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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
Form 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
- ---------- SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE YEAR ENDED DECEMBER 31, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
- ---------- SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 of incorporation) (I.R.S. Employer 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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
(Title of Class)
Indicate by check mark whether the registrant (l) 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 8, 1996, 3,141,393 shares of common stock of Southside
Bancshares, Inc. were outstanding and the aggregate market value of such common
stock held by nonaffiliates (based upon the last transaction known by
registrant on or before that date) was $34,150,155.
DOCUMENTS INCORPORATED BY REFERENCE
(a) Registrant's Proxy Statement to be filed for the Annual Meeting of
Shareholders to be held April 24, 1996. (Part III)
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PART I
ITEM 1. BUSINESS
GENERAL
Southside Bancshares, Inc. (the "Company"), a Texas corporation, is a
bank holding company organized in 1982, which at December 31, 1995, owned all
of the capital stock of one commercial bank in Texas, Southside Bank, and one
nonbank subsidiary, which did not conduct any business in 1995. As a bank
holding company, the Company may own or control more than one bank and furnish
services for such banks. Unless the context otherwise requires, references in
this Report to the Company include Southside Bank and the nonbank subsidiary.
The Company provides its subsidiaries with advice and coordination of
activities in the area of accounting, public relations and business
development. Southside Bank operates under the day-to-day management of its
own officers and directors; and, it formulates its own policies with respect to
lending practice, investment activities, asset liability management, service
charges and other banking matters. At this time the Company conducts no
business except with respect to Southside Bank and the nonbank subsidiary.
FORWARD-LOOKING INFORMATION
The statements contained in this Annual Report on Form 10K ("Annual
Report") that are not historical facts, including, but not limited to,
statements found in this Item 1. Business and Item. 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations, are
forward-looking statements that involve a number of risks and uncertainties.
The actual results of the future events described in such forward-looking
statements in this Annual Report could differ materially from those stated in
such forward-looking statements. Among the factors that could cause actual
results to differ materially are: general economic conditions, competition,
government regulations and possible future litigation, as well as the risks and
uncertainties discussed in this Annual Report, including, without limitation,
the portions referenced above, and the uncertainties set forth from time to
time in the Company's other public reports and filings and public statements.
EXPANSION
The Company's new South Broadway branch facility opened April 24, 1995
replacing the smaller existing facility. During the year ended December 31,
1995, the Company acquired land adjacent to the bank's existing North Tyler
branch and began construction on a new seven lane motor bank facility.
Remodeling and expansion of the main bank headquarters on South Beckham
will begin during 1996.
SERVICE AREAS
Southside Bank is the largest Tyler based bank in total deposits in the
Tyler Metropolitan Area, which includes Smith County. The Tyler Metropolitan
Area has a population of approximately 151,000. Tyler is the retail center of
East Texas and also has considerable oil and gas related industry as well as
manufacturing interests. In addition, it is the medical center of East Texas
with three major hospitals serving the area.
BANKING SERVICES
Southside Bank offers a full range of financial services to commercial,
industrial, financial and individual customers, including short-term and
medium-term loans, inventory and accounts
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receivable financing, equipment financing, real estate lending, safe deposit
services, savings accounts and various savings programs, interest and
noninterest bearing checking accounts and other personal loans. Southside Bank
makes automobile and other installment loans as well as home improvement and
mortgage loans to its customers. The Bank also offers its own credit card.
Southside Bank also makes indirect automobile loans through area auto dealers.
Through its affiliate, BSC Securities, L.C., which is partially owned by
Southside Bank, the bank offers full retail brokerage securities services.
Southside Bank offers automatic teller machine facilities and services through
a statewide system known as "Moneymaker."
Trust services are provided by Southside Bank, primarily to individuals
and to a lesser extent partnerships and corporations. Such services include
investment, management, administration and advisory services for trust
accounts. Southside Bank can act as trustee of living, testamentary, and
employee benefit trusts and as executor or administrator of estates.
THE BANKING INDUSTRY IN TEXAS
The banking industry is affected by general economic conditions such as
inflation, recession, unemployment and other factors beyond the Company's
control. During the mid to late 1980's, declining oil prices had an indirect
effect on the Company's business, and the deteriorating real estate market
caused a significant portion of the increase in the Company's nonperforming
assets during that period. During the early 1990's a mild recovery appeared to
be underway in East Texas and much of the nation. This recovery continued into
1994 and 1995 and at this time the economic activity in the State and East
Texas appears to be improving with some growth areas resulting. Management of
the Company, however, cannot predict whether current economic conditions will
improve, remain the same or decline.
COMPETITION
The activities engaged in by the Company and its subsidiary, Southside
Bank, are highly competitive. In the past few years other financial
institutions such as savings and loan associations, credit unions, consumer
finance companies, insurance companies, brokerage companies and other financial
institutions with varying degrees of regulatory restrictions have begun to
compete more vigorously for a share of the financial services market.
Brokerage companies continue to become more competitive in the financial
services arena and pose an ever increasing challenge to banks. Legislative
changes also greatly affect the level of competition the Company faces. The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 removes
state law barriers to acquisitions in all states and allows multi-state banking
operations to merge into a single bank with interstate branches. The
interstate branching provisions will become effective on June 1, 1997 unless a
state takes action before that time. A state can pass laws either to opt in
early or to opt out completely, as long as they act before June 1, 1997. The
Texas Legislature has voted to opt out until 1999. When Texas opts in, the
conditions described above will enhance an already attractive environment for
the large out-of-state money center banking organizations to expand into Texas
and specifically into the service area of the Company. Currently, the Company
must compete against some institutions located in Tyler, Texas and elsewhere in
the Company's service area which have capital resources and legal loan limits
substantially in excess of those available to the Company and Southside Bank.
The Company expects the competition it faces to continue to increase.
EMPLOYEES
At December 31, 1995, the Company employed 236 full time equivalent
persons. None of the employees are represented by any unions or similar
groups, and the Company has not experienced any type of strike or labor
dispute. The Company considers its relationship with its employees to be good.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and Southside Bank as of December
31, 1995, were as follows:
B. G. Hartley (Age 66), Chairman of the Board of the Company since 1983. He
was elected President of the Company in 1982. He also serves as Chairman of
the Board, President and Chief Executive Officer of the Company's subsidiary,
Southside Bank, having served in these capacities since the bank's inception in
1960.
Robbie N. Edmonson (Age 63), President of the Company since 1983. He is
currently Vice Chairman of the Board and Chief Administrative Officer of the
Company's subsidiary, Southside Bank. He joined Southside Bank as a vice
president in 1968.
Sam Dawson (Age 48), Executive Vice President and Secretary of the Company and
Executive Vice President and Trust Officer of the Company's subsidiary,
Southside Bank. He became an officer of the Company in 1982 and of Southside
Bank during 1975.
James F. Deakins (Age 62), Senior Vice President - Loan Review of the Company
since 1988. He joined Southside Bank in 1987 as a Vice President in commercial
lending.
Lee R. Gibson (Age 39), Executive Vice President and Chief Accounting Officer
of the Company and Executive Vice President of the Company's subsidiary,
Southside Bank. He became an officer of the Company in 1985 and of Southside
Bank during 1984.
Titus E. Jones (Age 51), Executive Vice President and Director of the Company's
subsidiary, Southside Bank, since 1987. Mr. Jones served as the President of
Southside Bank's branch at South Broadway while it was a separately chartered
bank from 1984 to 1987.
Jeryl Story (Age 44), Executive Vice President - Loan Administration of the
Company's subsidiary, Southside Bank, since 1985. He joined Southside Bank in
1979 as an officer in Loan Documentation.
H. Andy Wall (Age 55), Executive Vice President and Director of the Company's
subsidiary, Southside Bank, since 1984. Mr. Wall joined Southside Bank in 1968
and became an officer in 1969.
All the individuals named above serve in their capacity as officers of
the Company and its subsidiaries at the pleasure of the Board of Directors.
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SUPERVISION AND REGULATION
As a bank holding company, the Company is subject to regulation by the
Board of Governors of the Federal Reserve System (the "Board") and is required
to file with the Board an annual report and such other material as the Board
may require pursuant to the Bank Holding Company Act of 1956 (the "Act"). The
Company and its subsidiaries are subject to examination by the Board. The
Company must obtain prior approval of the Board for the acquisition of more
than 5% of the voting shares or substantially all the assets of any bank or
bank holding company. After an application to acquire a state or national bank
in Texas has been accepted for filing by the Board, the Company must submit a
copy of that application to the Texas Banking Commissioner (the "Commissioner")
pursuant to the Texas Banking Code of 1943 (the "Code"). The Commissioner must
advise the Board of her recommendations. If the Commissioner recommends that
the application be denied, the applicant is entitled to request a hearing. The
Company is prohibited from acquiring the assets or more than 5% of the voting
shares of a bank located outside Texas unless the acquisition is specifically
authorized by the statutes of the state in which said bank is located.
The Company is, with limited exceptions, prohibited from acquiring direct
or indirect ownership or control of more than 5% of the voting shares of any
company not a bank or bank holding company and from engaging in activities
other than banking, managing or controlling banks or furnishing services to its
subsidiaries. The Company may, however, engage in, and may own shares of
companies engaged in, certain activities found by the Board to be "so closely
related to banking or managing or controlling banks as to be a proper incident
thereto." After an application to engage in any of these activities has been
accepted for filing by the Board, the Company must submit a copy of that
application to the Commissioner, pursuant to the Code, for a determination as
to whether the application should be approved. The Commissioner is required to
deny the application, unless she finds the proposed activities will produce
benefits to the public, such as greater convenience or increased competition,
that outweigh possible adverse effects, such as unfair competition, conflicts
of interest or unsound banking practices.
Under the Act and the Board's regulations, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit or lease or sale of property or
furnishing of services. The Board has subpoena powers with respect to
applications and other proceedings under the Act and possesses cease and desist
powers over bank holding companies and their nonbank subsidiaries with respect
to actions deemed to represent unsafe and unsound practices or violations of
applicable laws. In addition, the Board can require a bank holding company to
terminate any nonbank activity, or divest any nonbank subsidiary, if it deems
that the activity or subsidiary constitutes a serious risk to the financial
safety, soundness or stability of any of its subsidiary banks.
The Federal Deposit Insurance Corporation Improvement Act of 1991 made a
number of changes in the legal environment for insured banks, including
reduction in insurance coverage for certain kinds of deposits, increases in
consumer-oriented requirements, and major revisions in the process of
supervision and examination of depository institutions. Deposit insurance
changes impose new limits on brokered deposits, coverage of certain pension
deposits and foreign branch and uninsured deposits that had previously received
de facto protection under the "too big to fail" policy.
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The operations of Southside Bank are also subject to numerous laws and
regulations relating to the extension of credit and making of loans to
individuals. Such laws include the Federal Consumer Credit Protection Act,
which regulates, among other things, disclosure of credit terms, credit
advertising, credit billing and collection, and expansion of credit, and the
Texas Consumer Credit Code and Texas Consumer Protection Code, which regulate,
among other things, interest rates, disclosure of credit terms and practices
relating to the extension and collection of credit. In addition, remedies to
the borrower and penalties to the lender are provided for failure of the lender
to comply with such laws and regulations. The scope and requirements of such
laws and regulations have been expanded significantly in recent years.
CAPITAL GUIDELINES
Southside Bank is regulated by the Texas Department of Banking (the
"State") and the Federal Deposit Insurance Corporation (the "FDIC"). The State
requires Southside Bank to maintain capital at a minimum of 6% of total assets.
The FDIC requires minimum levels of Tier 1 capital and risk-based capital for
FDIC-insured institutions. The FDIC requires a minimum leverage ratio of 3% of
adjusted total assets for the highest rated banks. Other banks are required to
meet a leverage standard of 4% or more, determined on a case-by-case basis.
On December 31, 1995, the minimum ratio for qualifying total risk-based
capital was 8% of which 4% must be Tier 1 capital. Southside Bank's actual
capital to total assets and risk-based capital ratios at December 31, 1995 were
in excess of the minimum requirements.
Also see discussion of "Capital Resources" under Item 7.
USURY LAWS
Texas usury laws limit the rate of interest that may be charged by state
banks. Certain Federal laws provide a limited preemption of Texas usury laws.
The maximum rate of interest that Southside Bank may charge on direct business
loans under Texas law varies between 18% per annum and (i) 28% per annum for
business and agricultural loans above $250,000 or (ii) 24% per annum for other
direct loans. Texas floating usury ceilings are tied to the 26-week United
States Treasury Bill Auction rate. Other ceilings apply to open-end credit
card loans and dealer paper purchased by Southside Bank. A Federal statute
removes interest ceilings under usury laws for loans by Southside Bank which
are secured by first liens on residential real property.
ECONOMIC ENVIRONMENT
The monetary policies of regulatory authorities, including the Board,
have a significant effect on the operating results of bank holding companies
and their subsidiaries. The Board regulates the national supply of bank
credit. Among the means available to the Board are open market operations in
United States Government Securities, changes in the discount rate on member
bank borrowings, changes in reserve requirements against member and nonmember
bank deposits, and loans and limitations on interest rates which member banks
may pay on time or demand deposits. These methods are used in varying
combinations to influence overall growth and distribution of bank loans,
investments and deposits. Their use may affect interest rates charged on loans
or paid for deposits.
Also see discussion of "Banking Industry in Texas" under Item 1.
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ITEM 2. PROPERTIES
Southside Bank owns the following properties:
- A two story building in Tyler, Texas, at 1201 South Beckham
Avenue, a parking lot across the street and the property
adjacent to the main bank building, known as the Southside
Bank Annex. These properties house the executive offices of
Southside Bancshares, Inc..
- Property and a building directly adjacent to the building
housing the Southside Bank Annex. The building is referred to
as the Operations Annex, where various back office lending and
accounts payable operations take place.
- Land and building located at 1010 East First Street in Tyler
where the Motor Bank facilities are located and which includes
fourteen drive-thru teller stations.
- 4.05 acres of land located at the intersection of South
Broadway and Grande Boulevard in Tyler. The entire tract is
occupied by Southside Bank's South Broadway branch, which
currently provides a full line of banking services.
- Property near its South Broadway branch where the new Motor
Bank facility is located. The new Motor Bank facility opened
October 17, 1994. This property was previously held in other
real estate owned by Southside Bank.
- Nine Automatic Teller Machine (ATM) facilities located
throughout Tyler and Smith County.
- Building located in the downtown square of Tyler which houses
Southside Bank's Downtown branch, providing a full line of
banking services.
- Land immediately adjacent to the bank's North Tyler branch on
which drive-thru facilities will be built.
ITEM 3. LEGAL PROCEEDINGS
Southside Bank is party to legal proceedings arising in the normal
conduct of business. Management of the Company, after consulting with its
legal counsel, believes that liability resulting from any of these proceedings
will not have a material effect on the financial position or results of
operations of the Company or Southside Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the three months ended December 31, 1995, there were no meetings,
annual or special, of the shareholders of the Company. No matters were
submitted to a vote of the shareholders, nor were proxies solicited by
management or any other person.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's common stock is not actively traded on any established
public trading market. The high/low prices shown below were acquired from
shareholders voluntarily advising the transfer agent. Accordingly, the market
information is incomplete. However, the per share prices listed below are, to
the Company's knowledge, generally representative of transactions for the
periods reported. During the third quarter of 1995, 1994 and 1993, the Company
declared and paid a 5% stock dividend.
Year Ended 1st qtr. 2nd qtr. 3rd qtr. 4th qtr.
- ----------------- ---------------- ---------------- ----------------- -----------------
December 31, 1995 $ 10.00 - 9.50 $ 12.00 - 10.00 $ 12.50 - 12.00 $ 13.50 - 12.50
December 31, 1994 $ 11.00 - 10.00 $ 11.00 - 9.88 $ 10.00 - 9.00 $ 9.50 - 9.10
See "Item 7. Capital Resources" for a discussion of the Company's common
stock repurchase program.
STOCKHOLDERS
There were approximately 1,135 holders of record of the Company's common
stock, the only class of equity securities currently issued and outstanding, as
of December 31, 1995.
DIVIDENDS
Cash dividends declared and paid were $.35 per share for the year ended
December 31, 1995 and $.25 per share for each of the years ended December 31,
1994 and 1993. Stock dividends of 5% were also declared and paid during each
of the years ended December 31, 1995, 1994 and 1993. Future dividends will
depend on the Company's earnings, financial condition and other factors which
the Board of Directors of the Company considers to be relevant.
ITEM 6. SELECTED FINANCIAL DATA
This information should be read in conjunction with "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations," as
set forth in this report (in thousands, except per share data).
Six Mos. Year
Years Ended Ended Ended
December 31, Dec. 31, June 30,
------------------------------------------- --------- ---------
1995 1994 1993 1992 1991 1991
--------- --------- --------- --------- --------- ---------
Interest & Deposit Service Income . . . . $ 32,342 $ 28,822 $ 26,812 $ 27,700 $ 14,983 $ 30,149
========= ========= ========= ========= ========= =========
Investment Securities . . . . . . . . . . $ 76,919 $ 82,720 $ 69,220 $ 59,086 $ 55,504 $ 56,051
========= ========= ========= ========= ========= =========
Mortgage-backed and Related Securities . $ 99,407 $ 88,080 $ 116,451 $ 120,245 $ 85,589 $ 76,000
========= ========= ========= ========= ========= =========
Loans, Net of Allowance for Loan Loss . . $ 225,461 $ 197,853 $ 180,763 $ 158,197 $ 153,773 $ 148,116
========= ========= ========= ========= ========= =========
Deposits . . . . . . . . . . . . . . . . $ 388,308 $ 385,102 $ 352,355 $ 350,416 $ 315,008 $ 306,655
========= ========= ========= ========= ========= =========
Long-term Obligations . . . . . . . . . . $ 13,686 $ 7,997 $ 8,850 $ $ $
========= ========= ========= ========= ========= =========
Net Income . . . . . . . . . . . . . . . $ 4,532 $ 3,519 $ 4,015 $ 2,586 $ 715 $ 751
========= ========= ========= ========= ========= =========
Net Income Per Common Share . . . . . . . $ 1.47 $ 1.13 $ 1.30 $ .85 $ .24 $ .25
========= ========= ========= ========= ========= =========
Cash Dividends Declared Per Common Share $ .35 $ .25 $ .25 $ .25 $ .10 $ .20
========= ========= ========= ========= ========= =========
Total Assets . . . . . . . . . . . . . . $ 448,673 $ 426,221 $ 404,216 $ 376,949 $ 342,158 $ 331,693
========= ========= ========= ========= ========= =========
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - December 31, 1995 compared to December 31,
1994
The following discussion and analysis provides a comparison of the
Company's results of operations for the years ended December 31, 1995 and 1994
and financial condition as of December 31, 1995 and 1994. This discussion
should be read in conjunction with the financial statements and related notes.
All share data has been adjusted to retroactively reflect stock dividends paid
in September 1995, 1994 and 1993.
OVERVIEW
During the year ended December 31, 1995, the Company's net income
increased $1,013,000 or 28.8% to $4,532,000, compared to $3,519,000 for the
same period in 1994. The change in net income was primarily attributable to an
increase in net interest income, a negative provision in the reserve for loan
losses, a significant reduction in FDIC insurance expense and an increase in
the gain on the sale of securities available for sale.
EARNING ASSETS
Average Interest Earning Assets, totaling $385.8 million at December 31,
1995, increased $11.1 million or 3.0% over December 31, 1994 primarily as a
result of increases in Average Loans. During the year ended December 31, 1995
the mix of the Company's Interest Earning Assets reflected an increase in Loans
compared to the prior year end as Loans averaged 54.2% of Total Average
Interest Earning Assets compared to 52.4% during 1994. Securities averaged
43.2% of the total and Other Interest Earning Asset categories averaged 2.6%
for December 31, 1995. During 1994 the comparable mix was 44.3% in Securities
and 3.3% in the Other Interest Earning Asset categories.
Average Loans increased during 1995, by $12.7 million or 6.5% from 1994
with increases occurring primarily in real estate and loans to individuals.
Average Securities increased $.8 million or .5% during the year ended
December 31, 1995 compared to 1994. The mix of Average Securities between
taxable and tax-exempt securities changed to 82% taxable and 18% tax-exempt for
the year ended 1995 from 82.6% taxable and 17.4% tax-exempt for 1994. Average
Other Interest Earning Assets, consisting primarily of Federal Funds Sold,
decreased $2.4 million or 19.4% during the year ended December 31, 1995
compared to 1994. The decrease in Federal Funds balances contributed to the
increase in Average Loans and Average Securities.
The mix of taxable securities reflected a decrease in Mortgage-backed
Securities. Average Mortgage-backed Securities represented 53.5% of the total
securities portfolio for 1995 compared to 56.9% for 1994.
The table on the following page represents loan maturities and
sensitivity to changes in interest rates. The amounts of total loans
outstanding at December 31, 1995, which, based on remaining scheduled
repayments of principal, are due in (1) one year or less*, (2) more than one
year but less than five years, and (3) more than five years*, are shown in the
following table. The amounts due after one year are classified according to
the sensitivity to changes in interest rates.
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After One
Due in One but within After Five
Year or Less Five Years Years
--------------- --------------- --------------
(in thousands)
Construction Loans . . . . . . . . . . . . . . . . . . $ 3,451 $ 804 $ 303
Real Estate Loans-Other . . . . . . . . . . . . . . . . 41,707 45,198 17,440
Commercial and Financial Loans . . . . . . . . . . . . 34,849 8,107 1,261
All Other Loans . . . . . . . . . . . . . . . . . . . . 33,015 42,328 315
--------------- --------------- --------------
Total Loans . . . . . . . . . . . . . . . . . . . $ 113,022 $ 96,437 $ 19,319
=============== =============== ==============
Loans with Maturities After
One Year for Which: Interest Rates are Fixed or Predetermined $ 114,227
Interest Rates are Floating or Adjustable $ 1,529
*The volume of commercial and industrial loans due within one year
reflects the Company's general policy of limiting such loans to a short
term maturity. Loans are shown net of unearned discount. Nonaccrual
loans are reflected in the due after five years column.
As discussed under "Item 7. Securities," the Company adopted FAS115
effective December 31, 1993 which changed the way the Company classifies and
accounts for debt and equity securities.
The following table sets forth the carrying amount of Investment
Securities, Mortgage-backed Securities and Marketable Equity Securities for the
years ended December 31, 1995, 1994 and 1993 (in thousands).
December 31,
-------------------------------------------------
Available for Sale: 1995 1994 1993
---------------- --------------- ---------------
U. S. Treasury . . . . . . . . . . . . . . . . . . . . . $ 7,064 $ 9,854 $ 26,235
U. S. Government Agencies . . . . . . . . . . . . . . . . 25,464 14,930 3,668
Mortgage-backed Securities:
Direct Govt. Agency Issues . . . . . . . . . . . . . . 61,988 26,231 98,800
Other Private Issues . . . . . . . . . . . . . . . . . 3,435 1,423 4,607
State and Political Subdivisions . . . . . . . . . . . . 40,291 911 5,518
Other Stocks and Bonds . . . . . . . . . . . . . . . . . 3,577 2,005 1,939
---------------- --------------- ---------------
Total . . . . . . . . . . . . . . . . . . . . . . . $ 141,819 $ 55,354 $ 140,767
================ =============== ===============
December 31,
--------------------------------------------------
Held to Maturity: 1995 1994 1993
---------------- ---------------- ----------------
U. S. Treasury . . . . . . . . . . . . . . . . . . . . . $ $ 7,016 $ 3,115
U. S. Government Agencies . . . . . . . . . . . . . . . . 1,665 20,124 607
Mortgage-backed Securities:
Direct Govt. Agency Issues . . . . . . . . . . . . . . 32,675 58,340 13,044
Other Private Issues . . . . . . . . . . . . . . . . . 1,309 2,086
State and Political Subdivisions . . . . . . . . . . . . 970 29,633 27,519
Other Stocks and Bonds . . . . . . . . . . . . . . . . . 252 2,558
---------------- --------------- ---------------
Total . . . . . . . . . . . . . . . . . . . . . . . $ 36,619 $ 117,451 $ 46,843
================ =============== ===============
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The maturities classified according to the sensitivity to changes in
interest rates of the December 31,1995 securities portfolio and the weighted
yields are presented below. Tax-exempt obligations are shown on a taxable
equivalent basis. Mortgage-backed securities are classified according to
repricing frequency and cash flows from street estimates of principal
prepayments.
MATURING OR REPRICING
------------------------------------------------------------------------
(dollars in thousands)
After 1 But After 5 But
Within 1 Yr. Within 5 Yrs. Within 10 Yrs. After 10 Yrs.
---------------- ---------------- ----------------- -------------------
Available For Sale: Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------ -------- ------ -------- ------- --------- --------
U.S. Treasury . . . . . . . . . . . $ 5,004 5.39% $ 2,060 5.91% $ $
U.S. Government Agencies . . . . . 22,906 6.24% 2,558 5.92%
Mortgage-backed Securities . . . . 27,987 6.75% 21,872 6.57% 15,564 6.78%
State and Political Subdivisions . 4,322 7.35% 18,433 7.25% 10,442 7.23% 7,094 7.42%
Other Stocks and Bonds . . . . . . 3,228 6.12% 349 3.15%
-------- ------- -------- ---------
Total . . . . . . . . . . . . $ 63,447 6.47% $44,923 6.78% $ 26,006 6.96% $ 7,443 7.22%
======== ======= ======== =========
MATURING OR REPRICING
----------------------------------------------------------------------
(dollars in thousands)
After 1 But After 5 But
Within 1 Yr. Within 5 Yrs. Within 10 Yrs. After 10 Yrs.
---------------- ---------------- ---------------- -----------------
Held to Maturity: Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- --------- ------ -------- ------ -------- -------
U.S. Treasury . . . . . . . . . . . $ $ $ $
U.S. Government Agencies . . . . . 461 6.43% 1,204 6.43%
Mortgage-backed Securities . . . . 11,208 6.54% 21,670 7.13% 1,106 7.56%
State and Political Subdivisions . 397 5.80% 573 6.30%
Other Stocks and Bonds . . . . . .
-------- ------- -------- ---------
Total . . . . . . . . . . . . $ 12,066 6.51% $23,447 7.07% $ 1,106 7.56% $
======== ======= ======== =========
DEPOSITS AND BORROWED FUNDS
Deposits provide a financial institution with its chief source of funds.
The increase of $8.2 million or 2.2% in Average Total Deposits during 1995
provided the Company with funds for the growth in earning assets discussed
previously. Average Time Deposits increased $11.2 million or 7% during 1995
compared to 1994. Average Noninterest Bearing Demand Deposits increased during
1995 $3.4 million or 4.6%. Average Interest Bearing Demand Deposits decreased
during 1995 by $6.1 million or 5.2% while Average Saving Deposits decreased $.4
million or 2.4%. The latter three categories, which are considered the lowest
cost deposits, comprised 54.3% of total average deposits during the year ended
December 31, 1995 compared to 56.3% during 1994 and 55.2% during 1993. The
increase in Average Total Deposits is reflective of overall bank growth and was
the primary source of funding the increase in Average Loans.
10
12
The following table sets forth the Company's deposit averages by category
for the years ended December 31, 1995, 1994 and 1993.
COMPOSITION OF DEPOSITS
(dollars in thousands)
Years Ended December 31,
------------------------------------------------------
1995 1994 1993
----------------- ----------------- -----------------
AVG. AVG. AVG. AVG. AVG. AVG.
BALANCE RATE BALANCE RATE BALANCE RATE
-------- ------- --------- ------ --------- ------
Noninterest Bearing Demand Deposits . . . . . . . . . . $ 78,338 N/A $ 74,918 N/A $ 68,401 N/A
Interest Bearing Demand Deposits . . . . . . . . . . . 111,063 2.78% 117,116 2.63% 108,899 2.64%
Savings Deposits . . . . . . . . . . . . . . . . . . . 14,931 2.76% 15,295 2.57% 14,067 2.65%
Time Deposits . . . . . . . . . . . . . . . . . . . . . 172,228 5.11% 161,000 4.09% 155,488 3.80%
-------- --------- ---------
Total Deposits . . . . . . . . . . . . . . . . . . $376,560 3.26% $ 368,329 2.73% $ 346,855 2.64%
======== ========= =========
Average borrowed funds consisting of Short-Term Borrowings, primarily in
the form of Federal Funds Purchased, decreased $.7 million or 28.9% during 1995
when compared to 1994.
Average Long Term Obligations consisting of FHLB Dallas Advances
increased in 1995 to $8.9 million compared to $8.4 million in 1994. The
advances were obtained from FHLB Dallas to fund long-term loans. Federal Home
Loan Bank advances are collateralized by Federal Home Loan Bank stock,
nonspecified real estate loans and mortgage-backed securities.
During the year ended December 31, 1995 total certificates of deposit of
$100,000 or more increased $1.6 million or 3.6% from December 31, 1994. This
increase was due to overall bank growth.
The table below sets forth the maturity distribution of certificates of
deposit of $100,000 or more issued by the Company at December 31, 1995 and
1994.
December 31, 1995 December 31, 1994
--------------------------------------- --------------------------------------
Time Other Time Other
Certificates Time Certificates Time
of Deposit Deposit Total of Deposit Deposit Total
------------ ----------- ------------ ------------ ----------- ------------
(in thousands)
Three months or less . . . . . $ 8,157 $ 377 $ 8,534 $ 10,751 $ 1,623 $ 12,374
Over three to six months . . . 9,717 1,623 11,340 9,230 377 9,607
Over six to twelve months . . . 8,859 8,859 7,409 7,409
Over twelve months . . . . . . 15,606 15,606 13,391 13,391
------------ ----------- ------------ ------------ ----------- ------------
Total . . . . . . . . $ 42,339 $ 2,000 $ 44,339 $ 40,781 $ 2,000 $ 42,781
============ =========== ============ ============ =========== ============
The tables on the following pages present average balance sheet amounts
and average yields for the years ended December 31, 1995, 1994 and 1993. The
information should be reviewed in conjunction with the other financial
statements in this presentation. Two major components affecting the Company's
earnings are the Interest Earning Assets and Interest Bearing Liabilities. A
summary of Average Interest Earning Assets and Interest Bearing Liabilities is
set forth below, together with the average yield on the Interest Earning Assets
and the average cost of the Interest Bearing Liabilities.
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13
AVERAGE BALANCES AND INTEREST RATES
(dollars in thousands)
Years Ended
---------------------------------------------------------------------------------------
December 31, 1995 December 31, 1994 December 31, 1993
---------------------------- --------------------------- ----------------------------
AVG. AVG. AVG. AVG. AVG. AVG.
ASSETS BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ------ --------- ---------- ----- --------- ---------- ----- --------- ---------- ------
INTEREST EARNING ASSETS:
Loans(1) . . . . . . . $ 209,141 $ 18,861 9.02% $ 196,436 $ 16,714 8.51% $ 170,409 $ 14,500 8.51%
Securities:
Inv. Sec. (Taxable) . . 45,452 2,839 6.25% 40,672 2,134 5.25% 34,885 1,851 5.31%
Inv. Sec.
(Tax-Exempt)(2) . . . 29,965 1,504 5.02% 28,802 1,433 4.98% 24,349 1,247 5.12%
Mortgage-backed Sec. . 89,151 5,673 6.36% 94,389 5,255 5.57% 114,281 6,376 5.58%
Marketable Equity Sec. 2.068 121 5.85% 1,976 102 5.16% 861 16 1.86%
Trading Account Sec. . 147 4 2.72%
Interest Earning
Deposits . . . . . . . 411 25 6.08% 341 12 3.52% 204 4 1.96%
Federal Funds Sold . . 9,576 567 5.92% 12,045 522 4.33% 3,315 99 2.99%
--------- --------- --------- --------- --------- ---------
Total Interest
Earning Assets . . . . 385,764 29,590 7.67% 374,661 26,172 6.99% 348,451 24,097 6.92%
--------- --------- ---------
NONINTEREST EARNING ASSETS:
Cash and Due From Banks 20,899 20,368 18,929
Bank Premises and
Equipment . . . . . . 10,717 7,172 6,101
Other Assets . . . . . 7,574 10,245 10,115
Less: Allowance
for Loan Loss . . . (3,323) (3,025) (2,965)
--------- --------- ---------
Total Assets . . . . . $ 421,631 $ 409,421 $ 380,631
========= ========= =========
LIABILITIES AND SHARE-
- ----------------------
HOLDERS' EQUITY:
- ----------------
INTEREST BEARING
LIABILITIES:
Savings Deposits . . . $ 14,931 412 2.76% $ 15,295 393 2.57% $ 14,067 373 2.65%
Time Deposits . . . . 172,228 8,793 5.11% 161,000 6,578 4.09% 155,488 5,908 3.80%
Interest Bearing
Demand Deposits . . . 111,063 3,085 2.78% 117,116 3,083 2.63% 108,899 2,872 2.64%
Federal Funds Purchased
And Other Interest
Bearing Liabilities . 1,790 94 5.25% 2,518 84 3.34% 3,004 86 2.86%
Long Term Interest
Bearing Liabilities .
FHLB Dallas . . . . . 8,912 453 5.08% 8,380 406 4.84% 2,562 125 4.88%
--------- --------- --------- --------- --------- ---------
Total Interest Bearing
Liabilities . . . . . 308,924 12,837 4.16% 304,309 10,544 3.46% 284,020 9,364 3.30%
--------- --------- ---------
NONINTEREST BEARING
LIABILITIES:
Demand Deposits . . . . 78,338 74,918 68,401
Other Liabilities . . . 4,184 3,039 3,543
--------- --------- ---------
Total Liabilities . . . 391,446 382,266 355,964
SHAREHOLDERS' EQUITY . 30,185 27,155 24,667
--------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY . $ 421,631 $ 409,421 $ 380,631
========= ========= =========
NET INTEREST INCOME . . $ 16,753 $ 15,628 $ 14,733
========= ========= =========
NET YIELD ON AVERAGE
EARNING ASSETS . . . . 4.34% 4.17% 4.23%
====== ====== ======
(1) Loans are shown net of unearned discount. Interest on loans includes
fees on loans which are not material in amount.
(2) Interest and rates on securities which are nontaxable for Federal Income
Tax purposes are not presented on a taxable equivalent basis.
Note: For the years ended December 31, 1995, 1994, and 1993, loans totaling
$1,256,000, $627,000 and $1,099,000, respectively, were on nonaccrual
status. The current policy is to reverse previously accrued, but unpaid
interest on nonaccrual loans; thereafter, interest income is recorded to
the extent received when appropriate.
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14
MANAGEMENT OF LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity management involves the ability to meet the funds flow
requirements of borrowers, fulfilling credit requirements and customers
withdrawing their funds. 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 December 31, 1995 these investments were 22.7%
of Total Assets, as compared with 23.8% for December 31, 1994, and 21.1% for
December 31, 1993. Liquidity is further provided through the matching, by time
period, of rate sensitive interest earning assets with rate sensitive interest
bearing liabilities.
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 sensitivity positions in recent years.
Interest rate sensitivity is a function of the repricing characteristics
of the Company's portfolio of assets and liabilities. These repricing
characteristics are the time frames at which interest earning assets and
interest bearing liabilities are subject to changes in interest rates either at
repricing replacement or maturity. Sensitivity is measured as the difference
between the volume of assets and liabilities in the Company's current portfolio
that are subject to repricing in future time periods. The differences are
referred to as interest sensitivity gaps and are usually calculated separately
for various segments of time and on a cumulative basis. Any excess of assets
or liabilities results in an interest sensitivity gap. A positive gap denotes
asset sensitivity and a negative gap represents liability sensitivity. The
table on page 15 shows interest sensitivity gaps for four different intervals
as of December 31, 1995.
SECURITIES
The securities portfolio of the Company plays a primary role in
management of the interest rate sensitivity of the Company and, therefore, is
managed in the context of the overall balance sheet. The Securities portfolio
generates a substantial percentage of the Company's interest income and serves
as a necessary source of liquidity.
Effective December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (FAS115) and accounts for debt and equity securities as
follows:
Held to Maturity (HTM). Debt securities that management has the positive
intent and ability to hold until maturity are classified as held to
maturity and are carried at their remaining unpaid principal balance, net
of unamortized premiums or unaccreted discounts. Premiums are amortized
and discounts are accreted using the level interest yield method over the
estimated remaining term of the underlying security.
Available for Sale (AFS). Debt and equity securities that will be held
for indefinite periods of time, including securities that may be sold in
response to changes in market interest or prepayment rates, needs for
liquidity and changes in the availability of and the yield of alternative
investments are classified as available for sale. These assets are
carried at market value. Market value is determined using published
quotes as of the close of business. Unrealized gains and losses are
excluded from earnings and reported net of tax as a separate component of
shareholders' equity until realized.
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15
Trading Securities. Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are
classified as trading securities and reported at market value, with
unrealized gains and losses included in earnings.
Prior to the adoption of FAS115, the Company accounted for debt and
equity securities as follows:
Held for Investment. Debt and equity securities classified as held for
investment were carried at their remaining unpaid principal balance, net
of unamortized premiums or unaccreted discounts. Investments and
mortgage-backed securities were classified as held for investment when
management had the ability and the intent to hold these securities until
maturity considering all foreseeable events and conditions.
Held for Resale. Debt and equity securities classified as held for
resale were carried at lower of cost or market value. Unrealized losses
were included in the consolidated statement of operations and retained
earnings.
Prudent management of the investment securities portfolio serves to
optimize portfolio yields. Management attempts to deploy investable funds
into instruments which are expected to increase the overall return of the
portfolio given the current assessment of economic and financial conditions.
The combined Investment Securities, Mortgage-backed Securities, and
Marketable Equity Securities portfolio increased to $178.4 million on December
31, 1995, compared to $172.8 million on December 31, 1994, an increase of $5.6
million or 3.3%. Mortgage-backed Securities secured by agency guaranteed
mortgages increased $11.3 million or 12.9% during 1995 when compared to 1994.
State and Political Subdivisions increased $10.7 million or 35.1% during 1995.
U.S. Treasury securities decreased during 1995 when compared to 1994 by $9.8
million or 58.1%, U.S. Government Agency securities decreased $7.9 million or
22.6% and Other Stocks and Bonds increased $1.3 million or 58.5% in 1995
compared to 1994. Due to the significant decrease in interest rates along with
the flattening of the yield curve, a change in investment strategy was
implemented during 1995. A barbell approach was adopted with respect to
securities purchased, i.e., the majority of the securities purchased included
short duration premium mortgage-backed securities balanced with longer duration
municipal securities. This created the same duration as would have been
obtained by purchasing intermediate duration securities. In order to implement
this strategy, a change in the securities portfolio mix was required and
resulted in the changes discussed above.
The market value of the Securities portfolio at December 31, 1995 was
$178.8 million, which represents a net unrealized gain on that date of $2.1
million. The net unrealized gain is comprised of $2.3 million in unrealized
gains and $.2 million of unrealized losses. Net unrealized gains and losses on
securities available for sale, which is a component of Shareholders' Equity on
the consolidated balance sheet, can fluctuate significantly as a result of
changes in interest rates. Because management cannot predict the future
direction of interest rates, the effect on Shareholders' Equity in the future
cannot be determined, however; this risk is monitored closely through the use
of shock tests on the available for sale securities portfolio using an array of
interest rate assumptions.
In October 1995, the Financial Accounting Standards Board issued an
implementation guide to FAS115 which allowed entities to reclassify their
securities among the three categories provided in FAS115. Transfers were
permitted after October 1995, but no later than December 31, 1995. As a
result, on November 16, 1995 the Company transferred a total of $57,584,000
from HTM to AFS at the amortized cost at date of transfer. Of this total,
$37,308,000 were investment securities. The remaining $20,276,000 transferred
were mortgage-backed securities. The unrealized loss on the securities
transferred from HTM to AFS was $419,000, net of tax, at date of transfer. The
14
16
transfer was done according to the guidelines set forth in the implementation
guide to FAS115. There were no securities transferred from AFS to HTM or sales
from the HTM portfolio during the year ended December 31, 1995.
The following table sets forth certain information as of December 31,
1995 with respect to rate sensitive assets and liabilities and interest
sensitivity GAP's (dollars in thousands):
Rate Sensitive Assets (RSA) 1-3 Mos. 4-12 Mos. 1-5 Yrs. Over 5 Yrs. Total
------------ ------------ ------------ ------------ -----------
Loans(1) . . . . . . . . . . . . . . $ 69,865 $ 43,157 $ 96,437 $ 18,063 $ 227,522
Securities . . . . . . . . . . . . . 35,447 40,066 68,370 34,555 178,438
Other Interest
Earning Assets . . . . . . . . . . 320 320
------------ ------------ ------------ ------------ -----------
Total Rate Sensitive Assets . . . . . $ 105,632 $ 83,223 $ 164,807 $ 52,618 $ 406,280
============ ============ ============ ============ ===========
Rate Sensitive Liabilities (RSL)
Interest Bearing Deposits (3) . . . . $ 155,855 $ 83,303 $ 64,407 $ 37 $ 303,602
Other Interest
Bearing Liabilities . . . . . . . . 6,359 4,183 5,314 3,782 19,638
------------ ------------ ------------ ------------ -----------
Total Rate Sensitive Liabilities . . $ 162,214 $ 87,486 $ 69,721 $ 3,819 $ 323,240
============ ============ ============ ============ ===========
GAP (2) . . . . . . . . . . . . . . . (56,582) (4,263) 95,086 48,799 83,040
Cumulative GAP . . . . . . . . . . . (56,582) (60,845) 34,241 83,040
Cumulative Ratio of RSA
to RSL . . . . . . . . . . . . . . .65 .76 1.11 1.26 1.26
Gap/Total Earning Assets . . . . . . (13.9%) (1.0%) 23.4% 12.0% 20.4%
- --------------------------------------------------------------------------------
(1) Amount is equal to total loans net of unearned discount less nonaccrual
loans at December 31, 1995.
(2) GAP equals Total RSA minus Total RSL.
(3) All Savings, Now and MMDA deposit accounts are included in the 1-3 Mos.
column.
The Asset Liability Management Committee of Southside Bank closely monitors
the desired GAP along with various liquidity ratios to insure a satisfactory
liquidity position for the Company. Management continually evaluates the
condition of the economy, the pattern of market interest rates and other
economic data to determine the types of investments that should be made and at
what maturities. Using this analysis, management from time to time assumes
calculated interest sensitivity GAP positions to maximize net interest income
based upon anticipated movements in the general level of interest rates.
Regulatory authorities also monitor the Bank's GAP position along with other
liquidity ratios. 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.
15
17
CAPITAL RESOURCES
Total Shareholders' Equity at December 31, 1995, of $33,352,000 increased
21.2 % or $5,828,000 from December 31, 1994 and represented 7.4% of total
assets at December 31, 1995 compared to 6.5% at December 31, 1994.
Net income for 1995 of $4,532,000 was the major contributor to the
increase in Shareholders' Equity at December 31, 1995 along with unrealized
gains of $2,352,000 on securities available for sale. In addition, the Company
issued $258,000 in common stock (20,800 shares) through the Company's dividend
reinvestment plan. Decreases to Shareholders' Equity consisted of $1,047,000
in dividends paid and the purchase of $267,000 in treasury stock (26,339
shares). The Company purchased treasury stock pursuant to a common stock
repurchase plan instituted in late 1994. Under the repurchase plan, the Board
of Directors establishes, on a quarterly basis, total dollar limitations and
price per share for stock to be repurchased. The Board reviews this plan in
conjunction with the capital needs of the Company and Southside Bank and may,
at it's discretion, modify or discontinue the plan. During the third quarter
of 1995, the Company issued a 5% stock dividend, which had no net effect on
Shareholders' Equity. The Company's dividend policy requires that any dividend
payments made by the Company not exceed consolidated earnings for that year.
The Federal Reserve Board has adopted risk-based capital guidelines for
bank holding companies. As of December 31, 1995, the minimum ratio of capital
to risk-adjusted assets (including certain off-balance sheet items, such as
standby letters of credit) was 8%. At least half of the total capital must be
comprised of common equity, retained earnings and a limited amount of perpetual
preferred stock, after subtracting goodwill and certain other adjustments
("Tier 1 capital"). The remainder may consist of perpetual debt, mandatory
convertible debt securities, a limited amount of subordinated debt, other
preferred stock and a limited amount of loan loss reserves ("Tier 2 capital").
The maximum amount of supplementary capital elements that qualifies as Tier 2
capital is limited to 100% of Tier 1 capital net of goodwill. The Federal
Reserve Board also has adopted a minimum leverage ratio (Tier 1 capital to
average total assets) of 3% for bank holding companies that meet certain
specified criteria, including having the highest regulatory rating. The rule
indicates that the minimum leverage ratio should be at least 1.0% to 2.0%
higher for holding companies that do not have the highest rating or that are
undertaking major expansion programs. The Company's state chartered banking
subsidiary is subject to similar capital and risk-based capital requirements
adopted by the FDIC and Texas Banking Department, respectively. The leverage
capital requirement adopted by the Texas Banking Department is 6%. At December
31, 1995, the Company and Southside Bank exceeded all regulatory minimum
capital ratios.
The table below summarizes key equity ratios for the Company for the
years ended December 31, 1995, 1994 and 1993.
Years Ended December 31,
--------------------------------------
1995 1994 1993
---------- ---------- ---------
Percentage of Net Income to:
Average Total Assets . . . . . . . . . . . . . . . . . . . . . 1.07% .86% 1.05%
Average Shareholders' Equity . . . . . . . . . . . . . . . . . 15.01% 12.96% 16.28%
Percentage of Dividends Declared Per Common
Share to Net Income Per Common Share . . . . . . . . . . . . . 23.81% 21.01% 18.25%
Percentage of Average Shareholders'
Equity to Average Total Assets . . . . . . . . . . . . . . . . 7.16% 6.63% 6.48%
Leverage - Tier 1 capital to Adjusted Average Total Assets . . . 7.32% 6.81% 6.48%
16
18
LOANS
The Company's main objective is to seek attractive lending opportunities
in Smith County, Texas and adjoining counties. Total Loans as of December 31,
1995 increased $27,788,000 or 13.8% while the average balance was up
$12,705,000 or 6.5% when compared to 1994. Real Estate Loans as of December 31,
1995 reflected an increase of $10,341,000 or 10.5% from December 31, 1994.
Loans to individuals increased $12,937,000 or 20.6% from December 31, 1994. The
increase in Real Estate Loans is due to a strong real estate market, lower
interest rates and an increased commitment in residential mortgage lending.
Loans to individuals increased due to an increase in indirect dealer loans and
additional penetration achieved with the bank's branch locations. In the
portfolio, loans dependent upon private household income represent a
significant concentration. Due to the number of customers involved who work in
all sectors of our economy, the risk in this portion of the portfolio is spread
throughout the economic community.
The average yield on loans for the year ended December 31, 1995 increased
to 9.0% from 8.5% for the year ended December 31, 1994. This increase was
reflective of the repricing characteristics of the loans. Some of the fixed
rate loans in 1995 repriced at the higher interest rates in 1994 while some of
the fixed rate loans on the books in 1994 repriced in 1993 at lower rates. In
addition, while rates declined in 1995, the prime rate did not decline until
July 1995 and then it only declined 25 basis points. Prime did not decline
again until late December 1995 which had little impact on the overall yield.
LOANS TO AFFILIATED PARTIES
In the normal course of business the Company's subsidiary, Southside Bank
makes loans to certain of its officers, directors, employees and their related
interests. As of December 31, 1995 and 1994 these loans totaled $9,913,000 and
$11,743,000, or 29.7% and 42.7% of Shareholders' Equity, respectively. Such
loans are made in the normal course of business at normal credit terms,
including interest rate and collateral requirements and do not represent more
than normal credit risks contained in the rest of the loan portfolio for loans
of similar types.
LOAN PORTFOLIO COMPOSITION AND ASSOCIATED RISK
For purposes of this discussion, the Company's loans are divided into
three categories: Real Estate Loans; Commercial, Financial and Agricultural
Loans; and Loans to Individuals.
REAL ESTATE LOANS
Real estate loans represent the Company's greatest concentration of
loans. However, the amount of risk associated with this group of loans is
mitigated in part due to the type of loans involved. For example, of the
$108.9 million in Real Estate Loans, $49.9 million or 45.8% represent loans
secured by residential dwellings that are primarily owner occupied.
Historically, the amount of losses suffered on this type of loan have been
significantly less than those on other properties. A significant portion of
the remaining Real Estate Loans are secured primarily with owner occupied
commercial real estate. The Company's loan policy requires appraisal prior to
funding any real estate loans and also outlines the requirements for appraisals
on renewals.
The real estate market in the late 1980's and early 1990's in Texas, and
more specifically in East Texas, experienced a significant decline in market
value. During 1994 and 1995, new appraisals of real estate in the market area
appeared to indicate improved real estate values for residential and improved
properties.
Due to the volume of real estate loans contained in the Company's
portfolio which are owner occupied, and the appraisal and other real estate
lending policies in place which evidences the
17
19
collateral on these loans, management does not consider the potential impact on
the loan loss reserve to be excessive even though real estate loans constitute
the largest percentage of loans outstanding. Management also pursues an
aggressive policy of reappraisal on any real estate loan which becomes troubled
and potential exposures are recognized and reserved for as soon as they are
identified. However, the slow pace of absorption for certain types of
properties could adversely affect the volume of nonperforming real estate loans
held by the Company.
COMMERCIAL, FINANCIAL AND AGRICULTURAL LOANS
Commercial, Financial and Agricultural Loans have traditionally generated
the largest volume of loan losses in the portfolio. Management does not
consider there to be any material concentration of risk in any one industry
type in this loan category since no industry classification represents over 10%
of loans. As the economy in the Company's trade territory has improved, the
volume of losses associated with this group of loans has decreased.
LOANS TO INDIVIDUALS
Loans to Individuals for the most part represent vehicle and general
loans to consumers. Southside Bank is a major consumer lender in its trade
territory and has been for many years. The largest concentration of loans to
individuals represent vehicle loans. A significant portion of these loans were
obtained through the Company's indirect dealer loan program which has continued
to grow. At this point, the economy in Southside Bank's trade territory
appears stable. If these trends continue the relatively low levels of loan
loss for this type of credit should continue.
SUMMARY LOAN PORTFOLIO COMPOSITION AND ASSOCIATED RISK
As noted above, Southside Bank is a major consumer lender holding a
diverse portfolio. The major concentration of loans is consumer loans and is
reflected throughout the portfolio. These loans are the 1-4 Family Residential
Loans and the Loans to Individuals. Due to the diversity of the customer base,
major industry concentrations in the loan portfolio have been avoided although
collateral concentrations in real estate do exist. The area economy and its
health will have a major impact on the volume of loan losses experienced by the
Company's subsidiary, Southside Bank.
The following table sets forth loan totals by category for the years
ended December 31, 1995, 1994, 1993, 1992, 1991 and the past fiscal year (in
thousands):
December 31, June 30,
------------------------------------------------------------- -----------
1995 1994 1993 1992 1991 1991
----------- ----------- ----------- ----------- ----------- -----------
Real Estate Loans:
Construction . . . . . . . . . $ 4,558 $ 6,118 $ 4,739 $ 3,064 $ 5,551 $ 2,708
1-4 Family Residential . . . . 49,909 38,563 34,982 29,647 27,907 27,856
Other . . . . . . . . . . . . 54,436 53,881 46,457 41,128 39,490 37,785
Commercial, Financial and
Agricultural Loans . . . . . . 44,217 39,707 40,860 41,473 43,199 42,709
Loans to Individuals . . . . . 75,658 62,721 56,571 45,596 40,161 39,236
----------- ----------- ----------- ----------- ----------- -----------
Total Loans . . . . . . . . . $ 228,778 $ 200,990 $ 183,609 $ 160,908 $ 156,308 $ 150,294
=========== =========== =========== =========== =========== ===========
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20
LOAN LOSS EXPERIENCE AND RESERVE FOR LOAN LOSSES
For the year ended December 31, 1995, the Company's subsidiary, Southside
Bank, had net recoveries on loans of $480,000, an improvement of 1,070.7%
compared to December 31, 1994. For the year ended December 31, 1994, net
recoveries on loans were $41,000. These levels are reflective of the economic
stability in the Company's market area.
The loan loss reserve in place at the end of each year is based on the
most current review of the loan portfolio at that time. Several methods are
used to maintain the review in the most current manner. First, the servicing
officer has the primary responsibility for updating significant changes in a
customer's financial position. Accordingly, each officer prepares status
updates on any credit deemed to be experiencing repayment difficulties which,
in the officer's opinion, would place the collection of principal or interest
in doubt. Second, an internal review officer from the Company is responsible
for an ongoing review of the Company's entire loan portfolio with specific
goals set for the volume of loans to be reviewed on an annual basis. Third,
Southside Bank is regulated and examined by both the Federal Deposit Insurance
Corporation and, or the Texas Department of Banking on an annual basis.
At each review of a credit, a subjective analysis methodology is used to
grade the respective loan. Categories of grading vary in severity to include
loans which do not appear to have a significant probability of loss at the time
of review to grades which indicate a probability that the entire balance of the
loan will be uncollectible. If full collection of the loan balance appears
unlikely at the time of review, estimates or appraisals of the collateral
securing the debt are used to allocate the necessary reserves. A list of loans
which are graded as having more than the normal degree of risk associated with
them are maintained by the internal 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.
In addition to maintaining an ongoing review of the loan portfolio, the
internal review officer maintains a history of the loans that have been
charged-off without first being identified as problems. This history is used
to determine the amount of nonspecifically allocated reserve necessary, in
addition to the portion which is specifically allocated by loan.
Due to the significant recoveries realized during 1995, the Company
reduced its reserve for loan losses by making a negative provision of $300,000.
The provision for loan losses for December 31, 1994 was $250,000. As of
December 31, 1995, the Company's review of the loan portfolio indicates that a
loan loss reserve of $3,317,000 is adequate.
The Company adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" (FAS114) and Statement of
Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures" (FAS118), on January 1, 1995.
Under these standards, a loan is considered impaired, based on current
information and events, if it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. Substantially all of the
Company's impaired loans are collateral-dependent, and as such, are measured
for impairment based on the fair value of the collateral. The adoption of
FAS114 and FAS118 resulted in no additional provision for credit losses.
The table on the following page summarizes the average amount of net
loans outstanding; changes in the reserve for loan losses arising from loans
charged-off and recoveries on loans previously charged-off; additions to the
reserve which have been charged to operating expense; the ratio of net loans
charged-off to average loans outstanding; and an allocation of the reserve for
loan loss.
19
21
LOAN LOSS EXPERIENCE AND RESERVE FOR LOAN LOSSES
Six Months Year
Years Ended Ended Ended
December 31, Dec. 31, June 30,
------------------------------------------------ ---------- -----------
1995 1994 1993 1992 1991 1991
---------- ----------- ----------- ---------- ---------- -----------
(dollars in thousands)
Average Net Loans Outstanding . . . . . $ 209,141 $ 196,436 $ 170,409 $ 157,260 $ 153,284 $ 149,570
========== =========== =========== ========== ========== ===========
Balance of Reserve for Loan Loss at
Beginning of Period . . . . . . . . . $ 3,137 $ 2,846 $ 2,711 $ 2,535 $ 2,178 $ 2,102
---------- ----------- ----------- ---------- ---------- -----------
Loan Charge-Offs:
Real Estate-Construction . . . . . . . (246) (38)
Real Estate-Other . . . . . . . . . . . (36) (6) (494) (79) (21) (374)
Commercial, Financial and
Agricultural Loans . . . . . . . . . (61) (129) (95) (365) (52) (376)
Loans to Individuals . . . . . . . . . (502) (395) (284) (335) (204) (356)
---------- ----------- ----------- ---------- ---------- -----------
Total Loan Charge-Offs . . . . . . . . (599) (530) (873) (1,025) (277) (1,144)
---------- ----------- ----------- ---------- ---------- -----------
Recovery on Loans Previously Charged off:
Real Estate-Construction . . . . . . .
Real Estate-Other . . . . . . . . . . . 272 93 4 99 7 24
Commercial, Financial and
Agricultural Loans . . . . . . . . . 546 326 287 150 32 108
Loans to Individuals . . . . . . . . . 261 152 117 102 45 88
---------- ----------- ----------- ---------- ---------- -----------
Total Recovery of Loans Previously
Charged-Off . . . . . . . . . . . . . 1,079 571 408 351 84 220
---------- ----------- ----------- ---------- ---------- -----------
Net Loan (Charge-Offs) Recoveries . . . 480 41 (465) (674) (193) (924)
Additions (Reductions) to Reserve
Charged (Credited) to Operating
Expense . . . . . . . . . . . . . . . (300) 250 600 850 550 1,000
--------- ----------- ----------- ---------- ---------- -----------
Balance at End of Period . . . . . . . $ 3,317 $ 3,137 $ 2,846 $ 2,711 $ 2,535 $ 2,178
========== =========== =========== ========== ========== ===========
Ratio of Net Charge-Offs (Recoveries)
to Average Loans Outstanding . . . . (.23%) (.02%) .27% .43% .13% .62%
========== =========== =========== ========== ========== ===========
Allocation of Reserve for Loan Loss:
December 31, June 30,
---------------------------------------------------------------------------- --------------
1995 1994 1993 1992 1991 1991
-------------- ------------- ------------- ------------- -------------- --------------
% of % of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total Amount Total
------ ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Real Estate-Construction $ 23 .7% $ 31 1.0% $ 7 .2% $ 31 1.2% $ 30 1.2% $ 20 .9%
Real Estate-Other . . . . 1,209 36.4% 1,127 35.9% 1,172 41.2% 1,026 37.8% 780 30.8% 811 37.2%
Commercial, Financial
and Agricultural Loans 911 27.5% 809 25.8% 1,018 35.8% 964 35.6% 1,137 44.9% 915 42.0%
Loans to Individuals . . 1,082 32.6% 1,085 34.6% 642 22.6% 640 23.6% 493 19.4% 409 18.8%
Unallocated . . . . . . . 92 2.8% 85 2.7% 7 .2% 50 1.8% 95 3.7% 23 1.1%
------ ----- ----- ------ ----- ------ ------ ------- ------ ------ ------ -----
Balance at End of Period $3,317 100% 3,137 100% 2,846 100% $2,711 100% $2,535 100% $2,178 100%
====== ===== ===== ====== ===== ====== ====== ======= ====== ====== ====== =====
20
22
NONPERFORMING ASSETS
The primary categories of nonperforming assets consist of delinquent
loans over 90 days past due, nonaccrual loans, other real estate owned and
restructured loans. Nonaccrual loans are those loans which are more than 90
days delinquent and collection in full of both the principal and interest is in
doubt. Additionally, some loans may be placed in nonaccrual status that are
not delinquent due to doubts about full collection of principal or interest.
When a loan is categorized as nonaccrual, the accrual of interest is
discontinued and the accrued balance is reversed for financial statement
purposes. Other Real Estate Owned (OREO) represents real estate taken in full
or partial satisfaction of debts previously contracted. Previously included in
the appropriate categories of nonperforming assets were loans meeting the
in-substance foreclosure criteria. As a result of the adoption of FAS114, the
Company reclassified in-substance foreclosed assets in these categories to
loans. These loans had balances of $807,000 for December 31, 1994 and
$1,849,000 for December 31, 1993. The OREO consists primarily of raw land and
oil and gas interests. The Company is actively marketing all properties and
none are being held for investment purposes. Restructured loans represent
loans which have been renegotiated to provide a reduction or deferral of
interest or principal because of deterioration in the financial position of the
borrowers. Categorization of a loan as nonperforming is not in itself a
reliable indicator of potential loan loss. Other factors, such as the value of
collateral securing the loan and the financial condition of the borrower must
be considered in judgments as to potential loan loss.
The following table of nonperforming assets is classified according to
federal call report guidelines.
NONPERFORMING ASSETS
(dollars in thousands)
December 31, June 30,
--------------------------------------------------------------- -----------
1995 1994 1993 1992 1991 1991
------------ ------------ ----------- ----------- ------------ -----------
Loans 90 Days Past Due:
Real Estate . . . . . . . . $ 266 $ 51 $ 342 $ 3 $ 40 $ 49
Installment . . . . . . . . 203 52 90 86 31 24
Commercial . . . . . . . . . 183 59 70 63 88 275
------------ ----------- ----------- ----------- ------------ -----------
652 162 502 152 159 348
------------ ----------- ----------- ----------- ------------ -----------
Loans on Nonaccrual:
Real Estate . . . . . . . . 486 424 711 961 1,370 892
Installment . . . . . . . . 116 179 175 138 2
Commercial . . . . . . . . . 654 24 213 458 705 122
------------ ----------- ----------- ----------- ------------ -----------
1,256 627 1,099 1,557 2,077 1,014
------------ ----------- ----------- ----------- ------------ -----------
Restructured Loans:
Real Estate . . . . . . . . 243 563 590 510 918 859
Installment . . . . . . . . 49 51 52 101 13 14
Commercial . . . . . . . . . 44 43 115 164 118 153
------------ ----------- ----------- ----------- ------------ -----------
336 657 757 775 1,049 1,026
------------ ----------- ----------- ----------- ------------ -----------
Total Nonperforming Loans . . . 2,244 1,446 2,358 2,484 3,285 2,388
Other Real Estate Owned . . . . 273 1,134 2,745 4,760 6,030 7,211
Repossessed Assets . . . . . . 240 256 203 458 322 205
------------ ----------- ----------- ----------- ------------ -----------
Total Nonperforming Assets . . $ 2,757 $ 2,836 $ 5,306 $ 7,702 $ 9,637 $ 9,804
============ =========== =========== =========== ============ ===========
Percentage of Total Assets . . .6% .7% 1.3% 2.0% 2.8% 3.0%
Percentage of Loans and Leases,
Net of Unearned Income . . . 1.2% 1.4% 2.9% 4.8% 6.2% 6.5%
21
23
Total nonperforming assets decreased $79,000 between December 31, 1994
and December 31, 1995. Nonperforming assets represent a continued drain on the
earning ability of the Company. Earnings losses are due both to the loss of
interest income and the costs associated with maintaining the OREO, for taxes,
insurance and other operating expenses. In addition to the nonperforming
assets, at December 31, 1995 in the opinion of management, the Company had
$462,000 of loans identified as potential problem loans. A potential problem
loan is a loan where information about possible credit problems of the borrower
is known, causing management to have serious doubts about the ability of the
borrower to comply with the present loan repayment terms and may result in a
future classification of the loan in one of the nonperforming asset categories.
The following is a summary of the Company's recorded investment in loans
(primarily nonaccrual loans) for which impairment has been recognized in
accordance with FAS114 (in thousands):
Valuation Carrying
Total Allowance Value
------------- ------------ ------------
Real Estate Loans . . . . . . . . . . . . . . . . . . . . . . . . . $ 486 $ 130 $ 356
Commercial Loans . . . . . . . . . . . . . . . . . . . . . . . . . 654 153 501
Loans to Individuals . . . . . . . . . . . . . . . . . . . . . . . 116 19 97
------------ ------------ ------------
Balance at December 31, 1995 . . . . . . . . . . . . . . . . . . . $ 1,256 $ 302 $ 954
============ ============ ============
For the year ended December 31, 1995, the average recorded investment in
impaired loans was approximately $1,330,000. During the year ended December
31, 1995, the amount of interest income reversed on impaired loans placed on
nonaccrual and the amount of interest income subsequently recognized on the
cash basis was not material.
The net amount of interest recognized on loans that were nonaccruing or
restructured during the year was $78,000, $260,000 and $98,000 for the years
ended December 31, 1995, 1994 and 1993. If these loans had been accruing
interest at their original contracted rates, related income would have been
$273,000, $126,000 and $170,000 for the years ended December 31, 1995, 1994 and
1993, respectively.
The OREO total has declined since reaching its high balance in the late
1980's. As a result of FAS114, certain loans classified as in-substance
foreclosures were reclassified from OREO to nonaccrual loans which is the
primary reason for the increase in nonperforming loans for the year ended
December 31, 1995.
The following is a summary of the Allowance for Losses on Other Real
Estate Owned for the years ended December 31, 1995, 1994 and 1993 (in
thousands):
Years Ended December 31,
-----------------------------------------
1995 1994 1993
------------ ------------ ------------
Balance at beginning of year . . . . . . . . . . . . . . . . . . . $ 1,291 $ 2,594 $ 3,455
Provision for Losses . . . . . . . . . . . . . . . . . . . . . 43 338
Losses on sales . . . . . . . . . . . . . . . . . . . . . . . . (1,442) (1,379)
Gains on sales . . . . . . . . . . . . . . . . . . . . . . . . 96 180
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (345)
------------- ------------ ------------
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . $ 946 $ 1,291 $ 2,594
============= ============ ============
Prior to January 1, 1995, the Company classified certain loans meeting
the in-substance foreclosure criteria as OREO. Upon the adoption of FAS114,
the Company reclassified in-substance foreclosed assets to loans. The "Other"
category above reflects the effect of this reclassification.
22
24
RESULTS OF OPERATIONS
ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
The following tables set forth the dollar amount of increase (decrease)
in interest income and interest expense resulting from changes in the volume of
interest earning assets and interest bearing liabilities and from changes in
yields and rates (in thousands):
Years Ended December 31,
1995 Compared to 1994
-----------------------------------------
Average Average Increase
Volume Rate (Decrease)
------------ ------------- -------------
INTEREST INCOME:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,958 $ 189 $ 2,147
Investment Securities (Taxable) . . . . . . . . . . . . . . . . 269 436 705
Investment Securities (Tax-Exempt) (1) . . . . . . . . . . . . 59 12 71
Mortgage-backed Securities . . . . . . . . . . . . . . . . . . (303) 721 418
Marketable Equity Securities . . . . . . . . . . . . . . . . . 5 14 19
Federal Funds Sold . . . . . . . . . . . . . . . . . . . . . . (57) 102 45
Interest Earning Deposits . . . . . . . . . . . . . . . . . . . 2 11 13
------------ ------------- ------------
Total Interest Income . . . . . . . . . . . . . . . . . . . . 1,933 1,485 3,418
------------ ------------- ------------
INTEREST EXPENSE:
Savings Deposits . . . . . . . . . . . . . . . . . . . . . . . (10) 29 19
Time Deposits . . . . . . . . . . . . . . . . . . . . . . . . . 484 1,731 2,215
Interest Bearing Demand Deposits . . . . . . . . . . . . . . . (164) 166 2
Federal Funds Purchased and Other
Interest Bearing Liabilities . . . . . . . . . . . . . . . . (10) 20 10
FHLB Advances . . . . . . . . . . . . . . . . . . . . . . . . . 26 21 47
------------ ------------- ------------
Total Interest Expense . . . . . . . . . . . . . . . . . . . 326 1,967 2,293
------------ ------------- ------------
Net Interest Earnings . . . . . . . . . . . . . . . . . . . . . $ 1,607 $ (482) $ 1,125
============ ============= ============
Years Ended December 31,
1994 Compared to 1993
----------------------------------------
Average Average Increase
Volume Rate (Decrease)
------------ ------------ ------------
INTEREST INCOME:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,215 $ (1) $ 2,214
Investment Securities (Taxable) . . . . . . . . . . . . . . . . 303 (20) 283
Investment Securities (Tax-Exempt) (1) . . . . . . . . . . . . 222 (36) 186
Mortgage-backed Securities . . . . . . . . . . . . . . . . . . (1,107) (14) (1,121)
Marketable Equity Securities . . . . . . . . . . . . . . . . . 36 50 86
Trading Account Securities . . . . . . . . . . . . . . . . . . (2) (2) (4)
Federal Funds Sold . . . . . . . . . . . . . . . . . . . . . . 361 62 423
Interest Earning Deposits . . . . . . . . . . . . . . . . . . . (9) 17 8
------------ ------------ ------------
Total Interest Income . . . . . . . . . . . . . . . . . . . . 2,019 56 2,075
------------ ------------ ------------
INTEREST EXPENSE:
Savings Deposits . . . . . . . . . . . . . . . . . . . . . . . 32 (12) 20
Time Deposits . . . . . . . . . . . . . . . . . . . . . . . . . 214 456 670
Interest Bearing Demand Deposits . . . . . . . . . . . . . . . 216 (5) 211
Federal Funds Purchased and Other
Interest Bearing Liabilities . . . . . . . . . . . . . . . . 93 (95) (2)
FHLB Advances . . . . . . . . . . . . . . . . . . . . . . . . . 282 (1) 281
------------ ------------ ------------
Total Interest Expense . . . . . . . . . . . . . . . . . . . 837 343 1,180
------------ ------------ ------------
Net Interest Earnings . . . . . . . . . . . . . . . . . . . . . $ 1,182 $ (287) $ 895
============ ============ ============
(1) Interest rates on securities which are nontaxable for Federal Income Tax
purposes are not presented on a taxable equivalent basis.
NOTE: Volume/Rate variances (change in volume times change in rate) have been
allocated to amounts attributable to changes in volumes and to changes
in rates in proportion to the amounts directly attributable to those
changes.
23
25
NET INTEREST INCOME
Net interest income is the principal source of a financial institution's
earnings stream and represents the difference or spread between interest and
fee income generated from earning assets and the interest expense paid on
deposits and borrowed funds. Fluctuations in interest rates as well as volume
and mix changes in earning assets and interst bearing liabilities materially
impact net interst income.
Net interest income increased for the year ended December 31, 1995
$1,125,000 or 7.2% compared to the same period in 1994. Interest income for the
year ended December 31, 1995 increased $3.4 million or 13.1% to $29.6 million
compared to the same period in 1994. The increased interest income in 1995 was
attributable to the increase in average yield as well as higher Average Earning
Assets during the year. The average yield on the Average Earning Assets
increased 68 basis points during the year ended December 31, 1995 as compared
to 1994. The increase in interest income on Loans of $2,147,000 or 12.8% was
the result of the increase in Average Loans and average yield during 1995.
Interest income on securities increased $1,213,000 in 1995 or 13.6% compared to
1994 primarily due to the increase in the average yield during 1995.
The increase in interest expense for the year ended December 31, 1995 of
$2.3 million or 21.7% was attributable to an increase in Average Interest
Bearing Liablities of $4.6 million or 1.5% along with the increase in the
average rate paid on Interest Bearing Liabilities of 70 basis points. Average
Time Depositis increased $11.2 million or 7.0% while the average rate paid
increased 102 basis points more than offsetting the decrease in Average
Interest Bearing Demand Deposits of $6.1 million. Average Long Term Interst
Bearing Liabilities increased $.5 million which contributed to the higher
interest expense in 1995.
NONINTEREST INCOME
Noninterest income is an important surce of earnings. The Company intends
to maximize noninterest income in the future by looking for new fee income
services to provide customers and by continuing to review service charge
schedules and by competitively and profitably pricing those services. The
following schedule lists the accounts from which noninterest income was
derived, gives totals for these accounts for the year ended December 31, 1995
and the comparable year ended December 31, 1994 and indicates the percentage
changes (dollars in thousands):
Years Ended
December 31,
---------------------- Percent
1995 1994 Change
---------- --------- --------
Deposit services . . . . . . . . . . . $ 2,752 $ 2,650 3.8%
Gains on securities available for sale 221 25 784.0%
Other . . . . . . . . . . . . . . . . . 901 921 (2.2%)
---------- ---------
Total noninterest income . . . . . . . $ 3,874 $ 3,596 7.7%
========== =========
Noninterest income consists of revenues generated from a broad range of
financial services and activities including fee based services. Total
noninterest income for the year ended December 31, 1995 increased 7.7% or
$278,000 compared to 1994. Securities gains increased $196,000 or 784.0% from
1994. Of the $221,000 in net securities gains from the AFS portfolio in 1995,
there were $450,000 in realized gains and $229,000 in realized losses. The
Company sold securities out of its AFS portfolio to accomplish ALCO and
investment portfolio objectives aimed at maximizing to the total return of the
securities portfolio. The increase in deposit services income of $102,000 or
3.8% was a result of increased deposit activity. Other noninterest income
decreased $20,000 or 2.2% primarily as a result of lower OREO and repo asset
income, reflective of the overall decrease in OREO.
24
26
NONINTEREST EXPENSE
The following schedule lists the accounts which comprise noninterest
expense, gives totals for these accounts for the year ended December 31, 1995
and the comparable year ended December 31, 1994 and indicates the percentage
changes (dollars in thousands):
Years Ended
December 31,
---------------------------- Percent
1995 1994 Change
------------- ------------ ----------
(in thousands)
Salaries and employee benefits . . . . . . . . . . . . . . . $ 8,545 $ 8,184 4.4%
Net occupancy expense . . . . . . . . . . . . . . . . . . . . 1,636 1,439 13.7%
Equipment expense . . . . . . . . . . . . . . . . . . . . . . 302 282 7.1%
Advertising, travel and entertainment . . . . . . . . . . . . 888 752 18.1%
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . 388 375 3.5%
FDIC insurance . . . . . . . . . . . . . . . . . . . . . . . 434 791 (45.1%)
Postage . . . . . . . . . . . . . . . . . . . . . . . . . . . 303 274 10.6%
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,186 2,156 1.4%
------------- -------------
Total noninterest expense . . . . . . . . . . . . . . . . . . $ 14,682 $ 14,253 3.0%
============= =============
Noninterest expense for the year ended December 31, 1995 increased
$429,000 or 3.0% when compared to the year ended December 31, 1994. Salaries
and employee benefits increased $361,000 or 4.4% due to several factors.
Higher direct salary expense including payroll taxes represented $408,000 of
the increase. The increase is reflective of staff additions during 1995 as a
result of overall bank growth and pay increases and the increased commitment to
residential mortgage lending. Health insurance expense decreased $185,000 or
21.2% in 1995 compared to the same period in 1994. The decrease occurred as a
result of lowered health claims due to changing the Bank's overall health
coverage to a Preferred Provider Organization which provided significant cost
savings. Retirement expense increased $138,000 or 20.7% for the year ended
December 31, 1995 as a result of lower than expected returns on the retirement
plan assets in 1994, increased personnel and increased contributions to the
ESOP plan.
Net occupancy expense increased $197,000 or 13.7% for the year ended
December 31, 1995 compared to the same period in 1994, largely due to higher
real estate taxes, depreciation expense and associated operating costs as a
result of the new South Broadway branch opened in April 1995 and the opening of
the new motor bank facility at South Broadway and the operations facility late
in 1994.
Advertising expense increased $136,000 or 18.1% for the year ended
December 31, 1995 compared to the same period in 1994. The increase occurred
due to increases in direct advertising during 1995 as a result of the opening
of the new South Broadway branch in 1995 and the new motor bank facility late
in 1994. Donations also increased during the year ended December 31, 1995 and
are included in this total.
FDIC insurance decreased $357,000 or 45.1% for the year ended December
31, 1995 compared to the year ended December 31, 1994. During August 1995, the
FDIC announced a decrease in the insurance premiums from $.23 per hundred
dollars of deposits insured to $.04 per hundred dollars insured effective June
1, 1995. As a result, Southside Bank received a refund of $230,000 in
September 1995 and the monthly expense for the remainder of the year decreased
significantly.
25
27
INCOME TAXES
Income tax expense was $1,713,000 for the year ended December 31, 1995
and represented a $511,000 or 42.5% increase from the year ended December 31,
1994. The increased income tax expense primarily is a result of higher pre-
tax income in 1995.
OTHER ACCOUNTING ISSUES
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights" (FAS122). This statement, which the Company will be required to adopt
in 1996, eliminates the accounting distinction of rights to service mortgage
loans whether they are acquired through loan origination activities or through
purchase transactions. The impact of the statement has been assessed by
management and will not have a material impact on the Company's financial
statements.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS123). This statement, which the Company will be required to
adopt in 1996, encourages, but does not require, companies to recognize
compensation expense for grants of stock, stock options and other equity
instruments to employees based on new fair value accounting rules. Companies
that choose not to adopt the new rules will continue to apply existing rules,
but will be required to disclose pro forma net income and earnings per share
under the new method. The Company will elect to provide the pro forma
disclosures in its 1996 financial statements.
EFFECTS OF INFLATION
The effects of inflation on the Company can be minimized by management of
the interest income and interest expense or simply by controlling the interest
rates paid for borrowed funds versus the interest rates earned on funds loaned
to customers.
26
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - December 31, 1994 compared to December 31, 1993
The following discussion and analysis provides a comparison of the
Company's results of operations for the years ended December 31, 1994 and 1993
and financial condition as of December 31, 1994 and 1993. This discussion
should be read in conjunction with the financial statements and related notes.
For a more detailed discussion of these periods, readers should refer to the
Company's December 31, 1994 Annual Report. All share data has been adjusted to
retroactively reflect the stock dividend paid in September 1995.
OVERVIEW
During the year ended December 31, 1994, the Company's net income
decreased $496,000 or 12.4% to $3,519,000, compared to $4,015,000 for the same
period in 1993. The decrease in net income is primarily attributable to
nonrecurring gains on the sale of securities during 1993 and a one time
increase in income resulting from a change in an accounting principle in 1993.
Also affecting earnings were costs associated with opening and operating two
new branches, opened in late 1993, and operating costs associated with new
facilities opened during 1994.
NET INTEREST INCOME
Net interest income is the principal source of a financial institution's
earnings stream and represents the difference or spread between interest and
fee income generated from earning assets and the interest expense paid on
deposits and borrowed funds. Fluctuations in interest rates as well as volume
and mix changes in earning assets and interest bearing liabilities materially
impact net interest income.
Net interest income increased for the year ended December 31, 1994
$895,000 or 6.1% compared to the same period in 1993. Interest income for the
year ended December 31, 1994 increased $2.1 million or 8.6% to $26.2 million
compared to the same period in 1993. The increased interest income in 1994 was
primarily attributable to the increase in Average Earning Assets during the
year. The average yield on the Average Earning Assets increased 7 basis points
during the year ended December 31, 1994 as compared to 1993. The increase in
interest income on Loans of $2,214,000 or 15.3% was the result of the increase
in Average Loans during 1994. Interest income on securities decreased $570,000
in 1994 or 6.0% compared to 1993 primarily due to lower average securities
during 1994.
The increase in interest expense for the year ended December 31, 1994 of
$1.2 million or 12.6% was attributable to an increase in Average Interest
Bearing Liabilities of $20.3 million or 7.1% along with the increase in the
average rate paid on Interest Bearing Liabilities of 16 basis points. Average
Time Deposits increased $5.5 million or 3.5% while the average rate paid
increased 29 basis points. Average Interest Bearing Demand Deposits increased
$8.2 million and Average Long Term Interest Bearing Liabilities increased $5.8
million which contributed to the higher interest expense in 1994.
PROVISION FOR LOAN LOSSES
The provision for loan losses for December 31, 1994 was $250,000 compared
to $600,000 for December 31, 1993. For the year ended December 31, 1994, the
Company's subsidiary, Southside Bank, had net recoveries on loans of $41,000,
an improvement of 108.8% compared to December 31, 1993. For the year ended
December 31, 1993, net charge-offs on loans were $465,000. These levels are
reflective of the economic stability in the Company's market area.
27
29
NONINTEREST INCOME
Total noninterest income for the year ended December 31, 1994 decreased
14.2% or $597,000 compared to 1993. Securities gains decreased $462,000 or
94.9% from 1993. Of the $25,000 in net securities gains from the AFS portfolio
in 1994, there were $164,000 in realized gains and $139,000 in realized losses.
During 1993, certain securities were sold for asset liability management
purposes to restructure a portion of the portfolio. The decrease in deposit
services income of $65,000 or 2.4% was a result of a higher earnings credit
rate applied to commercial accounts thus reducing service charges. Other
noninterest income decreased $70,000 or 7.1% primarily as a result of lower
OREO and repo asset income, reflective of the overall decrease in OREO.
NONINTEREST EXPENSE
Noninterest expense for the year ended December 31, 1994 increased
$1,298,000 or 10% when compared to the year ended December 31, 1993. Salaries
and employee benefits increased $1,011,000 or 14.1% due to several factors.
Direct salary expense including payroll taxes represented $829,000 of the
increase. The increase is reflective of staff additions during 1994 as a
result of overall bank growth, pay increases and staff additions for branches
opened late in 1993. Health insurance expense increased $233,000 or 36.4% in
1994 compared to the same period in 1993. Retirement expense decreased $51,000
or 7.1% for the year ended December 31, 1994.
Net occupancy expense increased $243,000 or 20.3% largely due to higher
depreciation expense as a result of computer equipment purchased, new motor
bank facilities opened and the purchase of an operations facility in 1994.
Other occupancy expenses increased due to costs associated with operating these
facilities and the new branches opened late in 1993. Equipment expense
decreased $44,000 or 13.5% primarily due to maintenance savings realized with
the purchase of new computer equipment.
Supply expense increased due to supply needs at the new facilities and
new forms required due to the bank's computer conversion and regulatory changes
during 1994. Other expense decreased $32,000 or 1.5% when comparing the year
ended December 31, 1994 to the same period in 1993. Net losses on other real
estate decreased 87.3% from $338,000 in the year ended December 31, 1993 to
$43,000 for the same period in 1994. In general, the market values of the
Company's other real estate stabilized, combined with the overall lower net
book balance of other real estate on the Company's books, preventing
significant write downs during 1994. The decreased OREO provision was
partially offset by increased expenses in 1994 partly due to the bank's
computer conversion, higher director fees and additional ATM expense due to
openings of new ATM's.
28
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth in Part IV.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF
THE REGISTRANT
Certain of the information required under this item appears
beginning on page 2 of the Company's definitive proxy statement
for the Annual Meeting of Shareholders to be held April 24, 1996,
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item appears beginning on
page 6 of the Company's definitive proxy statement for the Annual
Meeting of Shareholders to be held April 24, 1996, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item beginning on page 2
of the Company's definitive proxy statement for the Annual Meeting
of Shareholders to be held April 24, 1996, and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item beginning on page 11
of the Company's definitive proxy statement for the Annual Meeting
of Shareholders to be held April 24, 1996, and is incorporated
herein by reference.
29
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)
1. Financial Statements
The following consolidated financial statements of Southside
Bancshares, Inc. and its subsidiaries are filed as part of this
report.
Consolidated Balance Sheets as of December 31, 1995 and 1994.
Consolidated Statements of Income for the years ended
December 31, 1995, 1994, and 1993.
Consolidated Statements of Cash Flow for the years ended
December 31, 1995, 1994 and 1993.
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1995, 1994 and 1993.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
All schedules are omitted because they are not applicable or
not required, or because the required information is included in
the consolidated financial statements or notes thereto.
3. Exhibits
Exhibit
No.
-------
3 (a)(i) - Articles of Incorporation as amended and in
effect on December 31, 1992, of SoBank, Inc.
(now named Southside Bancshares, Inc.)(filed
as Exhibit 3 to the Registrant's Form 10K
for the year ended December 31, 1992, and
incorporated herein).
3 (a)(ii) - Articles of Amendment effective May 9, 1994
to Articles of Incorporation of SoBank, Inc.
(now named Southside Bancshares, Inc.)
(filed as Exhibit 3(a)(ii) to the
Registrant's Form 10K for the year ended
December 31, 1994, and incorporated herein).
3 (b) - Bylaws as amended and in effect on March 23,
1995 of Southside Bancshares, Inc. (filed
as Exhibit 3(b) to the Registrant's Form 10K
for the year ended December 31, 1994, and
incorporated herein).
30
32
** 10 (a)(i) - Deferred Compensation Plan for B.G. Hartley
effective February 13, 1984, as amended June
28, 1990 and December 15, 1994 (filed as
Exhibit 10(a)(i) to the Registrant's Form
10K for the year ended December 31, 1994,
and incorporated herein).
*,** 10 (a)(ii) - Deferred Compensation Plan for Robbie N.
Edmonson effective February 13, 1984, as
amended June 28, 1990 and March 16, 1995.
** 10 (b) - Officers Long Term Disability Income Plan
effective June 25, 1990 (filed as Exhibit
10(b) to the Registrant's Form 10K for the
year ended June 30, 1990, and incorporated
herein).
** 10 (c) - Retirement Plan Restoration Plan for the
subsidiaries of SoBank, Inc. (now named
Southside Bancshares, Inc.)(filed as Exhibit
10(c) to the Registrant's Form 10K for the
year ended December 31, 1992, and
incorporated herein).
** 10 (d) - Incentive Stock Option Plan effective April
1, 1993 of SoBank, Inc. (now named Southside
Bancshares, Inc.) (filed as Exhibit 10(d) to
the Registrant's Form 10K for the year ended
December 31, 1994).
*,** 10 (e) - Form of Deferred Compensation Agreements
dated June 30, 1994 with each of Sam Dawson,
Lee Gibson, Titus Jones, Jeryl Story and
Andy Wall as amended November 13, 1995.
22 - Subsidiaries of the Registrant (filed as
Exhibit 22 to the Registrant's Form 10K for
the year ended December 31, 1994).
* 27 - Financial Data Schedule for the year ended
December 31, 1995.
_______________
* Filed herewith.
** Compensation plan, benefit plan or employment contract or
arrangement.
(b) Reports on Form 8-K
Registrant did not file any Form 8-K's during the three months ended
December 31, 1995.
31
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BY: /s/ B. G. HARTLEY
----------------------------------------------------
B. G. Hartley, Chairman of the
Board and Director (Principal
Executive Officer)
/s/ LEE R. GIBSON
----------------------------------------------------
Lee R. Gibson, CPA, Executive Vice
President (Principal Financial
DATED: March 21, 1996 Officer and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ B. G. HARTLEY Chairman of the Board March 21, 1996
- ----------------------------------- and Director
(B. G. Hartley)
/s/ ROBBIE N. EDMONSON President and Director March 21, 1996
- -----------------------------------
(Robbie N. Edmonson)
/s/ FRED E. BOSWORTH Director March 21, 1996
- -----------------------------------
(Fred E. Bosworth)
/s/ HERBERT C. BUIE Director March 21, 1996
- -----------------------------------
(Herbert C. Buie)
/s/ ROLLINS CALDWELL Director March 21, 1996
- -----------------------------------
(Rollins Caldwell)
/s/ W. D. (JOE) NORTON Director March 21, 1996
- -----------------------------------
(W. D. (Joe) Norton)
/s/ WILLIAM SHEEHY Director March 21, 1996
- -----------------------------------
(William Sheehy)
/s/ MURPH WILSON Director March 21, 1996
- -----------------------------------
(Murph Wilson)
32
34
Report of Independent Accountants
To the Shareholders and Board of Directors
Southside Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of Southside
Bancshares, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, shareholders' equity, and cash flow
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Southside
Bancshares, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flow for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1993 the
Company changed its methods of accounting for income taxes and certain
investments in debt and equity securities in accordance with Statement of
Financial Accounting Standards Nos. 109 and 115, respectively.
/s/ COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
Dallas, Texas
March 1, 1996
33
35
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31, December 31,
1995 1994
-------------- -------------
ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,321 $ 25,381
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,100
Investment securities:
Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74,284 25,695
Held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,635 57,025
--------------- --------------
Total Investment securities . . . . . . . . . . . . . . . . . . . . . . 76,919 82,720
Mortgage-backed and related securities:
Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,423 27,654
Held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,984 60,426
--------------- --------------
Total Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . 99,407 88,080
Marketable equity securities:
Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,112 2,005
Loans:
Loans, net of unearned discount . . . . . . . . . . . . . . . . . . . . . 228,778 200,990
Less: Reserve for loan losses . . . . . . . . . . . . . . . . . . . . . . (3,317) (3,137)
-------------- -------------
Net Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,461 197,853
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . 11,669 9,875
Other real estate owned, net . . . . . . . . . . . . . . . . . . . . . . . . 273 1,134
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,095 2,581
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 412 1,909
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,004 3,583
--------------- --------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 448,673 $ 426,221
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 84,706 $ 88,008
Interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303,602 297,094
--------------- --------------
Total Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 388,308 385,102
Short-term obligations:
Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . 4,600
Long-term obligations:
Note payable - FHLB Dallas . . . . . . . . . . . . . . . . . . . . . . . . 13,686 7,997
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,727 5,598
--------------- --------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 415,321 398,697
--------------- --------------
Shareholders' equity:
Common stock: ($2.50 par, 6,000,000 shares authorized, 3,141,393
and 2,973,234 shares issued) . . . . . . . . . . . . . . . . . . 7,853 7,433
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,209 14,529
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,123 7,480
Treasury stock (49,421 and 23,082 shares at cost) . . . . . . . . . . . . (486) (219)
Net unrealized gains (losses) on securities available for sale . . . . . . 653 (1,699)
--------------- -------------
TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . 33,352 27,524
--------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . $ 448,673 $ 426,221
=============== ==============
The accompanying notes are an integral part of the financial statements.
34
36
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Years Ended December 31,
-------------------------------------
1995 1994 1993
------------ ----------- -----------
Interest income
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,861 $ 16,714 $ 14,500
Investment securities . . . . . . . . . . . . . . . . . . . . . . . 4,343 3,567 3,098
Mortgage-backed and related securities . . . . . . . . . . . . . . . 5,673 5,255 6,376
Marketable equity securities . . . . . . . . . . . . . . . . . . . . 121 102 16
Other interest earning assets . . . . . . . . . . . . . . . . . . . 592 534 107
------------ ----------- -----------
Total interest income . . . . . . . . . . . . . . . . . . . . 29,590 26,172 24,097
------------ ----------- -----------
Interest expense
Time and savings deposits . . . . . . . . . . . . . . . . . . . . . 12,290 10,054 9,153
Short-term obligations . . . . . . . . . . . . . . . . . . . . . . . 94 84 86
Long-term obligations . . . . . . . . . . . . . . . . . . . . . . . 453 406 125
------------ ----------- -----------
Total interest expense . . . . . . . . . . . . . . . . . . . . 12,837 10,544 9,364
------------ ----------- -----------
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . 16,753 15,628 14,733
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . (300) 250 600
------------ ----------- -----------
Net interest income after provision for loan losses . . . . . . . . . . 17,053 15,378 14,133
------------ ----------- -----------
Noninterest income
Deposit services . . . . . . . . . . . . . . . . . . . . . . . . . . 2,752 2,650 2,715
Gains on securities held for resale . . . . . . . . . . . . . . . . 436
Gains on securities held for investment . . . . . . . . . . . . . . 51
Gains on securities available for sale . . . . . . . . . . . . . . . 221 25
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 901 921 991
------------ ----------- -----------
Total noninterest income . . . . . . . . . . . . . . . . . . . 3,874 3,596 4,193
------------ ----------- -----------
Noninterest expense
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . 8,545 8,184 7,173
Net occupancy expense . . . . . . . . . . . . . . . . . . . . . . . 1,636 1,439 1,196
Equipment expense . . . . . . . . . . . . . . . . . . . . . . . . . 302 282 326
Advertising, travel & entertainment . . . . . . . . . . . . . . . . 888 752 745
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 388 375 314
FDIC insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 434 791 760
Postage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303 274 253
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,186 2,156 2,188
------------ ----------- -----------
Total noninterest expense . . . . . . . . . . . . . . . . . . 14,682 14,253 12,955
------------ ----------- -----------
Income before federal tax expense . . . . . . . . . . . . . . . . . . . 6,245 4,721 5,371
------------ ----------- -----------
Provision for federal tax expense
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,429 899 1,429
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284 303 13
------------ ----------- -----------
Total income taxes . . . . . . . . . . . . . . . . . . . . . . 1,713 1,202 1,442
------------ ----------- -----------
Net Income before cumulative effect of
change in accounting principle . . . . . . . . . . . . . . . . . . . 4,532 3,519 3,929
Cumulative effect of change in accounting principle . . . . . . . . . . 86
------------ ----------- -----------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,532 $ 3,519 $ 4,015
============ =========== ===========
Earnings Per Share
Net Income before cumulative effect of
change in accounting principle . . . . . . . . . . . . . . . . . $ 1.47 $ 1.13 $ 1.27
Cumulative effect of change in accounting principle . . . . . . . . $ .03
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.47 $ 1.13 $ 1.30
The accompanying notes are an integral part of the financial statements.
35
37
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
Years Ended December 31,
-----------------------------------
1995 1994 1993
----------- ----------- ----------
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,532 $ 3,519 $ 4,015
Adjustments to reconcile net cash provided by operations:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 1,563 1,792 2,330
Accretion of discount and loan fees . . . . . . . . . . . . . . . . . (846) (850) (565)
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . (300) 250 600
Deferred loan origination cost . . . . . . . . . . . . . . . . . . . (72) (44) (42)
(Gain) on securities . . . . . . . . . . . . . . . . . . . . . . . . (221) (25) (487)
(Gain) on premises and equipment . . . . . . . . . . . . . . . . . . (10) (10)
(Gain) loss on other real estate owned . . . . . . . . . . . . . . . (20) 43 338
(Increase) decrease in interest receivable . . . . . . . . . . . . . (514) 112 89
(Increase) decrease in other receivables and prepaids . . . . . . . . 563 (805) (939)
(Increase) decrease in deferred tax asset . . . . . . . . . . . . . . 284 303 (73)
Increase (decrease) in interest payable . . . . . . . . . . . . . . . 217 173 (76)
Increase in other payables . . . . . . . . . . . . . . . . . . . . . 2,912 1,178 1,163
Proceeds from sales of trading account securities . . . . . . . . . . 6,000
Purchases of trading account securities . . . . . . . . . . . . . . . (6,000)
----------- ----------- -----------
Net cash provided by operating activities . . . . . . . . . . . . 8,088 5,636 6,353
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale . . . 33,457 18,593
Proceeds from sales of mortgage-backed securities available for sale 16,555 27,414
Proceeds from sales of marketable equity securities available for sale 2
Proceeds from maturities of investment securities available for sale 20,582 11,575
Proceeds from maturities of mortgage-backed securities available for sale 5,994 16,454
Proceeds from maturities of investment securities held to maturity . 17,510 11,754
Proceeds from maturities of mortgage-backed securities held to maturity 6,403 5,749
Purchases of investment securities available for sale . . . . . . . . (63,663) (27,977)
Purchases of mortgage-backed securities available for sale . . . . . (38,299) (18,891)
Purchases of marketable equity securities available for sale . . . . (107) (67)
Purchases of investment securities held to maturity . . . . . . . . . (27,577)
Purchases of mortgage-backed securities held to maturity . . . . . . (5,971)
Proceeds from sales of securities held for resale . . . . . . . . . . 23,787
Proceeds from sales of investment securities held for investment . . 5,994
Proceeds from sales of mortgage-backed securities held for investment 6,992
Proceeds from maturities of securities held for resale . . . . . . . 9,332
Proceeds from maturities of investment securities held for investment 9,053
Proceeds from maturities of mortgage-backed securities held for investment 54,512
Purchases of investment securities held for investment . . . . . . . (34,460)
Purchases of mortgage-backed securities held for investment . . . . . (80,878)
Purchases of marketable equity securities held for investment . . . . (1,588)
Net (increase) decrease in federal funds sold . . . . . . . . . . . . 11,100 (11,100) 1,825
Net (increase) in loans . . . . . . . . . . . . . . . . . . . . . . . (27,486) (18,483) (25,186)
Purchases of premises and equipment . . . . . . . . . . . . . . . . . (2,822) (3,877) (2,348)
Retirement of premises and equipment . . . . . . . . . . . . . . . . 7
Proceeds from sales of premises and equipment . . . . . . . . . . . . 42 31
Proceeds from sales of repossessed assets . . . . . . . . . . . . . . 1,002 991 1,124
Proceeds from sales of other real estate owned . . . . . . . . . . . 145 1,711 2,920
----------- ----------- -----------
Net cash used in investing activities . . . . . . . . . . . . . . (19,587) (19,669) (28,914)
The accompanying notes are an integral part of the financial statements.
36
38
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (continued)
(in thousands)
Years Ended December 31,
-----------------------------------
1995 1994 1993
---------- ---------- ----------
FINANCING ACTIVITIES:
Net increase (decrease) in demand and savings accounts . . . . . . . . $ (6,388) $ 19,721 $ 12,301
Net increase (decrease) certificates of deposits . . . . . . . . . . . 9,594 13,026 (10,362)
Proceeds from the issuance of common stock . . . . . . . . . . . . . . 258 195 201
Net increase (decrease) in notes payable . . . . . . . . . . . . . . . 5,689 (853) 8,850
Net increase (decrease) in securities sold under agreement to repurchase (3,923) 3,923
Net increase (decrease) in federal funds purchased . . . . . . . . . . 4,600 (7,600) 7,150
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . (267) (219)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,047) (725) (686)
---------- ---------- ----------
Net cash provided by financing activities . . . . . . . . . . . . 12,439 19,622 21,377
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . 940 5,589 (1,184)
Cash and cash equivalents at beginning of year . . . . . . . . . . . . 25,381 19,792 20,976
----------- ----------- -----------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . $ 26,321 $ 25,381 $ 19,792
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,620 $ 10,312 $ 9,440
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,440 $ 878 $ 1,485
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of OREO and repossessed assets through foreclosure . . . . $ 986 $ 1,187 $ 2,062
Transfer of securities available for sale to held to maturity . . . . . $ 54,907
Transfer of securities to available for sale . . . . . . . . . . . . . $ 57,584 $ 138,422
FAS114 reclassification . . . . . . . . . . . . . . . . . . . . . . . . $ 807
The accompanying notes are an integral part of the financial statements.
37
39
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Net
Unrealized Total
Common Paid in Retained Treasury Gains Shareholders'
Stock Capital Earnings Stock (Losses) Equity
----------- ---------- ---------- ---------- ---------- ------------
Balance at December 31, 1992 . . . . . . $ 6,643 $ 12,339 $ 3,941 $ $ $ 22,923
Net Income . . . . . . . . . . . . . . . 4,015 4,015
Cash dividend ($.25 per share) . . . . . (686) (686)
5% Stock dividend . . . . . . . . . . . . 334 870 (1,204)
Common stock issued (20,761 shares) . . . 52 149 201
Net increase in unrealized gains on
securities available for sale (net of tax) 788 788
----------- ---------- ---------- ---------- ---------- -----------
Balance at December 31, 1993 . . . . . . 7,029 13,358 6,066 788 27,241
Net Income . . . . . . . . . . . . . . . 3,519 3,519
Cash dividend ($.25 per share) . . . . . (725) (725)
5% Stock dividend . . . . . . . . . . . . 354 1,026 (1,380)
Common stock issued (20,132 shares) . . . 50 145 195
Purchase of 23,082 shares of
treasury stock . . . . . . . . . . . . . (219) (219)
Net increase in unrealized (losses) on
securities available for sale (net of tax) (2,487) (2,487)
----------- ---------- ---------- ---------- ---------- -----------
Balance at December 31, 1994 . . . . . . 7,433 14,529 7,480 (219) (1,699) 27,524
Net Income . . . . . . . . . . . . . . . 4,532 4,532
Cash dividend ($.35 per share) . . . . . (1,047) (1,047)
5% Stock dividend . . . . . . . . . . . . 368 1,474 (1,842)
Common stock issued (20,800 shares) . . . 52 206 258
Purchase of 26,339 shares of
treasury stock . . . . . . . . . . . . . (267) (267)
Net increase in unrealized gains on
securities available for sale (net of tax) 2,352 2,352
----------- ---------- ---------- ---------- ---------- -----------
Balance at December 31, 1995 . . . . . . $ 7,853 $ 16,209 $ 9,123 $ (486) $ 653 $ 33,352
=========== ========== ========== ========== =========== ===========
The accompanying notes are an integral part of the financial statements.
38
40
NOTES TO FINANCIAL STATEMENTS Southside Bancshares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
The significant accounting and reporting policies of Southside Bancshares,
Inc. (the "Company"), and its wholly owned subsidiaries, Southside Bank
and the nonbank subsidiary, are summarized below.
Organization and Basis of Presentation. The consolidated financial
statements include the accounts of the Company, Southside Bank and the
nonbank subsidiary, which did not conduct any business in 1995. Southside
Bank offers a full range of financial services to commercial, industrial,
financial and individual customers. All significant intercompany accounts
and transactions are eliminated in consolidation. The preparation of
these consolidated financial statements in conformity with generally
accepted accounting principles requires the use of management's estimates.
These estimates are subjective in nature and involve matters of judgment.
Actual amounts could differ from these estimates.
Cash Equivalents. Cash equivalents for purposes of reporting cash flow,
include cash and amounts due from banks.
Loans. All loans are stated at principal outstanding net of unearned
income. Interest income on installment loans is recognized primarily on
the level yield method. Interest income on other loans is credited to
income based primarily on the principal outstanding at contract rates of
interest. The Company adopted Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan" (FAS114) and
Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures"
(FAS118), on January 1, 1995. Under these standards, a loan is considered
impaired, based on current information and events, if it is probable that
the Company will be unable to collect the scheduled payments of principal
or interest when due according to the contractual terms of the loan
agreement. Substantially all of the Company's impaired loans are
collateral-dependent, and as such, are measured for impairment based on
the fair value of the collateral. The adoption of FAS114 and FAS118
resulted in no additional provision for credit losses.
Reserve for Loan Losses. A reserve for loan losses is provided through
charges to income in the form of a provision for loan losses. Loans which
management believes are uncollectible are charged against this account
with subsequent recoveries, if any, credited to the account. The amount
of the current allowance for loan losses is determined by management's
evaluation of the quality and inherent risks in the loan portfolio,
economic conditions and other factors which warrant current recognition.
Nonaccrual Loans. A loan is placed on 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 collateralized
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 classified as
nonaccrual, accrued interest receivable on the loan is reversed and the
future accrual of interest is suspended. Payments of contractual interest
are recognized as income only to the extent that full recovery of the
principal balance of the loan is reasonably certain.
Other Real Estate Owned. Other Real Estate Owned includes real estate
acquired in full or partial settlement of loan obligations. Prior to
January 1, 1995, the Company classified certain loans meeting the
in-substance foreclosure criteria as Other Real Estate Owned (OREO). Upon
the adoption of FAS114, the Company reclassified in-substance foreclosed
assets to loans. Other Real
39
41
Estate Owned is carried at the lower of (1) the recorded amount of the
loan for which the foreclosed property previously served as collateral or
(2) the fair market value of the property. Prior to foreclosure, the
recorded amount of the loan is written down, if necessary, to the
appraised fair market value of the real estate to be acquired, less
selling costs, by charging the allowance for loan losses. Any subsequent
reduction in fair market value is charged to results of operations through
the Allowance for Losses on Other Real Estate account. Costs of
maintaining and operating foreclosed properties are expensed as incurred.
Expenditures to complete or improve foreclosed properties are capitalized
only if expected to be recovered; otherwise, they are expensed.
Mortgage Servicing Rights. In May 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights" (FAS122). This statement,
which the Company will be required to adopt in 1996, eliminates the
accounting distinction of rights to service certain mortgage loans whether
they are acquired through loan origination activities or through purchase
transactions. The impact of the statement has been assessed by management
and will not have a material impact on the Company's financial statements.
Securities. The Company uses the specific identification method to
determine the basis for computing realized gain or loss. Effective
December 31, 1993, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (FAS115) and accounts for debt and equity securities as
follows:
Held to Maturity (HTM). Debt securities that management has the
positive intent and ability to hold until maturity are classified
as held to maturity and are carried at their remaining unpaid
principal balance, net of unamortized premiums or unaccreted
discounts. Premiums are amortized and discounts are accreted
using the level interest yield method over the estimated remaining
term of the underlying security.
Available for Sale (AFS). Debt and equity securities that will be
held for indefinite periods of time, including securities that may
be sold in response to changes in market interest or prepayment
rates, needs for liquidity and changes in the availability of and
the yield of alternative investments are classified as available
for sale. These assets are carried at market value. Market value
is determined using published quotes as of the close of business.
Unrealized gains and losses are excluded from earnings and
reported net of tax as a separate component of shareholders'
equity until realized.
Trading Securities. Debt and equity securities that are bought
and held principally for the purpose of selling them in the near
term are classified as trading securities and reported at market
value, with unrealized gains and losses included in earnings.
Prior to the adoption of FAS115, the Company accounted for debt and
equity securities as follows:
Held for Investment. Debt and equity securities classified as
held for investment were carried at their remaining unpaid
principal balance, net of unamortized premiums or unaccreted
discounts. Investments and mortgage-backed securities were
classified as held for investment when management had the ability
and the intent to hold these securities until maturity considering
all foreseeable events and conditions.
Held for Resale. Debt and equity securities classified as held
for resale were carried at lower of cost or market value.
Unrealized losses were included in the consolidated statement of
operations and retained earnings.
40
42
Premises and Equipment. Bank premises and equipment are stated at cost,
net of accumulated depreciation. Depreciation is computed on a straight
line basis over the estimated useful lives of the related assets. Useful
lives are estimated to be 20 to 40 years for premises and 3 to 10 years
for equipment. Maintenance and repairs are charged to income as incurred
while major improvements and replacements are capitalized.
Loan Fees. The Company treats loan fees, net of direct costs, as an
adjustment to the yield of the related loan over its term.
Income Taxes. The Company files a consolidated Federal income tax return.
Effective January 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(FAS109). The cumulative effect of this change in accounting principle as
of January 1, 1993, increased net income by $86,000 and earnings per share
by $0.03 for the year ended December 31, 1993. Under FAS109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of changes in tax rates is recognized
in income in the period the change occurs.
Earnings Per Share. Earnings per share have been adjusted to give
retroactive recognition to stock splits and stock dividends. The weighted
average number of shares during the years ended December 31, 1995, 1994
and 1993 were 3,083,921, 3,105,481, and 3,083,862, respectively.
Stock Options. In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (FAS123). This statement, which the Company
will be required to adopt in 1996, encourages, but does not require,
companies to recognize compensation expense for grants of stock, stock
options and other equity instruments to employees based on new fair value
accounting rules. Companies that choose not to adopt the new rules will
continue to apply existing rules, but will be required to disclose pro
forma net income and earnings per share under the new method. The Company
will elect to provide the pro forma disclosures in its 1996 financial
statements.
General. Certain prior period amounts have been reclassified to conform
to current year presentation.
2. CASH AND DUE FROM BANKS
The Company is required to maintain reserve balances with the Federal Reserve
Bank. The reserve balances were $4,570,000 and $3,414,000 as of December 31,
1995 and 1994, respectively.
41
43
3. INVESTMENT, MORTGAGE-BACKED AND MARKETABLE EQUITY SECURITIES
The amortized cost and estimated market value of investment, mortgage-backed
and marketable equity securities as of December 31, 1995 and 1994 were (in
thousands):
AVAILABLE FOR SALE
-----------------------------------------------------------------------
Gross Gross Estimated
December 31, Amortized Unrealized Unrealized Market
1995 Cost Gains Losses Value
------------ ---------------- ----------------- ---------------- ----------------
U.S. Treasury . . . . . . . . . $ 7,029 $ 41 $ 6 $ 7,064
U.S. Government Agencies . . . 25,410 77 23 25,464
Mortgage-backed Securities:
Direct Govt. Agency Issues . 61,280 726 18 61,988
Other Private Issues . . . . 3,326 109 3,435
State and Political
Subdivisions . . . . . . . . 39,482 834 25 40,291
Other Stocks and Bonds . . . . 3,575 2 3,577
---------------- ----------------- ---------------- ----------------
Total . . . . . . . . . . . . $ 140,102 $ 1,789 $ 72 $ 141,819
================ ================= ================ ================
HELD TO MATURITY
-----------------------------------------------------------------------
Gross Gross Estimated
December 31, Amortized Unrealized Unrealized Market
1995 Cost Gains Losses Value
------------ ---------------- --------------- --------------- ----------------
U.S. Treasury . . . . . . . . . $ $ $ $
U.S. Government Agencies . . . 1,665 9 1,656
Mortgage-backed Securities:
Direct Govt. Agency Issues . 32,675 499 136 33,038
Other Private Issues . . . . 1,309 10 1,299
State and Political
Subdivisions . . . . . . . . 970 8 978
Other Stocks and Bonds . . . .
---------------- --------------- --------------- ----------------
Total . . . . . . . . . . . . $ 36,619 $ 507 $ 155 $ 36,971
================ =============== =============== ================
42
44
AVAILABLE FOR SALE
-----------------------------------------------------------------------
Gross Gross Estimated
December 31, Amortized Unrealized Unrealized Market
1994 Cost Gains Losses Value
------------ ---------------- ----------------- ---------------- ----------------
U.S. Treasury . . . . . . . . . $ 9,956 $ $ 102 $ 9,854
U.S. Government Agencies . . . 14,996 18 84 14,930
Mortgage-backed Securities:
Direct Govt. Agency Issues . 26,958 93 820 26,231
Other Private Issues . . . . 1,414 9 1,423
State and Political
Subdivisions . . . . . . . . 912 1 2 911
Other Stocks and Bonds . . . . 2,005 2,005
---------------- ----------------- ---------------- ----------------
Total . . . . . . . . . . . . $ 56,241 $ 121 $ 1,008 $ 55,354
================ ================= =============== ================
HELD TO MATURITY
-----------------------------------------------------------------------
Gross Gross Estimated
December 31, Amortized Unrealized Unrealized Market
1994 Cost Gains Losses Value
------------ ---------------- --------------- --------------- ----------------
U.S. Treasury . . . . . . . . . $ 7,016 $ $ 175 $ 6,841
U.S. Government Agencies . . . 20,124 641 19,483
Mortgage-backed Securities:
Direct Govt. Agency Issues . 58,340 2,400 55,940
Other Private Issues . . . . 2,086 109 1,977
State and Political
Subdivisions . . . . . . . . 29,633 338 843 29,128
Other Stocks and Bonds . . . . 252 252
---------------- ----------------- ---------------- ----------------
Total . . . . . . . . . . . . $ 117,451 $ 338 $ 4,168 $ 113,621
================ ================= =============== ================
Interest income recognized on securities for the years ended December 31,
1995, 1994 and 1993 were (in thousands):
Years Ended December 31,
-----------------------------------------------------
1995 1994 1993
----------------- ----------------- ---------------
U.S. Treasury . . . . . . . . . $ 713 $ 900 $ 1,428
U.S. Government Agencies . . . 2,039 1,111 266
Mortgage-backed Securities . . 5,673 5,255 6,376
State and Political Subdivisions 1,581 1,467 1,247
Other Stocks and Bonds . . . . 131 191 173
Trading Account Securities . . 4
---------------- ----------------- ---------------
Total interest income on securities $ 10,137 $ 8,924 $ 9,494
================ ================= ===============
Interest income from Trading Account Securities for the year ended December 31,
1993 is included in Interest income from Other interest earning assets on the
Consolidated Statements of Income.
43
45
In October 1995, the Financial Accounting Standards Board issued an
implementation guide to FAS115 which allowed entities to reclassify their
securities among the three categories provided in FAS115. Transfers were
permitted after October 1995, but no later than December 31, 1995. As a
result, on November 16, 1995 the Company transferred a total of $57,584,000
from HTM to AFS at the amortized cost at date of transfer. Of this total,
$37,308,000 were investment securities. The remaining $20,276,000 transferred
were mortgage-backed securities. The unrealized loss on the securities
transferred from HTM to AFS was $419,000, net of tax, at date of transfer. The
transfer was done according to the guidelines set forth in the implementation
guide to FAS115. There were no securities transferred from AFS to HTM or sales
from the HTM portfolio during the year ended December 31, 1995.
Of the $221,000 in net securities gains from the AFS portfolio in 1995, there
were $450,000 in realized gains and $229,000 in realized losses. Of the
$25,000 in net securities gains from the AFS portfolio in 1994, there were
$164,000 in realized gains and $139,000 in realized losses.
The scheduled maturities of AFS and HTM securities as of December 31, 1995 are
presented below. Mortgage-backed securities are presented in total by
category.
Amortized Aggregate
Cost Fair Value
-------------- --------------
(in thousands)
Held to maturity securities:
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . $ 858 $ 856
Due after one year through five years . . . . . . . . . . . . . . . . . . . 1,777 1,778
Due after five years through ten years . . . . . . . . . . . . . . . . . . .
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-------------- --------------
2,635 2,634
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . 33,984 34,337
-------------- --------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,619 $ 36,971
============== ==============
Available for sale securities:
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,398 $ 35,460
Due after one year through five years . . . . . . . . . . . . . . . . . . . 22,567 23,051
Due after five years through ten years . . . . . . . . . . . . . . . . . . . 10,206 10,442
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,325 7,443
-------------- --------------
75,496 76,396
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . 64,606 65,423
-------------- --------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 140,102 $ 141,819
============== ==============
Investment securities with book values of $20,042,000 and $11,663,000 were
pledged as of December 31, 1995 and 1994, respectively, to secure public and
trust deposits or for other purposes as required by law.
44
46
4. LOANS AND RESERVE FOR POSSIBLE LOAN LOSSES
Loans in the accompanying consolidated statement of condition are classified as
follows (in thousands):
December 31, December 31,
1995 1994
----------------- -----------------
Real Estate Loans:
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,558 $ 6,118
1-4 family residential . . . . . . . . . . . . . . . . . . . . . 49,909 38,563
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,436 53,881
Commercial, financial and agricultural loans . . . . . . . . . . . 44,436 39,871
Loans to individuals . . . . . . . . . . . . . . . . . . . . . . . 83,478 69,177
----------------- -----------------
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236,817 207,610
Less: Unearned income . . . . . . . . . . . . . . . . . . . . . 8,039 6,620
Reserve for loan losses . . . . . . . . . . . . . . . . . 3,317 3,137
----------------- -----------------
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 225,461 $ 197,853
================= =================
The following is a summary of the Reserve for Loan Losses for the years ended
December 31, 1995, 1994 and 1993 (in thousands):
Years Ended December 31,
-----------------------------------------
1995 1994 1993
------------- ------------ ------------
Balance at beginning of year . . . . . . . . . . . . . . . . . . . $ 3,137 $ 2,846 $ 2,711
Provision for loan losses . . . . . . . . . . . . . . . . . . . . (300) 250 600
Loans charged off . . . . . . . . . . . . . . . . . . . . . . . (599) (530) (873)
Recoveries of loans charged off . . . . . . . . . . . . . . . . 1,079 571 408
------------- ------------ ------------
Net loan (losses) recoveries . . . . . . . . . . . . . . . . 480 41 (465)
------------- ------------ ------------
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . $ 3,317 $ 3,137 $ 2,846
============= ============ ============
Nonaccrual loans at December 31, 1995 and 1994 were $1,256,000 and $627,000,
respectively. Loans with terms modified in troubled debt restructuring at
December 31, 1995 and 1994 were $336,000 and $657,000, respectively. There
were $807,000 in loans classified as substantively repossessed collateral,
which includes nonqualifying OREO sales, at December 31, 1994.
The following is a summary of the Company's recorded investment in loans
(primarily nonaccrual loans) for which impairment has been recognized in
accordance with FAS114 (in thousands):
Valuation Carrying
Total Allowance Value
------------- ------------ ------------
Real Estate Loans . . . . . . . . . . . . . . . . . . . . . . . . . $ 486 $ 130 $ 356
Commercial Loans . . . . . . . . . . . . . . . . . . . . . . . . . 654 153 501
Loans to Individuals . . . . . . . . . . . . . . . . . . . . . . . 116 19 97
------------- ------------ ------------
Balance at December 31, 1995 . . . . . . . . . . . . . . . . . . . $ 1,256 $ 302 $ 954
============= ============ ============
45
47
For the year ended December 31, 1995, the average recorded investment in
impaired loans was approximately $1,330,000. During the year ended December
31, 1995, the amount of interest income reversed on impaired loans placed on
nonaccrual and the amount of interest income subsequently recognized on the
cash basis was not material.
The amount of interest recognized on nonaccrual or restructured loans was
$78,000, $260,000 and $98,000 for the years ended December 31, 1995, 1994 and
1993, respectively. If these loans had been accruing interest at their
original contracted rates, related income would have been $273,000, $126,000
and $170,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
5. BANK PREMISES AND EQUIPMENT
December 31, December 31,
1995 1994
---------------- ----------------
(in thousands)
Bank premises . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,912 $ 10,833
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . 7,492 6,929
---------------- ----------------
20,404 17,762
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . 8,735 7,887
---------------- ----------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,669 $ 9,875
================ ================
Depreciation expense was $997,000, $953,000 and $815,000 for the years ended
December 31, 1995, 1994 and 1993, respectively.
6. OTHER REAL ESTATE OWNED
The following is a summary of the Allowance for Losses on Other Real Estate
Owned for the periods presented (in thousands):
Years Ended December 31,
-----------------------------------------
1995 1994 1993
------------- ------------ ------------
Balance at beginning of year . . . . . . . . . . . . . . . . . . . $ 1,291 $ 2,594 $ 3,455
Provision for Losses . . . . . . . . . . . . . . . . . . . . . 43 338
Losses on sales . . . . . . . . . . . . . . . . . . . . . . . . (1,442) (1,379)
Gains on sales . . . . . . . . . . . . . . . . . . . . . . . . 96 180
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (345)
------------- ------------ ------------
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . $ 946 $ 1,291 $ 2,594
============= ============ ============
As stated in Note 1, prior to January 1, 1995, the Company classified certain
loans meeting the in-substance foreclosure criteria as OREO. Upon the adoption
of FAS114, the Company reclassified in-substance foreclosed assets to loans.
The "Other" category above reflects the effect of this reclassification.
For the years ended December 31, 1995 and 1994, income from OREO properties
exceeded the provision and other expenses by $34,000 and $32,000, respectively.
For the year ended December 31, 1993, the provision and other expenses exceeded
income by $288,000.
46
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7. DOMESTIC TIME DEPOSITS
December 31, December 31,
1995 1994
---------------- ----------------
(in thousands)
Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,806 $ 15,023
Money Market demand deposits . . . . . . . . . . . . . . . . . . . 52,408 60,164
Now demand deposits . . . . . . . . . . . . . . . . . . . . . . . . 58,819 53,932
Certificates and other time deposits
of $100,000 or more . . . . . . . . . . . . . . . . . . . . . . . 44,339 42,781
Certificates and other time
deposits under $100,000 . . . . . . . . . . . . . . . . . . . . . 133,230 125,194
---------------- -----------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 303,602 $ 297,094
================ =================
For the years ended December 31, 1995, 1994 and 1993, interest expense on time
certificates of deposit of $100,000 or more aggregated $2,083,000, $1,675,000
and $1,470,000, respectively.
8. SHORT TERM BORROWINGS (dollars in thousands)
Years Ended December 31,
-----------------------------------------
1995 1994 1993
------------- ------------ ------------
Federal funds purchased
Balance at end of period . . . . . . . . . . . . . . . . . . . . $ 4,600 $ $ 7,600
Average amount outstanding during the period (1) . . . . . . . . 611 959 1,216
Maximum amount outstanding during the period . . . . . . . . . . 5,350 4,750 7,800
Weighted average interest rate during the period (2) . . . . . . 6.1% 3.4% 3.1%
Interest rate at end of period . . . . . . . . . . . . . . . . . 6.0% 3.1%
Securities sold under agreements to repurchase
Balance at end of period . . . . . . . . . . . . . . . . . . . . $ $ 3,923
Average amount outstanding during the period (1) . . . . . . . . 395 806
Maximum amount outstanding during the period . . . . . . . . . . 6,083 6,093
Weighted average interest rate during the period (2) . . . . . . 3.2% 3.3%
Interest rate at end of period . . . . . . . . . . . . . . . . . 3.1%
Treasury tax and loan funds
Balance at end of period . . . . . . . . . . . . . . . . . . . . $ 1,352 $ 1,653 $ 1,727
Average amount outstanding during the period (1) . . . . . . . . 1,180 1,164 982
Maximum amount outstanding during the period . . . . . . . . . . 2,907 2,475 2,127
Weighted average interest rate during the period (2) . . . . . . 4.8% 3.4% 2.2%
Interest rate at end of period . . . . . . . . . . . . . . . . . 5.2% 5.2% 2.9%
(1) The average amount outstanding during the period was computed by
dividing the total month-end outstanding principal balances by the
number of months in the period.
(2) The weighted average interest rate during the period was computed by
dividing the actual interest expense (annualized) by average
short-term debt outstanding.
47
49
9. LONG TERM OBLIGATIONS (dollars in thousands)
Years Ended December 31,
-----------------------------------------
1995 1994 1993
------------- ------------ ------------
FHLB - Advances
Balance at end of period . . . . . . . . . . . . . . . . . . . . $ 13,686 $ 7,997 $ 8,850
Average amount outstanding during the period (1) . . . . . . . . 8,912 8,380 2,562
Maximum amount outstanding during the period . . . . . . . . . . 13,766 8,850 9,000
Weighted average interest rate during the period (2) . . . . . . 5.1% 4.8% 4.9%
Interest rate at end of period . . . . . . . . . . . . . . . . . 5.5% 4.8% 4.8%
FHLB advances by remaining maturity at December 31 are:
Under Due Due Over 1995 1994
1 Year 1-5 Years 6-10 Years 10 Years Total Total
----------- ------------ ------------ ------------ ----------- -----------
Fixed rate . . . . . . . . . . $ 4,590 $ 5,314 $ 2,678 $ 1,104 $ 13,686 $ 7,997
----------- ------------ ------------ ------------ ----------- -----------
Total Long-term Obligations . $ 4,590 $ 5,314 $ 2,678 $ 1,104 $ 13,686 $ 7,997
=========== ============ ============ ============ =========== ===========
Federal Home Loan Bank advances are collateralized by Federal Home Loan Bank
stock, nonspecified real estate loans and mortgage-backed securities.
(1) The average amount outstanding during the period was computed by
dividing the total month-end outstanding principal balances by the
number of months in the period.
(2) The weighted average interest rate during the period was computed by
dividing the actual interest expense (annualized) by average long-term
debt outstanding.
10. RETIREMENT AND OTHER BENEFIT PLANS
Southside Bank has a deferred compensation agreement with seven of its
executive officers, which generally provides for payment of an aggregate amount
of $2,600,000 over a maximum period of fifteen years after retirement or death.
Deferred compensation expense was $97,000, $99,000 and $83,000 for the years
ended December 31, 1995, 1994 and 1993, respectively.
The Company provides accident and health insurance for substantially all
employees through an insurance program funded by the Company. Health insurance
benefits are offered to retired employees who pay a premium based on cost as
determined by a third party administrator. Substantially all of the Company's
employees may become eligible for those benefits if they reach normal
retirement age after fifteen years of employment with the Company. The cost of
health care benefits was $628,000, $736,000 and $564,000 for the years ended
December 31, 1995, 1994 and 1993. There was one retiree participating in the
health insurance plan as of December 31, 1995. There were two retirees
participating in the health insurance plan as of December 31, 1994.
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50
The Company has an Employee Stock Ownership Plan which covers substantially all
employees. Contributions to the plan are at the sole discretion of the Board
of Directors. Contributions to the plan for the years ended December 31, 1995,
1994 and 1993 were $150,000, $120,000 and $120,000, respectively. At December
31, 1995 and 1994, 80,745 and 72,504 shares of common stock were owned by the
Employee Stock Ownership Plan, respectively. The number of shares have been
adjusted as a result of stock dividends. These shares are treated as
externally held shares for dividend and earnings per share calculations.
The Company has an Officers Long Term Disability Income Plan, (the "Disability
Plan"), which covers officers of the Company and Southside Bank in the event
they become disabled as defined under its terms. Individuals are automatically
covered under the plan if they (a) have been elected as an officer, (b) have
been an employee of the Company and Southside Bank for three years and (c)
receive earnings of $50,000 or more on an annual basis. The Disability Plan
provides, among other things, under its terms that should a covered individual
become totally disabled he would receive 66-2/3%, not to exceed $10,000 per
month, of their current salary. The benefits paid out of this plan are limited
by the benefits paid to the individual under the terms of other Company
sponsored benefit plans.
The Company and Southside Bank have a defined benefit pension plan pursuant to
which participants are entitled to benefits based on final average monthly
compensation and years of credited service determined in accordance with plan
provisions. All employees of the Company and Southside Bank who have worked
1000 hours or more in their first twelve months of employment or during any
plan year thereafter are eligible to participate. Employees are vested upon
the earlier of five years credited service or the employee attaining 60 years
of age. Benefits are payable monthly commencing on the later of age 65 or the
participants date of retirement. Eligible participants may retire at reduced
benefit levels after reaching age 55. The Company contributes amounts to the
pension fund sufficient to satisfy funding requirements of the Employee
Retirement Income Security Act. Plan assets included 54,414 and 56,540 shares
of Southside Bancshares, Inc. stock purchased at fair market value as of
December 31, 1995 and 1994, respectively. The number of shares have been
adjusted as a result of stock dividends.
December 31, December 31,
1995 1994
---------------- ----------------
(in thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of ($5,850) and ($4,659) respectively . . . . . . . . . . . . . . $ 6,642 $ 5,295
================ ================
Projected benefit obligation for service rendered to date . . . . . $ (9,644) $ (7,452)
Plan assets at fair value, primarily stocks, bonds and CD's . . . . 7,570 6,258
---------------- ----------------
Plan assets over (under) projected benefit obligation . . . . . . . (2,074) (1,194)
Unrecognized net loss . . . . . . . . . . . . . . . . . . . . . . . 1,878 1,345
Unrecognized net asset being amortized over 16.55 years . . . . . . (370) (417)
---------------- ----------------
Net pension liability included in other liabilities . . . . . . . $ (566) $ (266)
================ ================
The weighted average discount rate and rate of increase in future compensation
levels used in determining actuarial present value of the projected benefit
obligation was 7.25% and 4.50% and 8.5% and 5.0% for December 31, 1995 and
1994, respectively. The assumed long-term rate of return on plan assets was
9.0% for both December 31, 1995 and 1994.
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51
Net periodic pension cost for the years ended December 31, 1995, 1994 and 1993
included the following components (in thousands):
Years Ended December 31,
-------------------------------------------
1995 1994 1993
------------- ------------ -------------
Service cost - benefits earned during the period . . . . . . . $ 436 $ 433 $ 363
Interest cost on projected benefit obligation . . . . . . . . . 623 531 467
Actual return on plan assets . . . . . . . . . . . . . . . . . (1,212) 149 (637)
Net amortization and deferral . . . . . . . . . . . . . . . . . 652 (726) 115
------------- ------------ -------------
Net periodic pension cost . . . . . . . . . . . . . . . . . . . $ 499 $ 387 $ 308
============= ============= =============
The Company has a nonfunded supplemental retirement plan (restoration plan) for
its employees whose benefits under the principal retirement plan are reduced
because of compensation deferral elections or limitations under federal tax
laws. The accumulated benefit obligation for this plan was $490,000 and
$294,000 as of December 31, 1995 and 1994, respectively. The expense for this
plan for the years ended December 31, 1995, 1994 and 1993 was $59,000, $62,000
and $51,000, respectively.
11. SHAREHOLDERS' EQUITY
Cash dividends declared and paid were $.35 per share for the year ended
December 31, 1995 and $.25 per share for each of the years ended December 31,
1994 and 1993. Future dividends will depend on the Company's earnings,
financial condition and other factors which the Board of Directors of the
Company considers to be relevant. The Company's dividend policy requires that
any dividend payments made by the Company not exceed consolidated earnings for
that year. Retained earnings not available for the payment of dividends at
December 31, 1995 was $9,123,000.
The Federal Reserve Board has adopted risk-based capital guidelines for bank
holding companies. As of December 31, 1995, the minimum ratio of capital to
risk-adjusted assets (including certain off-balance sheet items, such as
standby letters of credit) was 8%. At least half of the total capital must be
comprised of common equity, retained earnings and a limited amount of perpetual
preferred stock, after subtracting goodwill and certain other adjustments
("Tier 1 capital"). The remainder may consist of perpetual debt, mandatory
convertible debt securities, a limited amount of subordinated debt, other
preferred stock and a limited amount of loan loss reserves ("Tier 2 capital").
The maximum amount of supplementary capital elements that qualifies as Tier 2
capital is limited to 100% of Tier 1 capital net of goodwill. The Federal
Reserve Board also has adopted a minimum leverage ratio (Tier 1 capital to
average total assets) of 3% for bank holding companies that meet certain
specified criteria, including having the highest regulatory rating. The rule
indicates that the minimum leverage ratio should be at least 1.0% to 2.0%
higher for holding companies that do not have the highest rating or that are
undertaking major expansion programs. The Company's state chartered banking
subsidiary is subject to similar capital and risk-based capital requirements
adopted by the FDIC and Texas Banking Department, respectively. The leverage
capital requirement adopted by the Texas Banking Department is 6%. At December
31, 1995, the Company and Southside Bank exceeded all regulatory minimum
capital ratios.
50
52
In April 1993, the Company adopted the Southside Bancshares, Inc. 1993
Incentive Stock Option Plan. A total of 231,525 options to purchase stock were
approved by the shareholders for grant. During 1993, the Company granted seven
executive officers options to purchase 85,382 total shares of stock at an
exercise price of $6.91 per share. As of December 31, 1995, 34,153 of these
options were exercisable. These options are scheduled to expire in June 2003.
During 1995, the Company granted additional options to purchase 58,800 total
shares at an exercise price of $11.43 per share. As of December 31, 1995, none
of these option were exercisable. These options are scheduled to expire in
June 2005. As of December 31, 1995, there were 87,343 options remaining
available to grant. The number of shares and share prices have been adjusted
as a result of stock dividends.
12. DIVIDEND REINVESTMENT AND COMMON STOCK REPURCHASE PLAN
The Company has a Dividend Reinvestment Plan funded by stock authorized, but
not yet issued. Proceeds from the sale of the common stock will be used for
general corporate purposes and could be directed to the Company's subsidiaries.
For the year ended December 31, 1995, 20,800 shares were sold under this plan
at an average price of $12.41 per share, reflective of other trades at the time
of each sale.
The Company instituted a Common Stock Repurchase Plan in late 1994. Under the
repurchase plan, the Board of Directors establishes, on a quarterly basis,
total dollar limitations and price per share for stock to be repurchased. The
Board reviews this plan in conjunction with the capital needs of the Company
and Southside Bank and may, at it's discretion, modify or discontinue the plan.
During 1995, 26,339 shares of treasury stock were purchased under this plan at
a cost of $267,000.
Shareholders should not anticipate a continuation of the cash dividend simply
because of the implementation of a dividend reinvestment program. The payment
of dividends will depend upon future earnings, the financial condition of the
Company, and other related factors.
13. INCOME TAXES
The provisions for federal income taxes included in the accompanying statements
consist of the following (in thousands):
Years Ended December 31,
-----------------------------------------
1995 1994 1993
------------- ------------ ------------
Current tax provision . . . . . . . . . . . . . . . . . . . . . . . $ 1,429 $ 899 $ 1,429
Deferred tax provision . . . . . . . . . . . . . . . . . . . . . . 284 303 13
------------- ------------ ------------
Provision for tax expense charged to operations . . . . . . . . . . 1,713 1,202 1,442
Shareholders' Equity - Unrealized gains (losses) on
securities available for sale . . . . . . . . . . . . . . . . . 1,212 (1,281) 406
------------- ------------ ------------
Comprehensive provision (benefit) for income tax . . . . . . . . . $ 2,925 $ (79) $ 1,848
============= ============ ============
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53
Deferred income taxes result from timing differences in the recognition of
revenues and expenses for tax and book purposes. These differences and the tax
effect of each of the major categories are as follows (in thousands):
Years Ended December 31,
-----------------------------------------
1995 1994 1993
------------- ------------ ------------
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . $ 102 $ (85) $ (161)
Provision for OREO losses . . . . . . . . . . . . . . . . . . . . . 117 443 245
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 (9) (48)
Retirement and other benefit plans . . . . . . . . . . . . . . . . (41) (78) (64)
FHLB Stock dividends . . . . . . . . . . . . . . . . . . . . . . . 37 31
Loan origination costs . . . . . . . . . . . . . . . . . . . . . . 25 15 14
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (14) 27
------------- ------------ ------------
Deferred tax provision . . . . . . . . . . . . . . . . . . . . . . $ 284 $ 303 $ 13
============= ============ ============
The Company has a $267,000 capital loss carryforward remaining for tax purposes
at December 31, 1995. If unused, $77,000 of this carryforward will expire on
January 1, 1997 and the remaining $190,000 will expire on January 1, 1998.
The components of the net deferred tax asset as of December 31, 1995 are
summarized below (in thousands):
Assets Liabilities
------------- -----------
Allowance for Losses on OREO . . . . . . . . . . . . . . . . . . . . . . . . $ 369 $
Reserve for Loan Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . 244
Retirement and Other Benefit Plans . . . . . . . . . . . . . . . . . . . . . 454
Unrealized gains on securities available for sale . . . . . . . . . . . . . . (337)
Loan Origination Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . (141)
Premises and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . (124)
FHLB Stock Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . (68)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
------------- -----------
Gross deferred tax assets (liabilities) . . . . . . . . . . . . . . . . . 1,082 (670)
------------- -----------
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . $ 412
=============
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54
A reconciliation of tax at statutory rates and total tax expense is as follows
(dollars in thousands):
Years Ended December 31,
--------------------------------------------------------------
1995 1994 1993
------------------- ------------------- -------------------
Percent Percent Percent
of of of
Pre-Tax Pre-Tax Pre-Tax
Amount Income Amount Income Amount Income
-------- -------- --------- -------- -------- ---------
Calculated Tax Expense . . . . . . . . . . . . $ 2,123 34.0% $ 1,605 34.0% $ 1,826 34.0%
Increase (Decrease) in Taxes from:
Tax Exempt Interest . . . . . . . . . . . . . . (518) (8.3%) (492) (10.4%) (428) (8.0%)
Other Net . . . . . . . . . . . . . . . . . . . 108 1.7% 89 1.8% 44 .8%
-------- -------- --------- -------- -------- ---------
Provision for Tax Expense Charged to
Operations . . . . . . . . . . . . . . . . . 1,713 27.4% 1,202 25.4% 1,442 26.8%
Shareholders' Equity - Unrealized gains
(losses) on securities available for sale . 1,212 19.4% (1,281) (27.1%) 406 7.6%
-------- -------- --------- -------- -------- ---------
Comprehensive Provision (benefit) for
Income Tax . . . . . . . . . . . . . . . . . $ 2,925 46.8% $ (79) (1.7%) $ 1,848 34.4%
======== ======== ========= ======== ======== =========
14. CONTINGENCIES
Other than litigation in the normal course of business, to which the Company,
or its subsidiaries, is subject, management of the Company, after consulting
with its legal counsel, believes that liability resulting from any of these
actions will not have a material effect on the financial position of the
Company or its subsidiaries.
15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business the Company is a party to certain financial
instruments, with off-balance-sheet risk, to meet the financing needs of its
customers. These off-balance-sheet instruments include commitments to extend
credit and standby letters of credit. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
reflected in the financial statements. The contract or notional amounts of
these instruments reflect the extent of involvement and exposure to credit loss
the Company has in these particular classes of financial instruments.
Commitments to extend credit are agreements to lend to a customer provided that
the terms established in the contract are met. Commitments generally have
fixed expiration dates and may require payment of fee. Since some commitments
are expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. Standby letters of
credit are conditional commitments issued to guarantee the performance of a
customer to a third party. These guarantees are primarily issued to support
public and private borrowing arrangements. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
commitments to customers.
The Company had outstanding unused commitments to extend credit of $27,203,000
and $18,787,000 at December 31, 1995 and 1994, respectively. The Company had
outstanding standby letters of credit of $1,124,000 and $402,000 at December
31, 1995 and 1994, respectively.
53
55
In the normal course of business the Company buys and sells securities. At
December 31, 1995 and 1994, the Company had commitments to purchase $3,616,000
and $1,328,000 in securities, respectively.
The Company applies the same credit policies in making commitments and standby
letters of credit as it does for on- balance-sheet instruments. The Company
evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary, upon extension of credit is
based on management's credit evaluation of the borrower. Collateral held
varies but may include real estate, accounts receivable, inventory, property,
plant, and equipment.
16. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
The economy of the Company's market area, East Texas, is directly tied to the
Oil and Gas Industry. Oil prices have had an indirect effect on the Company's
business. Although the Company has a diversified loan portfolio, a significant
portion of its loans are secured by real estate. Repayment of these loans is
in part dependent upon the economic conditions in the market area. Part of the
risk associated with Real Estate Loans has been mitigated since 45.8% of this
group represents loans secured by residential dwellings that are primarily
owner occupied. Losses on this type of loan have historically been less than
those on speculative properties. Many of the remaining Real Estate Loans are
secured primarily with owner occupied commercial real estate.
The Mortgage-backed Securities held by the Company consist solely of Government
agency pass-through securities which are either directly or indirectly backed
by the full faith and credit of the United States Government.
17. RELATED PARTY TRANSACTIONS
Loan activity of executive officers, directors, and their affiliates for the
years ended December 31, 1995 and 1994 were (in thousands):
Year Ended Year Ended
December 31, December 31,
1995 1994
----------------- -----------------
Beginning Balance of Loans . . . . . . . . . . . . . . . . . . . . $ 8,417 $ 8,017
Additional Loans . . . . . . . . . . . . . . . . . . . . . . . . 2,224 2,888
Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,514) (2,488)
----------------- -----------------
Ending Balance of Loans . . . . . . . . . . . . . . . . . . . . . . $ 7,127 $ 8,417
================= =================
Other indebtedness of officers and employees as of December 31, 1995 and 1994
was $2,786,000 and $3,326,000, respectively.
The Company incurred legal costs of $152,000, $146,000 and $149,000 during the
years ended December 31, 1995, 1994 and 1993, respectively, from a law firm of
which an outside director of the Company is a partner. The Company paid
approximately $57,000, $56,000 and $41,000 in insurance premiums during the
years ended December 31, 1995, 1994 and 1993, respectively, to a company of
which an outside director is an officer.
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18. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet,
for which it is practicable to estimate that value. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other estimation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. Such techniques and assumptions, as they apply
to individual categories of the Company's financial instruments, are as
follows:
Cash and due from banks: The carrying amounts for cash and due from
banks is a reasonable estimate of those assets' fair value.
Investment, mortgage-backed and marketable equity securities: Fair
values for these securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are
based on quoted market prices for similar securities.
Loans receivable: For adjustable rate loans that reprice frequently
and with no significant change in credit risk, the carrying amounts are
a reasonable estimate of those assets' fair value. The fair value of
other types of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities. Nonperforming loans are valued based upon the underlying
value of the collateral.
Accrued interest receivable: The carrying amount of accrued interest
approximates its fair value.
Deposit liabilities: The fair value of demand deposits, savings
accounts, and certain money market deposits is the amount on demand at
the reporting date, that is, the carrying value. Fair values for fixed
rate certificates of deposits are estimated using a discounted cash
flow calculation that applies interest rates currently being offered
for deposits of similar remaining maturities.
Federal funds purchased and securities sold under agreement to
repurchase: Federal funds purchased and securities sold under
agreement to repurchase generally have an original term to maturity of
one day and thus are considered short-term borrowings. Consequently,
their carrying value is a reasonable estimate of fair value.
Commitments to extend credit: The carrying amounts of commitments to
extend credit and standby letters of credit are a reasonable estimate
of those assets' fair value.
Notes payable FHLB - Dallas: The fair value of these notes is
estimated by discounting the future cash flows using rates at which
notes would be made to borrowers with similar credit ratings and for
the same remaining maturities.
55
57
The following table presents the Company's assets, liabilities, and
unrecognized financial instruments at both their respective carrying amounts
and fair value. The Company's nonfinancial assets and liabilities are
presented in both columns at their carrying amount (in thousands).
At December 31, 1995 At December 31, 1994
------------------------------- -------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
--------------- -------------- --------------- --------------
Financial assets:
Cash and due from banks . . . . . . . $ 26,321 $ 26,321 $ 25,381 $ 25,381
Federal funds sold . . . . . . . . . . 11,100 11,100
Investment securities:
Available for sale . . . . . . . . . 74,284 74,284 25,695 25,695
Held to maturity . . . . . . . . . . 2,635 2,634 57,025 55,704
Mortgage-backed and related securities:
Available for sale . . . . . . . . . 65,423 65,423 27,654 27,654
Held to maturity . . . . . . . . . . 33,984 34,337 60,426 57,917
Marketable equity securities:
Available for sale . . . . . . . . . 2,112 2,112 2,005 2,005
Loans, net . . . . . . . . . . . . . . 225,461 231,818 197,853 198,714
Interest receivable . . . . . . . . . 3,095 3,095 2,581 2,581
Nonfinancial assets:
Other real estate owned . . . . . . . 273 273 1,134 1,134
Premises and equipment . . . . . . . . 11,669 11,669 9,875 9,875
Other assets . . . . . . . . . . . . . 3,416 3,416 5,492 5,492
--------------- -------------- --------------- --------------
Total Assets . . . . . . . . . . . . . . $ 448,673 $ 455,382 $ 426,221 $ 423,252
=============== ============== =============== ==============
Financial liabilities:
Retail deposits . . . . . . . . . . . $ 388,308 $ 389,908 $ 385,102 $ 382,720
Federal funds purchased . . . . . . . 4,600 4,600
Notes payable - FHLB Dallas . . . . . 13,686 13,024 7,997 7,221
Nonfinancial liabilities:
Other liabilities . . . . . . . . . . 8,727 8,727 5,598 5,598
--------------- -------------- --------------- --------------
Total liabilities . . . . . . . . . . . . $ 415,321 $ 416,259 $ 398,697 $ 395,539
=============== ============== =============== ==============
As discussed earlier, the fair value estimate of financial instruments for
which quoted market prices are unavailable is dependent upon the assumptions
used. Consequently, those estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. Accordingly, the aggregate fair value amounts
presented in the above fair value table do not necessarily represent the
underlying value of the Company.
The Company did not own any derivative financial instruments as defined by
FAS119 and adoption of the statement did not affect the Company's financial
statements.
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19. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Southside Bancshares, Inc. (parent company
only) was as follows (dollars in thousands):
CONDENSED BALANCE SHEETS
December 31, December 31,
ASSETS 1995 1994
---------------- ----------------
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . $ 267 $ 259
Investment in Southside Bank at equity in
underlying net assets . . . . . . . . . . . . . . . . . . . . . . . 33,116 27,249
Investment in service subsidiary at equity in
underlying net assets . . . . . . . . . . . . . . . . . . . . . . . 15 15
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7
---------------- ----------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $ 33,407 $ 27,530
================ ================
LIABILITIES
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . $ 55 $ 6
---------------- ----------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . 55 6
---------------- ----------------
SHAREHOLDERS' EQUITY
Common Stock ($2.50 par, 6,000,000 shares authorized:
3,141,393 and 2,973,234 shares issued) . . . . . . . . . . . . . . 7,853 7,433
Paid-in Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,209 14,529
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 9,123 7,480
Treasury Stock (49,421 and 23,082 shares) . . . . . . . . . . . . . . (486) (219)
Net unrealized gains (losses) on securities available for sale . . . 653 (1,699)
---------------- ----------------
TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . 33,352 27,524
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . $ 33,407 $ 27,530
================ ================
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CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
-----------------------------------------
1995 1994 1993
------------- ------------ ------------
INCOME
Dividends from subsidiary . . . . . . . . . . . . . . . . . . . . . $ 1,197 $ 975 $ 810
------------- ------------ ------------
TOTAL INCOME . . . . . . . . . . . . . . . . . . . . . . . . . 1,197 975 810
------------- ------------ ------------
EXPENSE
Salaries and employee benefits . . . . . . . . . . . . . . . . . . 150 120 120
Taxes other than income . . . . . . . . . . . . . . . . . . . . . . 39 38 40
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 60 11
------------- ------------ ------------
TOTAL EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . 273 218 171
------------- ------------ ------------
Income before federal income tax expense . . . . . . . . . . . . . 924 757 639
Benefit for federal income tax expense . . . . . . . . . . . . . . (93) (74) (58)
------------ ----------- -----------
Income before equity in undistributed
earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . 1,017 831 697
Equity in undistributed earnings of subsidiaries . . . . . . . . . 3,515 2,688 3,318
------------- ------------ ------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,532 $ 3,519 $ 4,015
============= ============ ============
CONDENSED STATEMENTS OF CASH FLOW
Years Ended December 31,
-----------------------------------------
1995 1994 1993
------------- ----------- -----------
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,532 $ 3,519 $ 4,015
Adjustments to reconcile net income
to cash provided by operations:
Equity in undistributed earnings of subsidiaries . . . . . . . (3,515) (2,688) (3,318)
(Increase) decrease in taxes receivable . . . . . . . . . . . . (2) 5 2
Increase (decrease) in other liabilities . . . . . . . . . . . 49 (2) (44)
------------- ------------ ------------
Net cash provided by operating activities . . . . . . . . 1,064 834 655
INVESTING ACTIVITIES:
Investments in subsidiaries . . . . . . . . . . . . . . . . . . . (15)
------------- ------------ ------------
Net cash used in investing activities . . . . . . . . . . (15)
FINANCING ACTIVITIES:
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . (1,047) (725) (686)
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . (267) (219)
Common Stock Issued . . . . . . . . . . . . . . . . . . . . . . . 258 195 201
------------- ------------ ------------
Net cash used in financing activities . . . . . . . . . . (1,056) (749) (485)
Net increase (decrease) in cash and cash equivalents . . . . . . 8 85 155
Cash and cash equivalents at beginning of year . . . . . . . . . 259 174 19
------------- ------------ ------------
Cash and cash equivalents at end of year . . . . . . . . . . . . $ 267 $ 259 $ 174
============= ============ ============
58
60
SOUTHSIDE BANCSHARES, INC.
Exhibit Index for the Year
Ended December 31, 1995
Item Description Reference for Filing
- -------- ------------------------------------ -------------------------------------
3(a)(i) Articles of Incorporation as amended This exhibit is incorporated herein
and in effect on December 31, 1992, by reference to the December 31, 1992
of SoBank, Inc. (now named Southside Form 10K.
Bancshares, Inc.).
3(a)(ii) Articles of Amendment effective May This exhibit is incorporated herein
9, 1994 to Articles of Incorporation by reference to the December 31, 1994
of SoBank, Inc. (now named Southside Form 10K.
Bancshares, Inc.).
3(b) Bylaws as amended and in effect on This exhibit is incorporated herein
March 23, 1995 of Southside by reference to the December 31, 1994
Bancshares, Inc.. Form 10K.
10(a)(i) Deferred Compensation Plan for B. G. This exhibit is incorporated herein
Hartley effective February 13, 1984, by reference to the December 31, 1994
as amended June 28, 1990 and December Form 10K.
15, 1994.
10(a)(ii) Deferred Compensation Plan for Robbie Filed herewith.
N. Edmonson effective February 13,
1984, as amended June 28, 1990 and
March 16, 1995.
10(b) Officers Long Term Disability Income This exhibit is incorporated herein
Plan effective June 25, 1990. by reference to the June 30, 1990
Form 10K.
10(c) Retirement Plan Restoration Plan for This exhibit is incorporated herein
the subsidiaries of SoBank, Inc. (now by reference to the December 31, 1992
named Southside Bancshares, Inc.). Form 10K.
10(d) Incentive Stock Option Plan effective This exhibit is incorporated herein
April 1, 1993 of SoBank, Inc. (now by reference to the December 31, 1994
named Southside Bancshares, Inc.). Form 10K.
10(e) Form of Deferred Compensation Filed herewith.
Agreements dated June 30, 1994 with
each of Sam Dawson, Lee Gibson, Titus
Jones, Jeryl Story and Andy Wall as
amended November 13, 1995.
22 Subsidiaries of the Registrant. This exhibit is incorporated herein
by reference to the December 31, 1994
Form 10K.
27 Financial Data Schedule for the year Filed herewith.
ended December 31, 1995.