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, 2002 ------------------------------------------------- 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 . --- --- The number of shares outstanding of each of the issuer's classes of capital stock as of April 30, 2002 was 7,971,268 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) <Table> <Caption> March 31, December 31, ASSETS 2002 2001 ----------- ------------ <S> <C> <C> Cash and due from banks ............................................................ $ 34,791 $ 52,681 Investment securities available for sale ........................................... 148,987 158,818 Mortgage-backed and related securities available for sale .......................... 463,247 454,078 Marketable equity securities available for sale .................................... 21,907 21,287 Loans: Loans, net of unearned discount ................................................. 535,982 537,898 Less: Reserve for loan losses .................................................. (6,138) (5,926) ----------- ----------- Net Loans ..................................................................... 529,844 531,972 Premises and equipment, net ........................................................ 30,054 27,748 Interest receivable ................................................................ 8,419 8,622 Other assets ....................................................................... 21,287 21,531 ----------- ----------- TOTAL ASSETS .................................................................. $ 1,258,536 $ 1,276,737 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest bearing ............................................................. $ 185,328 $ 171,802 Interest bearing ................................................................ 581,207 586,152 ----------- ----------- Total Deposits ................................................................ 766,535 757,954 Short-term obligations: Federal funds purchased ......................................................... 3,325 25,900 FHLB Dallas advances ............................................................ 121,772 114,177 Other obligations ............................................................... 1,841 2,500 ----------- ----------- Total Short-term obligations ................................................. 126,938 142,577 Long-term obligations: FHLB Dallas advances ............................................................ 244,027 260,713 Junior subordinated debentures .................................................. 16,905 16,950 Junior subordinated convertible debentures ...................................... 20,000 20,000 ----------- ----------- Total Long-term obligations .................................................. 280,932 297,663 Deferred tax liability ............................................................. 904 1,634 Other liabilities .................................................................. 14,147 8,324 ----------- ----------- TOTAL LIABILITIES ............................................................. 1,189,456 1,208,152 ----------- ----------- Shareholders' equity: Common stock: ($1.25 par, 20,000,000 shares authorized, 8,771,921 and 8,733,297 shares issued) ....................................... 10,965 10,917 Paid-in capital ................................................................. 35,507 35,195 Retained earnings ............................................................... 27,353 25,133 Treasury stock (984,677 and 920,577 shares at cost) ............................. (9,364) (8,511) Accumulated other comprehensive income .......................................... 4,619 5,851 ----------- ----------- TOTAL SHAREHOLDERS' EQUITY ................................................... 69,080 68,585 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................... $ 1,258,536 $ 1,276,737 =========== =========== </Table> 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) <Table> <Caption> Three Months Ended March 31, --------------------------- 2002 2001 ------------ ------------ <S> <C> <C> Interest income Loans ....................................................................... $ 9,591 $ 10,120 Investment securities ....................................................... 1,874 1,992 Mortgage-backed and related securities ...................................... 5,857 7,937 Other interest earning assets ............................................... 187 361 ------------ ------------ Total interest income ................................................... 17,509 20,410 Interest expense Deposits .................................................................... 4,283 7,265 Short-term obligations ...................................................... 1,203 2,123 Long-term obligations ....................................................... 3,986 3,706 ------------ ------------ Total interest expense .................................................. 9,472 13,094 ------------ ------------ Net interest income ............................................................ 8,037 7,316 Provision for loan losses ...................................................... 450 460 ------------ ------------ Net interest income after provision for loan losses ............................ 7,587 6,856 ------------ ------------ Noninterest income Deposit services ............................................................ 2,480 2,227 Gain on sales of securities available for sale .............................. 244 1,808 Trust income ................................................................ 254 224 Other ....................................................................... 845 407 ------------ ------------ Total noninterest income ................................................ 3,823 4,666 ------------ ------------ Noninterest expense Salaries and employee benefits .............................................. 5,265 4,068 Net occupancy expense ....................................................... 937 789 Equipment expense ........................................................... 184 183 Advertising, travel & entertainment ......................................... 396 433 Supplies .................................................................... 188 155 Professional fees ........................................................... 147 126 Other ....................................................................... 1,229 1,102 ------------ ------------ Total noninterest expense ............................................... 8,346 6,856 ------------ ------------ Income before federal tax expense .............................................. 3,064 4,666 Provision for federal tax expense .............................................. 298 1,182 ------------ ------------ Income before cumulative effect of change in accounting principle .............. 2,766 3,484 Cumulative effect of change in accounting principle, net of tax ................ -- (994) ------------ ------------ Net Income ..................................................................... $ 2,766 $ 2,490 ============ ============ Earnings Per Common Share: Basic: Income before cumulative effect of change in accounting principle ......... $ 0.35 $ 0.44 Cumulative effect of change in accounting principle, net of tax ........... -- (0.13) ------------ ------------ Net income ................................................................ $ 0.35 $ 0.31 ============ ============ Diluted: Income before cumulative effect of change in accounting principle ......... $ 0.30 $ 0.37 Cumulative effect of change in accounting principle, net of tax ........... -- (0.10) ------------ ------------ Net income ................................................................ $ 0.30 $ 0.27 ============ ============ </Table> 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) <Table> <Caption> Accumulated Other Compre- Total Compre- hensive Share- hensive Common Paid in Retained Treasury Income holders' Income Stock Capital Earnings Stock (Loss) Equity --------- --------- --------- --------- --------- ----------- --------- <S> <C> <C> <C> <C> <C> <C> <C> 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 declared on common stock.......... (546) (546) Purchase of 64,100 shares of treasury 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 ========= ========= ========== ========= ========= ========= Balance at December 31, 2000................ $ $ 10,269 $ 30,226 $ 19,891 $ (5,357) $ (3,334) $ 51,695 Net Income.................................. 2,490 2,490 2,490 Other comprehensive income, net of tax Unrealized gains on securities, net of reclassification adjustment (see Note 3).................................. 6,703 6,703 6,703 --------- Comprehensive income........................ $ 9,193 ========= Common stock issued (21,333 shares)......... 27 45 72 Dividends declared on common stock.......... (450) (450) Purchase of 180,000 shares of treasury stock............................ (1,649) (1,649) Tax benefit of incentive stock options...... 13 13 --------- --------- --------- --------- --------- --------- Balance at March 31, 2001................... $ 10,296 $ 30,284 $ 21,931 $ (7,006) $ 3,369 $ 58,874 ========= ========= ========== ========= ========= ========= </Table> 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) <Table> <Caption> Three Months Ended March 31, ------------------------- 2002 2001 ----------- ----------- <S> <C> <C> OPERATING ACTIVITIES: Net income .................................................................... $ 2,766 $ 2,490 Adjustments to reconcile net cash provided by operations: Depreciation ................................................................. 557 461 Amortization of premium ...................................................... 2,738 1,089 Accretion of discount and loan fees .......................................... (148) (581) Provision for loan losses .................................................... 450 460 Tax benefit of incentive stock options ....................................... 57 13 Decrease in interest receivable .............................................. 203 1,144 Decrease (increase) in other assets .......................................... 437 (359) Increase in deferred tax asset ............................................... (96) (13) Increase in interest payable ................................................. 150 493 Increase in other liabilities ................................................ 5,014 795 Gain on sale of available for sale securities ................................ (244) (1,808) Gain on sale of assets ....................................................... (12) -- Gain on sale of other real estate owned ...................................... (28) -- Cumulative effect of change in accounting principle .......................... -- 994 Proceeds from sales of trading securities .................................... -- 99,595 ----------- ----------- Net cash provided by operating activities .................................. 11,844 104,773 INVESTING ACTIVITIES: Proceeds from sales of investment securities available for sale ............... 37,511 18,854 Proceeds from sales of mortgage-backed securities available for sale .......... 25,530 19,003 Proceeds from maturities of investment securities available for sale .......... 5,295 22,924 Proceeds from maturities of mortgage-backed securities available for sale ..... 62,659 25,140 Purchases of investment securities available for sale ......................... (33,740) (49,623) Purchases of mortgage-backed securities available for sale .................... (100,805) (154,967) Purchases of marketable equity securities available for sale .................. (620) -- Net decrease (increase) in loans .............................................. 919 (12,348) Purchases of premises and equipment ........................................... (2,870) (660) Proceeds from sale of premises and equipment .................................. 19 -- Proceeds from sale of other real estate owned ................................. 79 -- Proceeds from sale of repossessed assets ...................................... 515 266 ----------- ----------- Net cash used in investing activities ...................................... (5,508) (131,411) </Table> 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) <Table> <Caption> Three Months Ended March 31, ------------------------ 2002 2001 ---------- ---------- FINANCING ACTIVITIES: <S> <C> <C> Net decrease in demand and savings accounts ................................... $ (2,662) $ (20,024) Net increase in certificates of deposit ....................................... 11,243 23,033 Net decrease in federal funds purchased ....................................... (22,575) (3,100) Net (decrease) increase in FHLB Dallas advances ............................... (9,091) 25,532 Net decrease in junior subordinated convertible debentures .................... (45) -- Proceeds from the issuance of common stock .................................... 303 72 Purchase of treasury stock .................................................... (853) (1,649) Dividends paid ................................................................ (546) -- ---------- ---------- Net cash (used in) provided by financing activities ...................... (24,226) 23,864 Net decrease in cash and cash equivalents ...................................... (17,890) (2,774) Cash and cash equivalents at beginning of period ............................... 52,681 38,800 ---------- ---------- Cash and cash equivalents at end of period ..................................... $ 34,791 $ 36,026 ========== ========== SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION: Interest paid ................................................................. $ 9,322 $ 12,601 Income taxes paid ............................................................. $ 500 $ 450 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisition of other repossessed assets and real estate through foreclosure ... $ 759 $ 182 Transfer of held to maturity securities to trading securities ................. $ -- $ 99,792 </Table> 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, 2002, and the related consolidated statements of income, shareholders' equity and cash flow for the three month period ended March 31, 2002 and 2001 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): <Table> <Caption> Three Months Ended March 31, ---------------------------- 2002 2001 ------------ ------------- <S> <C> <C> Basic Earnings and Shares: Income before cumulative effect of accounting change ............... $ 2,766 $ 3,484 Cumulative effect of change in accounting principle, net of tax .... -- (994) ------------ ------------ Net income ......................................................... $ 2,766 $ 2,490 ============ ============ Weighted-average basic shares outstanding .......................... 7,803 7,937 Basic Earnings Per Share: Income before cumulative effect of accounting change ............... $ 0.35 $ 0.44 Cumulative effect of change in accounting principle, net of tax .... -- (0.13) ------------ ------------ Net income ......................................................... $ 0.35 $ 0.31 ============ ============ Diluted Earnings and Shares: Income before cumulative effect of accounting change ............... $ 2,766 $ 3,484 Add: Applicable dividend on convertible debentures ................ 244 245 ------------ ------------ Adjusted net income ................................................ 3,010 3,729 Cumulative effect of change in accounting principle, net of tax .... -- (994) ------------ ------------ Net income ......................................................... $ 3,010 $ 2,735 ============ ============ Weighted-average basic shares outstanding .......................... 7,803 7,937 Add: Stock options ................................................ 547 298 Convertible debentures ....................................... 1,779 1,780 ------------ ------------ Weighted-average diluted shares outstanding ........................ 10,129 10,015 ============ ============ Diluted Earnings Per Share: Income before cumulative effect of accounting change ............... $ 0.30 $ 0.37 Cumulative effect of change in accounting principle, net of tax .... -- (0.10) ------------ ------------ Net income ......................................................... $ 0.30 $ 0.27 ============ ============ </Table> The accompanying notes are an integral part of these consolidated financial statements. 6
3. Comprehensive Income The components of accumulated comprehensive income (loss) are as follows: <Table> <Caption> Three Months Ended March 31, 2002 -------------------------------------- Before-Tax Tax(Expense) Net-of-Tax Amount Benefit Amount ---------- ------------ ---------- <S> <C> <C> <C> 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) ========== ========== ========== </Table> <Table> <Caption> Three Months Ended March 31, 2001 -------------------------------------- Before-Tax Tax (Expense) Net-of-Tax Amount Benefit Amount ---------- ------------- ---------- <S> <C> <C> <C> Unrealized gains on securities: Unrealized holding gains arising during period ..... $ 10,458 $ (3,556) $ 6,902 Less: reclassification adjustment for gains included in net income ......................... 1,808 (615) 1,193 ---------- ---------- ---------- Net unrealized gains on securities ................ 8,650 (2,941) 5,709 Less: cumulative effect of change in accounting principle .......................... (1,506) 512 (994) ---------- ---------- ---------- Other comprehensive income ............................ $ 10,156 $ (3,453) $ 6,703 ========== ========== ========== </Table> 4. Recent Accounting Pronouncements On January 1, 2001, Southside adopted Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities," (FAS133). As allowed by FAS133, at the date of initial application of this statement, Southside transferred held to maturity securities into the available for sale category and the trading category. Southside sold the securities transferred into the trading category during the first quarter of 2001. The effect of selling the securities in the trading category is shown as a cumulative effect of a change in accounting principle and reduced net income by $994,000 (net of taxes) during the first quarter of 2001. During 2001, Southside sold available for sale securities which resulted in realized gains of $4.1 million or an after tax gain of $2.7 million. These separate transactions allowed Southside to reduce the overall duration of and reposition the securities portfolio. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 141 "Business Combinations" (FAS 141) and Statement of Financial Accounting Standard No. 142 "Goodwill and Other Intangible Assets" (FAS 142). FAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under FAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of FAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company was required to adopt FAS 142 effective January 1, 2002. The adoption of this new accounting pronouncement did not have a material impact on the Company's consolidated financial position or results of operations. 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 7
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 Company does not believe that FAS 143 will have a material impact on its consolidated financial statements. In August 2001, the Financial Standards Board issued Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment and Disposal of Long-lived Assets" (FAS 144). This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. FAS 144 supercedes FAS 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of" and the accounting and reporting provisions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of the business previously defined in that opinion. FAS 144 also amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The Company will adopt the provisions of FAS 144 in the first quarter of fiscal 2003, and has not yet determined the impact of adoption. In April 2002, the Financial Standards Board issued Statement of 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 May 15, 2002. The Company does not believe that FAS 145 will have a material impact on its consolidated financial statements. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Three months ended March 31, 2002 compared to March 31, 2001. 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, 2002 compared to the same period in 2001. Net income for the three months ended March 31, 2002 was $2.8 million compared to $2.5 million for the same period in 2001. All share data has been adjusted to give retroactive recognition to stock splits and stock dividends. 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. Net Interest Income Net interest income for the three months ended March 31, 2002 was $8.0 million, an increase of $721,000 or 9.9% for the quarter when compared to the same period in 2001. Average interest earning assets increased $71.8 million or 6.5%, while the net interest spread increased from 2.08% at March 31, 2001 to 2.59% at March 31, 2002 and the net margin increased from 2.91% at March 31, 2001 to 3.10% at March 31, 2002. The increase in net interest spread and margin is primarily a result of the decrease in interest expense on the brokered Certificates of Deposits (CDs) called during the first six months ended June 30, 2001. During the three months ended March 31, 2002, Average Loans, funded primarily by the growth in average deposits and average FHLB Dallas advances, increased $48.8 million or 10.0%, compared to the same period in 2001. The average yield on loans decreased from 8.56% at March 31, 2001 to 7.48% at March 31, 2002 due to lower interest rates. Average Securities increased $ 22.7 million or 3.8% for the three months ended March 31, 2002 when compared to the same period in 2001. This increase was part of the leverage strategy implemented in 1998. The overall yield on Average Securities decreased to 5.49% during the three months ended March 31, 2002 from 7.03% during the same period in 2001. 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. Interest income from federal funds and other interest earning assets decreased $174,000 or 48.2% for the three months ended March 31, 2002 when compared to 2001 as a result of the decrease in the average yield from 6.00% in 2001 to 3.08% at March 31, 2002 due to lower interest rates. 9
Total interest expense decreased $ 3.6 million or 27.7% to $9.5 million during the three months ended March 31, 2002 as compared to $13.1 million during the same period in 2001. The decrease was attributable to a decrease in the average yield on interest bearing liabilities from 5.60% at March 31, 2001 to 3.75% at March 31, 2002. Average Interest Bearing Deposits increased $28.5 million or 5.15% while the average rate paid decreased from 5.31% at March 31, 2001 to 2.98% at March 31, 2002, which is due in part to the call of the higher cost long-term brokered CDs during 2001. During March 2001, the Company notified CD holders that $24.6 million of brokered CDs were being called April 12, 2001. The Company recorded $195,000 of additional interest expense associated with the call of the CDs during the first quarter ended March 31, 2001. During April 2001, the Company notified CD holders that the remaining $30.0 million of brokered CDs would be called May 24, 2001. An additional $357,000 of expense was incurred during the second quarter ending June 30, 2001, associated with the call of the brokered CDs. These CDs were replaced with long-term advances from the FHLB at an average rate of approximately 5.40% and an average life of approximately 4.9 years. Average Short-term Interest Bearing Liabilities, consisting primarily of FHLB Dallas advances and Federal Funds Purchased, decreased $1.7 million or 1.1% as compared to the same period in 2001. Average Long-term Interest Bearing Liabilities consisting of FHLB Dallas advances increased $49.1 million or 24.8% compared to $198.3 million at March 31, 2001. The advances were obtained from FHLB Dallas as part of the Company's balance sheet leverage strategy and partially to fund long-term loans. FHLB Dallas advances are collateralized by FHLB Dallas stock, securities and nonspecified real estate loans. The Company has adopted a balance sheet strategy going forward in which it will attempt to gradually reduce Federal Home Loan Bank borrowings as a percentage of deposits. On the asset side, the Company will attempt to gradually reduce the securities portfolio as a percentage of earning assets. Average Long-Term Junior Subordinated Convertible Debentures decreased slightly from $17.0 million at March 31, 2001 to $16.9 million at March 31, 2002. During the first quarter ended March 31, 2002, 4,500 convertible trust preferred shares were converted into 4,725 shares of the Company's common stock. Subsequent to March 31, 2002, an additional 171,994 convertible trust preferred shares were converted into 180,593 shares of the Company's common stock. The total convertible trust preferred shares converted to date represents 10.41% of the convertible trust preferred issue. Average Long Term Junior Subordinated Debentures remained the same at $20 million from March 31, 2001 to March 31, 2002. 10
The analysis below shows average interest earning assets and interest bearing liabilities together with the average yield on the interest earning assets and the average cost of the interest bearing liabilities. <Table> <Caption> SUMMARY OF INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES ---------------------------------------------------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST YIELD BALANCE INTEREST YIELD ---------- ---------- ---------- ---------- ---------- ---------- (dollars in thousands) Three Months Ended March 31, 2002 Three Months Ended March 31, 2001 ------------------------------------ ------------------------------------ INTEREST EARNING ASSETS: <S> <C> <C> <C> <C> <C> <C> Loans(1)(2) $ 537,784 $ 9,920 7.48% $ 488,940 $ 10,316 8.56% Investment Securities(3)(4) 163,001 2,555 6.36% 139,540 2,448 7.11% Mortgage-backed Securities(4) 458,477 5,857 5.18% 459,240 7,937 7.01% Other Interest Earning Assets 24,641 187 3.08% 24,398 361 6.00% ---------- ---------- ---------- ---------- TOTAL INTEREST EARNING ASSETS 1,183,903 18,519 6.34% 1,112,118 21,062 7.68% ---------- ---------- NONINTEREST EARNING ASSETS: Cash and Due from Banks 34,781 35,766 Bank Premises and Equipment 28,628 25,345 Other Assets 40,633 16,792 Less: Reserve for Loan Loss (6,000) (5,210) ---------- ---------- TOTAL ASSETS $1,281,945 $1,184,811 ========== ========== INTEREST BEARING LIABILITIES: Deposits $ 583,049 4,283 2.98% $ 554,504 7,265 5.31% Fed Funds Purchased and Other Interest Bearing Liabilities 4,539 21 1.88% 5,358 73 5.53% Short Term Interest Bearing Liabilities - FHLB Dallas 152,161 1,182 3.15% 153,072 2,050 5.43% Long Term Interest Bearing Liabilities - FHLB Dallas 247,391 3,191 5.23% 198,257 2,910 5.95% Long Term Junior Subordinated Convertible Debentures 16,941 370 8.74% 16,950 371 8.75% Long Term Junior Subordinated Debentures 20,000 425 8.50% 20,000 425 8.50% ---------- ---------- ---------- ---------- TOTAL INTEREST BEARING LIABILITIES 1,024,081 9,472 3.75% 948,141 13,094 5.60% ---------- ---------- NONINTEREST BEARING LIABILITIES Demand Deposits 175,778 162,980 Other Liabilities 11,039 15,881 ---------- ---------- Total Liabilities 1,210,898 1,127,002 SHAREHOLDERS' EQUITY 71,047 57,809 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,281,945 $1,184,811 ========== ========== NET INTEREST INCOME $ 9,047 $ 7,968 ========== ========== NET MARGIN ON AVERAGE EARNING ASSETS 3.10% 2.91% ========== ========== NET INTEREST SPREAD 2.59% 2.08% ========== ========== </Table> (1) Loans are shown net of unearned discount. Interest on loans includes fees on loans which are not material in amount. (2) Interest income includes taxable-equivalent adjustments of $329 and $196 as of March 31, 2002 and 2001, respectively. (3) Interest income includes taxable-equivalent adjustments of $681 and $456 as of March 31, 2002 and 2001, respectively. (4) For the purpose of calculating the average yield, the average balance of securities is presented at historical cost. 11
Noninterest Income Noninterest income was $3.8 million for the three months ended March 31, 2002 compared to $4.7 million for the same period in 2001. Deposit services income increased $253,000 or 11.4% for the three months ended March 31, 2002. Deposit services income increased primarily as a direct result of the overdraft privilege program and also due to increased numbers of deposit accounts and increased deposit activity from March 31, 2001 to March 31, 2002. Other noninterest income increased $438,000 or 107.6% for the three months ended March 31, 2002 primarily as a result of increases in bank owned life insurance income and mortgage servicing release fee income. During the three months ended March 31, 2002, the Company had gains on the sale of securities of $244,000 compared to gains on the sale of securities of $1.8 million for the same period in 2001. Southside sold available for sale securities during 2002 to restructure a portion of the securities portfolio. On January 1, 2001, Southside adopted Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities," (FAS133). As allowed by FAS133, at the date of initial application of this statement, Southside transferred held to maturity securities with an amortized cost of $155.2 million into the available for sale category. In addition, Southside transferred held to maturity securities with an amortized cost of $99.8 million and a market value of $98.3 million into the trading category. The effect of adopting FAS133 is shown as a cumulative effect of a change in accounting principle and reduced net income by $994,000 (net of taxes) during the first quarter of 2001. Southside sold the securities transferred into the trading category along with previously existing available for sale securities which resulted in realized gains of $1.8 million or an after tax gain of $1.2 million. These separate transactions allowed Southside to reposition the investment portfolio while having a positive impact of $302,000 or $199,000 (net of taxes) on consolidated net income for the first quarter of 2001. The market value of the entire securities portfolio at March 31, 2002 was $634.1 million with a net unrealized gain on that date of $7.2 million. The net unrealized gain is comprised of $8.9 million in unrealized gains and $1.7 million in unrealized losses. Noninterest Expense Noninterest expense was $8.3 million for the three months ended March 31, 2002, compared to $6.9 million for the same period of 2001, representing an increase of $1.5 million or 21.7 %. Salaries and employee benefits increased $1.2 million or 29.4% during the three months ended March 31, 2002 when compared to the same period in 2001. The Company has opened four new branches during this time period and opened one additional branch in April 2002. These openings combined with normal payroll increases and higher benefit costs were the primary reasons for the increase. Direct salary expense and payroll taxes increased $790,000 or 23.0% as a result of personnel additions for the three months ended March 31, 2002 when compared to the same period in 2001. Retirement expense increased $159,000 or 64.6% for the three months ended March 31, 2002 when compared to the same period in 2001, primarily as a result of the increase in the number of participants, the level of performance of retirement plan assets and actuarial assumptions. Health insurance expense increased $249,000 or 65.1% for the three months ended March 31, 2002 when compared to the same period in 2001. The Company has a self-insured health plan which is supplemented with stop loss insurance policies. During the three month period ended March 31, 2002, the Company experienced higher costs associated with this plan. Net occupancy expense increased $148,000 or 18.8% for the three months ended March 31, 2002 compared to the same period in 2001, largely due to branch expansion, higher real estate taxes and depreciation expense . Other expense increased $127,000 or 11.5% for the three months ended March 31, 2002 compared to the same period in 2001 primarily due to increases in dues to directors, bank analysis fees and ATM fees. Provision for Income Taxes The provision for the income tax expense for the three months ended March 31, 2002 was 9.7% compared to 25.3% for the three months ended March 31, 2001. The decrease in the effective tax rate and income tax expense is due to the increase in tax free income for the quarter ended March 31, 2002 when compared to the quarter ended March 31, 2001. The Company expects its tax free income as a percentage of total income to gradually begin to decrease which should gradually increase the Company's effective tax rate. 12
Capital Resources Total shareholders' equity for the Company at March 31, 2002, of $69.1 million was up $495,000 from December 31, 2001, and represented 5.5% of total assets at March 31, 2002 compared to 5.4% of total assets at December 31, 2001. Increases to shareholders' equity during the three months ended March 31, 2002 were net income of $2.8 million and $303,000 from common stock (38,624 shares) issued through the Company's dividend reinvestment and incentive stock option plans. Decreases to shareholders' equity consisted of $546,000 in dividends declared to shareholders, a decrease of $1.2 million in net unrealized gains on securities available for sale and the purchase of 64,100 shares of the Company's stock for $853,000. 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 $36.9 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, 2002, the Company and the Bank exceeded all regulatory minimum capital requirements. The Federal Reserve Deposit Insurance Act requires bank regulatory agencies to take "prompt corrective action" with respect to FDIC-insured depository institutions that do not meet minimum capital requirements. A depository institution's treatment for purposes of the prompt corrective action provisions will depend on how its capital levels compare to various capital measures and certain other factors, as established by regulation. It is management's intention to maintain the Company's capital at a level acceptable to all regulatory authorities and future dividend payments will be determined accordingly. Regulatory authorities require that any dividend payments made by either the Company or the Bank not exceed earnings for that year. Liquidity and Interest Rate Sensitivity Liquidity management involves the ability to convert assets to cash with a minimum of loss. The Company must be capable of meeting its obligations to its customers at any time. This means addressing (1) the immediate cash withdrawal requirements of depositors and other funds providers; (2) the funding requirements of all lines and letters of credit; and (3) the short-term credit needs of customers. Liquidity is provided by short-term investments that can be readily liquidated with a minimum risk of loss. Cash, Interest Earning Deposits, Federal Funds Sold and short-term investments with maturities or repricing characteristics of one year or less continue to be a substantial percentage of total assets. At March 31, 2002, these investments were 20.2% of Total Assets. Liquidity is further provided through the matching, by time period, of rate sensitive interest earning assets with rate sensitive interest bearing liabilities. The Company has three lines of credit for the purchase of federal funds. Two $15.0 million and one $10.0 million unsecured lines of credit have been established with Bank of America, Frost Bank and Texas Independent Bank, respectively. Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of new interest income through periods of changing interest rates. Through this process, market value volatility is also a key consideration. The Asset Liability Management Committee of the Bank closely monitors various liquidity ratios, interest rate spreads and margins, interest rate shock reports and market value of portfolio equity (MVPE) with rates shocked plus and minus 200 basis points to ensure a satisfactory liquidity position for the Company. In addition, the Bank utilizes a simulation model to determine the impact of net interest income under several different interest rate scenarios. By utilizing this technology, the Bank can determine changes that need to be made to the asset and liability mixes to minimize the change in net interest income under these various interest rate scenarios. 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 $9.52 per common share. These securities have a distribution rate of 8.75% per annum payable at the end of each calendar quarter. 13
The proceeds received by the Company from the Trust II Issuer continue to be used for general corporate purposes, including, but not limited to, capital contributions to the Bank to support growth, for working capital, the possible repurchase of shares of our common stock and acquisitions by the Company. Composition of Loans The Company's main objective is to seek attractive lending opportunities in East Texas and adjoining counties. Total Average Loans increased $48.8 million or 10.0% from the three months ended March 31, 2001 to March 31, 2002. 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 officer of the Company is responsible for an ongoing review of the Bank's entire loan portfolio with specific goals set for the volume of loans to be reviewed on an annual basis. A list of loans which are graded as having more than the normal degree of risk associated with them are maintained by the internal loan review officer. This list is updated on a periodic basis but no less than quarterly by the servicing officer in order to properly allocate necessary reserves and keep management informed on the status of attempts to correct the deficiencies noted in the credit. While management is aware of certain risk factors within segments of the loan portfolio, reserve allocations have been made on an individual loan basis. An additional reserve is maintained on the remainder of the portfolio of at risk loans that is based on tracking of the Company's loan losses on loans that have not been previously identified as problems. 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. For the three months ended March 31, 2001, loan charge-offs were $198,000 and recoveries were $139,000, resulting in net charge-offs of $59,000. Net charge-offs increased for the three months ended March 31, 2002 due to the increase in the loan portfolio. As a result of this and other factors, the necessary provision expense was estimated at $450,000 for the three months ended March 31, 2002. Nonperforming Assets The categories of nonperforming assets consist of delinquent loans over 90 days past due, nonaccrual and restructured loans, other real estate owned and repossessed assets. Delinquent loans over 90 days past due represent loans for which the payment of principal or interest has not been received in a timely manner. The full collection of both the principal and interest is still expected but is being withheld due to negotiation or other items expected to be resolved in the near future. Generally, a loan is categorized as nonaccrual when principal or interest is past due 90 days or more, unless, in the determination of management, the principal and interest on the loan are well secured and in the process of collection. In addition, a loan is placed on nonaccrual when, in the opinion of management, the future collectibility of interest and principal is in serious doubt. When a loan is categorized as nonaccrual, the accrual of interest is discontinued and any remaining accrued interest is reversed in that period; thereafter, interest income is recorded only when actually received. Restructured loans represent loans which have been renegotiated to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrowers. Categorization of a loan as nonperforming is not in itself a reliable indicator of potential loan loss. Other factors, such as the value of collateral securing the loan and the financial condition of the borrower must be considered in judgments as to potential loan loss. Other Real Estate Owned (OREO) represents real estate taken in full or partial satisfaction of debts previously contracted. The OREO consists primarily of two real estate properties. The Company is actively marketing all properties and none are being held for investment purposes. Total nonperforming assets at March 31, 2002 were $3.1 million, up $745,000 or 31.0% from $2.4 million at December 31, 2001. Loans 90 days past due or more increased $336,000 or 35.6% to $1.3 million. Of this total, 59% are 14
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. Eighteen percent are commercial real estate properties, 11% are commercial loans and 12% are loans to individuals. Restructured loans increased $13,000 or 4.6% to $296,000. From December 31, 2001 to March 31, 2002, nonaccrual loans increased $203,000 or 22.7% to $1.1 million. Repossessed assets increased $64,000 or 30%. Other real estate increased $129,000 or 198.5% to $194,000. Expansion Southside has continued to expand its market share and branch network. In early 2002, Southside opened a full-service branch in Whitehouse along with a second full-service branch in a grocery store. A fourth strategically placed full-service branch in Longview opened in a grocery store in early 2002 continuing our expanding commitment to the Longview market. The bank also plans to open two full-service grocery store branches in northwest and southeast Tyler. Other Accounting Issues On January 1, 2001, Southside adopted Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities," (FAS133). As allowed by FAS133, at the date of initial application of this statement, Southside transferred held to maturity securities into the available for sale category and the trading category. Southside sold the securities transferred into the trading category during the first quarter of 2001. The effect of selling the securities in the trading category is shown as a cumulative effect of a change in accounting principle and reduced net income by $994,000 (net of taxes) during the first quarter of 2001. During 2001, Southside sold available for sale securities which resulted in realized gains of $4.1 million or an after tax gain of $2.7 million. These separate transactions allowed Southside to reduce the overall duration of and reposition the securities portfolio. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 141 "Business Combinations" (FAS 141) and Statement of Financial Accounting Standard No. 142 "Goodwill and Other Intangible Assets" (FAS 142). FAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under FAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of FAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company was required to adopt FAS 142 effective January 1, 2002. The adoption of this new accounting pronouncement did not have a material impact on the Company's consolidated financial position or results of operations. 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 Company does not believe that FAS 143 will have a material impact on its consolidated financial statements. In August 2001, the Financial Standards Board issued Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment and Disposal of Long-lived Assets" (FAS 144). This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. FAS 144 supercedes FAS 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of" and the accounting and reporting provisions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of the business previously defined in that opinion. FAS 144 also amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The Company will adopt the provisions of FAS 144 in the first quarter of fiscal 2003, and has not yet determined the impact of adoption. 15
In April 2002, the Financial Standards Board issued Statement of 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 May 15, 2002. The Company does not believe that FAS 145 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, 2002, were within policy guidelines. This type of stimulation analysis requires numerous assumptions including but not limited to changes in balance sheet mix, prepayment assumptions and changes in spreads. Assumptions are based on management's best estimates but may not accurately reflect actual results under certain changes in interest rates. 16
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. Nonaccrual loans are not included in the loan totals. All instruments are classified as other than trading. EXPECTED MATURITY DATE (dollars in thousands) <Table> <Caption> Twelve Months Ending March 31, ------------------------------------------------------------------------------------------------------ Fair 2002 2003 2004 2005 2006 Thereafter Total Value ---------- ---------- ---------- ---------- ---------- ---------- ------------ ----------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Fixed Rate Loans.......... $ 202,434 $ 91,380 $ 54,558 $ 30,010 $ 17,925 $ 48,198 $ 444,505 $ 454,325 7.87% 7.80% 7.54% 7.37% 7.05% 6.03% 7.55% Adjustable Rate Loans..... 32,204 3,313 7,333 8,969 14,494 24,065 90,378 $ 90,378 5.40% 5.16% 5.32% 5.28% 5.23% 5.40% 5.35% Mortgage-backed Securities................ 183,404 110,153 67,317 41,020 24,902 36,451 463,247 $ 463,247 5.78% 5.82% 5.81% 5.80% 5.79% 5.77% 5.80% Investments and Other Interest Earning Assets... 37,189 1,394 3,302 6,462 1,033 122,086 171,466 $ 171,466 3.29% 3.75% 3.75% 5.15% 7.21% 7.30% 6.25% Total Interest Earning Assets............ $ 455,231 $ 206,240 $ 132,510 $ 86,461 $ 58,354 $ 230,800 $ 1,169,596 $ 1,179,416 6.48% 6.67% 6.44% 6.24% 6.06% 6.60% 6.49% Savings Deposits.......... $ 3,436 $ 1,718 $ 1,718 $ 1,718 $ 1,718 $ 24,054 $ 34,362 $ 31,475 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% NOW Deposits.............. 18,707 4,081 4,081 4,081 4,081 57,142 92,173 $ 83,367 1.41% 1.00% 1.00% 1.00% 1.00% 1.00% 1.08% Money Market Deposits..... 20,283 6,761 6,761 6,761 6,761 20,285 67,612 $ 65,308 1.63% 1.62% 1.62% 1.62% 1.62% 1.62% 1.62% Platinum Money Market..... 21,025 2,252 2,252 2,252 2,252 -- 30,033 $ 30,102 1.88% 1.88% 1.88% 1.88% 1.88% -- 1.88% Certificates of Deposit... 260,148 45,540 26,567 8,221 16,177 374 357,027 $ 361,707 3.39% 4.47% 5.16% 5.97% 5.10% 6.42% 3.80% FHLB Dallas Advances...... 122,340 111,286 45,225 23,265 23,230 40,453 365,799 $ 366,604 3.52% 4.81% 4.71% 5.58% 5.27% 6.19% 4.60% Other Borrowings.......... 5,166 -- -- -- -- 36,905 42,071 $ 42,071 1.82% 8.61% 7.78% Total Interest Bearing Liabilities....... $ 451,105 $ 171,638 $ 86,604 $ 46,298 $ 54,219 $ 179,213 $ 989,077 $ 980,634 3.16% 4.43% 4.29% 4.34% 4.18% 3.89% 3.72% </Table> 17
Residential fixed rate loans are assumed to have annual prepayment rates between 9% and 25% of the portfolio. Commercial and multi-family real estate loans are assumed to prepay at an annualized rate between 10% and 39%. Consumer loans are assumed to prepay at an annualized rate between 10% and 35%. 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 10% to 37%. At March 31, 2002, 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, 2002, of the $463.2 million of mortgage-backed and related securities held by the Company, an aggregate of $459.7 million were secured by fixed-rate mortgage loans and an aggregate of $3.5 million were secured by adjustable-rate mortgage loans. The Company assumes 70% of savings accounts and transaction accounts at March 31, 2002, are core deposits and are, therefore, expected to roll-off after five years. The Company assumes 30% of Money Market accounts at March 31, 2002 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. 18
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 18, 2002. (b) The election of three directors (term expiring at the 2005 Annual Meeting) were as follows: <Table> <Caption> FOR WITHHELD --------- ----------- <S> <C> <C> Rollins Caldwell 5,618,767 213,581 Sam Dawson 5,615,448 216,900 William Sheehy 5,618,822 213,526 </Table> Directors continuing until the 2003 Annual Meeting are as follows: Herbert C. Buie Robbie N. Edmonson W. D. (Joe) Norton Michael D. Gollob Directors continuing until the 2004 Annual Meeting are as follows: Fred E. Bosworth B. G. Hartley Paul W. Powell (c) The matters voted upon and the results of the voting were as follows: The shareholders voted 5,731,244 shares in the affirmative, 8,405 shares in the negative, and 92,699 abstentions to transact other business that may properly come before the meeting or any adjournments. There was no new business presented at the meeting. 19
ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - None (b) Reports on Form 8-K - None 20
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 10, 2002 ----------------------- /s/ LEE R. GIBSON -------------------------------------- Lee R. Gibson, Executive Vice President (Principal Financial and Accounting Officer) DATE: May 10, 2002 --------------------------------- 21