UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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, 2004
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.
| TEXAS | 75-1848732 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| 1201 S. Beckham, Tyler, Texas | 75701 | |
903-531-7111
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (x) . No ( ) .
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, 2004 was 10,970,443 shares of Common Stock, par value $1.25.
PART I. FINANCIAL INFORMATION
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
| September 30, | December 31, | |||||||
| 2004 |
2003 |
|||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 40,050 | $ | 47,223 | ||||
Federal funds sold |
7,625 | – | ||||||
Investment securities: |
||||||||
Available for sale |
128,655 | 144,876 | ||||||
Mortgage-backed and related securities: |
||||||||
Available for sale |
415,933 | 584,581 | ||||||
Held to maturity |
247,256 | 6,382 | ||||||
Marketable equity securities: |
||||||||
Available for sale |
24,818 | 23,670 | ||||||
Loans held for sale |
3,602 | 3,319 | ||||||
Loans: |
||||||||
Loans, net of unearned discount |
615,255 | 589,135 | ||||||
Less: Allowance for loan losses |
(6,816 | ) | (6,414 | ) | ||||
Net Loans |
608,439 | 582,721 | ||||||
Premises and equipment, net |
30,472 | 30,629 | ||||||
Interest receivable |
7,690 | 8,433 | ||||||
Deferred tax asset |
386 | – | ||||||
Other assets |
26,745 | 23,118 | ||||||
TOTAL ASSETS |
$ | 1,541,671 | $ | 1,454,952 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Deposits: |
||||||||
Noninterest bearing |
$ | 256,210 | $ | 229,649 | ||||
Interest bearing |
649,725 | 642,880 | ||||||
Total Deposits |
905,935 | 872,529 | ||||||
Short-term obligations: |
||||||||
Federal funds purchased |
– | 3,525 | ||||||
FHLB Dallas advances |
198,795 | 192,608 | ||||||
Other obligations |
2,500 | 2,598 | ||||||
Total Short-term obligations |
201,295 | 198,731 | ||||||
Long-term obligations: |
||||||||
FHLB Dallas advances |
297,069 | 252,075 | ||||||
Long-term debt |
20,619 | 20,619 | ||||||
Total Long-term obligations |
317,688 | 272,694 | ||||||
Deferred tax liability |
– | 1,551 | ||||||
Other liabilities |
10,153 | 9,061 | ||||||
TOTAL LIABILITIES |
1,435,071 | 1,354,566 | ||||||
Commitment and Contingencies (Note 8) |
||||||||
Shareholders’ equity: |
||||||||
Common stock: ($1.25 par, 20,000,000 shares authorized,
12,433,630 and 11,779,467 shares issued) |
15,542 | 14,724 | ||||||
Paid-in capital |
74,720 | 63,144 | ||||||
Retained earnings |
31,336 | 32,979 | ||||||
Treasury stock (1,463,187 and 1,420,587 shares at cost) |
(17,333 | ) | (16,544 | ) | ||||
Accumulated other comprehensive income |
2,335 | 6,083 | ||||||
TOTAL SHAREHOLDERS’ EQUITY |
106,600 | 100,386 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ | 1,541,671 | $ | 1,454,952 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
1
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
| Quarter | Nine Months | |||||||||||||||
| Ended September 30, |
Ended September 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Interest income |
||||||||||||||||
Loans |
$ | 8,735 | $ | 8,710 | $ | 25,937 | $ | 26,914 | ||||||||
Investment securities – taxable |
244 | 137 | 741 | 453 | ||||||||||||
Investment securities – tax-exempt |
898 | 1,011 | 2,751 | 3,074 | ||||||||||||
Mortgage-backed and related securities |
7,157 | 4,614 | 19,401 | 14,791 | ||||||||||||
Marketable equity securities |
123 | 114 | 320 | 404 | ||||||||||||
Other interest earning assets |
6 | 22 | 65 | 83 | ||||||||||||
Total interest income |
17,163 | 14,608 | 49,215 | 45,719 | ||||||||||||
Interest expense
Deposits |
2,511 | 2,573 | 7,224 | 8,998 | ||||||||||||
Short-term obligations |
1,546 | 1,724 | 4,311 | 4,806 | ||||||||||||
Long-term obligations |
2,958 | 3,022 | 8,571 | 9,293 | ||||||||||||
Total interest expense |
7,015 | 7,319 | 20,106 | 23,097 | ||||||||||||
Net interest income |
10,148 | 7,289 | 29,109 | 22,622 | ||||||||||||
Provision for loan losses |
– | – | 525 | 1,054 | ||||||||||||
Net interest income after provision for loan losses |
10,148 | 7,289 | 28,584 | 21,568 | ||||||||||||
Noninterest income |
||||||||||||||||
Deposit services |
3,476 | 3,441 | 10,424 | 9,512 | ||||||||||||
Gain on sale of securities available for sale |
375 | 699 | 2,449 | 4,278 | ||||||||||||
Gain on sale of loans |
371 | 853 | 1,258 | 2,314 | ||||||||||||
Trust income |
320 | 273 | 894 | 748 | ||||||||||||
Bank owned life insurance |
184 | 257 | 628 | 749 | ||||||||||||
Other |
436 | 394 | 1,227 | 1,064 | ||||||||||||
Total noninterest income |
5,162 | 5,917 | 16,880 | 18,665 | ||||||||||||
Noninterest expense |
||||||||||||||||
Salaries and employee benefits |
6,333 | 5,751 | 19,133 | 17,696 | ||||||||||||
Net occupancy expense |
1,072 | 995 | 3,099 | 2,945 | ||||||||||||
Equipment expense |
189 | 177 | 549 | 527 | ||||||||||||
Advertising, travel & entertainment |
385 | 343 | 1,308 | 1,281 | ||||||||||||
ATM expense |
112 | 174 | 479 | 456 | ||||||||||||
Amortization expense |
1 | 1,034 | 4 | 1,062 | ||||||||||||
Director fees |
145 | 107 | 438 | 333 | ||||||||||||
Supplies |
145 | 173 | 428 | 487 | ||||||||||||
Professional fees |
344 | 172 | 783 | 535 | ||||||||||||
Postage |
140 | 144 | 416 | 423 | ||||||||||||
Other |
1,129 | 1,033 | 3,294 | 3,314 | ||||||||||||
Total noninterest expense |
9,995 | 10,103 | 29,931 | 29,059 | ||||||||||||
Income before federal tax expense |
5,315 | 3,103 | 15,533 | 11,174 | ||||||||||||
Provision for federal tax expense |
1,082 | 353 | 3,134 | 1,640 | ||||||||||||
Net Income |
$ | 4,233 | $ | 2,750 | $ | 12,399 | $ | 9,534 | ||||||||
Earnings per common share – basic |
$ | 0.39 | $ | 0.29 | $ | 1.13 | $ | 1.02 | ||||||||
Earnings per common share – diluted |
$ | 0.36 | $ | 0.25 | $ | 1.07 | $ | 0.87 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
| Accumulated | ||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||
| Compre- | Total | |||||||||||||||||||||||||||
| Compre- | hensive | Share- | ||||||||||||||||||||||||||
| hensive | Common | Paid in | Retained | Treasury | Income | holders’ | ||||||||||||||||||||||
| Income |
Stock |
Capital |
Earnings |
Stock |
(Loss) |
Equity |
||||||||||||||||||||||
Balance at December 31, 2003 |
$ | $ | 14,724 | $ | 63,144 | $ | 32,979 | $ | (16,544 | ) | $ | 6,083 | $ | 100,386 | ||||||||||||||
Net Income |
12,399 | 12,399 | 12,399 | |||||||||||||||||||||||||
Other comprehensive loss, net of tax
|
||||||||||||||||||||||||||||
Unrealized losses on securities, net of
reclassification adjustment (see Note 4) |
(3,748 | ) | (3,748 | ) | (3,748 | ) | ||||||||||||||||||||||
Comprehensive income |
$ | 8,651 | ||||||||||||||||||||||||||
Common stock issued (131,286 shares) |
164 | 979 | 1,143 | |||||||||||||||||||||||||
Dividends paid on common stock |
(3,125 | ) | (3,125 | ) | ||||||||||||||||||||||||
Purchase of 42,600 shares of
common stock |
(789 | ) | (789 | ) | ||||||||||||||||||||||||
Tax benefit of incentive stock options |
334 | 334 | ||||||||||||||||||||||||||
Stock dividend paid |
654 | 10,263 | (10,917 | ) | – | |||||||||||||||||||||||
Balance at September 30, 2004 |
$ | 15,542 | $ | 74,720 | $ | 31,336 | $ | (17,333 | ) | $ | 2,335 | $ | 106,600 | |||||||||||||||
Balance at December 31, 2002 (1) |
$ | $ | 11,947 | $ | 44,050 | $ | 29,805 | $ | (12,714 | ) | $ | 7,234 | $ | 80,322 | ||||||||||||||
Net Income |
9,534 | 9,534 | 9,534 | |||||||||||||||||||||||||
Other comprehensive loss, net of tax
|
||||||||||||||||||||||||||||
Unrealized losses on securities, net of
reclassification adjustment (see Note 4) |
(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 (1) |
$ | 13,062 | $ | 54,039 | $ | 29,939 | $ | (16,544 | ) | $ | 4,622 | $ | 85,118 | |||||||||||||||
| (1) | Restated |
The accompanying notes are an integral part of these consolidated financial statements.
3
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
| Nine Months Ended | ||||||||
| September 30, |
||||||||
| 2004 |
2003 |
|||||||
OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 12,399 | $ | 9,534 | ||||
Adjustments to reconcile net cash provided by operations: |
||||||||
Depreciation |
1,733 | 1,757 | ||||||
Amortization of premium |
8,115 | 10,643 | ||||||
Accretion of discount and loan fees |
(463 | ) | (201 | ) | ||||
Provision for loan losses |
525 | 1,054 | ||||||
Tax benefit of incentive stock options |
334 | 159 | ||||||
Decrease in interest receivable |
743 | 1,610 | ||||||
Increase in other assets |
(3,426 | ) | (8,417 | ) | ||||
Net change in deferred taxes |
(6 | ) | (776 | ) | ||||
Increase (decrease) in interest payable |
162 | (508 | ) | |||||
Increase in other liabilities |
832 | 17,334 | ||||||
(Increase) decrease in loans held for sale |
(283 | ) | 9,195 | |||||
Loss on retirement of premises and equipment |
– | 149 | ||||||
Gain on sale of assets |
(20 | ) | (7 | ) | ||||
Impairment of other real estate owned |
– | 70 | ||||||
Loss (gain) on sale of other real estate owned |
23 | (26 | ) | |||||
Gain on sale of available for sale securities |
(2,449 | ) | (4,278 | ) | ||||
Net cash provided by operating activities |
18,219 | 37,292 | ||||||
INVESTING ACTIVITIES: |
||||||||
Net increase in federal funds sold |
(7,625 | ) | (1,350 | ) | ||||
Proceeds from sales of investment securities available for sale |
76,950 | 67,332 | ||||||
Proceeds from sales of mortgage-backed securities available for sale |
102,816 | 131,166 | ||||||
Proceeds from maturities of investment securities available for sale |
31,000 | 64,970 | ||||||
Proceeds from maturities of mortgage-backed securities available for sale |
107,241 | 190,700 | ||||||
Proceeds from maturities of mortgage-backed securities held to maturity |
8,525 | – | ||||||
Purchases of investment securities available for sale |
(89,790 | ) | (116,067 | ) | ||||
Purchases of mortgage-backed securities available for sale |
(294,766 | ) | (422,073 | ) | ||||
Purchases of marketable equity securities available for sale |
(1,148 | ) | (431 | ) | ||||
Purchases of mortgage-backed securities held to maturity |
(8,864 | ) | – | |||||
Net(increase) decrease in loans |
(26,797 | ) | 2,688 | |||||
Purchases of premises and equipment |
(1,586 | ) | (2,639 | ) | ||||
Proceeds from sales of premises and equipment |
30 | 46 | ||||||
Proceeds from sales of other real estate owned |
65 | 358 | ||||||
Proceeds from sales of repossessed assets |
266 | 686 | ||||||
Net cash used in investing activities |
(103,683 | ) | (84,614 | ) | ||||
The accompanying notes are an integral part of these consolidated financial statements.
4
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
| Nine Months Ended | ||||||||
| September 30, |
||||||||
| 2004 |
2003 |
|||||||
FINANCING ACTIVITIES: |
||||||||
Net increase in demand and savings accounts |
$ | 37,199 | $ | 52,467 | ||||
Net decrease in certificates of deposit |
(3,793 | ) | (20,647 | ) | ||||
Net decrease in federal funds purchased |
(3,525 | ) | (15,850 | ) | ||||
Net increase in FHLB Dallas advances |
51,181 | 21,915 | ||||||
Issuance of junior subordinated convertible debentures |
– | 20,000 | ||||||
Net decrease in junior subordinated convertible debentures |
– | (2,976 | ) | |||||
Proceeds from the issuance of common stock |
1,143 | 3,751 | ||||||
Purchase of common stock |
(789 | ) | (3,830 | ) | ||||
Dividends paid |
(3,125 | ) | (2,206 | ) | ||||
Net cash provided by financing activities |
78,291 | 52,624 | ||||||
Net (decrease) increase in cash and cash equivalents |
(7,173 | ) | 5,302 | |||||
Cash and cash equivalents at beginning of period |
47,223 | 49,607 | ||||||
Cash and cash equivalents at end of period |
$ | 40,050 | $ | 54,909 | ||||
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION: |
||||||||
Interest paid |
$ | 19,944 | $ | 23,605 | ||||
Income taxes paid |
$ | 2,650 | $ | 1,600 | ||||
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: |
||||||||
Acquisition of other repossessed assets and real estate through foreclosure |
$ | 554 | $ | 860 | ||||
Transfer of available for sale securities to held to maturity securities |
$ | 241,417 | $ | – | ||||
The accompanying notes are an integral part of these consolidated financial statements.
5
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
1. Basis of Presentation
The consolidated balance sheet of Southside Bancshares, Inc. (the “Company”) as of September 30, 2004, 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, 2004 and 2003 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 Annual report on Form 10-K. All share data has been adjusted to give retroactive recognition to stock splits and stock dividends.
2. Financial Statement Restatement for 2002
Certain financial statement components for the year ended December 31, 2002 were restated. It is important to note, the restatement entries described below completely reversed in the financial statements for the year ended December 31, 2003. It is also important to note, net income and earnings per share did not change for any of the periods presented.
During the preparation of the Form 10-K for December 31, 2003, the Company discovered, while reviewing retirement plan workpapers, that a minimum pension plan liability adjustment that should have been reflected on the balance sheet as of December 31, 2002 was inadvertently overlooked. The oversight occurred due in part to the fact that the Company, historically, had not had a minimum pension plan liability adjustment in its defined benefit plan. The entries required for 2002 completely reversed as the minimum pension plan liability adjustment reversed to zero as of December 31, 2003.
The net effect of the entries required, increased other liabilities; decreased deferred tax liability and decreased shareholders’ equity due to the minimum pension liability adjustment entry to accumulated other comprehensive income.
A summary of the adjustments made and their effect on the financial statements is presented below:
| As of and for the | ||||||||
| third quarter then ended | ||||||||
| September 30, 2003 | ||||||||
(dollars in thousands) |
||||||||
| As Originally | ||||||||
| Stated |
Restated |
|||||||
Deferred tax liability |
$ | 1,510 | $ | 559 | ||||
Other liabilities |
$ | 19,662 | $ | 22,458 | ||||
Total Liabilities |
$ | 1,336,633 | $ | 1,338,478 | ||||
Accumulated other comprehensive income |
$ | 6,467 | $ | 4,622 | ||||
Total Shareholders’ Equity |
$ | 86,963 | $ | 85,118 | ||||
| As of and for the | ||||||||
| year then ended | ||||||||
| December 31, 2002 | ||||||||
(dollars in thousands) |
||||||||
| As Originally | ||||||||
| Stated |
Restated |
|||||||
Deferred tax liability |
$ | 3,631 | $ | 2,680 | ||||
Other liabilities |
$ | 11,765 | $ | 14,561 | ||||
Total Liabilities |
$ | 1,267,019 | $ | 1,268,864 | ||||
Accumulated other comprehensive income |
$ | 9,079 | $ | 7,234 | ||||
Total Shareholders’ Equity |
$ | 82,167 | $ | 80,322 | ||||
Comprehensive Income |
$ | 16,553 | $ | 14,708 | ||||
6
3. 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 | Nine Months | |||||||||||||||
| Ended September 30, |
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