1 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 June 30, 2001 ------------------------------------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM to ---------- ---------- Commission file number 0-12247 ------------------------- SOUTHSIDE BANCSHARES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) TEXAS 75-1848732 - ------------------------------------------ ------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1201 S. Beckham, Tyler, Texas 75701 - ------------------------------------------ ------------------------------ (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) 903-531-7111 ------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- The number of shares outstanding of each of the issuer's classes of capital stock as of July 31, 2001 was 7,398,933 shares of Common Stock, par value $1.25.
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share amounts) <Table> <Caption> June 30, December 31, ASSETS 2001 2000 ------------ ----------- <S> <C> <C> Cash and due from banks ................................................................. $ 34,625 $ 38,800 Federal funds sold ...................................................................... 500 -- ------------ ----------- Cash and cash equivalents ............................................................ 35,125 38,800 Investment securities: Available for sale ................................................................... 122,487 56,777 Held to maturity ..................................................................... -- 104,508 ------------ ----------- Total Investment securities ........................................................ 122,487 161,285 Mortgage-backed and related securities: Available for sale ................................................................... 490,382 269,286 Held to maturity ..................................................................... -- 142,961 ------------ ----------- Total Mortgage-backed securities ................................................... 490,382 412,247 Marketable equity securities: Available for sale ................................................................... 20,773 20,226 Loans: Loans, net of unearned discount ...................................................... 509,658 481,435 Less: Reserve for loan losses ....................................................... (5,622) (5,033) ------------ ----------- Net Loans .......................................................................... 504,036 476,402 Premises and equipment, net ............................................................. 25,607 25,475 Interest receivable ..................................................................... 8,645 9,117 Deferred tax asset ...................................................................... -- 2,922 Other assets ............................................................................ 6,675 5,407 ------------ ----------- TOTAL ASSETS ....................................................................... $ 1,213,730 $ 1,151,881 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest bearing .................................................................. $ 178,029 $ 166,899 Interest bearing ..................................................................... 528,628 553,706 ------------ ----------- Total Deposits ..................................................................... 706,657 720,605 Short-term obligations: Federal funds purchased .............................................................. 975 5,025 FHLB Dallas advances ................................................................. 173,088 148,940 Other obligations .................................................................... 2,500 2,278 ------------ ----------- Total Short-term obligations ...................................................... 176,563 156,243 Long-term obligations: FHLB Dallas advances ................................................................. 210,748 179,645 Guaranteed Preferred Beneficial Interest in the Company's Junior Subordinated Debentures .................................................. 20,000 20,000 Guaranteed Preferred Beneficial Interest in the Company's Junior Subordinated Convertible Debentures ...................................... 16,950 16,950 ------------ ----------- Total Long-term obligations ....................................................... 247,698 216,595 Deferred tax liability .................................................................. 490 -- Other liabilities ....................................................................... 21,041 6,743 ------------ ----------- TOTAL LIABILITIES .................................................................. 1,152,449 1,100,186 ------------ ----------- Shareholders' equity: Common stock: ($1.25 par, 20,000,000 shares authorized, 8,278,321 and 8,215,135 shares issued and outstanding) ........................... 10,348 10,269 Paid-in capital ...................................................................... 30,559 30,226 Retained earnings .................................................................... 24,064 19,891 Treasury stock (830,052 and 606,552 shares at cost) .................................. (7,416) (5,357) Accumulated other comprehensive gain (loss) .......................................... 3,726 (3,334) ------------ ----------- TOTAL SHAREHOLDERS' EQUITY ........................................................ 61,281 51,695 ------------ ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................................ $ 1,213,730 $ 1,151,881 ============ =========== </Table> The accompanying notes are an integral part of these consolidated financial statements. 1
3 SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands, except per share data) <Table> <Caption> Quarter Ended June 30, Six Months Ended June 30, ----------------------- ------------------------ 2001 2000 2001 2000 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Interest income Loans ................................................... $ 10,526 $ 8,655 $ 20,646 $ 16,802 Investment securities ................................... 1,591 2,653 3,583 5,376 Mortgage-backed and related securities .................. 7,709 6,542 15,646 12,818 Other interest earning assets ........................... 250 663 611 1,050 ---------- ---------- ---------- ---------- Total interest income ............................... 20,076 18,513 40,486 36,046 Interest expense Time and savings deposits ............................... 6,739 5,601 14,004 10,412 Short-term obligations .................................. 1,878 2,444 4,001 4,987 Long-term obligations ................................... 3,878 2,917 7,584 5,693 ---------- ---------- ---------- ---------- Total interest expense .............................. 12,495 10,962 25,589 21,092 ---------- ---------- ---------- ---------- Net interest income ........................................ 7,581 7,551 14,897 14,954 Provision for loan losses .................................. 300 378 760 783 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses ........ 7,281 7,173 14,137 14,171 ---------- ---------- ---------- ---------- Noninterest income Deposit services ........................................ 2,323 2,043 4,550 4,006 Gain (loss) on sales of securities available for sale ... 509 (186) 2,317 (459) Other ................................................... 779 661 1,410 1,163 ---------- ---------- ---------- ---------- Total noninterest income ............................ 3,611 2,518 8,277 4,710 ---------- ---------- ---------- ---------- Noninterest expense Salaries and employee benefits .......................... 4,569 3,965 8,637 7,623 Net occupancy expense ................................... 872 784 1,716 1,557 Equipment expense ....................................... 186 157 369 311 Advertising, travel & entertainment ..................... 479 441 912 781 Supplies ................................................ 171 133 326 281 Other ................................................... 1,358 1,028 2,531 1,977 ---------- ---------- ---------- ---------- Total noninterest expense ........................... 7,635 6,508 14,491 12,530 ---------- ---------- ---------- ---------- Income before federal tax expense .......................... 3,257 3,183 7,923 6,351 Provision for federal tax expense .......................... 679 714 1,861 1,440 ---------- ---------- ---------- ---------- Income before cumulative effect of change in accounting principle .......................................... 2,578 2,469 6,062 4,911 Cumulative effect of change in accounting principle, net of tax ........................................ -- -- (994) -- ---------- ---------- ---------- ---------- Net Income ................................................. $ 2,578 $ 2,469 $ 5,068 $ 4,911 ========== ========== ========== ========== Earnings Per Common Share: Basic: Income before cumulative effect of change in accounting principle ....................... $ 0.35 $ 0.33 $ 0.81 $ 0.65 Net income ............................................ $ 0.35 $ 0.33 $ 0.68 $ 0.65 Diluted: Income before cumulative effect of change in accounting principle ...................... $ 0.30 $ 0.32 $ 0.69 $ 0.63 Net income ............................................ $ 0.30 $ 0.32 $ 0.59 $ 0.63 </Table> The accompanying notes are an integral part of these consolidated financial statements. 2
4 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, 2000................ $ $ 10,269 $ 30,226 $ 19,891 $ (5,357) $ (3,334) $ 51,695 Net Income.................................. 5,068 5,068 5,068 Other comprehensive income, net of tax Unrealized gains on securities, net of reclassification adjustment (see disclosure).............................. 7,060 7,060 7,060 --------- Comprehensive income........................ $ 12,128 ========= Common stock issued (63,186 shares)......... 79 283 362 Dividends paid on common stock.............. (895) (895) Purchase of 223,500 shares of Treasury stock............................ (2,059) (2,059) Tax benefit of incentive stock options...... 50 50 --------- --------- --------- --------- ----------- --------- Balance at June 30, 2001.................... $ 10,348 $ 30,559 $ 24,064 $ (7,416) $ 3,726 $ 61,281 ========= ========= ========== ========= =========== ========= Disclosure of reclassification amount: Unrealized holding gains arising during period................................... $ 7,595 Less: reclassification adjustment for gains included in net income............. 1,529 Less: cumulative effect of change in accounting principle..................... (994) --------- Net unrealized gains on securities.......... $ 7,060 ========= Balance at December 31, 1999................ $ $ 9,748 $ 27,472 $ 14,583 $ (4,544) $ (9,587) $ 37,672 Net Income.................................. 4,911 4,911 4,911 Other comprehensive income, net of tax Unrealized gains on securities, net of reclassification adjustment (see disclosure).............................. 1,376 1,376 1,376 --------- Comprehensive income........................ $ 6,287 ========= Common stock issued (25,702 shares)......... 32 164 196 Dividends paid on common stock.............. (727) (727) Purchase of 71,050 shares of Treasury stock............................ (626) (626) Tax benefit of incentive stock options...... 4 4 --------- --------- --------- --------- ----------- --------- Balance at June 30, 2000.................... $ 9,780 $ 27,640 $ 18,767 $ (5,170) $ (8,211) $ 42,806 ========= ========= ========== ========= =========== ========= Disclosure of reclassification amount: Unrealized holding gains arising during period................................... $ 1,073 Less: reclassification adjustment for losses included in net income............ (303) --------- Net unrealized gains on securities.......... $ 1,376 ========= </Table> The accompanying notes are an integral part of these consolidated financial statements. 3
5 SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) (in thousands) <Table> <Caption> Six Months Ended June 30, --------------------- 2001 2000 --------- --------- <S> <C> <C> OPERATING ACTIVITIES: Net income .................................................................. $ 5,068 $ 4,911 Adjustments to reconcile net cash provided by operations: Depreciation ............................................................... 936 871 Amortization of premium .................................................... 2,882 710 Accretion of discount and loan fee ......................................... (945) (1,027) Provision for loan losses .................................................. 760 783 Tax benefit of incentive stock options ..................................... 50 4 Increase (decrease) in interest receivable ................................. 472 (693) Increase in other receivables and prepaid expenses ......................... (1,310) (1,864) Increase in deferred tax asset ............................................. (225) (24) Increase in interest payable ............................................... 208 302 Decrease (increase) in other payables ...................................... 14,312 (441) Gain on sale of premises and equipment ..................................... (12) -- Gain on sale of other real estate owned .................................... (4) -- (Gain) loss on sales of securities ......................................... (2,317) 459 Cumulative effect of change in accounting principle ........................ 994 -- Proceeds from sales of trading securities .................................. 99,595 -- --------- --------- Net cash provided by operating activities ................................ 120,464 3,991 INVESTING ACTIVITIES: Proceeds from sales of investment securities available for sale ............. 47,360 41,569 Proceeds from sales of mortgage-backed securities available for sale ........ 57,930 114,485 Proceeds from maturities of investment securities available for sale ........ 46,219 1,475 Proceeds from maturities of mortgage-backed securities available for sale ... 69,516 18,483 Proceeds from maturities of investment securities held to maturity .......... -- 190 Proceeds from maturities of mortgage-backed securities held to maturity ..... -- 2,762 Purchases of investment securities available for sale ....................... (98,812) (30,671) Purchases of mortgage-backed securities available for sale .................. (251,062) (152,660) Purchases of investment securities held to maturity ......................... -- (3,829) Purchases of mortgage-backed securities held to maturity .................... -- (3,110) Purchases of marketable equity securities available for sale ................ (547) (801) Net increase in loans ....................................................... (28,939) (42,470) Purchases of premises and equipment ......................................... (1,082) (1,260) Proceeds from sale of premises and equipment ................................ 26 -- Proceeds from sale of other real estate owned ............................... 12 -- Proceeds from sales of repossessed assets ................................... 579 548 --------- --------- Net cash used in investing activities .................................... (158,800) (55,289) </Table> The accompanying notes are an integral part of these consolidated financial statements. 4
6 SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (continued) (UNAUDITED) (in thousands) <Table> <Caption> Six Months Ended June 30, ------------------- 2001 2000 -------- -------- FINANCING ACTIVITIES: <S> <C> <C> Net increase (decrease) in demand and savings accounts ........................ $ 617 $ (9,549) Net (decrease) increase in certificates of deposit ............................ (14,565) 64,245 Net (decrease) increase in federal funds purchased ............................ (4,050) 10,200 Net increase (decrease) in FHLB Dallas advances ............................... 55,251 (19,674) Proceeds from the issuance of common stock .................................... 362 196 Purchase of treasury stock .................................................... (2,059) (626) Dividends paid ................................................................ (895) (727) -------- -------- Net cash provided by financing activities ................................ 34,661 44,065 Net decrease in cash and cash equivalents ...................................... (3,675) (7,233) Cash and cash equivalents at beginning of period ............................... 38,800 41,131 -------- -------- Cash and cash equivalents at end of period ..................................... $ 35,125 $ 33,898 ======== ======== SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION: Interest paid ................................................................. $ 25,381 $ 21,394 Income taxes paid ............................................................. $ 1,125 $ 1,750 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisition of other repossessed assets and real estate through foreclosure ... $ 545 $ 433 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
7 SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 1. Basis of Presentation The consolidated balance sheet as of June 30, 2001, and the related consolidated statements of income, shareholders' equity and cash flow for the six month period ended June 30, 2001 and 2000 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 as required by Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS128), 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> Six Months Ended June 30, ------------------------- 2001 2000 --------- --------- <S> <C> <C> Basic Earnings and Shares: Income before effect of accounting change ............. $ 6,062 $ 4,911 Effect of change in accounting principle .............. (994) -- --------- --------- Net income ............................................ $ 5,068 $ 4,911 ========= ========= Weighted-average basic shares outstanding ............. 7,498 7,619 Basic Earnings Per Share: Income before effect of accounting change ............. $ 0.81 $ 0.65 Effect of change in accounting principle .............. (0.13) -- --------- --------- Net income ............................................ $ 0.68 $ 0.65 ========= ========= Diluted Earnings and Shares: Income before effect of accounting change ............. $ 6,062 $ 4,911 Add: Applicable dividend on convertible debentures ... 489 -- --------- --------- Adjusted net income ................................... 6,551 4,911 Effect of change in accounting principle .............. (994) -- --------- --------- Net income ............................................ $ 5,557 $ 4,911 ========= ========= Weighted-average basic shares outstanding ............. 7,498 7,619 Add: Stock options ................................... 306 208 Convertible Debentures .......................... 1,695 -- --------- --------- Weighted-average diluted shares outstanding ........... 9,499 7,827 ========= ========= Diluted Earnings Per Share: Income before effect of accounting change ............. $ 0.69 $ 0.63 Effect of change in accounting principle .............. (0.10) -- --------- --------- Net income ............................................ $ 0.59 $ 0.63 ========= ========= </Table> The accompanying notes are an integral part of these consolidated financial statements. 6
8 3. Comprehensive Income The components of accumulated comprehensive income as required by Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income" are as follows: <Table> <Caption> Six Months Ended June 30, 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........... $ 11,508 $ (3,913) $ 7,595 Less: reclassification adjustment for gains included in net income.............................. 2,317 (788) 1,529 --------------- -------------- --------------- Net unrealized gains on securities...................... 9,191 (3,125) 6,066 Less: cumulative effect of change in accounting principle................................ (1,506) 512 (994) --------------- -------------- --------------- Other comprehensive income.................................. $ 10,697 $ (3,637) $ 7,060 ================ ============== =============== </Table> <Table> <Caption> Quarter Ended June 30, 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........... $ 1,050 $ (357) $ 693 Less: reclassification adjustment for gains included in net income.............................. 509 (173) 336 --------------- -------------- --------------- Net unrealized gains on securities...................... 541 (184) 357 --------------- -------------- --------------- Other comprehensive income.................................. $ 541 $ (184) $ 357 ================ ============== =============== </Table> <Table> <Caption> Six Months Ended June 30, 2000 -------------------------------------------------- Before-Tax Tax (Expense) Net-of-Tax Amount Benefit Amount --------------- -------------- --------------- <S> <C> <C> <C> Unrealized gains on securities: Unrealized holding gains arising during period........... $ 1,626 $ (553) $ 1,073 Less: reclassification adjustment for losses included in net income............................... (459) 156 (303) --------------- -------------- --------------- Net unrealized gains on securities...................... 2,085 (709) 1,376 --------------- -------------- --------------- Other comprehensive income.................................. $ 2,085 $ (709) $ 1,376 ================ ============== =============== </Table> <Table> <Caption> Quarter Ended June 30, 2000 -------------------------------------------------- Before-Tax Tax (Expense) Net-of-Tax Amount Benefit Amount --------------- -------------- --------------- <S> <C> <C> <C> Unrealized gains on securities: Unrealized holding gains arising during period........... $ 2,375 $ (808) $ 1,567 Less: reclassification adjustment for losses included in net income............................... (186) 63 (123) --------------- -------------- --------------- Net unrealized gains on securities...................... 2,561 (871) 1,690 --------------- -------------- --------------- Other comprehensive income.................................. $ 2,561 $ (871) $ 1,690 ================ ============== =============== </Table> 7
9 4. Recent Accounting Pronouncements On June 15, 1998, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS133). FAS133 and its amendments are effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. FAS133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. In June 2000, the Financial Accounting Standards Board issued Financial Accounting Standards No. 138, "Accounting for Derivative Instruments and Hedging Activities, an Amendment of Financial Accounting Standards Board Statement No. 133," which addresses a limited number of issues causing implementation difficulties for numerous entities that apply Financial Accounting Standards No. 133, as amended. Financial Accounting Standards No. 138 amends the accounting and reporting standards of Financial Accounting Standards No. 133, as amended, for certain derivative instruments, certain hedging activities and for decisions made by the Financial Accounting Standards Board relating to the Derivatives Implementation Group process. 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 $2.3 million or an after tax gain of $1.5 million. These separate transactions allowed Southside to reposition the investment portfolio while having a positive impact of $811,000 or $535,000 (net of taxes) on consolidated net income for the first six months of 2001. In September 2000, the Financial Accounting Standards Board issued Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of Financial Accounting Standards Board Statement No. 125," which revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but, it carries over most of Financial Accounting Standards No. 125's provisions without reconsideration. The statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. It is effective for disclosures about securitizations and collateral and for the recognition and reclassification of collateral for fiscal years ending after December 15, 2000. The adoption of financial Accounting Standards No. 140 did not have a significant effect on the Company's results of operations or its financial position. 8
10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Six months ended June 30, 2001 compared to June 30, 2000. The following is a discussion of the consolidated financial condition, changes in financial condition, and results of operations of Southside Bancshares, Inc. (the "Company"), and should be read and reviewed in conjunction with the financial statements, and the notes thereto, in this presentation and in the Company's latest report on Form 10-K. The Company reported an increase in net income for the quarter and six months ended June 30, 2001 compared to the same period in 2000. Net income for the quarter and six months ended June 30, 2001 was $2.6 million and $5.1 million compared to $2.5 million and $4.9 million for the same period in 2000. All share data has been adjusted to give retroactive recognition to stock splits and stock dividends. Net Interest Income Net interest income for the six months ended June 30, 2001 was $14.9 million, a decrease of $57,000 or 0.4% for the six months when compared to the same period in 2000. Average interest earning assets increased $155.3 million or 16.1%, while the net interest spread decreased from 2.68% at June 30, 2000 to 2.14% at June 30, 2001 and the net margin decreased from 3.40% at June 30, 2000 to 2.93% at June 30, 2001. The decrease in net interest spread is primarily a result of higher interest expense associated with brokered CDs issued during the second quarter ended June 30, 2000 and $556,000 of additional interest expense associated with calling the brokered CDs during the first six months ended June 30, 2001. In addition, interest expense associated with the trust preferred securities issued November 2, 2000 contributed to the decrease in net interest spread. During the six months ended June 30, 2000, Average Loans, funded primarily by the growth in average deposits and average FHLB Dallas advances, increased $87.5 million or 21.5%, compared to the same period in 2000. The average yield on loans increased slightly from 8.40% at June 30, 2000 to 8.59% at June 30, 2001. Average Securities increased $67.3 million or 12.6% for the six months ended June 30, 2001 when compared to the same period in 2000. This increase was a direct result of the leverage strategy implemented in 1998. The overall yield on Average Securities decreased to 6.76% during the six months ended June 30, 2001 from 7.29% during the same period in 2000. The 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 $439,000 or 41.8% for the six months ended June 30, 2001 when compared to 2000 as a result of the decrease in the average yield from 8.99% in 2000 to 5.13% at June 30, 2001. The decrease is due to lower interest rates and a special FHLB Dallas dividend of $300,000 received on the FHLB Dallas stock the Company owns in the second quarter of 2000. Total interest expense increased $4.5 million or 21.3% to $25.6 million during the six months ended June 30, 2001 as compared to $21.1 million during the same period in 2000. The increase was attributable to an increase in Average Interest Bearing Liabilities of $126.7 million or 15.3% and an increase in the average yield on interest bearing liabilities from 5.12% at June 30, 2000 to 5.40% at June 30, 2001. Average Interest Bearing Deposits increased $89.2 million or 19.4% while the average rate paid increased from 4.54% at June 30, 2000 to 5.14% at June 30, 2001, which is due in part to the higher cost of long-term brokered CDs and the Company's Platinum Money Market account, both introduced during the second quarter of 2000. During the second quarter ended June 30, 2000, the Company issued $54.6 million of long-term brokered CD's with one-year continuous discrete call options. The average yield on these CD's was approximately 8.19% with an average life of approximately 10.8 years. Obtaining this long-term funding enabled the Bank to take advantage of the higher interest rate environment, primarily through the purchase of securities without incurring additional interest rate risk. The higher cost associated with these callable CD's had a negative impact on the Company's net interest spread during the last several quarters ending June 30, 2001. During April and May of 2001, the Company completed the call of $54.6 million of brokered CDs. The Company 9
11 recorded additional interest expense associated with the CDs of $556,000 and $361,000 for the six months and quarter ended June 30, 2001, respectively. These long-term callable brokered CDs had an average yield of approximately 8.19% and were replaced with long-term advances from the FHLB Dallas at an average yield of approximately 5.40% and an average life of approximately 4.65 years at June 30, 2001. As a result, the Company's interest expense on this $54.6 million has declined. During the second quarter of 2000, the Bank introduced a new Platinum Money Market deposit account. This account pays a higher rate on larger deposit balances than the Bank's other money market account. As deposits shift to the new money market account, the higher interest cost associated with this change will have a negative impact on the Company's net interest margin. The Bank hopes to attract new deposits due to the competitive rate of this account. Average Short-term Interest Bearing Liabilities, consisting primarily of FHLB Dallas advances and Federal Funds Purchased, decreased $6.5 million or 3.9% as compared to the same period in 2000. Average Long-term Interest Bearing Liabilities consisting of FHLB Dallas advances increased $27.0 million or 15.1% compared to $179.1 million at June 30, 2000. The advances were obtained from FHLB Dallas as part of the Company's balance sheet leverage strategy and partially to fund long-term loans. FHLB Dallas advances are collateralized by FHLB Dallas stock, securities and nonspecified real estate loans. The Company plans to gradually reduce the percentage of short-term FHLB Dallas advances, as a percent of total funding, with deposit growth and long-term FHLB advances. Loan growth should gradually replace a portion of the securities portfolio. Average Long-Term Junior Subordinated Convertible Debentures were $17.0 million for the six months ended June 30, 2001 compared to zero for the same period in 2000. The increase is a result of the sale of 1,695,000 Convertible Preferred Securities on November 2, 2000 at a liquidation amount of $10 per Convertible Preferred Security for an aggregate amount of $16,950,000. The debentures have a distribution rate of 8.75% per annum payable at the end of each calendar quarter. This increase in Average Long-term Junior Subordinated Convertible Debentures contributed to the higher average rate paid in 2001 when compared to 2000. Average Long Term Junior Subordinated Debentures remained the same at $20 million from June 30, 2000 to June 30, 2001. 10
12 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) Six Months Ended June 30, 2001 Six Months Ended June 30, 2000 -------------------------------------------- ---------------------------------------- <S> <C> <C> <C> <C> <C> <C> INTEREST EARNING ASSETS: Loans (1)(2) $ 494,581 $ 21,071 8.59% $ 407,097 $ 16,999 8.40% Investment Securities (3)(4) . 129,672 4,519 7.03% 174,290 6,525 7.53% Mortgage-backed Securities (4) 471,560 15,646 6.69% 359,650 12,818 7.17% Other Interest Earning Assets 24,014 611 5.13% 23,478 1,050 8.99% ----------- ----------- ----------- ---------- TOTAL INTEREST EARNING ASSETS 1,119,827 41,847 7.54% 964,515 37,392 7.80% ----------- ---------- NONINTEREST EARNING ASSETS: Cash and Due from Banks 34,633 31,846 Bank Premises and Equipment 25,474 21,194 Other Assets 17,504 15,307 Less: Reserve for Loan Loss (5,374) (4,809) ----------- ----------- TOTAL ASSETS $ 1,192,064 $ 1,028,053 =========== =========== INTEREST BEARING LIABILITIES: Deposits $ 549,952 14,004 5.14% $ 460,744 10,412 4.54% Fed Funds Purchased and Other Interest Bearing Liabilities 4,931 122 4.99% 4,921 141 5.76% Short Term Interest Bearing Liabilities - FHLB Dallas 157,743 3,879 4.96% 164,294 4,846 5.93% Long Term Interest Bearing Liabilities - FHLB Dallas 206,135 5,992 5.86% 179,100 4,843 5.44% Long Term Junior Subordinated Convertible Debentures 16,950 742 8.75% -- -- Long Term Junior Subordinated Debentures 20,000 850 8.50% 20,000 850 8.50% ----------- ----------- ----------- ---------- TOTAL INTEREST BEARING LIABILITIES 955,711 25,589 5.40% 829,059 21,092 5.12% ----------- ---------- NONINTEREST BEARING LIABILITIES Demand Deposits 163,028 148,848 Other Liabilities 14,673 10,879 ----------- ----------- Total Liabilities 1,133,412 988,786 SHAREHOLDERS' EQUITY 58,652 39,267 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,192,064 $ 1,028,053 =========== =========== NET INTEREST INCOME $ 16,258 $ 16,300 =========== ========== NET MARGIN ON AVERAGE EARNING ASSETS 2.93% 3.40% ======= ======= NET INTEREST SPREAD 2.14% 2.68% ======= ======= </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 $425 and $197 as of June 30, 2001 and 2000, respectively. (3) Interest income includes taxable-equivalent adjustments of $936 and $1,149 as of June 30, 2001 and 2000, respectively. (4) For the purpose of calculating the average yield, the average balance of securities is presented at historical cost. 11
13 Noninterest Income Noninterest income was $8.3 million for the six months ended June 30, 2001 compared to $4.7 million for the same period in 2000. Deposit services income increased $544,000 or 13.6% for the six months ended June 30, 2001. 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 June 30, 2000 to June 30, 2001. Other noninterest income increased $247,000 or 21.2% for the six months ended June 30, 2001 primarily as a result of increases in trust income and mortgage servicing release fees income. During the six months ended June 30, 2001, the Company had gains on the sale of securities of $2.3 million compared to losses on the sales of securities of $459,000 for the same period in 2000. 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 $2.3 million or an after tax gain of $1.5 million. These separate transactions allowed Southside to reposition the investment portfolio while having a positive impact of $811,000 or $535,000 (net of taxes) on consolidated net income for the first six months of 2001. The market value of the entire securities portfolio at June 30, 2001 was $633.6 million with a net unrealized gain on that date of $5.7 million. The net unrealized gain is comprised of $8.4 million in unrealized gains and $2.7 million in unrealized losses. Noninterest Expense Noninterest expense was $14.5 million for the six months ended June 30, 2001, compared to $12.5 million for the same period of 2000, representing an increase of $2.0 million or 15.7%. Salaries and employee benefits increased $1.0 million or 13.3% during the six months ended June 30, 2001 when compared to the same period in 2000. Direct salary expense and payroll taxes increased $738,000 or 11.7% as a result of personnel additions for the six months ended June 30, 2001 when compared to the same period in 2000. Branch expansion combined with normal payroll increases accounted for this increase. Retirement expense increased $270,000 or 73.2% for the six months ended June 30, 2001 when compared to the same period in 2000, primarily as a result of the level of performance of retirement plan assets and actuarial computations. Health, life and other employee related insurance expense increased $6,000 or 0.6% for the six months ended June 30, 2001 when compared to the same period in 2000. The Company has a self-insured health plan which is supplemented with stop loss insurance policies. Net occupancy expense increased $159,000 or 10.2% for the six months ended June 30, 2001 compared to the same period in 2000, largely due to higher real estate taxes, depreciation expense and branch expansion. Equipment expense increased $58,000 or 18.6% for the six months ended June 30, 2001 compared to the same period in 2000 due to additional locations, equipment and increased maintenance costs. Advertising, travel and entertainment expense increased $131,000 or 16.8% for the six months ended June 30, 2001 compared to the same period in 2000 due to an increased advertising budget and additional expenses associated with additional locations and growth in assets. Other expense increased $554,000 or 28.0% for the six months ended June 30, 2001 compared to the same period in 2000 primarily due to increases in professional fees, dues to directors, bank analysis fees, trust expense and ATM fees. Provision for Income Taxes The provision for the income tax expense for the six months ended June 30, 2001 was 23.5% compared to 22.7% for 12
14 the six months ended June 30, 2000. The increase in the effective tax rate and income tax expense is due to the increase in pre-tax income as a result of securities gains for the six months ended June 30, 2001. Capital Resources Total shareholders' equity for the Company at June 30, 2001, of $61.3 million was up $9.6 million from December 31, 2000, and represented 5.0% of total assets at June 30, 2001 compared to 4.5% of total assets at December 31, 2000. Increases to shareholders' equity during the six months ended June 30, 2001 were net income of $5.1 million and common stock (63,186 shares) issued through the Company's dividend reinvestment and incentive stock option plans of $362,000 and an increase of $7.1 million in net unrealized gains on securities available for sale. Decreases to shareholders' equity consisted of $895,000 in dividends paid to shareholders and the purchase of 223,500 shares of the Company's stock for $2.1 million. Under the Federal Reserve Board's risk-based capital guidelines for bank holding companies, the minimum ratio of total capital to risk-adjusted assets (including certain off-balance sheet items, such as standby letters of credit) is currently eight percent. The minimum Tier 1 capital to risk-adjusted assets is four percent. A portion of the $20 million trust preferred securities is considered Tier 1 capital by the Federal Reserve Bank. The Federal Reserve Board also requires bank holding companies to comply with the minimum leverage ratio guidelines. The leverage ratio is a ratio of bank holding company's Tier 1 capital to its total consolidated quarterly average assets, less goodwill and certain other intangible assets. The guidelines require a minimum average of 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 June 30, 2001, the Company and the Bank exceeded all regulatory minimum capital requirements. The Federal Reserve Deposit Insurance Act requires bank regulatory agencies to take "prompt corrective action" with respect to FDIC-insured depository institutions that do not meet minimum capital requirements. A depository institution's treatment for purposes of the prompt corrective action provisions will depend on how its capital levels compare to various capital measures and certain other factors, as established by regulation. It is management's intention to maintain the Company's capital at a level acceptable to all regulatory authorities and future dividend payments will be determined accordingly. Regulatory authorities require that any dividend payments made by either the Company or the Bank not exceed earnings for that year. Liquidity and Interest Rate Sensitivity Liquidity management involves the ability to convert assets to cash with a minimum of loss. The Company must be capable of meeting its obligations to its customers at any time. This means addressing (1) the immediate cash withdrawal requirements of depositors and other funds providers; (2) the funding requirements of all lines and letters of credit; and (3) the short-term credit needs of customers. Liquidity is provided by short-term investments that can be readily liquidated with a minimum risk of loss. Cash, Interest Earning Deposits, Federal Funds Sold and short-term investments with maturities or repricing characteristics of one year or less continue to be a substantial percentage of total assets. At June 30, 2001, these investments were 18.2% 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 8, 2000, the Company through Southside Capital Trust II sold 1,695,000 shares of Convertible Preferred 13
15 Securities at a liquidation amount of $10 per Convertible Preferred Security for an aggregate amount of $16,950,000. The debentures have a distribution rate of 8.75% per annum payable at the end of each calendar quarter and have a conversion feature to the Company's common stock at $10 per share. The proceeds received by the Company from the Trust Issuer will 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 $87.5 million or 21.5% from the six months ended June 30, 2000 to June 30, 2001. The majority of the increase is in Real Estate Loans. The increase in Real Estate Loans is due to a stronger real estate market, interest rates and a strong commitment in residential mortgage lending. Loan Loss Experience and Reserve for Loan Losses The loan loss reserve is based on the most current review of the loan portfolio at that time. An internal loan review officer of the Company is responsible for an ongoing review of the Bank's entire loan portfolio with specific goals set for the volume of loans to be reviewed on an annual basis. A list of loans which are graded as having more than the normal degree of risk associated with them are maintained by the internal loan review officer. This list is updated on a periodic basis but no less than quarterly by the servicing officer in order to properly allocate necessary reserves and keep management informed on the status of attempts to correct the deficiencies noted in the credit. While management is aware of certain risk factors within segments of the loan portfolio, reserve allocations have been made on an individual loan basis. An additional reserve is maintained on the remainder of the portfolio of at risk loans that is based on tracking of the Company's loan losses on loans that have not been previously identified as problems. For the second quarter and six months ended June 30, 2001, loan charge-offs were $409,000 and $607,000 and recoveries were $297,000 and $436,000, respectively, resulting in net charge-offs of $112,000 and $171,000. For the second quarter and six months ended June 30, 2000, loan charge-offs were $211,000 and $432,000 and recoveries were $75,000 and $158,000, respectively, resulting in net charge-offs of $136,000 and $274,000. Net charge-offs decreased for the six months ended June 30, 2001. As a result of this and other factors, the necessary provision expense was estimated at $760,000 for the six months ended June 30, 2001. 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. 14
16 Total nonperforming assets at June 30, 2001 were $2,260,000, down $217,000 or 8.8% from $2,477,000 at December 31, 2000. Loans 90 days past due or more decreased $325,000 or 26.7% to $894,000. Of this total, 60% are collateralized by residential dwellings that are primarily owner occupied. Historically, the amount of losses suffered on this type of loan have been less than those on other properties. Sixteen percent are commercial real estate properties, 2% are nonfarm nonresidential real estate loans, 20% are commercial loans and 2% are loans to individuals. Restructured loans decreased $24,000 or 6.2% to $365,000. From December 31, 2000 to June 30, 2001, nonaccrual loans increased $174,000 or 27.6% to $804,000. Repossessed assets decreased $42,000 or 21.4%. Other real estate remained unchanged at $43,000 from December 31, 2000 to June 30, 2001. Expansion The Company also acquired property in Whitehouse, Texas in southern Smith County on which it began construction of a full service branch during the second quarter of 2001. The Company anticipates opening during the second quarter of 2002. The Company plans to open a full service branch in a grocery store in the Tyler area during the first quarter of 2002. Recent Accounting Issues On June 15, 1998, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS133). FAS133 and its amendments are effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. FAS133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. In June 2000, the Financial Accounting Standards Board issued Financial Accounting Standards No. 138, "Accounting for Derivative Instruments and Hedging Activities, an Amendment of Financial Accounting Standards Board Statement No. 133," which addresses a limited number of issues causing implementation difficulties for numerous entities that apply Financial Accounting Standards No. 133, as amended. Financial Accounting Standards No. 138 amends the accounting and reporting standards of Financial Accounting Standards No. 133, as amended, for certain derivative instruments, certain hedging activities and for decisions made by the Financial Accounting Standards Board relating to the Derivatives Implementation Group process. 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 $2.3 million or an after tax gain of $1.5 million. These separate transactions allowed Southside to reposition the investment portfolio while having a positive impact of $811,000 or $535,000 (net of taxes) on consolidated net income for the first six months of 2001. In September 2000, the Financial Accounting Standards Board issued Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of Financial Accounting Standards Board Statement No. 125," which revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but, it carries over most of Financial Accounting Standards No. 125's provisions without reconsideration. The statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. It is effective for disclosures about securitizations and collateral and for the recognition and reclassification of collateral for fiscal years ending after December 15, 2000. The adoption of financial Accounting Standards No. 140 did not have a significant effect on the Company's results of operations or its financial position. 15
17 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 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 and the costs and effects of unanticipated litigation. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes since December 31, 2000. See Form 10-K, Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 16
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 Not Applicable ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit No. ------- *, ** 10(a)(i) - Deferred Compensation Plan for B. G. Hartley effective February 13, 1984, as amended June 28, 1990, December 15, 1994, November 20, 1995, December 21, 1999 and June 29, 2001 (filed as Exhibit 10(a)(i) to the Registrant's Form 10-Q for the quarter ended June 30, 2001, and filed herewith). *, ** 10(g) - Post Retirement Agreement for B. G. Hartley effective June 20, 2001 (filed as Exhibit 10(g) to the Registrant's Form 10-Q for the quarter ended June 30, 2001, and filed herewith). - ---------- * Filed herewith. ** Compensation plan, benefit plan or employment contract or arrangement. (b) Reports on Form 8-K - None 17
19 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: August 10, 2001 ------------------------- /s/ LEE R. GIBSON ----------------------------------------- Lee R. Gibson, Executive Vice President (Principal Financial and Accounting Officer) DATE: August 10, 2001 ------------------------- 18
20 EXHIBIT INDEX <Table> <Caption> EXHIBIT NUMBER DESCRIPTION - ------- ----------- <S> <C> 10(a)(i) Deferred Compensation Plan for B. G. Hartley effective February 13, 1984, as amended June 28, 1990, December 15, 1994, November 20, 1995, December 21, 1999 and June 29, 2001. 10(g) Post Retirement Agreement for B. G. Hartley effective June 20, 2001. </Table>