2002, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure" (FAS 148). This Statement is an amendment of FAS
Statement No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of FAS 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. FAS 148 permits two additional transition methods for
entities that adopt the preferable method of accounting for stock-based
compensation. This Statement requires disclosure of comparable information for
all companies regardless of whether, when, or how an entity adopts the
preferable, fair-value based method of accounting. In addition, FAS 148
prescribes a specific tabular format and requires disclosure in the "Summary of
Significant Accounting Policies" or its equivalent.
In November 2002, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 45 (FIN 45), Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees Of Indebtedness Of
Others, an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission
of FASB Interpretation No. 34. FIN 45 relates to the accounting for and
disclosure of guarantees and addresses (1) an obligation to stand ready to
perform over the term of the guarantee in the event that the specified
triggering events or conditions occur and (2) a contingent obligation to make
future payments if those triggering events or conditions occur.
FIN 45 requires that upon issuance of a guarantee, the entity (i.e., the
guarantor) must recognize a liability for the fair value of the obligation it
assumes under that guarantee. Many guarantees are embedded in purchase or sales
agreements, service contracts, joint venture agreements, or other commercial
agreements and the guarantor in many such arrangements does not receive a
separately identifiable upfront payment for issuing the guarantee. FIN 45
requires identical accounting for guarantees issued with or without a separately
identified premium.
The disclosure requirements are effective for financial statements of interim
and annual periods ending after December 15, 2002. The initial recognition and
initial measurement provisions should be applied only on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The guarantor's previous accounting for guarantees
issued prior to the initial application date of FIN 45 should not be revised or
restated to reflect the effect of the new recognition and measurement
provisions. The Company does not believe that FIN 45 will have a material impact
on its consolidated financial statements.
On January 17, 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51. The primary objective of the Interpretation is to
provide guidance on the identification of, and financial reporting for, entities
over which control is achieved through means other than voting rights; such
entities are known as variable-interest entities (VIEs). Although the FASB's
initial focus was on special-purpose entities (SPEs), the final guidance applies
to a wide range of entities. FIN 46 has far-reaching effects and applies to new
entities that are created after the effective date, as well as applies to
existing entities. Once it goes into effect, FIN 46 will be the guidance that
determines (1) whether consolidation is required under the "controlling
financial interest" model of Accounting Research Bulletin No. 51 (ARB 51),
Consolidated Financial Statements, or (b) other existing authoritative guidance,
or, alternatively, (2) whether the variable-interest model under FIN 46 should
be used to account for existing and new entities. The effective dates and
transition provisions of the Interpretation are as follows:
Public companies will be required to apply the Interpretation to preexisting
entities as of the beginning of the first interim period beginning after June
15, 2003.
All enterprises should apply the Interpretation to VIEs with which they become
involved beginning February 1, 2003.
All enterprises will be required to apply the transition disclosure requirements
in financial statements issued after February 1, 2003.
The Company does not believe FIN 46 will have a material impact on its
consolidated financial statements.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Three months ended March 31, 2003 compared to March 31, 2002.
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,
2003 compared to the same period in 2002. Net income for the three months ended
March 31, 2003 was $3.4 million compared to $2.8 million for the same period in
2002.
All share data has been adjusted to give retroactive recognition to stock splits
and stock dividends.
Critical Accounting Policies
The accounting and reporting policies of the Company and its subsidiaries
conform with accounting principles generally accepted in the United States and
general practices within the financial services industry. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. The Company considers its critical accounting
policies to include the following:
Allowance for Losses on Loans. The allowance for losses on loans represents
management's best estimate of probable losses inherent in the existing loan
portfolio. The allowance for losses on loans is increased by the provision for
losses on loans charged to expense and reduced by loans charged-off, net of
recoveries. The provision for losses on loans is determined based on
management's assessment of several factors: reviews and evaluations of specific
loans, changes in the nature and volume of the loan portfolio, current and
anticipated economic conditions and the related impact on specific borrowers and
industry groups, historical loan loss experience, the level of classified and
nonperforming loans and the results of regulatory examinations.
Loans are considered impaired if, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally based on the present
value of expected future cash flows discounted at the historical effective
interest rate stipulated in the loan agreement, except that all
collateral-dependent loans are measured for impairment based on fair value of
the collateral. In measuring the fair value of the collateral, management uses
assumptions (e.g. discount rates) and methodologies (e.g. comparison to the
recent selling price of similar assets) consistent with those that would be
utilized by unrelated third parties.
Changes in the financial condition of individual borrowers, in economic
conditions, in historical loss experience and in the conditions of the various
markets in which collateral may be sold may all affect the required level of the
allowance for losses on loans and the associated provision for loan losses.
Estimation of Fair Value. The estimation of fair value is significant to a
number of the Company's assets, including available for sale investment
securities and other real estate owned. These are all recorded at either fair
value or at the lower of cost or fair value. Furthermore, accounting principles
generally accepted in the United States require disclosure of the fair value of
financial instruments as a part of the notes to the consolidated annual
financial statements. Fair values are volatile and may be influenced by a number
of factors, including market interest rates, prepayment speeds, discount rates
and the shape of yield curves.
Fair values for most available for sale investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on the quoted prices of similar instruments.
The fair values of other real estate owned are typically determined based on
appraisals by third parties, less estimated costs to sell.
Refer to Item 1 entitled Loan Loss Experience and Reserve for Loan Loss and
Notes to Financial Statements No. 1, Summary of Significant Accounting and
Reporting Policies in the Company's latest report on Form 10-K filed March 7,
2003 for a detailed description of the Company's estimation process and
methodology related to the allowance for loan losses.
11
Forward Looking Information
Certain statements of other than historical fact that are contained in this
document and in written material, press releases and oral statements issued by
or on behalf of the Company may be considered to be "forward-looking statements"
as that term is defined in the Private Securities Litigation Reform Act of 1995.
These statements may include words such as "expect," "estimate," "project,"
"anticipate," "should," "intend," "probability," "risk," "target," "objective"
and similar expressions. Forward-looking statements are subject to significant
risks and uncertainties and the Company's actual results may differ materially
from the results discussed in the forward-looking statements. For example,
certain market risk disclosures are dependent on choices about key model
characteristics and assumptions and are subject to various limitations. See
"Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations." By their nature, certain of the market risk disclosures
are only estimates and could be materially different from what actually occurs
in the future. As a result, actual income gains and losses could materially
differ from those that have been estimated. Other factors that could cause
actual results to differ materially from forward-looking statements include, but
are not limited to general economic conditions, either nationally or in the
State of Texas, legislation or regulatory changes which adversely affect the
businesses in which the Company is engaged, changes in the interest rate
environment which reduce interest margins, significant increases in competition
in the banking and financial services industry, changes in consumer spending,
borrowing and saving habits, technological changes, the Company's ability to
increase market share and control expenses, the effect of compliance with
legislation or regulatory changes, the effect of changes in accounting policies
and practices and the costs and effects of unanticipated litigation.
Leverage Strategy
In May 1998 the Company implemented a leverage strategy designed to enhance its
profitability with acceptable levels of credit, interest rate and liquidity
risk. The leverage strategy consists of borrowing long and short-term funds from
the Federal Home Loan Bank (FHLB) of Dallas and investing the funds primarily in
premium mortgage-backed securities, and to a lesser extent, long-term municipal
securities. Although premium mortgage-backed securities often carry lower yields
than traditional mortgage loans and other types of loans the Company makes,
these securities generally increase the overall quality of the Company's assets
by virtue of the securities' underlying insurance or guarantees, are more liquid
than individual loans and may be used to collateralize the Company's borrowings
or other obligations. In addition, in low interest rate environments the
amortization expense for premium mortgage-backed securities is associated with
substantially higher prepayments experienced and reduces the overall yields of
the premium mortgage-backed securities portfolio. While the strategy of
investing a substantial portion of the Company's assets in premium
mortgage-backed and municipal securities has resulted in lower interest rate
spreads and margins, the Company believes that the lower operating expenses and
reduced credit risk combined with the managed interest rate risk of this
strategy have enhanced its overall profitability. At this time, the Company does
not maintain the leverage strategy for any other reason than to enhance overall
profitability . One of the risks associated with the asset structure the Company
maintains is a lower net interest rate spread and margin when compared to peers.
This asset structure, spread and margin increases the need to monitor the
Company's interest rate risk.
The Company will attempt to adopt a balance sheet strategy going forward to
gradually reduce the securities portfolio as a percentage of earning assets
assuming quality loan growth is available in the Company's market area. On the
liability side, the Company will attempt to gradually reduce FHLB Dallas
borrowings as a percentage of total deposits assuming deposits can be retained
or acquired at a lower overall cost. The intended net result is to increase the
Company's net interest spread. The leverage strategy is dynamic and requires
ongoing management. As interest rates, funding costs and security spreads
change, the Company's determination of the proper securities to own and funding
to obtain must be re-evaluated. Management has attempted to design the leverage
strategy so that in a rising interest rate environment the interest income
earned on the premium mortgage-backed securities may increase to help offset the
increase in funding costs. As interest rates decrease, the interest income on
the premium mortgage-backed securities may decrease due to increased prepayments
on these securities as funding costs decrease. Due to the unpredictable nature
of mortgage-backed securities prepayments, the length of interest rate cycles,
and the slope of the interest rate yield curve, net interest income could
fluctuate more than simulated under the Asset Liability Committee (ALCO)
scenarios modeled.
12
Net Interest Income
Net interest income for the three months ended March 31, 2003 was $7.5 million,
a decrease of $578,000 or 7.2% when compared to the same period in 2002. Average
interest earning assets increased $26.1 million or 2.2%, while the net interest
spread decreased from 2.59% at March 31, 2002 to 2.30% at March 31, 2003 and the
net margin decreased from 3.10% at March 31, 2002 to 2.80% at March 31, 2003.
Net interest income decreased as a result of decreases in the Company's net
interest margin and spread during the first quarter of 2003 which was due in
part to lower mortgage interest rates and the lower overall interest rate
environment. This led to substantially increased residential mortgage
refinancing nationwide and in the Company's market area combined with
substantially increased repricing of all of the Company's other loan types.
Increased prepayments associated with the Company's mortgage-backed securities,
residential mortgage loans and the substantial increase in repricing of other
loan types may continue to impact the Company's net interest margin during the
second quarter of 2003 or until overall interest rates increase. This may be
offset by several factors including new deposit repricing strategies partially
implemented during the first quarter but fully in place on April 1, 2003, $68.5
million of fixed rate FHLB advances currently at an average rate of 4.58% that
will reprice during the last three quarters of 2003 and continued fee income
from the sale of mortgage loans into the secondary market due to the volume of
refinancing that the Company is currently handling in its market area.
During the three months ended March 31, 2003, average loans, funded primarily by
the growth in average deposits, increased $38.8 million or 7.2%, compared to the
same period in 2002. The average yield on loans decreased from 7.48% at March
31, 2002 to 6.64% at March 31, 2003 reflective of an overall decrease in
interest rates. As interest rates have declined, especially short-term interest
rates, loan customers are increasingly requesting floating rate loans, which
lowers the overall yield on loans. In addition, the Company has experienced a
large number of loan customers requesting loan repricing due to lower interest
rates offered by competing financial institutions. If interest rates remain low
or move lower, the Company anticipates it will be required to meet lower
interest rate offers from competing financial institutions in order to retain
quality loan relationships, which could impact the overall loan yield. The
decrease in interest income on loans of $573,000 or 6.0% was the result of the
decrease in interest rates partially offset by the increase in average loans.
During the first quarter ended March 31, 2003, loans decreased $8.8 million or
1.5% when compared to the year ended December 31, 2002 primarily as a result of
a decrease in the sold mortgage loans in the process of funding at March 31,
2003.
Average securities decreased $15.0 million or 2.4% for the three months ended
March 31, 2003 when compared to the same period in 2002. This decrease was a
result of reducing a portion of the leverage strategy. The overall yield on
average securities decreased to 4.65% during the three months ended March 31,
2003 from 5.49% during the same period in 2002. This decrease is reflective of
overall lower interest rates, increased prepayment speeds on mortgage-backed
securities which led to increased amortization expense and a restructuring of a
portion of the securities portfolio in an effort to lower duration, reduce tax
free income derived from the securities portfolio and reposition some of the
mortgage-backed securities coupons in an attempt to reduce prepayments.
Interest income from marketable equity securities, federal funds sold and other
interest earning assets decreased $23,000 or 12.3% for the three months ended
March 31, 2003 when compared to 2002 as a result of the decrease in the average
yield from 3.08% in 2002 to 2.47% at March 31, 2003 due to lower interest rates.
Total interest expense decreased $1.3 million or 13.3% to $8.2 million during
the three months ended March 31, 2003 as compared to $9.5 million during the
same period in 2002. The decrease was attributable to a decrease in interest
rates partially offset by an increase in average interest bearing liabilities of
$2.6 million or 0.3%. The average yield on interest bearing liabilities
decreased from 3.75% at March 31, 2002 to 3.25% at March 31, 2003.
Average interest bearing liabilities increased $2.6 million for the quarter
ended March 31, 2003 when compared to the same period in 2002. Average interest
bearing deposits increased $44.2 million or 7.6% while the average rate paid
decreased from 2.98% at March 31, 2002 to 2.26% at March 31, 2003. Average
short-term interest bearing liabilities, consisting primarily of FHLB Dallas
advances and federal funds purchased, decreased $14.8 million or 9.4% as
compared to the same period in 2002. Interest expense associated with short-term
interest bearing liabilities increased $331,000 or 27.5% and the average rate
paid increased 127 basis points for the quarter ended March 31, 2003 when
compared to the same period in 2002 due to long-term advances rolling into the
short-term category and overnight advances decreasing. Average long-term
interest bearing liabilities consisting of FHLB Dallas advances decreased $24.0
million or 9.7% during the quarter ended March 31, 2003 to $223.3 million as
compared to $247.4 million at March 31, 2002. Interest expense associated with
long-term FHLB Dallas advances decreased $739,000 or 23.2% and the average rate
paid decreased 78 basis points for the quarter ended March 31, 2003 when
compared to the same period in 2002. The long-term advances were obtained from
the FHLB Dallas primarily to fund long-term securities and to a lesser extent
long-
13
term loans. FHLB Dallas advances are collateralized by FHLB Dallas stock,
securities and nonspecific real estate loans.
Average long-term junior subordinated convertible debentures decreased from
$16.9 million at March 31, 2002 to $14.2 million at March 31, 2003. During the
first quarter ended March 31, 2003, 30,200 convertible trust preferred shares
were converted into 33,294 shares of the Company's common stock. Subsequent to
March 31, 2003, an additional 30,000 convertible trust preferred shares were
converted into 33,075 shares of the Company's common stock. Cumulative to date,
332,664 convertible trust preferred shares were converted into 355,357 shares of
the Company's common stock. The total convertible trust preferred shares
converted to date represents 19.6% of the convertible trust preferred issue.
Interest expense decreased $65,000 or 17.6% as a result of conversions of the
convertible trust preferred shares into shares of the Company's common stock.
Average long-term junior subordinated debentures remained the same at $20
million from March 31, 2002 to March 31, 2003. Interest expense and rate paid
were the same for the quarters ended March 31, 2003 and 2002.
14
The analysis below shows average interest earning assets and interest bearing
liabilities together with the average yield on the interest earning assets and
the average cost of the interest bearing liabilities.
SUMMARY OF INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES
-------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD BALANCE INTEREST YIELD
-----------------------------------------------------------------------------------------
(dollars in thousands)
Three Months Ended March 31, 2003 Three Months Ended March 31, 2002
--------------------------------- ---------------------------------
INTEREST EARNING ASSETS:
Loans (1)(2) ................... $ 576,560 $ 9,441 6.64% $ 537,784 $ 9,920 7.48%
Investment Securities (3)(4) ... 124,498 1,774 5.78% 163,001 2,555 6.36%
Mortgage-backed Securities (4) . 481,967 5,187 4.36% 458,477 5,857 5.18%
Other Interest Earning Assets .. 26,941 164 2.47% 24,641 187 3.08%
----------- ----------- ----------- -----------
TOTAL INTEREST EARNING ASSETS .... 1,209,966 16,566 5.55% 1,183,903 18,519 6.34%
----------- -----------
NONINTEREST EARNING ASSETS:
Cash and Due from Banks .......... 37,479 34,781
Bank Premises and Equipment ...... 30,042 28,628
Other Assets ..................... 46,079 40,633
Less: Reserve for Loan Loss .... (6,360) (6,000)
----------- -----------
TOTAL ASSETS ..................... $ 1,317,206 $ 1,281,945
=========== ===========
INTEREST BEARING LIABILITIES:
Deposits ....................... $ 627,228 3,499 2.26% $ 583,049 4,283 2.98%
Fed Funds Purchased and
Other Interest Bearing
Liabilities .................. 2,254 8 1.44% 4,539 21 1.88%
Short Term Interest Bearing
Liabilities - FHLB Dallas .... 139,681 1,526 4.43% 152,161 1,182 3.15%
Long Term Interest Bearing
Liabilities - FHLB Dallas .... 223,347 2,452 4.45% 247,391 3,191 5.23%
Long Term Junior Subordinated
Convertible Debentures ....... 14,151 305 8.62% 16,941 370 8.74%
Long Term Junior Subordinated
Debentures ................... 20,000 425 8.50% 20,000 425 8.50%
----------- ----------- ----------- -----------
TOTAL INTEREST BEARING LIABILITIES 1,026,661 8,215 3.25% 1,024,081 9,472 3.75%
----------- -----------
NONINTEREST BEARING LIABILITIES
Demand Deposits .................. 192,156 175,778
Other Liabilities ................ 14,291 11,039
----------- -----------
TOTAL LIABILITIES ................ 1,233,108 1,210,898
SHAREHOLDERS' EQUITY ............. 84,098 71,047
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ........... $ 1,317,206 $ 1,281,945
=========== ===========
NET INTEREST INCOME .............. $ 8,351 $ 9,047
=========== ===========
NET MARGIN ON AVERAGE
EARNING ASSETS ................. 2.80% 3.10%
======== =========
NET INTEREST SPREAD .............. 2.30% 2.59%
======== =========
(1) Loans are shown net of unearned discount. Interest on loans includes fees
on loans which are not material in amount.
(2) Interest income includes taxable-equivalent adjustments of $423 and $329
as of March 31, 2003 and 2002, respectively.
(3) Interest income includes taxable-equivalent adjustments of $469 and $681
as of March 31, 2003 and 2002, respectively.
(4) For the purpose of calculating the average yield, the average balance of
securities is presented at historical cost.
15
Noninterest Income
Noninterest income was $6.6 million for the three months ended March 31, 2003
compared to $3.7 million for the same period in 2002. Deposit services income
increased $497,000 or 20.0% for the three months ended March 31, 2003. Deposit
services income increased primarily as a direct result of increases in overdraft
income, increased numbers of deposit accounts and increased deposit activity
from March 31, 2002 to March 31, 2003. Mortgage servicing release fee income
increased $283,000 or 72.2% to $675,000 for the three months ended March 31,
2003 from $392,000 for the three months ended March 31, 2002 due to the
significant increase in mortgage loan refinancing the Company handled during the
first quarter of 2003 as a result of the lower interest rates. Bank owned life
insurance increased $22,000 and Trust income decreased $23,000 for the three
months ended March 31, 2003 compared to the three months ended March 31, 2002.
Other noninterest income increased $99,000 or 48.3% for the three months ended
March 31, 2003 primarily as a result of increases in other fee income and income
from subsidiaries. During the three months ended March 31, 2003, the Company had
gains on the sale of securities of $2.2 million compared to $244,000 for the
same period in 2002. The Company sold securities out of its AFS portfolio to
accomplish Asset Liability Committee and investment portfolio objectives aimed
at repositioning and reducing the overall duration of the securities portfolio
in an effort to maximize the total return of the securities portfolio. Sales of
AFS securities were the result of changes in economic conditions and a change in
the desired mix of the securities portfolio. During the first quarter ended
March 31, 2003, interest rates remained low and the yield curve remained steep.
The Company used this interest-rate environment to reposition the securities
portfolio in an attempt to lower the overall duration, reduce tax free income
derived from the securities portfolio and minimize prepayment of the premium
mortgage-backed securities.
The market value of the entire securities portfolio at March 31, 2003 was $627.5
million with a net unrealized gain on that date of $12.7 million. The net
unrealized gain is comprised of $14.2 million in unrealized gains and $1.5
million in unrealized losses.
Noninterest Expense
Noninterest expense was $9.4 million for the three months ended March 31, 2003,
compared to $8.3 million for the same period of 2002, representing an increase
of $1.2 million or 14.2%.
Salaries and employee benefits increased $741,000 or 14.3% during the three
months ended March 31, 2003 when compared to the same period in 2002. Normal
payroll increases and higher benefit costs were the primary reasons for the
increase. Direct salary expense and payroll taxes increased $565,000 or 13.3% as
a result of bank growth and pay increases for the three months ended March 31,
2003 when compared to the same period in 2002. Retirement expense increased
$220,000 or 54.4% for the three months ended March 31, 2003 when compared to the
same period in 2002, primarily as a result of the increase in the number of
participants, the level of performance of retirement plan assets and actuarial
assumptions. Retirement expense for 2003 could increase significantly due to a
possible low return on plan assets, the continued low discount rate or a
possible decrease in this rate, increased funding required and the increasing
numbers of participants. The Company is currently using a 9.0% assumed long-term
rate of return. Due to the decline in major stock market indexes for three
straight years combined with low interest rates the Company's rate of return on
plan assets did not achieve a 9.0% return. The Company will continue to evaluate
the assumed long-term rate of return of 9.0% to determine if it should be
changed in the future. If this assumption were decreased the cost and funding
required for the retirement plan could increase. Health insurance expense
decreased $44,000 or 8.1% for the three months ended March 31, 2003 when
compared to the same period in 2002. The Company has a self-insured health plan
which is supplemented with stop loss insurance policies. Health insurance costs
are rising nationwide and these costs may increase during the last three
quarters of 2003.
Net occupancy expense increased $36,000 or 3.8% for the three months ended March
31, 2003 compared to the same period in 2002, largely due to branch expansion
during 2002, higher real estate taxes and depreciation expense.
Advertising, travel and entertainment expense increased $88,000 or 22.2%
compared to the same period in 2002 primarily as a result of increases in direct
media costs. Professional fees increased $59,000 or 40.1% compared to the same
period in 2002 due to increased consulting fees.
Other expense increased $286,000 or 31.4% for the three months ended March 31,
2003 compared to the same period in 2002 primarily due to increases in losses in
other real estate owned, liability insurance, personnel placement fees and other
losses.
16
Provision for Income Taxes
The provision for the income tax expense for the three months ended March 31,
2003 was 17.2% compared to 9.7% for the three months ended March 31, 2002. The
increase in the effective tax rate and income tax expense is due to the overall
increase in income before income taxes and the decrease in tax free income for
the quarter ended March 31, 2003 when compared to the quarter ended March 31,
2002 as the decrease in the average investment in tax free municipal securities
more than offset the increase in the average tax free municipal loans.
Capital Resources
Total shareholders' equity at March 31, 2003 of $84.1 million increased 2.3% or
$1.9 million from December 31, 2002 and represented 6.3% of total assets at
March 31, 2003 compared to 6.1% at December 31, 2002.
Net income of $3.4 million was the major contributor to the increase in
shareholders' equity at March 31, 2003 along with the issuance of $580,000 in
common stock (87,165 shares) through conversions from the Company's junior
subordinated debentures into the Company's common stock and the Company's
incentive stock option and dividend reinvestment plans. Decreases to
shareholders' equity consisted of a decrease of $895,000 in the accumulated
comprehensive income, $673,000 in dividends paid and the purchase of $543,000 in
common stock (31,300 shares). The Company purchased common stock pursuant to a
common stock repurchase plan instituted in late 1994. Under the repurchase plan,
the Board of Directors establishes, on a quarterly basis, total dollar
limitations. The Board reviews this plan in conjunction with the capital needs
of the Company and Southside Bank and may, at its discretion, modify or
discontinue the plan. The Company's dividend policy requires that any cash
dividend payments made by the Company not exceed consolidated earnings for that
year. Shareholders should not anticipate a continuation of the cash dividend
simply because of the implementation of a dividend reinvestment program. The
payment of dividends will depend upon future earnings, the financial condition
of the Company, and other related factors.
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 $33.9 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
four percent for bank holding companies that meet certain specified criteria.
Failure to meet minimum capital regulations can initiate certain mandatory and
possibly additional discretionary actions by regulation, that if undertaken,
could have a direct material effect on the Bank's financial statements. At March
31, 2003, the Company and the Bank exceeded all regulatory minimum capital
requirements.
The Federal Deposit Insurance Corporation Improvement 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 March 31, 2003, these investments were 24.8% 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
17
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 interest income through periods
of changing interest rates. 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.
On November 2, 2000, the Company through its wholly-owned subsidiary, Southside
Capital Trust II (the "Trust II Issuer"), sold 1,695,000 cumulative convertible
preferred securities (the "junior subordinated convertible debentures") at a
liquidation amount of $10 per convertible preferred security for an aggregate
amount of $16,950,000. These securities have a convertible feature that allows
the owner to convert each security to a share of the Company's common stock at a
conversion price of $9.07 per common share. These securities have a distribution
rate of 8.75% per annum payable at the end of each calendar quarter.
The proceeds received by the Company from the Trust II Issuer were used for
general corporate purposes, which included, capital contributions to the Bank to
support growth, for working capital and the repurchase of shares of the
Company's common stock.
Composition of Loans
One of the Company's main objectives is to seek attractive lending opportunities
in East Texas, primarily in Smith and Gregg counties. Total average loans
increased $38.8 million or 7.2% from the three months ended March 31, 2002 to
March 31, 2003. The majority of the increase is in loans to municipalities and
school districts. The increase in municipal loans is due to a strong commitment
in municipal 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 department 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 or loan relationships of $50,000 or more, which are graded as
having more than the normal degree of risk associated with them, is maintained
by the internal loan review department. This list is updated on a periodic basis
but no less than quarterly 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, 2003, loan charge-offs were $334,000 and
recoveries were $109,000, resulting in net charge-offs of $225,000. For the
three months ended March 31, 2002, loan charge-offs were $344,000 and recoveries
were $106,000, resulting in net charge-offs of $238,000.
Net charge-offs decreased $13,000 or 5.5% for the three months ended March 31,
2003 compared to the three months ended March 31, 2002. The necessary provision
expense was estimated at $529,000 for the three months ended March 31, 2003.
18
Nonperforming Assets
Nonperforming assets consist of delinquent loans over 90 days past due,
nonaccrual loans, other real estate owned, repossessed assets and restructured
loans. Nonaccrual loans are those loans which are more than 90 days delinquent
and collection in full of both the principal and interest is in doubt.
Additionally, some loans that are not delinquent may be placed on nonaccrual
status due to doubts about full collection of principal or interest. When a loan
is categorized as nonaccrual, the accrual of interest is discontinued and the
accrued balance is reversed for financial statement purposes. 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.
Total nonperforming assets at March 31, 2003 were $3.8 million, up $381,000 or
11.3% from $3.4 million at December 31, 2002. Loans 90 days past due or more
increased $145,000 or 50.5% to $432,000. Of this total, approximately 68% are
collateralized by residential dwellings that are primarily owner occupied.
Historically, the amount of losses suffered on this type of loan have been less
than those on other properties. Seventeen percent are commercial loans and 15%
are loans to individuals. From December 31, 2002 to March 31, 2003, nonaccrual
loans increased $113,000 or 5.0% to $2.4 million. Repossessed assets increased
$127,000 or 1,154.5% compared to an unusually low level of repossessed assets at
December 31, 2002 of approximately $11,000. Other real estate increased $17,000
or 3.2% to $541,000. Restructured loans decreased $21,000 or 6.5% to $304,000.
Expansion
Currently, the Company has no definitive expansion plans in place. The Company
continues to evaluate new opportunities for branches but will continue to be
very selective about the opportunities it pursues.
Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 143, "Accounting for Asset Retirement Obligations" (FAS
143). FAS 143 requires liability recognition for retirement obligations
associated with tangible long-lived assets. The obligations included within the
scope of FAS 143 are those for which a company faces a legal obligation for
settlement. The initial measurement of the asset retirement obligation is to be
at fair value. The asset retirement cost equal to the fair value of the
retirement obligation is to be capitalized as part of the cost of the related
long-lived asset and amortized to expense over the useful life of the asset. FAS
143 is effective for all fiscal years beginning after June 15, 2002. The
adoption of FAS 143 did not have a material impact on the Company's consolidated
financial statements.
In April 2002, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 145, "Rescission of FAS 4, 44, and 64, Amendment of FAS
13, and Technical Corrections" (FAS 145). This statement updates, clarifies and
simplifies existing accounting pronouncements with respect to the accounting for
gains and losses from the extinguishments of debt. FAS 4 required all gains and
losses from extinguishments of debt to be aggregated and, if material,
classified as an extraordinary item, net of related tax effect. As a result of
the rescission of FAS 4, the criteria in APB Opinion No. 30 will now be used to
classify those gains and losses. The provisions of this statement are applicable
to transactions occurring after January 1, 2003. The adoption of FAS 145 did not
have a material impact on the Company's consolidated financial statements.
In June 2002, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" (FAS 146). This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The principal
difference between this Statement and Issue 94-3 relates to its requirements for
recognition of a liability for a cost associated with an exit or disposal
activity. This Statement requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred. Under
Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized
at the date of an entity's commitment to an exit plan. A fundamental conclusion
reached by the Board in this Statement is that an entity's commitment to a plan,
by itself, does not create a present obligation to others that meets the
definition of a liability. Therefore, this Statement eliminates the definition
and requirements for recognition
19
of exit costs in Issue 94-3. This Statement also establishes that fair value is
the objective for initial measurement of the liability. The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002. The adoption of FAS 146 did not have a material impact on the
Company's consolidated financial statements.
In October 2002, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 147, "Acquisitions of Certain Financial Institutions"
(FAS 147). This statement is an amendment of FAS Statements No. 72 and 144 and
FAS Interpretation No. 9. FAS Statement No. 72, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions", and FASB Interpretation No. 9,
"Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a
Similar Institution Is Acquired in a Business Combination Accounted for by the
Purchase Method", provided interpretive guidance on the application of the
purchase method to acquisitions of financial institutions. Except for
transactions between two or more mutual enterprises, this Statement removes
acquisitions of financial institutions from the scope of both FAS 72 and
Interpretation 9 and requires that those transactions be accounted for in
accordance with FAS 141, "Business Combinations", and FAS 142, "Goodwill and
Other Intangible Assets." Thus, the requirement in paragraph 5 of FAS 72 to
recognize (and subsequently amortize) any excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable intangible
assets acquired as an unidentifiable intangible asset no longer applies to
acquisitions within the scope of this Statement. In addition, this Statement
amends FAS 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," to include in its scope long-term customer-relationship intangible
assets of financial institutions such as depositor- and borrower-relationship
intangible assets and credit cardholder intangible assets. Consequently, those
intangible assets are subject to the same undiscounted cash flow recoverability
test and impairment loss recognition and measurement provisions that FAS 144
requires for other long-lived assets that are held and used. The adoption of FAS
147 did not have a material impact on the Company's consolidated financial
statements.
In December 2002, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure" (FAS 148). This Statement is an amendment of FAS
Statement No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of FAS 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. FAS 148 permits two additional transition methods for
entities that adopt the preferable method of accounting for stock-based
compensation. This Statement requires disclosure of comparable information for
all companies regardless of whether, when, or how an entity adopts the
preferable, fair-value based method of accounting. In addition, FAS 148
prescribes a specific tabular format and requires disclosure in the "Summary of
Significant Accounting Policies" or its equivalent.
In November 2002, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 45 (FIN 45), Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees Of Indebtedness Of
Others, an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission
of FASB Interpretation No. 34. FIN 45 relates to the accounting for and
disclosure of guarantees and addresses (1) an obligation to stand ready to
perform over the term of the guarantee in the event that the specified
triggering events or conditions occur and (2) a contingent obligation to make
future payments if those triggering events or conditions occur.
FIN 45 requires that upon issuance of a guarantee, the entity (i.e., the
guarantor) must recognize a liability for the fair value of the obligation it
assumes under that guarantee. Many guarantees are embedded in purchase or sales
agreements, service contracts, joint venture agreements, or other commercial
agreements and the guarantor in many such arrangements does not receive a
separately identifiable upfront payment for issuing the guarantee. FIN 45
requires identical accounting for guarantees issued with or without a separately
identified premium.
The disclosure requirements are effective for financial statements of interim
and annual periods ending after December 15, 2002. The initial recognition and
initial measurement provisions should be applied only on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The guarantor's previous accounting for guarantees
issued prior to the initial application date of FIN 45 should not be revised or
restated to reflect the effect of the new recognition and measurement
provisions. The Company does not believe that FIN 45 will have a material impact
on its consolidated financial statements.
On January 17, 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation
20
No. 46 (FIN 46), Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51. The primary objective of the Interpretation is to provide
guidance on the identification of, and financial reporting for, entities over
which control is achieved through means other than voting rights; such entities
are known as variable-interest entities (VIEs). Although the FASB's initial
focus was on special-purpose entities (SPEs), the final guidance applies to a
wide range of entities. FIN 46 has far-reaching effects and applies to new
entities that are created after the effective date, as well as applies to
existing entities. Once it goes into effect, FIN 46 will be the guidance that
determines (1) whether consolidation is required under the "controlling
financial interest" model of Accounting Research Bulletin No. 51 (ARB 51),
Consolidated Financial Statements, or (b) other existing authoritative guidance,
or, alternatively, (2) whether the variable-interest model under FIN 46 should
be used to account for existing and new entities. The effective dates and
transition provisions of the Interpretation are as follows: Public companies
will be required to apply the Interpretation to preexisting entities as of the
beginning of the first interim period beginning after June 15, 2003.
All enterprises should apply the Interpretation to VIEs with which they become
involved beginning February 1, 2003.
All enterprises will be required to apply the transition disclosure requirements
in financial statements issued after February 1, 2003.
The Company does not believe FIN 46 will have a material impact on its
consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the banking industry, a major risk exposure is changing interest rates. The
primary objective of monitoring the Company's interest rate sensitivity, or
risk, is to provide management the tools necessary to manage the balance sheet
to minimize adverse changes in net interest income as a result of changes in the
direction and level of interest rates. Federal Reserve Board monetary control
efforts, the effects of deregulation and legislative changes have been
significant factors affecting the task of managing interest rate sensitivity
positions in recent years.
In an attempt to manage its exposure to changes in interest rates, management
closely monitors the Company's exposure to interest rate risk. Management
maintains an asset/liability committee which meets regularly and reviews the
Company's interest rate risk position and makes recommendations for adjusting
this position. In addition, the Board reviews on a monthly basis the Company's
asset/liability position. The Company primarily uses two methods for measuring
and analyzing interest rate risk: Net income simulation analysis and market
value of portfolio equity modeling. Through these simulations the Company
attempts to estimate the impact on net interest income of a 200 basis point
parallel shift in the yield curve. Policy guidelines limit the estimated change
in net interest income to 10 percent of forecasted net income over the
succeeding 12 months and 200 basis point parallel rate shock. Policy guidelines
limit the change in market value of equity in a 200 basis point parallel rate
shock to 20 percent of the base case. The results of the valuation analysis as
of March 31, 2003, were within policy guidelines. This type of simulation
analysis requires numerous assumptions including but not limited to changes in
balance sheet mix, prepayment rates on mortgage-related assets and fixed rate
loans, cash flows and repricing of all financial instruments, changes in volumes
and pricing, future shapes of the yield curve, relationship of market interest
rates to each other (basis risk), credit spread and deposit sensitivity.
Assumptions are based on management's best estimates but may not accurately
reflect actual results under certain changes in interest rates.
21
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. Except for the
effects of prepayments and scheduled principal amortization, the table presents
principal cash flows and related weighted average interest rates by the
contractual term to maturity. Callable FHLB Dallas Advances are presented based
on contractual maturity. Nonaccrual loans totaling $2,351,000 are not included
in the loan totals. All instruments are classified as other than trading.
EXPECTED MATURITY DATE
(dollars in thousands)
Twelve Months Ending March 31,
------------------------------
Fair
2004 2005 2006 2007 2008 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
Fixed Rate Loans ................. $ 198,759 $ 96,939 $ 58,070 $ 35,020 $ 20,850 $ 45,506 $ 455,144 $ 478,725
6.88% 7.09% 6.95% 6.77% 6.58% 5.73% 6.80%
Adjustable Rate Loans ............ 37,166 8,613 6,830 12,542 13,604 37,149 115,904 $ 115,904
4.90% 4.80% 4.65% 4.79% 4.85% 4.74% 4.81%
Mortgage-backed Securities ....... 218,461 124,060 70,116 38,573 21,096 19,783 492,089 $ 492,089
4.27% 4.23% 4.18% 4.10% 4.05% 4.01% 4.21%
Investments and Other
Interest Earning Assets .......... 63,744 265 913 341 353 80,937 146,553 $ 146,553
1.84% 7.80% 8.73% 7.84% 7.87% 7.47% 5.03%
Total Interest Earning Assets .... $ 518,130 $ 229,877 $ 135,929 $ 86,476 $ 55,903 $ 183,375 $ 1,209,690 $ 1,233,271
5.02% 5.46% 5.42% 5.30% 5.21% 6.11% 5.34%
Savings Deposits ................. $ 4,227 $ 2,113 $ 2,113 $ 2,113 $ 2,113 $ 29,584 $ 42,263 $ 41,044
0.81% 0.81% 0.81% 0.81% 0.81% 0.81% 0.81%
NOW Deposits ..................... 24,831 4,792 4,792 4,792 4,792 67,076 111,075 $ 106,616
0.67% 0.33% 0.33% 0.33% 0.33% 0.33% 0.41%
Money Market Deposits ............ 20,761 6,920 6,920 6,920 6,920 20,761 69,202 $ 69,647
0.97% 0.97% 0.97% 0.97% 0.97% 0.97% 0.97%
Platinum Money Market ............ 43,407 4,651 4,651 4,651 4,650 -- 62,010 $ 63,092
1.15% 1.15% 1.15% 1.15% 1.15% -- 1.15%
Certificates of Deposit .......... 243,660 46,334 16,980 18,816 14,713 285 340,788 $ 349,624
2.48% 4.07% 4.64% 5.10% 4.29% 6.50% 3.03%
FHLB Dallas Advances ............. 85,986 100,900 44,513 23,965 10,839 83,344 349,547 $ 361,733
4.66% 3.26% 4.49% 4.77% 4.13% 5.50% 4.43%
Other Borrowings ................. 2,500 -- -- -- -- 33,923 36,423 $ 48,889
1.04% -- -- -- -- 8.60% 8.08%
Total Interest Bearing Liabilities $ 425,372 $ 165,710 $ 79,969 $ 61,257 $ 44,027 $ 234,973 $ 1,011,308 $ 1,040,645
2.58% 3.22% 3.68% 3.68% 2.80% 3.48% 3.06%
22
Residential fixed rate loans are assumed to have annual prepayment rates between
7% and 35% of the portfolio. Commercial and multi-family real estate loans are
assumed to prepay at an annualized rate between 8% and 40%. Consumer loans are
assumed to prepay at an annualized rate between 8% and 30%. Commercial loans are
assumed to prepay at an annualized rate between 8% and 45%. Municipal loans are
assumed to prepay at an annualized rate between 6% and 15%. Fixed and adjustable
rate mortgage-backed securities, including Collateralized Mortgage Obligations
("CMOs") and Real Estate Mortgage Investment Conduits ("REMICs"), have annual
payment assumptions ranging from 6% to 50%. At March 31, 2003, the contractual
maturity of substantially all of the Company's mortgage-backed or related
securities was in excess of ten years. The actual maturity of a mortgage-backed
or related security is less than its stated maturity due to regular principal
payments and prepayments of the underlying mortgages. Prepayments that are
faster than anticipated may shorten the life of the security and affect its
yield to maturity. The yield to maturity is based upon the interest income and
the amortization of any premium or discount related to the security. In
accordance with generally accepted accounting principles, premiums and discounts
are amortized over the estimated lives of the loans, which decrease and increase
interest income, respectively. The prepayment assumptions used to determine the
amortization period for premiums and discounts can significantly affect the
yield of the mortgage-backed or related security, and these assumptions are
reviewed periodically to reflect actual prepayments. Although prepayments of
underlying mortgages depend on many factors, including the type of mortgages,
the coupon rate, the age of mortgages, the geographical location of the
underlying real estate collateralizing the mortgages and general levels of
market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments. During periods of
falling mortgage interest rates, if the coupon rate of the underlying mortgages
exceeds the prevailing market interest rates offered for mortgage loans,
refinancing may increase and accelerate the prepayment of the underlying
mortgages and the related security. At March 31, 2003, of the $492.1 million of
mortgage-backed and related securities held by the Company, an aggregate of
$490.8 million were collateralized by fixed-rate mortgage loans and an aggregate
of $1.3 million were secured by adjustable-rate mortgage loans.
The Company assumes 70% of savings accounts and approximately 60% of transaction
accounts at March 31, 2003, are core deposits and are, therefore, expected to
roll-off after five years. The Company assumes 30% of Money Market accounts at
March 31, 2003 are core deposits and are, therefore, expected to roll-off after
five years. The Company does not consider any of its Platinum Money Markets
accounts as core deposits. No roll-off rate is applied to certificates of
deposit. Fixed maturity deposits reprice at maturity.
In evaluating the Company's exposure to interest rate risk, certain limitations
inherent in the method of analysis presented in the foregoing table must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable rate mortgages, have
features which restrict changes in interest rates, prepayment and early
withdrawal levels may deviate significantly from those assumed in calculating
the table. Finally, the ability of many borrowers to service their debt may
decrease in the event of an interest rate increase. The Company considers all of
these factors in monitoring its exposure to interest rate risk.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this Quarterly Report on Form
10-Q, an evaluation was carried out under the supervision and with participation
of the Company's management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 under
the Securities Exchange Act of 1934). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the disclosure
controls and procedures were effective. No significant changes were made in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to certain litigation that it considers routine
and incidental to its business. Management does not expect the results
of any of these actions to have a material effect on the Company's
business, results of operations or financial condition.
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 17, 2003.
(b) The election of four directors (term expiring at the 2006 Annual
Meeting) were as follows:
FOR WITHHELD
--------- --------
Herbert C. Buie .. 5,658,296 51,380
Robbie N. Edmonson 5,657,493 52,183
Michael D. Gollob 5,658,296 51,380
Joe Norton ....... 5,657,811 51,865
Directors continuing until the 2004 Annual Meeting are as follows:
Fred E. Bosworth
B. G. Hartley
Paul W. Powell
Directors continuing until the 2005 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 5,556,626 shares in the affirmative, 102,865
shares in the negative, and 50,185 abstentions to transact other
business that may properly come before the meeting or any
adjournments. There was no new business presented at the meeting.
24
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
Exhibit
No.
---
* 99.1 - Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
* 99.2 - Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K - Earnings Release dated April 17, 2003.
-----------
* Filed herewith.
25
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: May 13, 2003
/s/ LEE R. GIBSON
------------------------------------
Lee R. Gibson, Executive Vice
President (Principal Financial
and Accounting Officer)
DATE: May 13, 2003
26
CERTIFICATION
I, B. G. Hartley, Chairman of the Board and Chief Executive Officer of Southside
Bancshares, Inc. (the "Company"), certify that:
1. I have reviewed this report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading as with respect to the period covered
by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Company as of, and for, the periods presented in this
quarterly report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report
is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee
of the Company's Board of Directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to
record, process, summarize and report financial data and have
identified for the Company's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's
internal controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 13, 2003 By: /s/ B. G. Hartley
----------------------------------------
B. G. Hartley
Chairman of the Board and Chief
Executive Officer
27
CERTIFICATION
I, Lee R. Gibson, Executive Vice President and Chief Financial Officer of
Southside Bancshares, Inc. (the "Company"), certify that:
1. I have reviewed this report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading as with respect to the period covered
by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Company as of, and for, the periods presented in this
quarterly report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report
is being prepared;
b. evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee
of the Company's Board of Directors:
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to
record, process, summarize and report financial data and have
identified for the Company's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's
internal controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 13, 2003 By: /s/ Lee R. Gibson
----------------------------------------
Lee R. Gibson, CPA
Executive Vice President and Chief
Financial Officer
28
Exhibit Index
Exhibit
Number Description
- ------ -----------
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
99.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
29