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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 September 30, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM to
-------------- --------------
Commission file number 0-12247
SOUTHSIDE BANCSHARES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 75-1848732
- ---------------------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1201 S. Beckham, Tyler, Texas 75701
- ---------------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
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 October 31, 2003 was 9,073,794 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)
September 30, December 31,
2003 2002
------------ ------------
ASSETS
Cash and due from banks .............................................. $ 54,909 $ 49,607
Federal funds sold ................................................... 1,350 -
Investment securities available for sale ............................. 136,334 151,509
Mortgage-backed and related securities available for sale ............ 578,041 489,015
Marketable equity securities available for sale ...................... 22,822 22,391
Loans:
Loans, net of unearned discount ................................... 568,790 582,241
Less: Allowance for loan losses .................................. (6,540) (6,195)
------------ ------------
Net Loans ....................................................... 562,250 576,046
Premises and equipment, net .......................................... 30,794 30,100
Interest receivable .................................................. 7,320 8,930
Other assets ......................................................... 29,776 21,588
------------ ------------
TOTAL ASSETS .................................................... $ 1,423,596 $ 1,349,186
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing ............................................... $ 221,003 $ 193,305
Interest bearing .................................................. 625,303 621,181
------------ ------------
Total Deposits .................................................. 846,306 814,486
Short-term obligations:
Federal funds purchased ........................................... - 15,850
FHLB Dallas advances .............................................. 148,502 153,422
Junior subordinated convertible debentures ........................ 11,249 -
Junior subordinated debentures .................................... 20,000 -
Other obligations ................................................. 11,429 2,500
------------ ------------
Total Short-term obligations ................................... 191,180 171,772
Long-term obligations:
FHLB Dallas advances .............................................. 257,975 231,140
Junior subordinated convertible debentures ........................ - 14,225
Junior subordinated debentures .................................... 20,000 20,000
------------ ------------
Total Long-term obligations .................................... 277,975 265,365
Deferred tax liability ............................................... 1,510 3,631
Other liabilities .................................................... 19,662 11,765
------------ ------------
TOTAL LIABILITIES ............................................... 1,336,633 1,267,019
------------ ------------
Shareholders' equity:
Common stock: ($1.25 par, 20,000,000 shares authorized,
10,449,550 and 9,557,598 shares issued) ........................... 13,062 11,947
Paid-in capital ................................................... 54,039 44,050
Retained earnings ................................................. 29,939 29,805
Treasury stock (1,420,587 and 1,198,787 shares at cost) ........... (16,544) (12,714)
Accumulated other comprehensive income ............................ 6,467 9,079
------------ ------------
TOTAL SHAREHOLDERS' EQUITY ..................................... 86,963 82,167
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................... $ 1,423,596 $ 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)
Quarter Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Interest income
Loans .............................................. $ 8,710 $ 9,568 $ 26,914 $ 28,592
Investment securities .............................. 1,148 1,608 3,527 5,247
Mortgage-backed and related securities ............. 4,614 6,371 14,791 18,358
Marketable equity securities ....................... 114 166 404 502
Other interest earning assets ...................... 22 10 83 42
---------- ---------- ---------- ----------
Total interest income .......................... 14,608 17,723 45,719 52,741
Interest expense
Deposits ........................................... 2,573 4,012 8,998 12,395
Short-term obligations ............................. 1,724 1,447 4,806 4,118
Long-term obligations .............................. 3,022 3,631 9,293 11,117
---------- ---------- ---------- ----------
Total interest expense ......................... 7,319 9,090 23,097 27,630
---------- ---------- ---------- ----------
Net interest income ................................... 7,289 8,633 22,622 25,111
Provision for loan losses ............................. - 530 1,054 1,581
---------- ---------- ---------- ----------
Net interest income after provision for loan losses ... 7,289 8,103 21,568 23,530
---------- ---------- ---------- ----------
Noninterest income
Deposit services ................................... 3,441 2,687 9,512 7,810
Gain on sales of securities available for sale ..... 699 2,044 4,278 3,087
Mortgage servicing release fees .................... 853 566 2,314 1,471
Trust income ....................................... 273 243 748 724
Bank owned life insurance .......................... 257 168 749 663
Other .............................................. 394 264 1,064 730
---------- ---------- ---------- ----------
Total noninterest income ....................... 5,917 5,972 18,665 14,485
---------- ---------- ---------- ----------
Noninterest expense
Salaries and employee benefits ..................... 5,751 5,549 17,698 16,147
Net occupancy expense .............................. 995 1,015 2,945 2,930
Equipment expense .................................. 177 182 527 507
Advertising, travel & entertainment ................ 343 422 1,281 1,300
ATM and bank analysis fees ......................... 254 209 695 642
Supplies ........................................... 173 180 487 546
Professional fees .................................. 172 147 535 478
Postage ............................................ 144 141 423 382
Other .............................................. 2,094 1,138 4,468 3,017
---------- ---------- ---------- ----------
Total noninterest expense ...................... 10,103 8,983 29,059 25,949
---------- ---------- ---------- ----------
Income before federal tax expense ..................... 3,103 5,092 11,174 12,066
Provision for federal tax expense ..................... 353 948 1,640 1,795
---------- ---------- ---------- ----------
Net Income ............................................ $ 2,750 $ 4,144 $ 9,534 $ 10,271
========== ========== ========== ==========
Earnings per common share - basic ..................... $ 0.30 $ 0.48 $ 1.07 $ 1.18
========== ========== ========== ==========
Earnings per common share - diluted ................... $ 0.26 $ 0.39 $ 0.91 $ 0.98
========== ========== ========== ==========
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 Total
Compre- Compre- Share-
hensive Common Paid in Retained Treasury hensive holders'
Income Stock Capital Earnings Stock Income Equity
--------- --------- --------- --------- ----------- ----------- ---------
Balance at December 31, 2002 ............... $ $ 11,947 $ 44,050 $ 29,805 $ (12,714) $ 9,079 $ 82,167
Net Income ................................. 9,534 9,534 9,534
Other comprehensive loss, net of tax
Unrealized losses on securities, net of
reclassification adjustment (see Note 3). (2,612) (2,612) (2,612)
---------
Comprehensive income ....................... $ 6,922
=========
Common stock issued (462,730 shares) ....... 578 3,173 3,751
Dividends paid on common stock ............. (2,206) (2,206)
Purchase of 221,800 shares of
common stock ............................. (3,830) (3,830)
Tax benefit of incentive stock options ..... 159 159
Stock dividend paid ........................ 537 6,657 (7,194) -
--------- --------- --------- --------- --------- ---------
Balance at September 30, 2003 .............. $ 13,062 $ 54,039 $ 29,939 $ (16,544) $ 6,467 $ 86,963
========= ========= ========= ========= ========= =========
Balance at December 31, 2001 ............... $ $ 10,917 $ 35,195 $ 25,133 $ (8,511) $ 5,851 $ 68,585
Net Income ................................. 10,271 10,271 10,271
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment (see Note 3). 2,228 2,228 2,228
---------
Comprehensive income ....................... $ 12,499
=========
Common stock issued (343,341 shares) ....... 429 2,524 2,953
Dividends paid on common stock ............. (1,813) (1,813)
Purchase of 276,710 shares of
common stock ............................. (4,181) (4,181)
Tax benefit of incentive stock options ..... 137 137
Stock dividend paid ........................ 494 5,513 (6,007) -
--------- --------- --------- --------- --------- ---------
Balance at September 30, 2002 .............. $ 11,840 $ 43,369 $ 27,584 $ (12,692) $ 8,079 $ 78,180
========= ========= ========= ========= ========= =========
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)
Nine Months Ended
September 30,
---------------------------
2003 2002
------------ ------------
OPERATING ACTIVITIES:
Net income .................................................................... $ 9,534 $ 10,271
Adjustments to reconcile net cash provided by operations:
Depreciation ................................................................. 1,757 1,719
Amortization of premium ...................................................... 10,643 7,175
Accretion of discount and loan fees .......................................... (201) (273)
Provision for loan losses .................................................... 1,054 1,581
Decrease in interest receivable .............................................. 1,610 933
(Increase) decrease in other assets .......................................... (8,417) 1,358
Increase in deferred tax asset ............................................... (776) (261)
Decrease in interest payable ................................................. (508) (360)
Increase in other liabilities ................................................ 17,334 12,892
Loss on retirement of premises and equipment ................................. 149 -
Gain on sales of premises and equipment ...................................... (7) (12)
Impairment of other real estate owned ........................................ 70 -
(Gain) loss on sales of other real estate owned .............................. (26) 61
Gain on sales of available for sale securities ............................... (4,278) (3,087)
------------ ------------
Net cash provided by operating activities .................................. 27,938 31,997
INVESTING ACTIVITIES:
Net increase in federal funds sold ............................................ (1,350) -
Proceeds from sales of investment securities available for sale ............... 67,332 97,500
Proceeds from sales of mortgage-backed securities available for sale .......... 131,166 100,532
Proceeds from maturities of investment securities available for sale .......... 64,970 11,580
Proceeds from maturities of mortgage-backed securities available for sale ..... 190,700 155,887
Purchases of investment securities available for sale ......................... (116,067) (82,302)
Purchases of mortgage-backed securities available for sale .................... (422,073) (290,866)
Purchases of marketable equity securities available for sale .................. (431) (943)
Net decrease (increase) in loans .............................................. 11,883 (32,181)
Purchases of premises and equipment ........................................... (2,639) (4,462)
Proceeds from sales of premises and equipment ................................. 46 19
Proceeds from sales of other real estate owned ................................ 358 481
Proceeds from sales of repossessed assets ..................................... 686 1,201
------------ ------------
Net cash used in investing activities ...................................... (75,419) (43,554)
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)
Nine Months Ended
September 30,
-----------------------
2003 2002
---------- ----------
FINANCING ACTIVITIES:
Net increase in demand and savings accounts ................................... $ 52,467 $ 17,945
Net (decrease) increase in certificates of deposit ............................ (20,647) 9,896
Net decrease in federal funds purchased ....................................... (15,850) (25,800)
Net increase in FHLB Dallas advances .......................................... 21,915 6,003
Issuance of junior subordinated debentures .................................... 20,000 -
Net decrease in junior subordinated convertible debentures .................... (2,976) (2,172)
Tax benefit of incentive stock options ........................................ 159 137
Proceeds from the issuance of common stock .................................... 3,751 2,953
Purchase of common stock ...................................................... (3,830) (4,181)
Dividends paid ................................................................ (2,206) (1,813)
---------- ----------
Net cash provided by financing activities ................................ 52,783 2,968
Net increase (decrease) in cash and cash equivalents ........................... 5,302 (8,589)
Cash and cash equivalents at beginning of period ............................... 49,607 52,681
---------- ----------
Cash and cash equivalents at end of period ..................................... $ 54,909 $ 44,092
========== ==========
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION:
Interest paid ................................................................. $ 23,605 $ 27,990
Income taxes paid ............................................................. $ 1,600 $ 1,900
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of other repossessed assets and real estate through foreclosure ... $ 860 $ 2,068
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 September 30, 2003, and the related
consolidated statements of income, shareholders' equity, cash flow and notes to
the financial statements for the quarter and nine-month periods ended September
30, 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. Stock dividends of 5% were declared and paid during each of the third
quarters ended September 30, 2003 and 2002.
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):
Quarter Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Basic Earnings and Shares:
Net income.................................................... $ 2,750 $ 4,144 $ 9,534 $ 10,271
========== ========== ========== ==========
Weighted-average basic shares outstanding .................... 8,993 8,709 8,885 8,685
========== ========== ========== ==========
Basic Earnings Per Share:
Net income.................................................... $ 0.30 $ 0.48 $ 1.07 $ 1.18
========== ========== ========== ==========
Diluted Earnings and Shares:
Net income.................................................... $ 2,750 $ 4,144 $ 9,534 $ 10,271
Add: Applicable dividend on convertible debentures .......... 162 213 543 675
---------- ---------- ---------- ----------
Adjusted net income........................................... $ 2,912 $ 4,357 $ 10,077 $ 10,946
========== ========== ========== ==========
Weighted-average basic shares outstanding .................... 8,993 8,709 8,885 8,685
Add: Stock options .......................................... 629 633 641 635
Convertible debentures ................................. 1,359 1,711 1,514 1,810
---------- ---------- ---------- ----------
Weighted-average diluted shares outstanding .................. 10,981 11,053 11,040 11,130
========== ========== ========== ==========
Diluted Earnings Per Share:
Net income ................................................... $ 0.26 $ 0.39 $ 0.91 $ 0.98
========== ========== ========== ==========
6
3. Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) are as follows
(in thousands):
Nine months Ended September 30, 2003
------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------ ------------ ------------
Unrealized losses on securities:
Unrealized holding gains arising during period ..... $ 320 $ (109) $ 211
Less: reclassification adjustment for gains
included in net income ........................ 4,278 (1,455) 2,823
------------ ------------ ------------
Net unrealized losses on securities ............... (3,958) 1,346 (2,612)
------------ ------------ ------------
Other comprehensive loss .............................. $ (3,958) $ 1,346 $ (2,612)
============ ============ ============
Quarter Ended September 30, 2003
------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------ ------------ ------------
Unrealized losses on securities:
Unrealized holding losses arising during period .... $ (2,645) $ 899 $ (1,746)
Less: reclassification adjustment for gains
included in net income ........................ 699 (238) 461
------------ ------------ ------------
Net unrealized losses on securities ............... (3,344) 1,137 (2,207)
------------ ------------ ------------
Other comprehensive loss .............................. $ (3,344) $ 1,137 $ (2,207)
============ ============ ============
Nine months Ended September 30, 2002
------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------ ------------ ------------
Unrealized gains on securities:
Unrealized holding gains arising during period ..... $ 6,462 $ (2,197) $ 4,265
Less: reclassification adjustment for gains
included in net income ........................ 3,087 (1,050) 2,037
------------ ------------ ------------
Net unrealized gains on securities ................ 3,375 (1,147) 2,228
------------ ------------ ------------
Other comprehensive income ............................ $ 3,375 $ (1,147) $ 2,228
============ ============ ============
Quarter Ended September 30, 2002
------------------------------------------
Before-Tax Tax(Expense) Net-of-Tax
Amount Benefit Amount
------------ ------------ ------------
Unrealized gains on securities:
Unrealized holding gains arising during period ..... $ 4,305 $ (1,464) $ 2,841
Less: reclassification adjustment for gains
included in net income ........................ 2,044 (695) 1,349
------------ ------------ ------------
Net unrealized gains on securities ................ 2,261 (769) 1,492
------------ ------------ ------------
Other comprehensive income ............................ $ 2,261 $ (769) $ 1,492
============ ============ ============
7
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 the intrinsic value method of APB Opinion 25 and related
Interpretations in accounting for the Plan and discloses the pro forma
information for the value method required by FAS 123 and 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 September 30, 2003, there were no stock options available for
grant. At September 30, 2002, there were 23,524 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
28,875 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 Opinion 25,
the Company has not recognized any compensation cost for these stock options.
A summary of the status of the Company's stock options and the changes during
the periods ended on those dates is presented below:
Quarter Ended September 30, Nine months Ended September 30,
- ---------------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
# Shares of Average # Shares of Average # Shares of Average # Shares of Average
Underlying Exercise Underlying Exercise Underlying Exercise Underlying Exercise
Options Prices Options Prices Options Price Options Prices
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning
of the period 1,052,097 $ 6.37 1,140,199 $ 5.95 1,102,304 $ 5.98 1,218,153 $ 5.93
- --------------------------------------------------------------------------------------------------------------------------
Granted - $ - - $ - 28,875 $ 15.33 - $ -
- --------------------------------------------------------------------------------------------------------------------------
Exercised (35,652) $ 6.23 (23,056) $ 5.53 (110,090) $ 4.77 (98,295) $ 5.53
- --------------------------------------------------------------------------------------------------------------------------
Forfeited (5,946) $ 6.65 - $ - (10,590) $ 6.51 (2,715) $ 6.37
- --------------------------------------------------------------------------------------------------------------------------
Expired - - - - - - - -
- --------------------------------------------------------------------------------------------------------------------------
Outstanding at end of
period 1,010,499 $ 6.38 1,117,143 $ 5.96 1,010,499 $ 6.38 1,117,143 $ 5.96
- --------------------------------------------------------------------------------------------------------------------------
Exercisable at end of
period 787,910 $ 5.99 779,629 $ 5.66 787,910 $ 5.99 779,629 $ 5.66
- --------------------------------------------------------------------------------------------------------------------------
Weighted-average fair
value of options granted
during the period ended
September 30 N/A N/A $ 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%.
8
The following table summarizes information about stock options outstanding at
September 30, 2003:
Options Outstanding Options Exercisable
------------------------------------------------- -----------------------------
WEIGHTED AVG.
REMAINING
RANGE OF NUMBER CONTRACT LIFE WEIGHTED AVG. NUMBER WEIGHTED AVG.
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
$ 3.88 to $ 6.38 663,699 4.5 $ 5.68 541,728 $ 5.52
$ 6.91 to $ 15.33 346,800 5.7 $ 7.71 246,182 $ 7.02
--------- -------
$ 3.88 to $ 15.33 1,010,499 4.9 $ 6.38 787,910 $ 5.99
========= =======
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 123, the Company's net income
and net income per common share would approximate the pro forma amounts below
(in thousands, except per share amounts, net of taxes):
- ------------------------------------------------------------------------------------------------------------------------------
Quarter Ended September 30, Nine months Ended September 30,
- ------------------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
- ------------------------------------------------------------------------------------------------------------------------------
FAS123 Charge $ - $ 44 $ - $ 39 $ - $ 127 $ - $ 137
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ 2,750 $ 2,706 $ 4,144 $ 4,105 $ 9,534 $ 9,407 $ 10,271 $ 10,134
- ------------------------------------------------------------------------------------------------------------------------------
Net Income per
Common Share-Basic $ 0.30 $ 0.30 $ 0.48 $ 0.47 $ 1.07 $ 1.06 $ 1.18 $ 1.17
- ------------------------------------------------------------------------------------------------------------------------------
Net Income per
Common Share-Diluted $ 0.26 $ 0.26 $ 0.39 $ 0.39 $ 0.91 $ 0.90 $ 0.98 $ 0.97
- ------------------------------------------------------------------------------------------------------------------------------
The effects of applying FAS123 in this pro forma disclosure are not indicative
of future amounts.
9
5. Accounting Pronouncements
In April 2003, the Financial Accounting Standards Board (FASB) issued Financial
Accounting Standard No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" (FAS 149). FAS 149 amends and clarifies (1)
the accounting guidance on derivative instruments (including certain derivative
instruments embedded in other contracts) and (2) hedging activities that fall
within the scope of FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). In addition, FAS 149 amends FAS
133 to reflect decisions made as part of the Derivatives Implementation Group
(DIG) process that effectively required amendments to FAS 133, in connection
with other projects dealing with financial instruments, and regarding
implementation issues related to the application of the definition of a
derivative. The changes in FAS 149 improve financial reporting by requiring that
contracts with comparable characteristics be accounted for similarly and
clarifying when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. The guidance is to be applied
prospectively. FAS 149 is effective for contracts entered into or modified after
June 30, 2003, with certain exceptions, and for hedging relationships designated
after June 30, 2003. The adoption of FAS 149 did not have a material impact on
the consolidated financial statements.
In May 2003, the Financial Accounting Standards Board (FASB) issued Financial
Accounting Standard No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" (FAS 150). FAS 150 improves the
accounting for certain financial instruments that, under previous guidance,
issuers could account for as equity and requires that those instruments be
classified as liabilities (or assets in certain circumstances) in statements of
financial position.
FAS 150 affects the issuer's accounting for three types of freestanding
financial instruments:
1. Mandatorily redeemable shares are required to be redeemed at a
specified or determinable date or upon an event certain to
occur. A financial instrument is deemed mandatorily redeemable
if it embodies an obligation outside the control of the issuer
and the holder to redeem the instrument by transferring cash
or other assets and the obligation is required to be redeemed
at a specified or determinable date or upon an event certain
to occur. No entity would be exempt from classifying MRIs as
liabilities. Further, those entities that have only one class
of stock and that stock is considered mandatorily redeemable
would be required to specifically distinguish those
instruments within the financial statements from other
instruments classified as liabilities.
2. Put options and forward purchase contracts, which involves
financial instruments embodying an obligation that the issuer
must or could choose to settle by issuing a variable number of
its shares or other equity instruments based solely on
something other than the issuer's own equity shares.
3. Certain obligations that can be settled with shares, the
monetary value of which is fixed, tied solely or predominantly
to a variable such as a market index or varies inversely with
the value of the issuers' shares. FAS 150 does not apply to
features embedded in a financial instrument that is not a
derivative in its entirety.
FAS 150 also requires disclosures about alternative ways of settling the
instruments and the capital structure of entities--all of whose shares are
mandatorily redeemable. FAS 150 is generally effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of FAS 150 did not have a material impact on the consolidated
financial statements.
FIN No. 46 "Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51." FIN 46 establishes accounting guidance for
consolidation of variable interest entities (VIE) that function to support the
activities of the primary beneficiary. The primary beneficiary of a VIE entity
is the entity that absorbs a majority of the VIE's expected losses, receives a
majority of the VIE's expected residual returns, or both, as a result of
ownership, controlling interest, contractual relationship or other business
relationship with a VIE. Prior to the implementation of FIN 46, VIEs were
generally consolidated by an enterprise when the enterprise had a controlling
financial interest through ownership of a majority of voting interest in the
entity. The provisions of FIN 46 were effective immediately for all arrangements
entered into after January 31, 2003. If a VIE existed prior to February 1, 2003,
FIN 46 was effective at the beginning of the first interim period beginning
after June 15, 2003. However, on
10
October 8, 2003, the Financial Accounting Standards Board (FASB) deferred the
implementation date of FIN 46 until the first period ending after December 15,
2003.
The Company expects to adopt FIN 46 in connection with its consolidated
financial statements for the year ended December 31, 2003. In its current form,
FIN 46 may require the Company to de-consolidate its investments in Southside
Capital Trusts I & II and Southside Statutory Trust III in future financial
statements. The potential de-consolidation of subsidiary trusts of bank holding
companies formed in connection with the issuance of trust preferred securities,
like Southside Capital Trusts I & II and Southside Statutory Trust III, appears
to be an unintended consequence of FIN 46. It is currently unknown if, or when,
the FASB will address this issue. In July 2003, the Board of Governors of the
Federal Reserve System issued a supervisory letter instructing bank holding
companies to continue to include the trust preferred securities in their Tier I
capital for regulatory capital purposes until notice is given to the contrary.
The Federal Reserve intends to review the regulatory implications of any
accounting treatment changes and, if necessary or warranted, provide further
appropriate guidance. There can be no assurance that the Federal Reserve will
continue to permit institutions to include trust preferred securities in Tier I
capital for regulatory capital purposes. As of September 30, 2003, assuming the
Company was not permitted to include a portion of the $51.2 million in trust
preferred securities issued by Southside Capital Trusts I & II and Southside
Statutory Trust III in its Tier 1 capital, the Company would still exceed the
regulatory required minimums for capital adequacy purposes. If the trust
preferred securities were no longer permitted to be included in Tier 1 capital,
the Company would also be permitted to redeem the capital securities, which bear
interest at an average rate of 6.83%, without penalty.
The interpretations of FIN 46 and its application to various transaction types
and structures are evolving. Management continuously monitors emerging issues
related to FIN 46, some of which could potentially impact the Company's
financial statements.
6. Commitments and Contingencies
In the normal course of business the Company buys and sells securities. At
September 30, 2003 and December 31, 2002 the Company had recorded in its balance
sheet commitments to purchase $10.8 million and $5.3 million in securities,
respectively.
The Company, or its subsidiaries, is involved with various litigation which
resulted in the normal course of business. Management of the Company, after
consulting with its legal counsel, believes that any liability resulting from
litigation will not have a material effect on the financial position and results
of operations and the liquidity of the Company or its subsidiaries.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Nine months ended September 30, 2003 compared to September 30,
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 a decrease in net income for the quarter and nine months
ended September 30, 2003 compared to the same period in 2002. Net income for the
quarter and nine months ended September 30, 2003 was $2.75 million and $9.5
million compared to $4.1 million and $10.3 million for the same period in 2002.
All share data has been adjusted to give retroactive recognition to stock splits
and stock dividends.
Forward-Looking Information
Certain statements contained in this document and in written material, press
releases and oral statements issued by or on behalf of Southside Bancshares,
Inc., a bank holding 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," "could," "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
and may impact prepayments on the mortgage-backed securities portfolio, changes
effecting the leverage strategy, 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,
the impact of FASB Interpretation No. 46, and the costs and effects of
litigation.
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
12
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.
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.
Estimation of Fair Value. The estimation of fair value is significant to a
number of the Company's assets, including available for sale 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 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.
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 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 its
peers. The Company's 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 adequate quality loan growth is available in the Company's market area.
During the first nine months ended September 30, 2003 quality loan growth was
not available at a market price the Company was willing to accept. As a result,
the securities portfolio as a percentage of total assets increased slightly at
September 30, 2003 when compared to December 31, 2002. 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 and at maturities that balance overall Asset Liability
Committee (ALCO) objectives. During the 2003 low interest rate environment,
long-term deposits necessary to balance ALCO objectives have not been available
in the Company's market area at a market price the Company was willing to
accept. As a result, FHLB Dallas borrowings as a percentage of deposits remained
almost unchanged when comparing September 30, 2003 and December 31, 2002. The
intended net result of the overall balance sheet strategy 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
13
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 ALCO scenarios modeled.
Net Interest Income
Net interest income for the nine months ended September 30, 2003 was $22.6
million, a decrease of $2.5 million or 9.9% when compared to the same period in
2002. Average interest earning assets increased $61.9 million or 5.2%, while the
net interest spread decreased from 2.67% at September 30, 2002 to 2.26% at
September 30, 2003 and the net margin decreased from 3.19% at September 30, 2002
to 2.74% at September 30, 2003. Net interest income decreased as a result of
decreases in the Company's net interest margin and spread during the third
quarter of 2003 when compared to the same period in 2002, which was due in large
part to significantly lower mortgage interest rates and the lower overall
interest rate environment especially during the second quarter ended June 30,
2003. This led to substantially increased residential mortgage refinancing
nationwide and in the Company's market area combined with increased repricing of
all of the Company's other loan types during the third quarter ended September
30, 2003. Increased prepayments associated with the Company's mortgage-backed
securities, residential mortgage loans and the increase in repricing of other
loan types could impact the Company's net interest margin in the future should
long-term interest rates decrease to May and June 2003 levels. During the third
quarter 2003 long-term interest rates increased from the lows experienced during
May and June 2003. This caused a slowing in refinancings which should reduce
mortgage prepayments for specific coupons during the fourth quarter. Other
factors that should improve Southside's net interest margin and spread include
new deposit repricing strategies fully implemented during the second quarter,
$31.9 million of fixed rate FHLB Dallas advances currently at an average rate of
3.86% that will reprice during the fourth quarter of 2003, and the reduction in
interest expense on $20,000,000 of refinanced trust preferred securities
beginning during the fourth quarter ended December 31, 2003. In addition, during
the first quarter of 2004, $17 million of fixed rate FHLB Dallas advances
currently at an average rate of 4.97%, will reprice. The Company's net interest
margin and spread decreased during the third quarter ended September 30, 2003 to
2.57% and 2.11%, respectively when compared to 3.22% and 2.69%, respectively for
the same period in 2002.
During the nine months ended September 30, 2003, average loans, funded primarily
by the growth in average deposits, increased $30.2 million or 5.5%, compared to
the same period in 2002. The average yield on loans decreased from 7.28% at
September 30, 2002 to 6.60% at September 30, 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 at current levels or move lower, the Company anticipates it will be
required to continue to meet lower interest rate offers from competing financial
institutions in order to retain quality loan relationships, which could impact
the overall loan yield and, therefore profitability. The decrease in interest
income on loans of $1.7 million or 5.9% was the result of the decrease in
interest rates partially offset by the increase in average loans. During the
first nine months ended September 30, 2003, loans decreased $13.5 million or
2.3% when compared to the year ended December 31, 2002 primarily as a result of
a decrease in sold mortgage loans in the process of funding and quality loan
growth not available in the Company's market area at a market price the Company
was willing to accept.
Average securities increased $23.8 million or 3.9% for the nine months ended
September 30, 2003 when compared to the same period in 2002. This increase was a
result of the increase in average deposits. The overall yield on average
securities decreased to 4.15% during the nine months ended September 30, 2003
from 5.59% during the same period in 2002. This decrease is reflective of
overall lower interest rates, significantly increased prepayment speeds on
mortgage-backed securities which led to significantly increased amortization
expense and a restructuring of a portion of the securities portfolio in an
effort to 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 $57,000 or 10.5% for the nine months ended
September 30, 2003 when compared to 2002 as a result of the decrease in the
average yield from 2.98% in 2002 to 2.02% at September 30, 2003, due to lower
interest rates, which were partially offset by an increase in the average
balance.
14
Total interest expense decreased $4.5 million or 16.4% to $23.1 million during
the nine months ended September 30, 2003 as compared to $27.6 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
$25.8 million or 2.5%. The average yield on interest bearing liabilities
decreased from 3.64% at September 30, 2002 to 2.97% at September 30, 2003.
Average interest bearing deposits increased $36.3 million or 6.1% while the
average rate paid decreased from 2.81% at September 30, 2002 to 1.92% at
September 30, 2003. Average short-term interest bearing liabilities, consisting
primarily of FHLB Dallas advances, federal funds purchased and junior
subordinated debentures, decreased $3.5 million or 2.2% as compared to the same
period in 2002. Interest expense associated with short-term interest bearing
liabilities increased $688,000 or 16.7% and the average rate paid increased 69
basis points for the nine month period ended September 30, 2003 when compared to
the same period in 2002 due to long-term advances rolling into the short-term
category and average overnight advances decreasing. Average long-term interest
bearing liabilities consisting of FHLB Dallas advances decreased $4.4 million or
1.9% during the nine months ended September 30, 2003 to $229.7 million as
compared to $234.1 million at September 30, 2002. Interest expense associated
with long-term FHLB Dallas advances decreased $1.6 million or 17.7% and the
average rate paid decreased 81 basis points for the nine months ended September
30, 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-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
$15.6 million at September 30, 2002 to $13.1 million at September 30, 2003.
During the nine months ended September 30, 2003, 297,705 convertible trust
preferred shares were converted into 330,953 shares of the Company's common
stock. During the third quarter ended September 30, 2003, 121,105 convertible
trust preferred shares were converted into 136,256 shares of the Company's
common stock. As of November 7, 2003, cumulative to date, 697,305 convertible
trust preferred shares were converted into 767,112 shares of the Company's
common stock. The total convertible trust preferred shares converted to date
represents 41.1% of the convertible trust preferred issue. Interest expense
decreased $200,000 or 19.6% 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 September 30, 2002 to September 30, 2003. Interest expense
decreased $67,000 or 5.3% and the average yield decreased 43 basis points to
8.07% for the nine months ended September 30, 2003 when compared to the same
period in 2002. On September 4, 2003 Southside Capital Trust I (the "Trust"), a
subsidiary of Southside Bancshares, Inc. announced the redemption on October 6,
2003 of all of its 8.50% Cumulative Trust Preferred Securities and 8.50% Trust
Common Securities which totaled $20,618,560. Concurrent with the Trust taking
such action Southside Bancshares redeemed all of its $20,618,560 8.50%
debentures due June 30, 2028 (the "Debentures") which were held exclusively by
the Trust. In connection with the redemption of the Debentures, Southside
Bancshares expensed $1,034,000 of unamortized origination cost associated with
the Debentures during the third quarter. As a result of the redemption, the
Debentures are categorized as short-term on September 30, 2003 due to the
redemption on October 6, 2003. Southside Bancshares funded the redemption
through the issuance of $20,619,000 of junior subordinated debentures that will
adjust quarterly at a rate equal to the three month LIBOR plus 294 basis points
to Southside Statutory Trust III. The initial rate for the junior subordinated
debentures was 4.08%. This initial lower interest rate should provide interest
savings beginning in the fourth quarter and should provide a better match for
the overall interest rate sensitivity position of Southside Bancshares.
Southside Capital Trust II (the "Trust"), a subsidiary of Southside Bancshares,
Inc. will redeem on December 31, 2003 (the "Redemption Date") all of its 8.75%
Cumulative Convertible Trust Preferred Securities (the "Trust Preferred
Securities") and its 8.75% Common Securities (the "Trust Common Securities") at
the optional Redemption Price equal to 115% of the stated Liquidation Amount
($10.00 per security) plus accrued and unpaid interest per security to the
Redemption Date. All interest accruing on the Trust Preferred Securities and the
Trust Common Securities will cease to accrue effective the Redemption Date. The
Wilmington Trust Company of Delaware, property trustee of the Convertible Trust
Preferred Securities, will notify the holders of the redemption. At September
30, 2003 the convertible debentures are categorized as short-term due to the
fact notice of redemption effective December 31, 2003 had been sent to security
holders.
Conversion rights for holders of the Trust Preferred Securities will cease at
4:00 p.m. on December 30, 2003.
15
Requests to convert must be received by The Wilmington Trust Company by 4:00 pm
EST on December 30, 2003. Any Trust Preferred Securities submitted for
conversion prior to that time will be entitled to receive shares of common stock
of Southside Bancshares at a rate of 1.1576 shares of common stock for each
Trust Preferred Security. Conversion rights are facilitated through The
Depository Trust Company's conversion program.
16
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)
Nine months Ended September 30, 2003 Nine months Ended September 30, 2002
---------------------------------------------------------------------------
INTEREST EARNING
ASSETS:
Loans (1)(2) $ 575,336 $ 28,382 6.60% $ 545,118 $ 29,670 7.28%
Investment Securities (3)(4) 114,290 4,976 5.82% 147,415 7,263 6.59%
Mortgage-backed Securities (4) 522,657 14,791 3.78% 465,715 18,358 5.27%
Other Interest Earning Assets 32,226 487 2.02% 24,371 544 2.98%
---------- --------- ---------- ----------
TOTAL INTEREST EARNING
ASSETS 1,244,509 48,636 5.23% 1,182,619 55,835 6.31%
--------- ----------
NONINTEREST EARNING
ASSETS:
Cash and Due from Banks 36,628 35,577
Bank Premises and Equipment 29,817 29,816
Other Assets 43,402 40,135
Less: Allowance for Loan Loss (6,562) (6,081)
---------- ----------
TOTAL ASSETS $1,347,794 $1,282,066
========== ==========
INTEREST BEARING LIABILITIES:
Deposits $ 626,500 8,998 1.92% $ 590,233 12,395 2.81%
Fed Funds Purchased and
Other Interest Bearing
Liabilities 2,241 19 1.13% 3,945 35 1.19%
Short Term Interest Bearing
Liabilities - FHLB Dallas 147,155 4,661 4.23% 150,883 4,083 3.62%
Short Term Junior
Subordinated Debentures (5) 1,978 126 8.50% - - -
Long Term Interest Bearing
Liabilities - FHLB Dallas 229,696 7,262 4.23% 234,123 8,819 5.04%
Long Term Junior Subordinated
Convertible Debentures (6) 13,074 823 8.39% 15,640 1,023 8.72%
Long Term Junior
Subordinated Debentures (7) 20,000 1,208 8.07% 20,000 1,275 8.50%
---------- --------- ---------- ----------
TOTAL INTEREST BEARING
LIABILITIES 1,040,644 23,097 2.97% 1,014,824 27,630 3.64%
--------- ----------
NONINTEREST BEARING
LIABILITIES
Demand Deposits 202,974 182,131
Other Liabilities 18,954 11,461
---------- ----------
Total Liabilities 1,262,572 1,208,416
SHAREHOLDERS' EQUITY 85,222 73,650
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,347,794 $1,282,066
========== ==========
NET INTEREST INCOME $ 25,539 $ 28,205
========= ==========
NET MARGIN ON AVERAGE
EARNING ASSETS 2.74% 3.19%
==== ====
NET INTEREST SPREAD 2.26% 2.67%
==== ====
(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 $1,468 and
$1,078 as of September 30, 2003 and 2002, respectively.
(3) Interest income includes taxable-equivalent adjustments of $1,449 and
$2,016 as of September 30, 2003 and 2002, respectively.
(4) For the purpose of calculating the average yield, the average balance of
securities is presented at historical cost.
(5) Southside Capital Trust I from September 4, 2003, when redemption was
announced, to September 30, 2003.
(6) Southside Capital Trust II.
(7) Southside Capital Trust I through September 3, 2003, the day before its
redemption was announced and Southside Statutory Trust III issued
September 4, 2003.
17
Noninterest Income
Noninterest income was $18.7 million for the nine months ended September 30,
2003 compared to $14.5 million for the same period in 2002. Deposit services
income increased $1.7 million or 21.8% for the nine months ended September 30,
2003. Deposit services income increased primarily as a direct result of
increases in the fees charged to customers for return check and overdraft
charges effective August 1, 2003, increased numbers of deposit accounts and
increased deposit activity from September 30, 2002 to September 30, 2003.
Mortgage servicing release fee income increased $843,000 or 57.3% to $2.3
million for the nine months ended September 30, 2003 from $1.5 million for the
same period in 2002 due to significant increases in mortgage loan refinancing
the Company handled during the first nine months of 2003 as a result of the
lower interest rates. Other noninterest income increased $334,000 or 45.8% for
the nine months ended September 30, 2003 primarily as a result of increases in
other fee income, income from check sales, and income from subsidiaries. During
the nine months ended September 30, 2003, the Company had gains on the sale of
securities of $4.3 million compared to $3.1 million for the same period in 2002.
The Company sold securities out of its AFS portfolio to accomplish ALCO and
investment portfolio objectives aimed at repositioning 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 nine months ended
September 30, 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 minimize prepayment of the premium
mortgage-backed securities.
The market value of the entire securities portfolio at September 30, 2003 was
$737.2 million with a net unrealized gain on that date of $10.1 million. The net
unrealized gain is comprised of $13.7 million in unrealized gains and $3.6
million in unrealized losses.
Noninterest Expense
Noninterest expense was $29.1 million for the nine months ended September 30,
2003, compared to $25.9 million for the same period of 2002, representing an
increase of $3.1 million or 12.0%.
Salaries and employee benefits increased $1.6 million or 9.6% during the nine
months ended September 30, 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 $1.2 million or 9.1%
as a result of bank growth and pay increases for the nine months ended September
30, 2003 when compared to the same period in 2002. Retirement expense increased
$400,000 or 29.4% for the nine months ended September 30, 2003 when compared to
the same period in 2002, primarily as a result of the increase in the number of
participants, level of performance of retirement plan assets and actuarial
assumptions. Retirement expense for 2003 increased due to a low return on plan
assets during the previous year, the discount 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 the previous 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 $37,000 or 2.0% for the nine months ended
September 30, 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 quarter of 2003.
Professional fees increased $57,000 or 11.9% compared to the same period in 2002
due to increased consulting fees. Postage expense increased $41,000 or 10.7%
compared to the same period in 2002 due to increased postage rates effective
June 30, 2002.
Other expense increased $1.5 million or 48.1% for the nine months ended
September 30, 2003 compared to the same period in 2002 primarily due to the
amortization expense associated with the redemption of Southside Capital Trust I
cumulative trust preferred securities, the retirement of assets in a grocery
store branch, liability insurance, personnel placement fees and other losses.
The retirement of assets in the grocery store branch was a result of relocating
the branch within the store prior to fully depreciating the original lease
improvements.
18
Provision for Income Taxes
The provision for the income tax expense for the nine months ended September 30,
2003 was 14.7% compared to 14.9% for the nine months ended September 30, 2002.
The slight decrease in the effective tax rate and income tax expense is due to
the overall decrease in income before income taxes partially offset by the
decrease in tax free income for the nine months ended September 30, 2003 when
compared to the nine months ended September 30, 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 for the Company at September 30, 2003, was $87.0
million representing an increase of $4.8 million from December 31, 2002, and
represented 6.1% of total assets at September 30, 2003 and December 31, 2002.
Net income of $9.5 million was the major contributor to the increase in
shareholders' equity at September 30, 2003 along with the issuance of $3.8
million in common stock (462,730 shares) through conversions of Southside
Capital Trust II's preferred securities 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 $2.6 million in the accumulated
other comprehensive income, $2.2 million in dividends paid and the purchase of
$3.8 million in common stock (221,800 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 including the
discretion of the Board of Directors.
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 Company's $51.2 million of trust preferred securities
is considered Tier 1 capital by the Federal Reserve Board. 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 Company's financial statements. At
September 30, 2003, the Company and the Bank exceeded all regulatory minimum
capital requirements.
The Federal Reserve Deposit Insurance Act requires bank regulatory agencies to
take "prompt corrective action" with respect to FDIC-insured depository
institutions that do not meet minimum capital requirements. A depository
institution's treatment for purposes of the prompt corrective action provisions
will depend on how its capital levels compare to various capital measures and
certain other factors, as established by regulation.
It is management's intention to maintain the Company's capital at a level
acceptable to all regulatory authorities and future dividend payments will be
determined accordingly. Regulatory authorities require that any dividend
payments made by either the Company or Southside Bank not exceed earnings for
that year.
Liquidity and Interest Rate Sensitivity
Liquidity management involves the ability to convert assets to cash with a
minimum of loss. The Company must be capable of meeting its obligations to its
customers at any time. This means addressing (1) the immediate cash withdrawal
requirements of depositors and other funds providers; (2) the funding
requirements of all lines and letters 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 September 30, 2003, these investments were 23.5% of total
assets. Liquidity is further provided through the matching, by time period, of
rate sensitive interest earning assets with rate sensitive interest bearing
19
liabilities. The Company has three lines of credit for the purchase of overnight
federal funds at prevailing rates. Two $15.0 million and one $10.0 million
unsecured lines of credit have been established with Bank of America, Frost Bank
and Texas Independent Bank, respectively.
Interest rate sensitivity management seeks to avoid fluctuating net interest
margins and to enhance consistent growth of new interest income through periods
of changing interest rates. The ALCO of Southside Bank closely monitors various
liquidity ratios, interest rate spreads and margins, interest rate shock
reports and market value of portfolio equity (MVPE) with rates shocked plus and
minus 200 basis points to ensure a satisfactory liquidity position for
Southside Bank and, therefore the Company. In addition, Southside Bank utilizes
a simulation model to determine the impact of net interest income under several
different interest rate scenarios. By utilizing this technology, Southside Bank
can determine changes that need to be made to the asset and liability mixes to
minimize the change in net interest income under these various interest rate
scenarios.
Composition of Loans
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 $30.2 million or 5.5% from the nine months ended September 30, 2002 to
September 30, 2003. The majority of the increase is in loans to municipalities
and real estate loans. The increase in municipal loans is due to a strong
commitment in municipal lending. The increase in average real estate loans is a
result of increases in commercial real estate loans and home equity loans.
Loan Loss Experience and Allowance for Loan Losses
The allowance for loan losses is based on the most current review of the loan
portfolio at that time. The Internal Loan Review department of the Company is
responsible for an ongoing review of Southside Bank's entire loan portfolio with
specific goals set for the volume of loans to be reviewed on an annual basis.
A list of loans 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 by the servicing officer in order to properly
allocate necessary allowances 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, allowance allocations have been made on an individual loan basis. An
additional allowance is maintained on the remainder of the portfolio that is
based on tracking of the Company's loan losses on loans that have not been
previously identified as problems and anticipated problems using historical data
and current economic valuations.
For the third quarter and nine months ended September 30, 2003, loan charge-offs
were $217,000 and $1.1 million and recoveries were $152,000 and $423,000,
respectively, resulting in net charge-offs of $65,000 and $709,000. For the
third quarter and nine months ended September 30, 2002, loan charge-offs were
$347,000 and $1.5 million and recoveries were $51,000 and $217,000,
respectively, resulting in net charge-offs of $296,000 and $1.3 million. The
necessary provision expense was estimated at $1.1 million for the nine months
ended September 30, 2003.
20
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 September 30, 2003 were $2.3 million, down
$1.1 million or 31.5% from $3.4 million at December 31, 2002. From December 31,
2002 to September 30, 2003, nonaccrual loans decreased $885,000 or 39.5% to $1.4
million. Of the total at September 30, 2003, 28.8% are residential real estate
loans, 8.9% are commercial real estate loans, 38.1% are commercial loans and
24.2% are loans to individuals. Other real estate decreased $284,000 or 54.2% to
$240,000 at September 30, 2003 from $524,000 at December 31, 2002. Of the total
at September 30, 2003, 16.3% consist of residential dwellings, 75.4% consist of
commercial real estate and 8.3% are construction and land development loans. The
Company is actively marketing all properties and none are being held for
investment purposes. Loans 90 days past due or more increased $114,000 or 39.7%
to $401,000. Repossessed assets increased $56,000 or 509.1% to $67,000 compared
to an unusually low level of repossessed assets at December 31, 2002 of
approximately $11,000. Restructured loans decreased $66,000 or 20.3% to
$259,000.
Expansion
Pending regulatory approval, the Company plans to open a full service grocery
store branch in Bullard, Texas in Smith County late in the fourth quarter of
2003.
Accounting Pronouncements
See "Basis of Presentation" and "Accounting Pronouncements" in Note 1 and Note 5
to the Company's financial statements in this Form 10-Q.
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 September 30, 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. Adjustable rate student loans totaling $4.3 million are
classified in the one year category. These loans reprice annually and are not
retained by the Company when they enter repayment status. Nonaccrual loans,
totaling $1,353,000, are not included in the loan totals. All instruments are
classified as other than trading.
EXPECTED MATURITY DATE
(dollars in thousands)
Twelve Months Ending September 30,
----------------------------------------------------------------------------------------------------
Fair
2004 2005 2006 2007 2008 Thereafter Total Value
--------- --------- --------- --------- --------- ---------- ------------- -----------
Fixed Rate Loans.......... $ 208,115 $ 72,964 $ 43,196 $ 26,810 $ 17,726 $ 71,979 $ 440,790 $ 460,200
6.76% 6.95% 6.74% 6.71% 6.43% 5.42% 6.55%
Adjustable Rate Loans..... 42,906 4,281 5,685 19,116 12,368 42,291 126,647 126,647
4.43% 4.70% 4.76% 4.57% 4.31% 4.52% 4.49%
Mortgage-backed
Securities................ 231,933 142,758 87,907 54,951 32,850 27,642 578,041 578,041
3.97% 3.84% 3.72% 3.56% 3.41% 3.40% 3.80%
Investments and Other
Interest Earning Assets... 47,030 609 1,090 1,060 719 109,998 160,506 160,506
1.68% 7.69% 8.29% 5.50% 7.49% 6.79% 5.30%
Total Interest
Earning Assets............ $ 529,984 $ 220,612 $ 137,878 $ 101,937 $ 63,663 $ 251,910 $ 1,305,984 $ 1,325,394
4.90% 4.90% 4.75% 4.60% 4.47% 5.65% 4.98%
Savings Deposits.......... $ 4,503 $ 2,251 $ 2,251 $ 2,251 $ 2,251 $ 31,518 $ 45,025 $ 42,372
0.40% 0.40% 0.40% 0.40% 0.40% 0.40% 0.40%
NOW Deposits.............. 25,510 4,903 4,903 4,903 4,903 68,647 113,769 107,009
0.50% 0.11% 0.11% 0.11% 0.11% 0.11% 0.20%
Money Market Deposits..... 22,806 7,602 7,602 7,602 7,602 22,805 76,019 75,770
0.79% 0.79% 0.79% 0.79% 0.79% 0.79% 0.79%
Platinum Money Market..... 46,327 4,964 4,964 4,964 4,964 - 66,183 67,150
0.94% 0.94% 0.94% 0.94% 0.94% - 0.94%
Certificates of Deposit... 235,102 40,959 15,829 24,216 8,000 201 324,307 331,416
1.92% 4.03% 4.09% 4.90% 3.50% 6.38% 2.56%
FHLB Dallas Advances...... 98,649 117,879 73,491 19,418 34,069 62,971 406,477 415,602
3.60% 2.98% 3.31% 4.60% 4.99% 5.32% 3.80%
Other Borrowings.......... 42,678 - - - - 20,000 62,678 73,113
7.41% - - - - 4.08% 6.35%
Total Interest
Bearing Liabilities....... $ 475,575 $ 178,558 $ 109,040 $ 63,354 $ 61,789 $ 206,142 $ 1,094,458 $ 1,112,432
2.52% 2.96% 2.94% 3.47% 3.40% 2.21% 2.68%
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 September 30, 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
mortgage-backed securities, 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 September 30, 2003, $578.0 million of mortgage-backed and
related securities held by the Company were collateralized by fixed-rate
mortgage loans.
The Company assumes 70% of savings accounts and approximately 60% of transaction
accounts at September 30, 2003, are core deposits and are, therefore, expected
to roll-off after five years. The Company assumes 30% of Money Market accounts
at September 30, 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
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the
"Exchange Act"), as of the end of the quarter ended September 30, 2003, we
carried out an evaluation under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as defined in Rule 13a-15(e) under the Exchange Act.
Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures are effective
in ensuring that the information required to be disclosed by the Company in the
reports it files or submits under the Exchange Act is (i) accumulated and
communicated to the Company's management (including the Chief Executive Officer
and Chief Financial Officer) in a timely manner, and (ii) recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
The Company maintains internal control over financial reporting. During the
quarter ended September 30, 2003, there have been no changes in our internal
controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
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
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
Exhibit
No.
- -------
* 31.1 - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
* 31.2 - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
* 32.1 - Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* 32.2 - Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K -
A current report on Form 8-K was filed with the Securities and Exchange
Commission on July 21, 2003 with respect to a press release issued by
the Company, on July 18, 2003 announcing its earnings for the second
quarter of 2003.
A current report on Form 8-K was filed with the Securities and Exchange
Commission on September 5, 2003 with respect to a press release issued
by the Company, on September 4, 2003 announcing the redemption of the
Southside Capital Trust I trust securities.
------------------
* Filed herewith.
24
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: November 12, 2003
/s/ LEE R. GIBSON
-----------------------------------------
Lee R. Gibson, Executive Vice President
and Chief Financial Officer (Principal
Financial and Accounting Officer)
DATE: November 12, 2003
25
Exhibit Index
Exhibit
Number Description
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
26