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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
FOR THE YEAR ENDED DECEMBER 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM______ TO________
COMMISSION FILE NUMBER 0-12247
Southside Bancshares, Inc.
(Exact name of registrant as specified in its charter)
TEXAS 75-1848732
(State 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 2, 1998, 3,496,269 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 $44,922,428.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Proxy Statement to be filed for the Annual Meeting of
Shareholders to be held April 22, 1998. (Part III)
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PART I
ITEM 1. BUSINESS
GENERAL
Southside Bancshares, Inc. (the "Company") is a $571 million bank holding
company in Tyler, Texas, with a metropolitan area population of 166,000, located
90 miles east of Dallas/Fort Worth and 90 miles west of Shreveport, Louisiana,
south of Interstate 20. Southside Bank is the largest bank headquartered in
Smith County, Texas. The Company is a Texas corporation organized in 1982, which
through an intermediate holding company, owns all of the capital stock of
Southside Bank which was organized in 1960. 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 its subsidiaries. At this time the Company
conducts no business except with respect to Southside Bank and its subsidiaries.
The Company has been, and intends to remain a community-oriented
financial institution offering a variety of financial services to meet the needs
of the communities it serves. The Company attracts deposits from the general
public and uses such deposits, together with Federal Home Loan Bank ("FHLB")
Dallas borrowings and other borrowings to fund loans. See "Lending Activities."
The Company also invests in mortgage-backed securities secured by 1-4 family
residential mortgages, municipal obligations, U.S. Government and agency
obligations and other permissible investments. The Company, through its
affiliate, BSC Securities, L.C., offers a full range of retail brokerage
securities services. Southside Bank opened a finance company, Countywide Loans,
Inc. during 1997 in Tyler. The finance company provides basic financial services
such as lending, check cashing and money orders.
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 receivable financing, equipment
financing, real estate lending, other personal loans and safe deposit services.
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 made indirect automobile loans through area
auto dealers until December 31, 1997. The Company exited this line of business
effective January 2, 1998, to concentrate more on direct automobile loans. The
Company offers a variety of deposit accounts having a wide range of interest
rates and terms, which generally include savings, money market, and a variety of
checking accounts, as well as certificate accounts. The Company generally
solicits deposits in its primary market areas. Southside Bank offers automatic
teller machine facilities and services through a statewide system known as
"Moneymaker." The Company also began offering home banking during January 1998
and debit cards during 1997.
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.
At December 31, 1997, the Company had total assets of $571.1 million,
deposits of $462.7 million, borrowings of $63.1 million and shareholders' equity
of $40.0 million.
At December 31, 1997, the Company's total loan portfolio totaled $296.0
million, including $76.2 million of 1-4 family residential first mortgage loans,
$55.8 million of commercial and other real estate loans, $91.7 million of loans
to individuals and $62.0 million of commercial loans. In addition, on that date,
the Company had $141.4 million of mortgage-backed securities and $75.1 million
of other investment securities and FHLB Dallas stock.
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At December 31, 1997, the vast majority of the Company's loans were
secured by properties and/or collateral located in Smith County. The Company's
revenues are derived primarily from interest on loans, mortgage-backed
securities and investments, and income from service charges.
In February 1998, the Company made application to open a grocery store
branch in Longview, Texas. A native Longview banking veteran has joined
Southside Bank to lead the Company in its expansion into the Longview market
area. The Company anticipates it will also make application to open a free
standing full-service branch with drive-up facilities in Longview as soon as a
suitable site is found. The Company's television and radio advertising has
extended into this market area for several years, providing Southside Bank name
recognition in the Greater Longview area.
MARKET AREA
Tyler's industry base is a diverse mix that includes oil and gas,
manufacturing, distribution, conventions and tourism, as well as retirement
relocation, to name a few. All of these support a growing regional system of
medical service, retail and education centers. Tyler is home to several
nationally recognized health care systems. Five Tyler hospitals represent all
major specialties and employ over 6,500 individuals. In 1996, Target Stores
chose a location in the greater Tyler area along Interstate 20 for its $80
million distribution center that will employ approximately 900 workers. This
facility is expected to begin operations in mid 1998.
LENDING ACTIVITIES
The Company's main objective is to seek attractive lending opportunities
in Smith County, Texas and adjoining counties. Total Loans as of December 31,
1997 increased $37.9 million or 14.7% while the average balance was up $30.7
million or 12.6% when compared to 1996. Real Estate Loans as of December 31,
1997 reflected an increase of $15.0 million or 11.8% from December 31, 1996.
Loans to individuals increased $12.2 million or 15.4% from December 31, 1996 and
Commercial loans increased $10.7 million or 20.8%. The increase in Real Estate
Loans is due to a stronger real estate market, lower interest rates and
increased commitment by the Company to residential mortgage lending. Commercial
loans increased as a result of commercial growth in the Company's market area.
Loans to individuals increased due to an increase in indirect dealer loans and
additional penetration achieved through the bank's branch locations. Effective
January 2, 1998, the Company exited its indirect dealer loan line of business to
concentrate more on direct loans. 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 the local economy, the Company
believes the risk in this portion of the portfolio is spread throughout the
economic community.
The aggregate amount of loans that Southside Bank is permitted to make
under applicable bank regulations to any one borrower, including related
entities, is 25% of unimpaired capital and surplus. The Company's legal lending
limit at December 31, 1997 was $7.5 million.
The average yield on loans for the year ended December 31, 1997 decreased
slightly to 8.68% from 8.74% for the year ended December 31, 1996. This decrease
was reflective of the repricing characteristics of the loans and the decrease in
lending rates during 1997.
LOANS TO AFFILIATED PARTIES
In the normal course of business, the Company's subsidiary, Southside
Bank makes loans to certain of the Company's, as well as its own, officers,
directors, employees and their related interests. As of December 31, 1997 and
1996, these loans totaled $8.6 million and $9.9 million or 21.6% and 27.0% 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.
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LOAN PORTFOLIO COMPOSITION AND ASSOCIATED RISK
For purposes of this discussion, the Company's loans are divided into
three categories: Real Estate Loans, Commercial Loans, and Loans to Individuals.
REAL ESTATE LOANS
Real estate loans are divided into three categories: 1-4 Family
Residential Mortgage Lending, Construction Loans and Other, which are primarily
Commercial Real Estate Loans.
1-4 Family Residential Mortgage Lending
Residential loan originations are generated by the Company's in-house
originations staff, marketing efforts, present customers, walk-in customers and
referrals from real estate agents, mortgage brokers and builders. The Company
focuses its lending efforts primarily on the origination of loans secured by
first mortgages on owner-occupied, 1-4 family residences. Substantially, all of
the Company's 1-4 family residential mortgage originations are secured by
properties located in Smith County, Texas. Historically, the Company has sold a
portion of its loan originations to secondary market investors pursuant to
ongoing purchase commitments.
The Company's fixed rate 1-4 family residential mortgage loans generally
have maturities ranging from 7 to 30 years. These loans are typically fully
amortizing with monthly payments sufficient to repay the total amount of the
loan. The Company also makes 7 to 30 year amortizing loans with a balloon
feature, typically due in 7 years or less.
The Company reviews information concerning the income, financial
condition, employment and credit history when evaluating the creditworthiness of
the applicant.
Construction Loans
The Company's construction loans are secured by property located
primarily in the Company's market area. The Company's emphasis for construction
loans is directed toward properties that will be owner occupied. Occasionally,
speculative construction loans are financed, but these typically have
substantial secondary sources of repayment. The Company's construction loans to
individuals generally have fixed interest rates during the construction period.
Construction loans to individuals are typically made in connection with the
granting of the permanent loan on the property.
Commercial Real Estate Loans
In determining whether to originate commercial real estate loans, the
Company generally considers such factors as the financial condition of the
borrower and the debt service coverage of the property. Commercial real estate
loans are made at both fixed and adjustable interest rates for terms generally
up to 20 years.
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 $142.3
million in Real Estate Loans, $76.2 million or 53.6% represent loans
collateralized by residential dwellings that are primarily owner occupied.
Historically, the amount of losses suffered on this type of loan has been
significantly less than those on other properties. A significant portion of the
remaining Real Estate Loans are collateralized 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.
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The real estate market in the late 1980's in Texas, and more specifically
in East Texas, experienced a significant decline in market value. During the
1990's, new appraisals of real estate in the Company's market area appeared to
indicate improved overall real estate values for residential and commercial
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 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.
In November 1997, Texas voters approved a change to the Texas
Constitution allowing home equity loans. The Company began offering this newly
available form of real estate lending beginning January 1, 1998 when the law
became effective. The Company has established underwriting and pricing
guidelines for this new lending area.
COMMERCIAL LOANS
The Company's Commercial Loans are diversified to meet most business
needs. Loan types include, short-term working capital loans for inventory and
accounts receivable and short and medium-term loans for equipment or other
business capital expansion. 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. Commercial Loans
traditionally generated the largest volume of loan losses in the portfolio.
In its commercial business loan underwriting, the Company assesses the
creditworthiness, ability to repay and the value and liquidity of the collateral
being offered. Terms are generally granted commensurate with the useful life of
the collateral offered.
LOANS TO INDIVIDUALS
Southside Bank is a major consumer lender in its trade territory and has
been for many years. The majority of loans outstanding are those secured by
vehicles including the indirect portfolio which at December 31, 1997 was
approximately $40.0 million. Additionally, the Company makes loans for a full
range of other consumer purposes which may be secured or unsecured depending on
the credit quality and purpose of the loan. Other major categories of the
portfolio include loans secured by boats and cash or equivalently secured loans.
The largest concentration of loans to individuals, vehicle loans, were primarily
obtained through the Company's indirect dealer loan program. The Company exited
the indirect dealer loan program effective January 2, 1998 to concentrate more
on direct loans.
At this point, the economy in Southside Bank's trade territory appears
stable. One area of concern is the personal bankruptcy rate occurring nationwide
and in East Texas. Management expects this trend to have some effect on the
Company's net charge-offs. Most of the Company's Loans to Individuals are
collateralized which management believes will limit the exposure in this area
should current bankruptcy trends continue.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. The underwriting
standards employed by the Company for consumer loans include an application, a
determination of the applicant's payment history on other debts, with greatest
weight being given to payment history with the Company, and an assessment of
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the borrower's ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is a primary consideration, the
underwriting process also includes a comparison of the value of the collateral,
if any, in relation to the proposed loan amount.
LOAN PORTFOLIO COMPOSITION
The following table sets forth loan totals by category for the years
presented (in thousands):
December 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
Real Estate Loans:
Construction................................ $ 10,299 $ 7,821 $ 4,558 $ 6,118 $ 4,739
1-4 Family Residential...................... 76,243 62,356 49,909 38,563 34,982
Other....................................... 55,802 57,198 54,436 53,881 46,457
Commercial Loans............................. 61,972 51,307 44,217 39,707 40,860
Loans to Individuals......................... 91,719 79,485 75,658 62,721 56,571
----------- ----------- ----------- ----------- -----------
Total Loans................................. $ 296,035 $ 258,167 $ 228,778 $ 200,990 $ 183,609
=========== =========== =========== =========== ===========
The following table represents loan maturities and sensitivity to changes
in interest rates. The amounts of total loans outstanding at December 31, 1997,
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.
After One
Due in One but within After Five
Year or Less Five Years Years
------------ ------------ ------------
(in thousands)
Construction Loans ..................... $ 9,696 $ 603 $
Real Estate Loans-Other ................ 40,587 54,917 36,541
Commercial Loans ....................... 44,788 12,956 4,228
All Other Loans ........................ 41,372 49,924 423
------------ ------------ ------------
Total Loans ...................... $ 136,443 $ 118,400 $ 41,192
============ ============ ============
Loans with Maturities After
One Year for Which: Interest Rates are Fixed or Predetermined $ 158,248
Interest Rates are Floating or Adjustable $ 22,900
*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.
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LOAN LOSS EXPERIENCE AND RESERVE FOR LOAN LOSSES
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 FDIC and/or the State 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.
As of December 31, 1997, the Company's review of the loan portfolio
indicates that a loan loss reserve of $3.4 million is adequate.
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.
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LOAN LOSS EXPERIENCE AND RESERVE FOR LOAN LOSSES
Years Ended December 31,
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1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(dollars in thousands)
Average Net Loans Outstanding ................ $ 274,577 $ 243,925 $ 209,141 $ 196,436 $ 170,409
========= ========= ========= ========= =========
Balance of Reserve for Loan Loss at
Beginning of Period ........................ $ 3,249 $ 3,317 $ 3,137 $ 2,846 $ 2,711
--------- --------- --------- --------- ---------
Loan Charge-Offs:
Real Estate-Construction
Real Estate-Other ............................ (36) (6) (494)
Commercial Loans ............................. (525) (70) (61) (129) (95)
Loans to Individuals ......................... (704) (768) (502) (395) (284)
--------- --------- --------- --------- ---------
Total Loan Charge-Offs ....................... (1,229) (838) (599) (530) (873)
--------- --------- --------- --------- ---------
Recovery on Loans Previously Charged off:
Real Estate-Construction ..................... 10
Real Estate-Other ............................ 14 7 272 93 4
Commercial Loans ............................. 133 78 546 326 287
Loans to Individuals ......................... 188 185 261 152 117
--------- --------- --------- --------- ---------
Total Recovery of Loans Previously Charged-Off 345 270 1,079 571 408
--------- --------- --------- --------- ---------
Net Loan (Charge-Offs) Recoveries ............ (884) (568) 480 41 (465)
Additions (Reductions) to Reserve
Charged (Credited) to Operating Expense .... 1,005 500 (300) 250 600
--------- --------- --------- --------- ---------
Balance at End of Period ..................... $ 3,370 $ 3,249 $ 3,317 $ 3,137 $ 2,846
========= ========= ========= ========= =========
Ratio of Net Charge-Offs (Recoveries)
to Average Loans Outstanding ............... .32% .23% (.23%) (.02%) .27%
========= ========= ========= ========= =========
Allocation of Reserve for Loan Loss (dollars in thousands):
December 31,
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1997 1996 1995 1994 1993
----------------------------------------------------------------------------------------
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Real Estate-Construction .......... $ 52 1.5% $ 39 1.2% $ 23 .7% $ 31 1.0% $ 7 .2%
Real Estate-Other ................. 1,087 32.3% 1,059 32.6% 1,209 36.4% 1,127 35.9% 1,172 41.2%
Commercial Loans .................. 1,181 35.0% 1,129 34.7% 1,059 31.9% 1,059 33.8% 1,018 35.8%
Loans to Individuals .............. 1,040 30.9% 948 29.2% 934 28.2% 835 26.6% 642 22.6%
Unallocated ....................... 10 .3% 74 2.3% 92 2.8% 85 2.7% 7 .2%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Balance at End of Period .......... $3,370 100% $3,249 100% $3,317 100% $3,137 100% $2,846 100%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
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NONPERFORMING ASSETS
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
that are not delinquent may be placed on nonaccrual status due to doubts about
full collection of principal or interest. When a loan is categorized as
nonaccrual, the accrual of interest is discontinued and the accrued balance is
reversed for financial statement purposes. 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 Statement of Financial Accounting Standard No. 114, "Accounting
by Creditors for Impairment of a Loan" (FAS114), effective January 1, 1995, 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
bank regulatory call report guidelines.
NONPERFORMING ASSETS
(dollars in thousands)
December 31,
----------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Loans 90 Days Past Due:
Real Estate ................................... $ 454 $ 214 $ 266 $ 51 $ 342
Loans to Individuals .......................... 232 170 203 52 90
Commercial .................................... 56 88 183 59 70
------ ------ ------ ------ ------
742 472 652 162 502
------ ------ ------ ------ ------
Loans on Nonaccrual:
Real Estate ................................... 108 646 486 424 711
Loans to Individuals .......................... 177 113 116 179 175
Commercial .................................... 1,059 774 654 24 213
------ ------ ------ ------ ------
1,344 1,533 1,256 627 1,099
------ ------ ------ ------ ------
Restructured Loans:
Real Estate ................................... 214 230 243 563 590
Loans to Individuals .......................... 189 108 49 51 52
Commercial .................................... 32 62 44 43 115
------ ------ ------ ------ ------
435 400 336 657 757
------ ------ ------ ------ ------
Total Nonperforming Loans ........................ 2,521 2,405 2,244 1,446 2,358
Other Real Estate Owned .......................... 364 273 273 1,134 2,745
Repossessed Assets ............................... 206 262 240 256 203
------ ------ ------ ------ ------
Total Nonperforming Assets ....................... $3,091 $2,940 $2,757 $2,836 $5,306
====== ====== ====== ====== ======
Percentage of Total Assets ....................... .5% .6% .6% .7% 1.3%
Percentage of Loans and Leases,
Net of Unearned Income ........................ 1.0% 1.1% 1.2% 1.4% 2.9%
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Total nonperforming assets increased $151,000 between December 31, 1996
and December 31, 1997. Nonperforming assets as a percentage of assets decreased
.1% from the previous year and as a percentage of loans decreased .1%.
Nonperforming assets represent a 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, 1997 in the
opinion of management, the Company had $96,000 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 ................................ $ 108 $ 27 $ 81
Commercial Loans ................................. 1,059 185 874
Loans to Individuals ............................. 177 12 165
------ --------- ------
Balance at December 31, 1997 ..................... $1,344 $ 224 $1,120
====== ========= ======
Valuation Carrying
Total Allowance Value
------ --------- ------
Real Estate Loans ................................ $ 646 $ 128 $ 518
Commercial Loans ................................. 774 199 575
Loans to Individuals ............................. 113 18 95
------ --------- ------
Balance at December 31, 1996 ..................... $1,533 $ 345 $1,188
====== ========= ======
For the years ended December 31, 1997 and 1996, the average recorded
investment in impaired loans was approximately $1,450,000 and $1,468,000,
respectively. During the year ended December 31, 1997, 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 $110,000, $97,000 and $78,000 for the years
ended December 31, 1997, 1996 and 1995. If these loans had been accruing
interest at their original contracted rates, related income would have been
$336,000, $216,000 and $273,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
The following is a summary of the Allowance for Losses on Other Real
Estate Owned for the years presented (in thousands):
Years Ended December 31,
-------------------------
1997 1996
---------- -----------
Balance at beginning of year ................ $ 946 $ 946
Provision for Losses
Losses on sales
Gains on sales
Disposition of OREO...................... (274)
----- -----
Balance at end of year ...................... $ 672 $ 946
===== =====
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SECURITIES ACTIVITY
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.
The Company 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.
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.
Average Securities increased $13.8 million or 8.1% during the year ended
December 31, 1997 compared to 1996. The mix of Average Securities between
taxable and tax-exempt securities changed to 78.4% taxable and 21.6% tax-exempt
for the year ended 1997 from 77.8% taxable and 22.2% tax-exempt for 1996.
Average Other Interest Earning Assets, consisting primarily of Federal Funds
Sold, decreased $1.0 million or 26.5% during the year ended December 31, 1997
compared to 1996. The slight decrease in Federal Funds balances is attributable
to the increase in Average Loans and Average Securities.
The mix of taxable securities reflected an increase in Mortgage-backed
Securities. Average Mortgage-backed Securities represented 66.0% of the total
securities portfolio for 1997 compared to 62.2% for 1996.
The combined Investment Securities, Mortgage-backed Securities, and
Marketable Equity Securities portfolio increased to $216.5 million on December
31, 1997, compared to $174.4 million on December 31, 1996, an increase of $42.1
million or 24.1%. Mortgage-backed Securities collateralized by agency guaranteed
mortgages increased $27.1 million or 23.7% during 1997 when compared to 1996.
State and Political Subdivisions increased $7.4 million or 18.4% during 1997.
U.S. Treasury securities increased during 1997 compared to 1996 by $14.9 million
or 294.9%, U.S. Government Agency securities decreased $8.1 million or 85.0% and
Other Stocks and Bonds increased $.9 million or 16.9% in 1997 compared to 1996.
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. During the second half of 1997 rates decreased
and the yield curve flattened as the spread between the two year treasury yield
and thirty year treasury yield narrowed. The Company continued to use the
barbell approach adopted in 1995 during most of 1996 and 1997, however some
intermediate term securities were purchased during 1997. In order to maintain
the barbell strategy, a continued change in the securities portfolio mix was
required and resulted in the changes discussed
10
12
above during 1996 and 1997. The increase in U.S. Treasury securities occurred
primarily in December 1997 as short-term treasuries were purchased to pledge as
collateral for a new public funds account obtained during 1997, which
accumulates large balances during the time period December through February each
year.
The market value of the Securities portfolio at December 31, 1997 was
$216.5 million, which represents a net unrealized gain on that date of $2.3
million. The net unrealized gain is comprised of $2.6 million in unrealized
gains and $.3 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 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, 1997 or 1996.
The following table sets forth the carrying amount of Investment
Securities, Mortgage-backed Securities and Marketable Equity Securities at
December 31, 1997 and 1996 (in thousands):
December 31,
-------------------
Available for Sale: 1997 1996
-------- --------
U. S. Treasury ............................................. $ 19,956 $ 5,054
U. S. Government Agencies .................................. 631 8,457
Mortgage-backed Securities:
Direct Govt. Agency Issues .............................. 93,981 74,442
Other Private Issues .................................... 33,770 16,132
State and Political Subdivisions ........................... 47,658 39,629
Other Stocks and Bonds ..................................... 6,044 5,171
-------- --------
Total ................................................ $202,040 $148,885
======== ========
December 31,
-------------------
Held to Maturity: 1997 1996
-------- --------
U. S. Government Agencies .................................. $ 804 $ 1,124
Mortgage-backed Securities:
Direct Govt. Agency Issues .............................. 13,662 23,782
State and Political Subdivisions ........................... 610
-------- --------
Total ................................................ $ 14,466 $ 25,516
======== ========
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The maturities classified according to the sensitivity to changes in
interest rates of the December 31,1997 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 ............................... $19,956 5.60% $ $ $
U.S. Government Agencies .................... 514 6.88% 117 9.12%
Mortgage-backed Securities .................. 37,716 6.67% 75,936 6.55% 13,205 6.27% 894 6.57%
State and Political Subdivisions ............ 2,988 7.81% 9,982 7.86% 8,771 7.67% 25,917 7.82%
Other Stocks and Bonds ...................... 3,480 5.86% 1,814 6.38% 401 6.26% 349 3.05%
------- ------- ------- -------
Total .................................. $64,654 6.35% $87,849 6.70% $22,377 6.82% $27,160 7.72%
======= ======= ======= =======
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. Government Agencies ......................... $ -- -- $ 804 5.42% $ $
Mortgage-backed Securities ....................... 5,505 5.54% 8,157 6.08%
------ ------ ------- -------
Total ............................................ $5,505 5.54% $8,961 6.02% $ $
====== ====== ======= =======
DEPOSITS AND BORROWED FUNDS
Deposits provide the Company with its primary source of funds. The
increase of $36.7 million or 8.6% in Total Deposits during 1997 provided the
Company with funds for the growth in loans and securities. Time Deposits
increased $12.3 million or 6.2% during 1997 compared to 1996. Noninterest
Bearing Demand Deposits increased during 1997 $14.6 million or 14.8%. Interest
Bearing Demand Deposits increased during 1997 $8.9 million or 7.9% and Saving
Deposits increased $.9 million or 6.2%. The latter three categories, which are
considered the lowest cost deposits, comprised 54.4% of total deposits at
December 31, 1997 compared to 53.3% at December 31, 1996. The increase in Total
Deposits is reflective of overall bank growth and branch expansion and was the
primary source of funding the increase in Loans.
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14
The following table sets forth the Company's deposits by category for the
years ended December 31, 1997 and 1996.
Years Ended December 31,
1997 1996
---------- ----------
(in thousands)
Noninterest Bearing Demand Deposits .............. $ 113,499 $ 98,901
Interest Bearing Demand Deposits ................. 121,861 112,957
Savings Deposits ................................. 16,155 15,213
Time Deposits .................................... 211,159 198,879
---------- ----------
Total Deposits ....................... $ 462,674 $ 425,950
========== ==========
Short-term Obligations, consisting primarily of FHLB Dallas advances and
Federal Funds Purchased, increased $27.7 million or 405.2% during 1997 when
compared to 1996. This increase reflects a strategically planned increase in
balance sheet leverage to achieve certain Asset/Liability Management committee
("ALCO")objectives.
Long-term Obligations consisting of FHLB Dallas advances increased in
1997 to $28.5 million or 213.8% compared to $9.1 million in 1996. The advances
were obtained from FHLB Dallas to fund long-term loans. FHLB Dallas advances are
collateralized by FHLB Dallas stock, nonspecified real estate loans and
securities.
During the year ended December 31, 1997 total certificates of deposit of
$100,000 or more increased $6.4 million or 11.5% from December 31, 1996. This
increase was due to overall bank growth and an increase in Public Funds.
The table below sets forth the maturity distribution of certificates of
deposit of $100,000 or more issued by the Company at December 31, 1997 and 1996
(in thousands).
December 31, 1997 December 31, 1996
---------------------------------------- -------------------------------------
Time Other Time Other
Certificates Time Certificates Time
of Deposit Deposit Total of Deposit Deposit Total
------------ ------------------------ ------------ ------------------------
Three months or less .............. $ 14,971 $ 6,140 $ 21,111 $ 15,767 $ 4,482 $ 20,249
Over three to six months .......... 9,810 6,000 15,810 9,170 4,000 13,170
Over six to twelve months ......... 11,038 11,038 9,270 9,270
Over twelve months ................ 14,193 14,193 13,069 13,069
--------- --------- --------- --------- --------- ---------
Total ................... $ 50,012 $ 12,140 $ 62,152 $ 47,276 $ 8,482 $ 55,758
========= ========= ========= ========= ========= =========
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15
THE BANKING INDUSTRY IN TEXAS
The banking industry is affected by general economic conditions such as
interest rates, 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 1996 and 1997 and at this time the economic activity in the State
and East Texas appears to be stable to improving with some growth areas
resulting. One area of concern continues to be the personal bankruptcy rate
occurring nationwide and in East Texas. Management expects this trend to have
some effect on the Company's net charge-offs. 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. 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 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. 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, 1997, the Company employed approximately 275 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, 1997, were as follows:
B. G. Hartley (Age 68), 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 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 65), 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 50), Executive Vice President and Secretary of the Company. He
was elected President and Chief Operations Officer of the Company's subsidiary,
Southside Bank during 1996. He became an officer of the Company in 1982 and of
Southside Bank during 1975.
James F. Deakins (Age 64), 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 41), 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 53), Executive Vice President and Director of the Company's
subsidiary, Southside Bank, since 1987. He joined Southside Bank in 1965.
Jeryl Story (Age 46), was elected Senior Executive Vice President - Loan
Administration of the Company's subsidiary, Southside Bank, during 1996. He
joined Southside Bank in 1979 as an officer in Loan Documentation.
Lonny R. Uzzell (Age 44), was elected Executive Vice President of the Company's
subsidiary, Southside Bank, during 1996. He joined Southside Bank in 1981 as an
officer in Marketing.
H. Andy Wall (Age 57), Executive Vice President and Director of the Company's
subsidiary, Southside Bank, since 1984. He 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/or Southside Bank at the pleasure of each entities Board of
Directors.
SUPERVISION AND REGULATION
Banking is a complex, highly regulated industry. The primary goals of
the bank regulatory scheme are to maintain a safe and sound banking system and
to facilitate the conduct of sound monetary policy. In furtherance of these
goals, Congress has created several largely autonomous regulatory agencies and
enacted myriad legislation that governs banks, bank holding companies and the
banking industry. The descriptions of and references to the statutes and
regulations below are brief summaries and do not purport to be complete. The
descriptions are qualified in their entirety by reference to the specific
statutes and regulations discussed.
15
17
THE COMPANY
As a bank holding company under the Bank Holding Company Act of 1956,
as amended (the "BHC Act"), the Company is registered with and subject to
regulation by the Board of Governors of the Federal Reserve System ("FRB"). The
Company is required to file annual and other reports with, and furnish
information to, the FRB, which makes periodic inspections of the Company.
The BHC Act provides that a bank holding company must obtain the prior
approval of the FRB for the acquisition of more than 5% of the voting stock or
substantially all the assets of any bank or bank holding company. In addition,
the BHC Act restricts the extension of credit to any bank holding company by its
subsidiary bank. The BHC Act also provides that, with certain exceptions, a bank
holding company may not (i) engage in any activities other than those of banking
or managing or controlling banks and other authorized subsidiaries or (ii) own
or control more than 5% of the voting shares of any company that is not a bank.
The FRB has deemed certain limited activities to be closely related to banking
and therefore permissible for a bank holding company to engage in.
In approving acquisitions by bank holding companies of banks and
companies engaged in banking-related activities, the FRB considers whether the
performance of any such activity by an affiliate of the holding company can
reasonably be expected to produce benefits to the public, such as greater
convenience, increased competition or gains in efficiency, that outweigh such
possible adverse effects as undue concentration of resources, decreased or
unfair competition, conflicts of interest or unsound banking practices. The FRB
has cease-and-desist powers over bank holding companies and their nonbanking
subsidiaries where their actions would constitute a serious threat to the
safety, soundness or stability of a subsidiary bank. Federal regulatory agencies
also have authority to regulate debt obligations (other than commercial paper)
issued by bank holding companies. This authority includes the power to impose
interest ceilings and reserve requirements on such debt obligations. A bank
holding company and its subsidiaries are also prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services.
Federal banking law generally provides that a bank holding company may
acquire or establish banks in any state of the United States, subject to certain
aging and deposit concentration limits. In addition, Texas banking laws permit a
bank holding company which owns stock of a bank located outside the State of
Texas (an "Out-of-State Bank Holding Company") to acquire a bank or bank holding
company located in Texas. Such acquisition may occur only if the Texas bank to
be directly or indirectly controlled by the Out-of-State Bank Holding Company
has existed and continuously operated as a bank for a period of at least five
years. In any event, however, a bank holding company may not own or control
banks in Texas the deposits of which would exceed 20% of the total deposits of
all federally-insured deposits in Texas.
The FRB has promulgated capital adequacy regulations to which all bank
holding companies that have assets in excess of $150 million are subject. The
FRB's capital adequacy regulations are based upon a risk based capital
determination, whereby a bank holding company's capital adequacy is determined
in light of the risk, both on- and off-balance sheet, contained in the company's
assets. Different categories of assets are assigned risk weightings and, based
thereon, are counted at a percentage (from 0% to 100%) of their book value. The
regulations divide capital between Tier 1 capital, (core capital) and Tier 2
capital. For a bank Company, Tier 1 capital consists primarily of common stock,
perpetual preferred stock, related surplus, minority interests in consolidated
subsidiaries and a limited amount of qualifying cumulative preferred securities
such as the Preferred Securities. Goodwill and certain other intangibles are
excluded from Tier 1 capital. Tier 2 capital consists of varying percentages of
the allowance for loan and lease losses, all other types of preferred stock not
included in Tier 1 capital, hybrid capital instruments and term subordinated
debt. Investments in and loans to unconsolidated banking and finance
subsidiaries that constitute capital of those subsidiaries are excluded from
capital. The sum of Tier 1 and Tier 2 capital constitutes qualifying total
capital. The Tier 1 component must comprise at least 50% of qualifying total
capital.
16
18
Every bank holding company has to achieve and maintain a minimum Tier 1
Capital Ratio of at least 4.00% and a minimum Total Capital Ratio of at least
8.00%. In addition, bank holding companies are generally required to achieve and
maintain a Leverage Capital Ratio of at least 4.00%.
Generally, under the prompt corrective action provisions of the FDIC
Improvement Act of 1991 ("FDICIA"), (described below), an institution is
considered well capitalized if it has a Leverage Capital Ratio of at least 5.0%,
a Core Capital Ratio of at least 6.0% and a Total Capital Ratio of at least
10.0%, and is deemed to be adequately capitalized if it has a Leverage Capital
Ratio of at least 4.0%, a Core Capital Ratio of at least 4.0% and a Total
Capital Ratio of at least 8.0%
As a bank holding company that does not, as an entity, currently engage
in separate business activities of a material nature, the Company's ability to
pay cash dividends depends upon the cash dividends it receives from the Bank.
The Company's only sources of income are (i) those dividends paid to it by the
Bank and (ii) the tax savings, if any, that result from the filing of
consolidated income tax returns for the Company and its subsidiaries. The
Company must pay all of its operating expenses from funds received by it from
its subsidiaries. Therefore, shareholders may receive dividends from the Company
only to the extent that funds are available after payment of the Company's
operating expenses. In addition, in November 1985 the FRB adopted a policy
statement concerning payment of cash dividends, which generally prohibits bank
holding companies from paying dividends except out of operating earnings. In
addition, the Company is subject to certain restrictions on the payment of
dividends as a result of the requirement that it maintain an adequate level of
capital as described above.
SOUTHSIDE BANK
Southside Bank (the "Bank") is subject to various requirements and
restrictions under the laws of the United States and the State of Texas, and to
regulation, supervision and regular examination by the TDB and the FDIC. The TDB
and the FDIC have the power to enforce compliance with applicable banking
statutes and regulations. Such requirements and restrictions include
requirements to maintain reserves against deposits, restrictions on the nature
and amount of loans that may be made and the interest that may be charged
thereon and restrictions relating to investments and other activities of the
Bank.
Transactions with Affiliates. Among the federal legislation applicable
to the Bank, the Federal Reserve Act, as amended by the Competitive Equality
Banking Act of 1987, prohibits the Bank from engaging in specified transactions
(including, for example, loans) with certain affiliates unless the terms and
conditions of such transactions are substantially the same or at least as
favorable to such banks as those prevailing at the time for comparable
transactions with or involving other nonaffiliated entities. In the absence of
such comparable transactions, any transaction between a bank and its affiliates
must be on terms and under circumstances, including credit standards, that in
good faith would be offered or would apply to nonaffiliated companies. In
addition, certain transactions, referred to as "covered transactions," between
the Bank and its affiliates may not exceed 10% of the Bank's capital and surplus
per affiliate and an aggregate of 20% of its capital and surplus for covered
transactions with all affiliates. Certain transactions with affiliates, such as
loans, also must be secured by collateral of specific types and amounts.
Finally, the Bank is prohibited from purchasing low quality assets from an
affiliate. Every company under common control with the Bank, including the
Company and Southside Delaware, are deemed to be affiliates of the Bank.
Loans to Insiders. Federal law also constrains the types and amounts of
loans that any bank may make to its executive officers, directors and principal
shareholders. Among other things, such loans must be approved by a bank's board
of directors in advance and must be on terms and conditions as favorable to the
bank as those available to an unrelated person.
17
19
Regulation of Lending Activities. Loans made by the Bank are also
subject to numerous federal and state laws and regulations, including the
Truth-In-Lending Act, Federal Consumer Credit Protection Act, the Texas Consumer
Credit Code, the Texas Consumer Protection Code, the Equal Credit Opportunity
Act, the Real Estate Settlement Procedures Act and adjustable rate mortgage
disclosure requirements. Remedies to the borrower and penalties to the Bank are
provided for failure of the Bank to comply with such laws and regulations. The
scope and requirements of such laws and regulations have expanded significantly
in recent years.
Branch Banking. Pursuant to the Texas Finance Code, all banks located
in Texas are authorized to branch statewide. Accordingly, a bank located
anywhere in Texas has the ability, subject to regulatory approval, to establish
branch facilities near any of the Bank's facilities and within its market areas.
If other banks were to establish branch facilities near the Bank or any of its
facilities, it is uncertain whether such branch facilities would have a
materially adverse effect on the business of the Bank.
In addition, in 1994 Congress adopted the Reigle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Reigle Act"). That statute
provides for nationwide interstate banking and branching. However, during 1995,
the Texas legislature elected to opt out of the branching provisions under the
Reigle Act until 1999, which effectively prohibits out of state banks from
opening branches in Texas. Similarly, banks located in Texas are generally
prohibited from opening branches outside of Texas. The Texas legislature will
revisit that issue during the 1999 session. Therefore, interstate branching will
continue to be prohibited in Texas until at least 1999.
Governmental Monetary Policies. The commercial banking business is
affected not only by general economic conditions but also by the monetary
policies of the FRB. Changes in the discount rate on member bank borrowings,
control of borrowings, control of borrowings at the "discount window," open
market operations, the imposition of and changes in reserve requirements against
member banks, deposits and assets of foreign branches, the imposition of and
changes in reserve requirements against certain borrowings by banks and their
affiliates and the placing of limits on interest rates which member banks may
pay on time and savings deposits are some of the instruments of monetary policy
available to the FRB. Those monetary policies influence to a significant extent
the overall growth of the bank loans, investments and deposits and the interest
rates charged on loans or paid on time and savings deposits. The nature of
future monetary policies and the effect of such policies on the future business
and earnings of the Bank, therefore, cannot be predicted accurately.
Dividends. All dividends paid by the Bank are paid to the Company, the
sole indirect shareholder of the Bank, through Southside Delaware. The general
dividend policy of the Bank is to pay dividends at levels consistent with
maintaining liquidity and preserving applicable capital ratios and servicing
obligations of the Company. The dividend policy of the Bank is subject to the
discretion of the Board of Directors of the Bank and will depend upon such
factors as future earnings, financial conditions, cash needs, capital adequacy,
compliance with applicable statutory and regulatory requirements and general
business conditions.
The ability of the Bank, as a Texas banking association, to pay
dividends is restricted under applicable law and regulations. The Bank generally
may not pay a dividend reducing its capital and surplus without the prior
approval of the Texas Banking Commissioner. All dividends must be paid out of
net profits then on hand, after deducting expenses, including losses and
provisions for loan losses. Additionally, the FDIC has the right to prohibit the
payment of dividends by a bank where such payment is deemed to be an unsafe and
unsound banking practice. The Bank is also subject to certain restrictions on
the payment of dividends as a result of the requirements that it maintain an
adequate level of capital in accordance with guidelines promulgated from time to
time by the FDIC.
The exact amount of future dividends on the stock of the Bank will be a
function of the profitability of the Bank in general and applicable tax rates in
effect from year to year. The Bank's ability to pay
18
20
dividends in the future will directly depend on the its future profitability,
which cannot be accurately estimated or assured.
Capital Adequacy. In 1983, Congress enacted the International Lending
Supervision Act, which, among other things, directed the FDIC to establish
minimum levels of capital for banks and to require banks to achieve and maintain
adequate capital. Pursuant to this authority, the FDIC has promulgated capital
adequacy regulations to which all state nonmember banks, such as the Bank, are
subject. These requirements are similar to the FRB requirements promulgated with
respect to bank holding companies. See "Regulation--The Company and Southside
Delaware."
FIRREA. The Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA") includes various provisions that affect or may affect the
Bank. Among other matters, FIRREA generally permits bank holding companies to
acquire healthy thrifts as well as failed or failing thrifts. FIRREA removed
certain cross-marketing prohibitions previously applicable to thrift and bank
subsidiaries of a common holding company. Furthermore, a multibank holding
company may now be required to indemnify the federal deposit insurance fund
against losses it incurs with respect to such company's affiliated banks, which
in effect makes a bank holding company's equity investments in healthy bank
subsidiaries available to the FDIC to assist such company's failing or failed
bank subsidiaries.
In addition, pursuant to FIRREA, any depository institution that has
been chartered less than two years, is not in compliance with the minimum
capital requirements of its primary federal banking regulator or is otherwise in
a troubled condition must notify its primary federal banking regulator of the
proposed addition of any person to the board of directors or the employment of
any person as a senior executive officer of the institution at least 30 days
before such addition or employment becomes effective. During such 30-day period,
the applicable federal banking regulatory agency may disapprove of the addition
of employment of such director or officer. The Bank is not subject to any such
requirements.
FIRREA also expanded and increased civil and criminal penalties
available for use by the appropriate regulatory agency against certain
"institution-affiliated parties" primarily including (i) management, employees
and agents of a financial institution, as well as (ii) independent contractors
such as attorneys and accountants and others who participate in the conduct of
the financial institution's affairs and who caused or are likely to cause more
than minimum financial loss to or a significant adverse affect on the
institution, who knowingly or recklessly violate a law or regulation, breach a
fiduciary duty or engage in unsafe or unsound practices. Such practices can
include the failure of an institution to timely file required reports or the
submission of inaccurate reports. Furthermore, FIRREA authorizes the appropriate
banking agency to issue cease and desist orders that may, among other things,
require affirmative action to correct any harm resulting from a violation or
practice, including restitution, reimbursement, indemnifications or guarantees
against loss. A financial institution may also be ordered to restrict its
growth, dispose of certain assets or take other action as determined by the
ordering agency to be appropriate.
FDICIA. FDICIA made a number of reforms addressing the safety and
soundness of the deposit insurance system, supervision of domestic and foreign
depository institutions, and improvement of accounting standards. This statute
also limited deposit insurance coverage, implemented changes in consumer
protection laws and provided for least-cost resolution and prompt regulatory
action with regard to troubled institutions.
FDICIA requires every bank with total assets in excess of $500 million
to have an annual independent audit made of the bank's financial statements by a
certified public accountant to verify that the financial statements of the bank
are presented in accordance with generally accepted accounting principles and
comply with such other disclosure requirements as prescribed by the FDIC.
FDICIA also places certain restrictions on activities of banks
depending on their level of capital. FDICIA divides banks into five different
categories, depending on their level of capital. Under regulations
19
21
recently adopted by the FDIC, a bank is deemed to be "well capitalized" if it
has a total Risk-Based Capital Ratio of 10% or more, a Core Capital Ratio of 6%
or more and a Leverage Ratio of 5% or more, and the bank is not subject to an
order or capital directive to meet and maintain a certain capital level. Under
such regulations, a bank is deemed to be "adequately capitalized" if it has a
total Risk-Based Capital Ratio of 8% or more, a Core Capital Ratio of 4% or more
and a Leverage Ratio of 4% or more (unless it receives the highest composite
rating at its most recent examination and is not experiencing or anticipating
significant growth, in which instance it must maintain a Leverage Ratio of 3% or
more). Under such regulations, a bank is deemed to be "undercapitalized" if it
has a total Risk-Based Capital Ratio of less than 8%, a Core Capital Ratio of
less than 4% or a Leverage Ratio of less than 4%. Under such regulations, a bank
is deemed to be "significantly undercapitalized" if it has a Risk-Based Capital
Ratio of less than 6%, a Core Capital Ratio of less than 3% and a Leverage Ratio
of less than 3%. Under such regulations, a bank is deemed to be "critically
undercapitalized" if it has a Leverage Ratio of less than or equal to 2%. In
addition, the FDIC has the ability to downgrade a bank's classification (but not
to "critically undercapitalized") based on other considerations even if the bank
meets the capital guidelines. According to these guidelines, the Bank was
classified as "well-capitalized" as of December 31, 1997.
In addition, if a state nonmember bank is classified as
undercapitalized, the bank is required to submit a capital restoration plan to
the FDIC. Pursuant to FDICIA, an undercapitalized bank is prohibited from
increasing its assets, engaging in a new line of business, acquiring any
interest in any company or insured depository institution, or opening or
acquiring a new branch office, except under certain circumstances, including the
acceptance by the FDIC of a capital restoration plan for the bank.
Furthermore, if a state nonmember bank is classified as
undercapitalized, the FDIC may take certain actions to correct the capital
position of the bank; if a bank is classified as significantly undercapitalized
or critically undercapitalized, the FDIC would be required to take one or more
prompt corrective actions. These actions would include, among other things,
requiring: sales of new securities to bolster capital, improvements in
management, limits on interest rates paid, prohibitions on transactions with
affiliates, termination of certain risky activities and restrictions on
compensation paid to executive officers. If a bank is classified as critically
undercapitalized, FDICIA requires the bank to be placed into conservatorship or
receivership within ninety days, unless the FDIC determines that other action
would better achieve the purposes of FDICIA regarding prompt corrective action
with respect to undercapitalized banks.
The capital classification of a bank affects the frequency of
examinations of the bank and impacts the ability of the bank to engage in
certain activities and affects the deposit insurance premiums paid by the bank.
Under FDICIA, the FDIC is required to conduct a full-scope, on-site examination
of every bank at least once every twelve months. An exception to this rule
provides that banks that (i) have assets of less than $100 million (ii) are
categorized as "well capitalized," (iii) were found to be well managed with a
composite rating of "outstanding" and (iv) have not been subject to a change in
control during the last twelve months, need only be examined by the FDIC once
every eighteen months.
Under FDICIA, banks may be restricted in their ability to accept
brokered deposits, depending on their capital classification. "Well capitalized"
banks are permitted to accept brokered deposits, but all banks that are not well
capitalized are not permitted to accept such deposits. The FDIC may, on a
case-by-case basis, permit banks that are adequately capitalized to accept
brokered deposits if the FDIC determines that acceptance of such deposits would
not constitute an unsafe or unsound banking practice with respect to the bank.
In addition, under FDICIA, the FDIC is authorized to assess insurance
premiums on a bank's deposits at a variable rate depending on the probability
that the deposit insurance fund will incur a loss with respect to the bank.
Under prior law, the deposit insurance assessment was a flat rate, regardless of
the likelihood of loss. In this regard, the FDIC has issued regulations for a
transitional risk-based deposit assessment that determines the deposit insurance
assessment rates on the basis of the bank's capital classification and
supervisory evaluations. Each of these categories has three subcategories,
resulting in
20
22
nine assessment risk classifications. The three subcategories with respect to
capital are "well capitalized," "adequately capitalized" and "less than
adequately capitalized (which would include "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized" banks). The three
subcategories with respect to supervisory concerns are "healthy," "supervisory
concern" and "substantial supervisory concern." A bank is deemed "healthy" if it
is financially sound with only a few minor weaknesses. A bank is deemed subject
to "supervisory concern" if it has weaknesses that, if not corrected, could
result in significant deterioration of the bank and increased risk to the Bank
Insurance Fund. A bank is deemed subject to "substantial supervisory concern" if
it poses a substantial probability of loss to the Bank Insurance Fund.
The federal banking agencies have established guidelines, effective
August 9, 1995, which prescribe standards for depository institutions relating
to internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth and
management compensation. The agencies may require an institution which fails to
meet the standards set forth in the guidelines to submit a compliance plan. The
agencies are also currently proposing standards for asset quality and earnings.
The Company cannot predict what effect such guidelines will have on the Bank.
Deposit Insurance. The Bank's deposits are insured up to $100,000 per
insured account by the Bank Insurance Fund of the FDIC (the "BIF"). As an
institution whose deposits are insured by BIF, the Bank is currently required to
pay semi-annual deposit insurance premiums to BIF. The Bank's deposit insurance
assessments may increase depending upon the risk category and subcategory, if
any, to which the Bank is assigned by the FDIC. Any increase in insurance
assessments could have an adverse effect on the Bank's earnings.
Management of the Company and the Bank cannot predict what other
legislation might be enacted or what other regulations might be adopted or the
effects thereof.
The foregoing is an attempt to summarize some of the relevant laws,
rules and regulations governing banks and bank holding companies but does not
purport to be a complete summary of all applicable laws, rules and regulations
governing banks and bank holding companies.
21
23
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, 1997, 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, 1997 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" above.
22
24
ITEM 2. PROPERTIES
The Company completed expansion and remodeling of the bank headquarters
at Beckham and Lake Streets during the second half of 1997. Remodeling of the
annex building, to accommodate the Company's new centralized phone center,
immediately across the parking lot from the bank headquarters, is expected to be
completed during 1998.
Due to growth, the Company acquired the Gentry Parkway branch facility
which was previously being leased and added a second ATM. After remodeling is
complete, this branch will provide expanded facilities adequate to service this
growing market area.
Southside Bank owns the following properties:
o 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..
o 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 are located.
o Land and building located at 1010 East First Street in Tyler
where Motor Bank facilities are located.
o 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.
o Property on South Broadway near the South Broadway branch where
Motor Bank facilities are located.
o Thirteen Automatic Teller Machines (ATM) facilities located
throughout Tyler and Smith County.
o Building located in the downtown square of Tyler which houses
Southside Bank's Downtown branch, providing a full line of banking
services.
o Gentry Parkway branch and motor bank facility.
Management believes its facilities are adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
Southside Bank is party to legal proceedings arising in the normal
conduct of business. Management of the Company believes that such litigation is
not material to the financial position or results of the 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, 1997, 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.
23
25
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 1997, 1996 and 1995, the Company
declared and paid a 5% stock dividend.
Year Ended 1st qtr. 2nd qtr. 3rd qtr. 4th qtr.
- ----------------------- ------------------- ------------------- ------------------ ---------------
December 31, 1997 $ 17.50 - 17.50 $ 17.75 - 17.50 $ 17.75 - 17.75 $ 17.75 - 17.50
December 31, 1996 $ 15.50 - 14.50 $ 15.50 - 15.50 $ 16.50 - 15.50 $ 17.50 - 15.50
See "Item 7. Capital Resources" for a discussion of the Company's common
stock repurchase program.
STOCKHOLDERS
There were approximately 1,199 holders of record of the Company's common
stock, the only class of equity securities currently issued and outstanding, as
of March 2, 1998.
DIVIDENDS
Cash dividends declared and paid were $.40 per share for the years ended
December 31, 1997 and 1996 and $.35 per share for the year ended December 31,
1995. Stock dividends of 5% were also declared and paid during each of the years
ended December 31, 1997, 1996 and 1995. The Company has paid a cash dividend at
least once every year since 1970. 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.
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26
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).
As of and For the Years Ended December 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ------------
Investment Securities............................ $ 71,835 $ 57,825 $ 76,919 $ 82,720 $ 69,220
=========== =========== =========== =========== ===========
Mortgage-backed and Related Securities........... $ 141,413 $ 114,356 $ 99,407 $ 88,080 $ 116,451
=========== =========== =========== =========== ===========
Loans, Net of Allowance for Loan Loss............ $ 292,665 $ 254,918 $ 225,461 $ 197,853 $ 180,763
=========== =========== =========== =========== ===========
Deposits......................................... $ 462,674 $ 425,950 $ 388,308 $ 385,102 $ 352,355
=========== =========== =========== =========== ===========
Total Assets..................................... $ 571,145 $ 482,694 $ 448,673 $ 426,221 $ 404,216
=========== =========== =========== =========== ===========
Long-term Obligations............................ $ 28,547 $ 9,096 $ 13,686 $ 7,997 $ 8,850
=========== =========== =========== =========== ===========
Interest & Deposit Service Income................ $ 39,168 $ 34,593 $ 32,342 $ 28,822 $ 26,812
=========== =========== =========== =========== ===========
Net Income....................................... $ 5,006 $ 4,205 $ 4,532 $ 3,519 $ 4,015
=========== =========== =========== =========== ===========
Net Income Per Common Share-Basic................ $ 1.47 $ 1.23 $ 1.33 $ 1.03 $ 1.18
=========== =========== =========== =========== ===========
Net Income Per Common Share-Diluted.............. $ 1.43 $ 1.21 $ 1.31 $ 1.02 $ 1.17
=========== =========== =========== =========== ===========
Cash Dividends Declared Per Common Share......... $ .40 $ .40 $ .35 $ .25 $ .25
=========== =========== =========== =========== ===========
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides a comparison of the
Company's results of operations for the years ended December 31, 1997, 1996 and
1995 and financial condition as of December 31, 1997 and 1996. This discussion
should be read in conjunction with the financial statements and related notes.
All share data has been adjusted to give retroactive recognition to stock
dividends.
FORWARD-LOOKING INFORMATION
Certain statements of other than historical fact that are contained in
this document and in written material, press releases and oral statements issued
by or on behalf of the Company may be considered to be "forward-looking
statements" as that term is defined in the Private Securities Litigation Reform
Act of 1995. These statements may include words such as "expect," "estimate,"
"project," "anticipate," "should," "intend," "probability," "risk," "target,"
"objective" and similar expressions. Forward-looking statements are subject to
significant risks and uncertainties and the Company's actual results may differ
materially from the results discussed in the forward-looking statements. For
example, certain market risk disclosures are dependent on choices about key
model characteristics and assumptions and are subject to various limitations.
See "Item 1 - Business" and "Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations." By their nature, certain of the
market risk disclosures are only estimates and could be materially different
from what actually occurs in the future. As a result, actual income gains and
losses could materially differ from those that have been estimated. Other
factors that could cause actual results to differ materially from
forward-looking statements include, but are not limited to general economic
conditions, either nationally or in the State of Texas, legislation or
regulatory changes which adversely affect the businesses in which the Company is
engaged, changes in the interest rate environment which reduce interest margins,
significant increases in competition in the banking and financial services
industry, changes in consumer spending, borrowing and saving habits,
technological changes, the Company's ability to increase market share and
control expenses, the effect of compliance with legislation or regulatory
changes, the effect of changes in accounting policies and practices and the
costs and effects of unanticipated litigation.
FINANCIAL CONDITION
Total assets increased $88.5 million or 18.3% to $571.1 million at
December 31, 1997 from $482.7 million at December 31, 1996. The increase was
primarily attributable to a $37.8 million increase in net loans and a $42.1
million increase in the securities portfolio. At December 31, 1997, net loans
were $292.7 million compared to $254.9 million at December 31, 1996. The
securities portfolio totaled $216.5 million at December 31, 1997 compared to
$174.4 million at December 31, 1996. The increase in loans and securities was
funded primarily by retail deposit growth and Federal Home Loan Bank ("FHLB")
Dallas advances.
Nonperforming assets at December 31, 1997 totaled $3.1 million,
representing .5% of total assets, compared to $2.9 million or .6% of total
assets at December 31, 1996. Nonaccruing loans decreased to $1.3 million and the
ratio of nonaccruing loans to total loans decreased to .5% at December 31, 1997
as compared to $1.5 million or .6% at December 31, 1996. Real estate owned
increased to $364,000 at December 31, 1997 from $273,000 at December 31, 1996.
Deposits increased $36.7 million to $462.7 million at December 31, 1997
from $426.0 million at December 31, 1996. FHLB Dallas advances were $57.6
million at December 31, 1997, a $48.5 million increase from $9.1 million at
December 31, 1996. Other borrowings at December 31, 1997 and 1996 totaled $5.5
million and $6.8 million, respectively, and consisted of short-term and
overnight borrowings.
Shareholders' equity at December 31, 1997 totaled $40.0 million compared
to $36.6 million at December 31, 1996. The increase primarily reflects the net
income recorded for the year ended December 31, 1997, partially offset by the
repurchase of 65,464 shares of the outstanding stock at an average price of
$17.62 per share and the declaration of cash dividends.
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RESULTS OF OPERATIONS
The following table presents average balance sheet amounts and average
yields for the years ended December 31, 1997, 1996 and 1995. The information
should be reviewed in conjunction with the other financial statements. 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.
AVERAGE BALANCES AND INTEREST RATES
(dollars in thousands)
Years Ended
------------------------------------------------------------------------------------------------
December 31, 1997 December 31, 1996 December 31, 1995
------------------- --------------------------- ----------------------------
AVG. AVG. AVG. AVG. AVG. AVG.
ASSETS BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ------ ------- -------- ------- ------- -------- ------- ------- -------- ------
INTEREST EARNING ASSETS:
Loans(1) ....................... $274,577 $23,847 8.68% $243,925 $21,314 8.74% $209,141 $18,861 9.02%
Securities:
Inv. Sec. (Taxable) ............ 20,242 1,238 6.12% 24,398 1,476 6.05% 45,452 2,839 6.25%
Inv. Sec. (Tax-Exempt)(2) ...... 39,819 3,049 7.66% 37,721 2,805 7.44% 29,965 2,221 7.41%
Mortgage-backed Sec ............ 121,546 7,729 6.36% 105,923 6,756 6.38% 89,151 5,673 6.36%
Marketable Equity Sec .......... 2,415 129 5.34% 2,179 119 5.46% 2,068 121 5.85%
Interest Earning Deposits ...... 602 34 5.65% 381 21 5.51% 411 25 6.08%
Federal Funds Sold ............. 2,285 129 5.65% 3,547 188 5.30% 9,576 567 5.92%
------- ------- ------- ------- --------- -------
Total Interest Earning Assets .. 461,486 36,155 7.83% 418,074 32,679 7.82% 385,764 30,307 7.86%
------- ------- -------
NONINTEREST EARNING ASSETS:
Cash and Due From Banks ........ 23,945 22,160 20,899
Bank Premises and Equipment .... 14,693 12,325 10,717
Other Assets ................... 8,950 7,257 7,574
Less: Allowance for Loan Loss (3,355) (3,282) (3,323)
------ ------ --------
Total Assets ................... $505,719 $456,534 $421,631
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST BEARING LIABILITIES:
Savings Deposits .............. $16,173 446 2.76% $ 15,105 417 2.76% $14,931 412 2.76%
Time Deposits ................. 206,776 11,000 5.32% 190,094 10,083 5.30% 172,228 8,793 5.11%
Interest Bearing
Demand Deposits .............. 117,496 3,265 2.78% 111,950 3,093 2.76% 111,063 3,085 2.78%
Short-term Interest
Bearing Liabilities .......... 14,222 773 5.44% 2,671 132 4.94% 1,790 94 5.25%
Long-term Interest Bearing
Liabilities-FHLB Dallas ...... 12,151 721 5.93% 12,010 672 5.60% 8,912 453 5.08%
------- ------- ------- ------- -------- -------
Total Interest Bearing
Liabilities.................. 366,818 16,205 4.42% 331,830 14,397 4.34% 308,924 12,837 4.16%
------- ------- -------
NONINTEREST BEARING LIABILITIES:
Demand Deposits ................ 94,102 85,453 78,338
Other Liabilities .............. 6,873 4,788 4,184
------- -------- --------
Total Liabilities .............. 467,793 422,071 391,446
SHAREHOLDERS' EQUITY ........... 37,926 34,463 30,185
------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY .......... $505,719 $456,534 $421,631
======== ======== ========
NET INTEREST INCOME ............ $19,950 $18,282 $ 17,470
======= ======= ========
NET YIELD ON AVERAGE
EARNING ASSETS ................ 4.32% 4.37% 4.53%
====== ===== ======
(1) Loans are shown net of unearned discount. Interest on loans includes
fees on loans which are not material in amount.
(2) Interest income includes taxable-equivalent adjustments of $988, $907
and $717 as of December 31, 1997, 1996 and 1995, respectively.
Note: For the years ended December 31, 1997, 1996 and 1995, loans totaling
$1,344,000, $1,533,000, and $1,256,000, respectively, were on nonaccrual
status. The 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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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,
1997 Compared to 1996
---------------------------------
Average Average Increase
Volume Rate (Decrease)
INTEREST INCOME: ------- ------- --------
Loans .......................................... $ 2,663 $ (130) $ 2,533
Investment Securities (Taxable) ................ (254) 16 (238)
Investment Securities (Tax-Exempt) (1) ......... 166 78 244
Mortgage-backed Securities ..................... 994 (21) 973
Marketable Equity Securities ................... 13 (3) 10
Federal Funds Sold ............................. (72) 13 (59)
Interest Earning Deposits ...................... 12 1 13
------- ------- -------
Total Interest Income ........................ 3,522 (46) 3,476
------- ------- -------
INTEREST EXPENSE:
Savings Deposits ............................... 29 29
Time Deposits .................................. 887 30 917
Interest Bearing Demand Deposits ............... 154 18 172
Federal Funds Purchased and Other
Interest Bearing Liabilities ................. 627 14 641
FHLB Dallas Advances ........................... 8 41 49
------- ------- -------
Total Interest Expense ....................... 1,705 103 1,808
------- ------- -------
Net Interest Earnings .......................... $ 1,817 $ (149) $ 1,668
======= ======= =======
Years Ended December 31,
1996 Compared to 1995
------------------------------
Average Average Increase
Volume Rate (Decrease)
------- ------- ----------
INTEREST INCOME:
Loans .......................................... $ 3,055 $ (602) $ 2,453
Investment Securities (Taxable) ................ (1,276) (87) (1,363)
Investment Securities (Tax-Exempt) (1) ......... 577 7 584
Mortgage-backed Securities ..................... 1,070 13 1,083
Marketable Equity Securities ................... 8 (10) (2)
Federal Funds Sold ............................. (325) (54) (379)
Interest Earning Deposits ...................... (2) (2) (4)
------- ------- -------
Total Interest Income ........................ 3,107 (735) 2,372
------- ------- -------
INTEREST EXPENSE:
Savings Deposits ............................... 5 -- 5
Time Deposits .................................. 938 352 1,290
Interest Bearing Demand Deposits ............... 25 (17) 8
Federal Funds Purchased and Other
Interest Bearing Liabilities ................. 43 (5) 38
FHLB Dallas Advances ........................... 170 49 219
------- ------- -------
Total Interest Expense ....................... 1,181 379 1,560
------- ------- -------
Net Interest Earnings .......................... $ 1,926 $(1,114) $ 812
======= ======= =======
(1) Interest rates on securities which are nontaxable for Federal Income
Tax purposes are 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.
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30
The Company's results of operations are dependent primarily on net
interest income, which is the difference between the income earned on its loan,
securities and investment portfolios and its cost of funds, consisting of the
interest paid on deposits and borrowings. Results of operations are also
affected by the Company's noninterest income, provision for loan losses and
noninterest expenses. General economic and competitive conditions, particularly
changes in interest rates, government policies and actions of regulatory
authorities, also significantly affect the Company's results of operations.
Future changes in applicable law, regulations or government policies may also
have a material impact on the Company.
Comparison of Operating Results for the years ending December 31, 1997 compared
to December 31, 1996
OVERVIEW
During the year ended December 31, 1997, the Company's net income
increased $.8 million or 19.0% to $5.0 million, from $4.2 million for the same
period in 1996. The increase in net income was primarily attributable to an
increase in net interest income and noninterest income which was partially
offset by an increase in noninterest expense and provision for loan losses. The
results of operations of the Company are primarily those of the Bank.
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 interest earning assets and the interest expense paid on
deposits and borrowed funds. Fluctuations in interest rates as well as volume
and mix changes in interest earning assets and interest bearing liabilities
materially impact net interest income.
Net interest income increased for the year ended December 31, 1997 $1.6
million or 9.1% compared to the same period in 1996. Interest income for the
year ended December 31, 1997 increased $3.4 million or 10.7% to $35.2 million
compared to the same period in 1996. The increased interest income in 1997 was
attributable to the increase in Average Interest Earning Assets during the year.
Average Interest Earning Assets, totaling $461.5 million at December 31, 1997,
increased $43.4 million or 10.4% over December 31, 1996 primarily as a result of
increases in Average Loans. During the year ended December 31, 1997 the mix of
the Company's Interest Earning Assets reflected an increase in Loans compared to
the prior year end as Loans averaged 59.5% of Total Average Interest Earning
Assets compared to 58.3% during 1996. Securities averaged 39.9% of the total and
Other Interest Earning Asset categories averaged .6% for December 31, 1997.
During 1996 the comparable mix was 40.7% in Securities and 1.0% in the Other
Interest Earning Asset categories. The average yield on the Average Interest
Earning Assets increased 1 basis point during the year ended December 31, 1997
as compared to 1996. The increase in interest income on Loans of $2.5 million or
11.9% was the result of the increase in Average Loans during 1997. Interest
income on securities increased $.9 million in 1997 or 8.9% compared to 1996
primarily due to the increase in the Average Securities during 1997.
The increase in interest expense for the year ended December 31, 1997 of
$1.8 million or 12.6% was attributable to an increase in Average Interest
Bearing Liabilities of $35.0 million or 10.5% along with the increase in the
average rate paid on Interest Bearing Liabilities of 8 basis points. Average
Time Deposits increased $16.7 million or 8.8% while the average rate paid
increased 2 basis points along with an increase in Average Interest Bearing
Demand Deposits of $5.5 million or 5.0% and an increase in Average Savings
Deposits of $1.1 million or 7.1%. Average Noninterest Bearing Demand Deposits
increased during 1997 $8.6 million or 10.1%. The latter three categories, which
are considered the lowest cost deposits, comprised 52.4% of total average
deposits during the year ended December 31, 1997 compared to 52.8% during 1996
and 54.3% during 1995. The increase in Average Total Deposits is reflective of
overall bank growth and branch expansion and was the primary
29
31
source of funding the increase in Average Loans. Average Long-term and
Short-term Interest Bearing Liabilities other than deposits increased $11.7
million or 79.6% which contributed to the higher interest expense in 1997.
The following table sets forth the Company's deposit averages by category
for the years ended December 31, 1997, 1996 and 1995:
COMPOSITION OF DEPOSITS
(dollars in thousands)
Years Ended December 31,
---------------------------------------------------------------
1997 1996 1995
-------------------- ------------------- -------------------
AVG. AVG. AVG. AVG. AVG. AVG.
BALANCE RATE BALANCE RATE BALANCE RATE
--------- ------ --------- ----- --------- -----
Noninterest Bearing Demand Deposits.............. $ 94,102 N/A $ 85,453 N/A $ 78,338 N/A
Interest Bearing Demand Deposits................. 117,496 2.78% 111,950 2.76% 111,063 2.78%
Savings Deposits................................. 16,173 2.76% 15,105 2.76% 14,931 2.76%
Time Deposits.................................... 206,776 5.32% 190,094 5.30% 172,228 5.11%
--------- --------- ---------
Total Deposits.............................. $ 434,547 3.39% $ 402,602 3.38% $ 376,560 3.26%
========= ========= =========
PROVISION FOR LOAN LOSSES
The provision for loan losses for December 31, 1997 was $1.0 million
compared to $.5 million for December 31, 1996. For the year ended December 31,
1997, the Company's subsidiary, Southside Bank, had net charge-offs of loans of
$.9 million, an increase of 55.6% compared to December 31, 1996. For the year
ended December 31, 1996, net charge-offs on loans were $.6 million.
The increase in net charge-offs for 1997 occurred primarily as a result
of the increase in loans over the past four years which have grown $112 million,
increased bankruptcies which caused the charge-offs for loans to individuals to
remain consistent with last year's increased level and three commercial loans
which comprised the majority of the increase in charge-offs for commercial
loans.
As of December 31, 1997, the Company's review of the loan portfolio
indicates that a loan loss reserve of $3.4 million is adequate.
NONINTEREST INCOME
Noninterest income is an important source 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, 1997 and the
comparable year ended December 31, 1996 and indicates the percentage changes
(dollars in thousands):
Years Ended
December 31,
---------------- Percent
1997 1996 Change
---------------- -------
Deposit services ............................ $4,001 $2,821 41.8%
Gains on securities available for sale ...... 233 132 76.5%
Other ....................................... 1,432 1,180 21.4%
------ ------
Total noninterest income .................... $5,666 $4,133 37.1%
====== ======
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32
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, 1997 increased 37.1% or $1.5
million compared to 1996. Securities gains increased $.1 million or 76.5% from
1996. Of the $233,000 in net securities gains from the AFS portfolio in 1997,
there were $376,000 in realized gains and $143,000 in realized losses. The
Company sold securities out of its AFS portfolio to accomplish Asset Liability
Committee (ALCO) and investment portfolio objectives aimed at maximizing the
total return of the securities portfolio. The increase in deposit services
income of $1.2 million or 41.8% was a result of the introduction of a new
overdraft privilege program, increased numbers of deposit accounts and increased
deposit activity. Other noninterest income increased $.3 million or 21.4%
primarily as a result of increases in trust income and mortgage servicing
release fees.
NONINTEREST EXPENSE
The following schedule lists the accounts which comprise noninterest
expense, gives totals for these accounts for the year ended December 31, 1997
and the comparable year ended December 31, 1996 and indicates the percentage
changes:
Years Ended
December 31,
----------------------------
1997 1996 Percent
(in thousands) Change
------------ ------------ -------
Salaries and employee benefits.................................... $ 9,889 $ 9,382 5.4%
Net occupancy expense............................................. 2,089 1,749 19.4%
Equipment expense................................................. 414 321 29.0%
Advertising, travel and entertainment............................. 1,006 956 5.2%
Supplies.......................................................... 440 436 .9%
FDIC insurance.................................................... 52 2 2500.0%
Postage........................................................... 331 301 10.0%
Other............................................................. 2,707 2,219 22.0%
------------ ------------
Total noninterest expense......................................... $ 16,928 $ 15,366 10.2%
============ ============
Noninterest expense for the year ended December 31, 1997 increased $1.6
million or 10.2% when compared to the year ended December 31, 1996. Salaries and
employee benefits increased $.5 million or 5.4% due to several factors. Higher
direct salary expense including payroll taxes of $.8 million was offset by lower
retirement expense. The increase is reflective of personnel additions to staff
the three new branches opened in the second half of 1996, overall bank growth
and pay increases. Health insurance expense increased $28,000 or 3.2% in 1997
compared to the same period in 1996. Retirement expense decreased $.3 million or
34.1% for the year ended December 31, 1997.
Net occupancy expense increased $.3 million or 19.4% for the year ended
December 31, 1997 compared to the same period in 1996, largely due to higher
real estate taxes, depreciation expense and associated operating costs as a
result of the three new branches opened in 1996 and the expansion of the bank
headquarters completed during 1997.
Equipment expense increased $.1 million or 29.0% for the year ended
December 31, 1997 when compared to 1996 due to increased equipment usage at the
three new branch locations opened in 1996 and increased equipment costs
associated with equipment maintenance.
Advertising expense increased $.1 million or 5.2% for the year ended
December 31, 1997 compared to the same period in 1996. The increase occurred due
to increases in direct advertising
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33
during 1997 as a result of the opening of the three new branches in 1996 and new
products introduced in 1997. Donations also increased during the year ended
December 31, 1997 and are included in this total.
FDIC insurance increased $50,000 or 2,500% for the year ended December
31, 1997 compared to the year ended December 31, 1996. The Company anticipates
the percentage of change will decrease in 1998. During the year ended December
31, 1996, the insurance expense was reduced to $500 per quarter as a result of
the Bank Insurance Fund being fully funded. Congress passed legislation which
increased FDIC insurance expense to $1.26 per hundred dollars of deposits in
1997 to pay for a portion of the Savings and Loan bailout.
Other expense increased $.5 million or 22.0% during the year ended
December 31, 1997 compared to 1996. The increase was due primarily to increased
professional fees paid during 1997 for additional internal auditing, data
processing programming, compliance reviews, loan loss reviews and consulting
fees paid in relation to the introduction of the overdraft privilege product.
INCOME TAXES
Income tax expense was $1.7 million for the year ended December 31, 1997
and represented a $.3 million or 17.5% increase from the year ended December 31,
1996. The increased income tax expense was primarily a result of higher pre-tax
income.
Management believes that the Company will generate sufficient future taxable
income to realize the entire deferred tax asset and that realization of net
deferred tax asset is more likely than not.
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34
December 31, 1996 compared to December 31, 1995
OVERVIEW
During the year ended December 31, 1996, the Company's net income
decreased $.3 million or 7.2% to $4.2 million, compared to $4.5 million for the
same period in 1995. The decrease in net income was primarily attributable to a
net increase in the reserve for loan losses provision expense, expenses
associated with the opening of three new branches and a decrease in gains
realized on the sale of securities which was partially offset by an increase in
net interest income and noninterest income.
NET INTEREST INCOME
Net interest income increased for the year ended December 31, 1996 $.6
million or 3.7% compared to the same period in 1995. Interest income for the
year ended December 31, 1996 increased $2.2 million or 7.4% to $31.8 million
compared to the same period in 1995. The increased interest income in 1996 was
attributable to the increase in Average Interest Earning Assets during the year.
The average yield on Average Interest Earning Assets decreased 4 basis points
during the year ended December 31, 1996 as compared to 1995. The increase in
interest income on Loans of $2.5 million or 13.0% was the result of the increase
in Average Loans during 1996. Interest income on securities increased $.1
million in 1996 or 1.1% compared to 1995 primarily due to the increase in the
Average Securities during 1996.
The increase in interest expense for the year ended December 31, 1996 of
$1.6 million or 12.2% was attributable to an increase in Average Interest
Bearing Liabilities of $22.9 million or 7.4% along with the increase in the
average rate paid on Interest Bearing Liabilities of 18 basis points. Average
Time Deposits increased $17.9 million or 10.4% while the average rate paid
increased 19 basis points along with the increase in Average Interest Bearing
Demand Deposits of $.9 million. Average Long-term Interest Bearing Liabilities
increased $3.1 million which contributed to the higher interest expense in 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses for December 31, 1996 and 1995 were
$500,000 and ($300,000), respectively. For the year ended December 31, 1996, the
Company's subsidiary, Southside Bank, had net charge-offs of loans of $568,000
an increase of 218.3% compared to December 31, 1995. For the year ended December
31, 1995, net recoveries on loans were $480,000. The increase in net charge-offs
for 1996 occurred primarily as a result of significant recoveries realized
during 1995. Also contributing to the increase was an increase in charged-off
loans. In 1995, due to the significant recoveries realized, the Company recorded
a negative provision for loan loss of $300,000. The $500,000 provision for loan
loss in 1996 is reflective of increased charge-offs and smaller recoveries in
1996 compared to 1995 and an increase in the loan portfolio of $29.4 million.
NONINTEREST INCOME
Total noninterest income for the year ended December 31, 1996 increased
6.7% or $.3 million compared to 1995. Securities gains decreased $.1 million or
40.3% from 1995. Of the $132,000 in net securities gains from the AFS portfolio
in 1996, there were $199,000 in realized gains and $67,000 in realized losses.
The Company sold securities out of its AFS portfolio to accomplish ALCO and
investment portfolio objectives aimed at maximizing the total return of the
securities portfolio. The increase in deposit services income of $69,000 or 2.5%
was a result of increased deposit activity. Other noninterest income increased
$279,000 or 31% primarily as a result of increases in trust income, credit life
commissions and mortgage servicing release fees.
33
35
NONINTEREST EXPENSE
Noninterest expense for the year ended December 31, 1996 increased $.7
million or 4.7% when compared to the year ended December 31, 1995. Salaries and
employee benefits increased $.8 million or 9.8% due to several factors. Higher
direct salary expense including payroll taxes represented $.7 million of the
increase. The increase is reflective of personnel additions to staff the three
new branches opened during 1996 along with overall bank growth, pay increases
and the increased commitment to residential mortgage lending. Health insurance
expense increased $.2 million or 27.2% in 1996 compared to the same period in
1995. Retirement expense decreased $10,000 or 1.2% for the year ended December
31, 1996.
Net occupancy expense increased $.1 million or 6.9% for the year ended
December 31, 1996 compared to the same period in 1995, largely due to higher
real estate taxes, depreciation expense and associated operating costs as a
result of three new branches opened in 1996 and the opening of the new motor
bank facility at Gentry Parkway.
Advertising expense increased $.1 million or 7.7% for the year ended
December 31, 1996 compared to the same period in 1995. The increase occurred due
to increases in direct advertising during 1996 as a result of the opening of
three new branches in 1996 and the new motor bank facility. Donations also
increased during the year ended December 31, 1996 and are included in this
total.
FDIC insurance decreased $.4 million or 99.5% for the year ended December
31, 1996 compared to the year ended December 31, 1995. 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. During the year ended December 31, 1996, the insurance expense
was reduced to $500 per quarter as a result of the Bank Insurance Fund being
fully funded.
INCOME TAXES
Income tax expense was $1,437,000 for the year ended December 31, 1996 and
represented a $276,000 or 16.1% decrease from the year ended December 31, 1995.
The decreased income tax expense primarily is a result of lower pre-tax income
and an increase in tax free income in 1996.
MANAGEMENT OF LIQUIDITY
Liquidity management involves the ability to convert assets to cash
with a minimum of loss. The Company must be capable of meeting its obligations
to its customers at any time. This means addressing (1) the immediate cash
withdrawal requirements of depositors and other funds providers; (2) the funding
requirements of all lines and letters of credit; and (3) the short-term credit
needs of customers. Liquidity is provided by short-term investments that can be
readily liquidated with a minimum risk of loss. Cash, Interest Earning Deposits,
Federal Funds Sold and short-term investments with maturities or repricing
characteristics of one year or less continue to be a substantial percentage of
total assets. At December 31, 1997 these investments were 18.7% of Total Assets,
as compared with 18.2% for December 31, 1996, and 22.7% for December 31, 1995.
Liquidity is further provided through the matching, by time period, of rate
sensitive interest earning assets with rate sensitive interest bearing
liabilities. The Company has two lines of credit for the purchase of federal
funds. A $15.0 million and $10.0 million unsecured line of credit has been
established with Nationsbank and Texas Independent Bank, respectively.
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36
INTEREST RATE RISK
The primary objective of monitoring the Company's interest rate
sensitivity, or risk, is to provide management the tools necessary to manage the
balance sheet to minimize adverse changes in net interest income as a result of
changes in the direction and level of interest rates. Federal Reserve Board
monetary control efforts, the effects of deregulation and legislative changes
have been significant factors affecting the task of managing interest rate
sensitivity positions in recent years.
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 net
asset sensitivity and a negative gap represents net liability sensitivity. The
table on page 37 shows interest sensitivity gaps for four different intervals as
of December 31, 1997.
The interest rate risk inherent in assets and liabilities may be
determined by analyzing the extent to which such assets and liabilities are
"interest rate sensitive" and by measuring an institution's interest rate
sensitivity "gap." An asset or liability is said to be interest rate sensitive
within a defined time period if it matures or reprices within that period. The
difference or mismatch between the amount of interest-earning assets maturing or
repricing within a defined period and the amount of interest-bearing liabilities
maturing or repricing within the same period is defined as the interest rate
sensitivity gap. An institution is considered to have a negative gap if the
amount of interest-bearing liabilities maturing or repricing within a specified
time period exceeds the amount of interest-earning assets maturing or repricing
within the same period. If more interest-earning assets than interest-bearing
liabilities mature or reprice within a specified period, then the institution is
considered to have a positive gap. Accordingly, in a rising interest rate
environment in an institution with a negative gap, the cost of its rate
sensitive liabilities would theoretically rise at a faster pace than the yield
on its rate sensitive assets, thereby diminishing future net interest income. In
a falling interest rate environment, a negative gap would indicate that the cost
of rate sensitive liabilities would decline at a faster pace than the yield on
rate sensitive assets and improve net interest income. For an institution with a
positive gap, the reverse would be expected.
In an attempt to manage its exposure to changes in interest rates,
management closely monitors the Company's exposure to interest rate risk.
Management maintains an asset/liability committee which meets regularly and
reviews the Company's interest rate risk position and makes recommendations for
adjusting this position. In addition, the Board reviews on a monthly basis the
Company's asset/liability position.
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37
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. Except for the
effects of prepayments and scheduled principal amortization on mortgage related
assets, the table presents principal cash flows and related weighted average
interest rates by the contractual term to maturity. Nonaccrual loans are not
included in the Loan totals. All instruments are classified as other than
trading.
EXPECTED MATURITY DATE
(dollars in thousands)
Year Ending December 31,
-----------------------------------------------------------------------------------
Fair
1998 1999 2000 2001 2002 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
Fixed Rate Loans.......... $ 80,763 $ 49,788 $ 31,377 $ 21,740 $ 12,446 $ 42,897 $ 239,011 $ 238,073
9.11% 9.04% 9.01% 8.86% 8.64% 8.36% 8.90%
Adjustable Rate Loans..... 32,780 2,378 3,340 1,512 1,715 13,955 55,680 55,680
9.84% 10.00% 10.05% 9.75% 10.06% 9.77% 9.85%
Mortgage-backed
Securities................ 40,397 33,827 24,405 16,730 9,131 16,923 141,413 141,439
6.49% 6.51% 6.49% 6.45% 6.57% 6.45% 6.49%
Investments and Other
Interest Earning Assets... 30,023 4,549 5,794 1,691 683 35,438 78,178 78,173
5.85% 7.55% 7.46% 7.39% 7.87% 7.72% 6.97%
Total Interest
Earning Assets............ $ 183,963 $ 90,542 $ 64,916 $ 41,673 $ 23,975 $ 109,213 $ 514,282 $ 513,365
8.13% 8.05% 7.98% 7.87% 7.93% 8.04% 8.05%
Savings Deposits.......... $ 2,154 $ 1,077 $ $ $ $ 12,924 $ 16,155 $ 16,155
2.76% 2.76% 2.76% 2.76%
NOW Deposits.............. 8,583 4,291 51,494 64,368 64,321
2.15% 2.15% 2.15% 2.15%
Money Market Deposits..... 7,666 3,833 45,994 57,493 57,493
3.38% 3.38% 3.38% 3.38%
Certificates of Deposit... 154,699 36,146 9,972 2,887 7,437 18 211,159 211,658
5.25% 5.78% 6.28% 5.90% 6.00% 5.35% 5.42%
FHLB Dallas Advances...... 30,320 1,201 4,069 4,363 6,287 11,307 57,547 54,753
4.96% 5.68% 5.94% 6.06% 6.11% 6.06% 5.47%
Other Borrowings.......... 5,531 5,531 5,530
7.06% 7.06%
Total Interest
Bearing Liabilities........ $ 208,953 $ 46,548 $ 14,041 $ 7,250 $ 13,724 $ 121,737 $ 412,253 $ 409,910
5.03% 5.18% 6.18% 6.00% 6.05% 3.04% 4.55%
Residential fixed rate loans are assumed to have annual payment rates
between 4% and 15% of the portfolio. Commercial and multi-family real estate
loans are assumed to prepay at an annualized rate between 4% and 15%. Consumer
loans are assumed to prepay at an annualized rate between 8% and 15%. Fixed and
adjustable rate mortgage-backed securities, including Collateralized Mortgage
Obligations ("CMOs") and Real Estate Mortgage Investment Conduits ("REMICs"),
have annual payment assumptions ranging from 20% to 40%.
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38
The Company assumes 80% of savings accounts, transaction accounts and
Money Market accounts at December 31, 1997, are core deposits and are,
therefore, expected to roll-off after five years. The remaining savings accounts
are assumed to roll-off over the first eighteen months. No roll-off rate is
applied to certificates of deposit. Fixed maturity deposits reprice at
maturity.
In evaluating the Company's exposure to interest rate risk, certain
limitations inherent in the method of analysis presented in the foregoing table
must be considered. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable rate mortgages,
have features which restrict changes in interest rates, prepayment and early
withdrawal levels may deviate significantly from those assumed in calculating
the table. Finally, the ability of many borrowers to service their debt may
decrease in the event of an interest rate increase. The Company considers all of
these factors in monitoring its exposure to interest rate risk.
The following table sets forth certain information as of December 31,
1997 with respect to rate sensitive assets and liabilities and interest
sensitivity gap (dollars in thousands):
Rate Sensitive Assets (RSA) 1-3 Mos. 4-12 Mos. 1-5 Yrs. Over 5 Yrs. Total
------------- ----------- ------------ ----------- ------------
Loans(1)................................. $ 81,113 $ 55,330 $ 118,400 $ 39,848 $ 294,691
Securities............................... 19,861 50,298 96,810 49,537 216,506
Other Interest
Earning Assets......................... 3,085 3,085
------------- ----------- ------------ ----------- ------------
Total Rate Sensitive Assets.............. $ 104,059 $ 105,628 $ 215,210 $ 89,385 $ 514,282
============= =========== ============ =========== ============
Rate Sensitive Liabilities (RSL)
Interest Bearing Deposits (3)............ $ 191,631 $ 101,084 $ 56,442 $ 18 $ 349,175
Other Interest
Bearing Liabilities.................... 9,879 25,972 15,920 11,307 63,078
------------- ----------- ------------ ----------- ------------
Total Rate Sensitive Liabilities......... $ 201,510 $ 127,056 $ 72,362 $ 11,325 $ 412,253
============= =========== ============ =========== ============
Gap (2).................................. (97,451) (21,428) 142,848 78,060 102,029
Cumulative Gap........................... (97,451) (118,879) 23,969 102,029
Cumulative Ratio of RSA
to RSL................................. .52 .64 1.06 1.25 1.25
Gap/Total Earning Assets................. (18.9%) (4.2%) 27.8% 15.2% 19.8%
- -------------------------------------------------------------------------------
(1) Amount is equal to total loans net of unearned discount less nonaccrual
loans at December 31, 1997.
(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. Rates have fluctuated several hundred basis
points during the last five years. During this time, NOW, MMDA and Savings rates
have moved very little. Therefore, when considering rate sensitivity, management
does not consider NOW, Savings and 50% of MMDA to be one day interest rate
sensitive. Management puts these deposits in the over 5 year category for
purposes of internal evaluation. As a result of reclassifying these deposits,
management considers the Company to be well matched. Management continually
evaluates the condition of the economy, the pattern of
37
39
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.
CAPITAL RESOURCES
Total Shareholders' Equity at December 31, 1997, of $40,031,000 increased
9.4% or $3,427,000 from December 31, 1996 and represented 7.0% of total assets
at December 31, 1997 compared to 7.6% at December 31, 1996.
Net income for 1997 of $5,006,000 was the major contributor to the
increase in Shareholders' Equity at December 31, 1997 along with a net increase
in unrealized gains of $445,000 on securities available for sale. In addition,
the Company issued $326,000 in common stock (18,430 shares) through the
Company's dividend reinvestment plan and sold $77,000 of treasury stock (11,700
shares). Decreases to Shareholders' Equity consisted of $1,316,000 in dividends
paid and the purchase of $1,154,000 in treasury stock (65,464 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 its discretion,
modify or discontinue the plan. During the third quarter of 1997, the Company
issued a 5% stock dividend, which had no net effect on Shareholders' Equity. The
Company's dividend policy requires that any cash dividend payments made by the
Company not exceed consolidated earnings for that year. Shareholders should not
anticipate a continuation of the cash dividend simply because of the
implementation of a dividend reinvestment program. The payment of dividends will
depend upon future earnings, the financial condition of the Company, and other
related factors.
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of Total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
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40
To be categorized as well capitalized, the Bank must maintain minimum
Total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in
the following table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- ---------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
--------- ----- -------------- ------------ -------------- -----------
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets)......... $ 41,965 12.89% > or = $26,038 > or = 8.0% > or = $32,547 > or = 10.0%
Tier 1 Capital
(to Risk Weighted Assets)......... $ 38,595 11.86% > or = $13,019 > or = 4.0% > or = $19,528 > or = 6.0%
Tier 1 Capital
(to Average Assets) (1)........... $ 38,595 7.25% > or = $21,283 > or = 4.0% > or = $26,604 > or = 5.0%
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets)......... $ 38,891 13.74% > or = $22,640 > or = 8.0% > or = $28,300 > or = 10.0%
Tier 1 Capital
(to Risk Weighted Assets)......... $ 35,642 12.59% > or = $11,320 > or = 4.0% > or = $16,980 > or = 6.0%
Tier 1 Capital
(to Average Assets) (1)........... $ 35,642 7.63% > or = $14,015 > or = 3.0% > or = $23,359 > or = 5.0%
(1) Refers to quarterly average assets as calculated by bank regulatory
agencies.
The table below summarizes key equity ratios for the Company for the years
ended December 31, 1997, 1996 and
1995.
Years Ended December 31,
-----------------------------------
1997 1996 1995
----- ---- ----
Percentage of Net Income to:
Average Total Assets................................................ .99% .92% 1.07%
Average Shareholders' Equity........................................ 13.20% 12.20% 15.01%
Percentage of Dividends Declared Per Common
Share to Net Income Per Common Share-Basic.......................... 27.21% 32.52% 26.32%
Percentage of Dividends Declared Per Common
Share to Net Income Per Common Share-Diluted........................ 27.97% 33.06% 26.72%
Percentage of Average Shareholders'
Equity to Average Total Assets...................................... 7.50% 7.55% 7.16%
YEAR 2000 COMPLIANCE (Y2K)
The Company continues to address the Y2K issue as it effects all
software, hardware and other systems associated with ensuring the Company is Y2K
compliant. The Y2K issue could impact any computer or other date sensitive
systems that store dates using a two digit year format. These systems may
recognize the year "00" as 1900, not 2000. This could produce miscalculations,
generate erroneous data or even cause a system to fail. All software, hardware
and other systems have been identified and categorized as to its business
significance and critical nature. Third parties on which the Company is
dependent for Y2K compliance have been notified. The Company is initiating
communication with large customers to determine what steps they are undertaking
to ensure they will be Y2K compliant before January 1, 2000. Future credit
decisions when appropriate will include a detailed
39
41
assessment of customers' Y2K plans for achieving timely compliance. The
Company's critical software, hardware and other systems should be thoroughly
tested and Y2K compliant before the end of 1998. Contingency plans have been
made as necessary for appropriate software, hardware and other systems. It is
anticipated the cost associated with the Company becoming fully Y2K compliant is
approximately $750,000. Approximately 80% of this cost will be new equipment and
new software which will be depreciated over a three to five year period.
The Company presently believes that with modifications to existing
software and conversion to new software, the Y2K issue will not pose significant
operational problems for the Company's computer systems or business operations.
However, if such modifications and conversions are not made, or are not
completed timely, the Y2K issue could have a material impact on the operations
of the Company. In addition, there can be no assurance that unforeseen problems
in the Company's computer systems, or the systems of third parties on which the
Company's computers rely, would not have an adverse effect on the Company's
systems or operations.
OTHER ACCOUNTING ISSUES
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (FAS 128). This statement,
supersedes APB 15, "Earnings Per Share" and simplifies the computation of
earnings per share (EPS) by replacing the "primary" EPS requirements of APB 15
with a "basic" EPS computation based upon weighted-average shares outstanding.
The new standard requires a dual presentation of basic and diluted EPS. Diluted
EPS is similar to fully diluted EPS required under APB 15 for entities with
complex capital structures. The adoption of FAS 128 did not have a material
impact on the Company.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS
130). This statement, which the Company will be required to adopt in 1998,
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The new
standard requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The Company will adopt
FAS 130 beginning January 1, 1998.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (FAS 131). This statement, which the Company
will be required to adopt in 1998, supersedes FAS 14, Financial Reporting for
Segments of a Business Enterprise, but retains the requirement to report
information about major customers. The new standard requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. In the initial year of application, comparative
information for earlier years is to be restated. The Company will adopt FAS 131
in the year ending December 31, 1998.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" (FAS 132). This statement,
which the Company will be required to adopt in 1998, amends FAS 87, Employers'
Accounting for Pension, FAS 88, Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits and
FAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions.
The new standard revises employers' disclosures about pension and other
postretirement benefit plans without changing the measurement or recognition of
those plans. It standardizes the disclosure requirements for pension and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain disclosures. The
Company will adopt FAS 132 beginning January 1, 1998.
40
42
EFFECTS OF INFLATION
The consolidated financial statements of the Company, and their related
notes, have been prepared in accordance with generally accepted accounting
principles, that require the measurement of financial position and operating
results in terms of historical dollars without considering the change in the
relative purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
many industrial companies, nearly all of the assets and liabilities of the
Company are monetary. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
41
43
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 22, 1998, 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 22, 1998, 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 22, 1998, 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 22, 1998, and is incorporated herein by
reference.
42
44
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, 1997 and 1996.
Consolidated Statements of Income for the years ended December
31, 1997, 1996, and 1995.
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flow for the years ended December
31, 1997, 1996 and 1995.
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 10-K 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 10-K 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 10-K for the
year ended December 31, 1994, and incorporated herein).
**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 10-K for the year ended December 31,
1994, and incorporated herein).
43
45
**10(a)(ii) - Deferred Compensation Plan for Robbie N. Edmonson effective
February 13, 1984, as amended June 28, 1990 and March 16, 1995 (filed as
Exhibit 10(a)(ii) to the Registrant's Form 10-K for the year ended December
31, 1995, and incorporated herein).
**10(b) - Officers Long-term Disability Income Plan effective June 25, 1990
(filed as Exhibit 10(b) to the Registrant's Form 10-K 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 10-K 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 10-K for the year ended December 31, 1994, and
incorporated herein).
**10(e) - Form of Deferred Compensation Agreements dated June 30, 1994 with
each of Titus Jones and Andy Wall as amended November 13, 1995. (filed as
Exhibit 10(e) to the Registrant's Form 10-K for the year ended December 31,
1995 and incorporated herein).
*,**10(f) - Form of Deferred Compensation Agreements dated June 30, 1994 with each of Sam
Dawson, Lee Gibson and Jeryl Story as amended October 15, 1997 and Form of
Deferred Compensation Agreement dated October 15, 1997 with Lonny Uzzell.
*22 - Subsidiaries of the Registrant.
*23 - Consent of Independent Accountants.
*27 - Financial Data Schedule for the year ended December 31, 1997.
*27(a) - Restated Financial Data Schedule for the quarter ended September 30, 1997.
*27(b) - Restated Financial Data Schedule for the quarter ended June 30, 1997.
*27(c) - Restated Financial Data Schedule for the quarter ended March 31, 1997.
*27(d) - Restated Financial Data Schedule for the year ended December 31, 1996.
44
46
*27(e) - Restated Financial Data Schedule for the quarter ended September 30, 1996.
*27(f) - Restated Financial Data Schedule for the quarter ended June 30, 1996.
*27(g) - Restated Financial Data Schedule for the quarter ended March 31, 1996.
*27(h) - Restated 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, 1997.
45
47
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 Officer and Accounting
DATED: March 26, 1998 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 26, 1998
- ----------------------------------------- and Director
(B. G. Hartley)
/s/ ROBBIE N. EDMONSON President and Director March 26, 1998
- -----------------------------------------
(Robbie N. Edmonson)
/s/ SAM DAWSON Executive Vice President, March 26, 1998
- ----------------------------------------- Secretary and Director
(Sam Dawson)
/s/ FRED E. BOSWORTH Director March 26, 1998
- -----------------------------------------
(Fred E. Bosworth)
/s/ HERBERT C. BUIE Director March 26, 1998
- -----------------------------------------
(Herbert C. Buie)
/s/ ROLLINS CALDWELL Director March 26, 1998
- -----------------------------------------
(Rollins Caldwell)
/s/ W. D. (JOE) NORTON Director March 26, 1998
- -----------------------------------------
(W. D. (Joe) Norton)
/s/ WILLIAM SHEEHY Director March 26, 1998
- -----------------------------------------
(William Sheehy)
/s/ MURPH WILSON Director March 26, 1998
- -----------------------------------------
(Murph Wilson)
46
48
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, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flow
for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flow for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
Dallas, Texas
March 13, 1998
47
49
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31, December 31,
1997 1996
------------ ------------
ASSETS
Cash and due from banks ....................................................... $ 36,593 $ 31,653
Investment securities:
Available for sale ......................................................... 71,031 56,091
Held to maturity ........................................................... 804 1,734
--------- ---------
Total Investment securities .............................................. 71,835 57,825
Mortgage-backed and related securities:
Available for sale ......................................................... 127,751 90,574
Held to maturity ........................................................... 13,662 23,782
--------- ---------
Total Mortgage-backed securities ......................................... 141,413 114,356
Marketable equity securities:
Available for sale ......................................................... 3,258 2,220
Loans:
Loans, net of unearned discount ........................................... 296,035 258,167
Less: Reserve for loan losses ............................................. (3,370) (3,249)
--------- ---------
Net Loans ................................................................ 292,665 254,918
Premises and equipment, net ................................................... 17,627 13,695
Other real estate owned, net .................................................. 364 273
Interest receivable ........................................................... 3,918 3,300
Deferred tax asset ............................................................ 460 464
Other assets .................................................................. 3,012 3,990
--------- ---------
TOTAL ASSETS ............................................................. $ 571,145 $ 482,694
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing ........................................................ $ 113,499 $ 98,901
Interest bearing ........................................................... 349,175 327,049
--------- ---------
Total Deposits ........................................................... 462,674 425,950
Short-term obligations:
Federal funds purchased .................................................... 3,884 4,800
FHLB Dallas Advances ....................................................... 29,000
Other obligations .......................................................... 1,647 2,035
Long-term obligations:
FHLB Dallas Advances ....................................................... 28,547 9,096
Other liabilities ............................................................. 5,362 4,209
--------- ---------
TOTAL LIABILITIES ........................................................ 531,114 446,090
--------- ---------
Shareholders' equity:
Common stock: ($2.50 par, 6,000,000 shares authorized,
3,496,269 and 3,316,127 shares issued) .................................... 8,740 8,290
Paid-in capital ............................................................ 21,290 18,501
Retained earnings .......................................................... 10,414 9,628
Treasury stock (116,750 and 62,986 shares at cost) ......................... (1,820) (777)
Net unrealized gains on securities available for sale, net of taxes ........ 1,407 962
--------- ---------
TOTAL SHAREHOLDERS' EQUITY .............................................. 40,031 36,604
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .............................. $ 571,145 $ 482,694
========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
48
50
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Years Ended December 31,
------------------------------------
1997 1996 1995
-------- -------- --------
Interest income
Loans .............................................................. $ 23,847 $ 21,314 $ 18,861
Investment securities .............................................. 3,299 3,374 4,343
Mortgage-backed and related securities ............................. 7,729 6,756 5,673
Marketable equity securities ....................................... 129 119 121
Other interest earning assets ...................................... 163 209 592
-------- -------- --------
Total interest income ........................................ 35,167 31,772 29,590
-------- -------- --------
Interest expense
Time and savings deposits .......................................... 14,711 13,593 12,290
Short-term obligations ............................................. 773 132 94
Long-term obligations .............................................. 721 672 453
-------- -------- --------
Total interest expense ....................................... 16,205 14,397 12,837
-------- -------- --------
Net interest income ................................................... 18,962 17,375 16,753
Provision for loan losses ............................................. 1,005 500 (300)
-------- -------- --------
Net interest income after provision for loan losses ................... 17,957 16,875 17,053
-------- -------- --------
Noninterest income
Deposit services ................................................... 4,001 2,821 2,752
Gain on sales of securities available for sale ..................... 233 132 221
Other .............................................................. 1,432 1,180 901
-------- -------- --------
Total noninterest income ..................................... 5,666 4,133 3,874
-------- -------- --------
Noninterest expense
Salaries and employee benefits ..................................... 9,889 9,382 8,545
Net occupancy expense .............................................. 2,089 1,749 1,636
Equipment expense .................................................. 414 321 302
Advertising, travel & entertainment ................................ 1,006 956 888
Supplies ........................................................... 440 436 388
FDIC insurance ..................................................... 52 2 434
Postage ............................................................ 331 301 303
Other .............................................................. 2,707 2,219 2,186
-------- -------- --------
Total noninterest expense .................................... 16,928 15,366 14,682
-------- -------- --------
Income before federal tax expense ..................................... 6,695 5,642 6,245
-------- -------- --------
Provision (benefit) for federal tax expense
Current ............................................................ 1,914 1,648 1,429
Deferred ........................................................... (225) (211) 284
-------- -------- --------
Total income taxes ........................................... 1,689 1,437 1,713
-------- -------- --------
Net Income ............................................................ $ 5,006 $ 4,205 $ 4,532
======== ======== ========
Earnings Per Common Share-Basic
Net Income ......................................................... $ 1.47 $ 1.23 $ 1.33
Earnings Per Common Share-Diluted
Net Income ......................................................... $ 1.43 $ 1.21 $ 1.31
The accompanying notes are an integral part of
these consolidated financial statements.
49
51
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except per share data)
Net
Unrealized Total
Common Paid in Retained Treasury Gains Shareholders'
Stock Capital Earnings Stock (Losses) Equity
-------- -------- -------- -------- --------- -----------
Balance at December 31, 1994 ................ $ 7,433 $ 14,529 $ 7,480 $ (219) $ (1,699) $ 27,524
Net Income .................................. 4,532 4,532
Cash dividend ($.35 per share) .............. (1,047) (1,047)
5% Stock dividend ........................... 368 1,474 (1,842)
Common stock issued (20,800 shares) ......... 52 206 258
Purchase of 26,339 shares of
treasury stock ............................. (267) (267)
Net increase in unrealized gains on
securities available for sale (net of tax) . 2,352 2,352
-------- --------- -------- -------- --------- -----------
Balance at December 31, 1995 ................ 7,853 16,209 9,123 (486) 653 33,352
Net Income .................................. 4,205 4,205
Cash dividend ($.40 per share) .............. (1,258) (1,258)
5% Stock dividend ........................... 388 2,017 (2,405)
Common stock issued (19,557 shares) ......... 49 259 308
Purchase of 27,648 shares of
treasury stock ............................. (425) (425)
Sale of 14,083 shares of
treasury stock ............................. (37) 134 97
Net increase in unrealized gains on
securities available for sale (net of tax) . 309 309
FAS 109 - Incentive Stock Options ........... 16 16
-------- --------- -------- -------- --------- -----------
Balance at December 31, 1996 ................ 8,290 18,501 9,628 (777) 962 36,604
Net Income .................................. 5,006 5,006
Cash dividend ($.40 per share) .............. (1,316) (1,316)
5% Stock dividend ........................... 404 2,466 (2,870)
Common stock issued (18,430 shares) ......... 46 280 326
Purchase of 65,464 shares of
treasury stock ............................. (1,154) (1,154)
Sale of 11,700 shares of
treasury stock ............................. (34) 111 77
Net increase in unrealized gains on
securities available for sale (net of tax) . 445 445
FAS 109 - Incentive Stock Options ........... 43 43
-------- --------- -------- -------- --------- -----------
Balance at December 31, 1997 ................ $ 8,740 $ 21,290 $ 10,414 $ (1,820) $ 1,407 $ 40,031
======== ========= ======== ======== ========= ===========
The accompanying notes are an integral part of
these consolidated financial statements.
50
52
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
Years Ended December 31,
---------------------------------------
1997 1996 1995
--------- --------- ----------
OPERATING ACTIVITIES:
Net income ................................................................... $ 5,006 $ 4,205 $ 4,532
Adjustments to reconcile net cash provided by operations:
Depreciation and amortization .............................................. 2,804 2,250 1,563
Accretion of discount and loan fees ........................................ (780) (737) (846)
Provision for loan losses .................................................. 1,005 500 (300)
Deferred loan origination cost ............................................. (72)
Gain on sales of securities available for sale ............................. (233) (132) (221)
Gain on sales of premises and equipment .................................... (12) (6) (10)
Gain on sales of other real estate owned ................................... (20)
Increase in interest receivable ............................................ (618) (205) (514)
(Increase) decrease in other assets ........................................ 923 (964) 563
(Increase) decrease in deferred tax asset .................................. (182) (194) 284
Increase in interest payable ............................................... 598 103 217
Increase (decrease) in other payables ...................................... 167 (2,586) 2,912
--------- --------- ----------
Net cash provided by operating activities .............................. 8,678 2,234 8,088
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale ............ 31,037 19,928 33,457
Proceeds from sales of mortgage-backed securities available for sale ....... 37,247 18,991 16,555
Proceeds from maturities of investment securities available for sale ....... 16,366 33,920 20,582
Proceeds from maturities of mortgage-backed securities available for sale .. 33,389 18,529 5,994
Proceeds from maturities of investment securities held to maturity ......... 936 941 17,510
Proceeds from maturities of mortgage-backed securities held to maturity .... 10,214 10,398 6,403
Purchases of investment securities available for sale ...................... (61,370) (35,098) (63,663)
Purchases of mortgage-backed securities available for sale ................. (108,788) (63,353) (38,299)
Purchases of marketable equity securities available for sale ............... (1,038) (108) (107)
Net decrease in federal funds sold ......................................... 11,100
Net increase in loans ...................................................... (39,900) (31,144) (27,486)
Purchases of premises and equipment ........................................ (5,153) (3,070) (2,822)
Proceeds from sales of premises and equipment .............................. 17 25 42
Proceeds from sales of repossessed assets .................................. 1,015 1,165 1,002
Proceeds from sales of other real estate owned ............................. 98 145
--------- --------- ----------
Net cash used in investing activities .................................. (85,930) (28,876) (19,587)
The accompanying notes are an integral part of
these consolidated financial statements.
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53
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (continued)
(in thousands)
Years Ended December 31,
------------------------------------
1997 1996 1995
-------- -------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in demand and savings accounts .................. $ 24,443 $ 16,332 $ (6,388)
Net increase in certificates of deposit ................................. 12,281 21,310 9,594
Proceeds from advances .................................................. 58,900 6,500
Repayment of advances ................................................... (10,449) (4,590) (811)
Net increase (decrease) in federal funds purchased ...................... (916) 200 4,600
Proceeds from the issuance of common stock .............................. 326 308 258
Purchase of treasury stock .............................................. (1,154) (425) (267)
Proceeds from sale of treasury stock .................................... 77 97
Dividends paid .......................................................... (1,316) (1,258) (1,047)
-------- -------- --------
Net cash provided by financing activities ......................... 82,192 31,974 12,439
-------- -------- --------
Net increase in cash and cash equivalents ............................... 4,940 5,332 940
Cash and cash equivalents at beginning of year .......................... 31,653 26,321 25,381
-------- -------- --------
Cash and cash equivalents at end of year ................................ $ 36,593 $ 31,653 $ 26,321
======== ======== ========
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION:
Interest paid ........................................................... $ 15,701 $ 14,294 $ 12,620
Income taxes paid ....................................................... $ 1,990 $ 1,623 $ 1,440
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of OREO and other repossessed assets through foreclosure .... $ 1,148 $ 1,187 $ 986
Transfer of securities to available for sale ............................ $ 57,584
FAS114 reclassification ................................................. $ 807
The accompanying notes are an integral part of
these consolidated financial statements.
52
54
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 Delaware
Financial Corporation, Southside Bank (the "Bank") and the nonbank
subsidiary, are summarized below.
Organization and Basis of Presentation. The consolidated financial
statements include the accounts of the Company, Southside Delaware
Financial Corporation, Southside Bank and the nonbank subsidiary, which did
not conduct any business in 1997. 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 using
the level yield method. Interest income on other loans is credited to
income based primarily on the principal outstanding at contract rates of
interest. Loans receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or pay-off are reported
at their outstanding principal adjusted for any charge-offs, the allowance
for loan losses, and any deferred fees or costs on originated loans and
unamortized premiums or discounts on purchased loans. 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.
Loan Fees. The Company treats loan fees, net of direct costs, as an
adjustment to the yield of the related loan over its term.
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 contractually 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.
53
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Other Real Estate Owned. Other Real Estate Owned includes real estate
acquired in full or partial settlement of loan obligations. Other Real
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.
Securities. The Company uses the specific identification method to
determine the basis for computing realized gain or loss. The Company
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.
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.
Income Taxes. The Company files a consolidated Federal income tax return.
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. The Company adopted the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128).
This statement supersedes APB 15, "Earnings Per Share" and simplifies the
computation of earnings per share (EPS) by replacing the "primary" EPS
requirements of APB 15 with a "basic" EPS computation based upon
weighted-average shares outstanding. The new standard requires a dual
presentation of basic and diluted EPS. Diluted EPS is similar to fully
diluted EPS required under APB 15 for entities with complex capital
structures. The adoption of FAS 128 did not have a material impact on the
Company. All previous periods have been restated to reflect the adoption of
FAS 128. Earnings per share have been adjusted to give retroactive
recognition to stock dividends.
Earnings per share on a basic and diluted basis as required by Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share"
is calculated as follows (in thousands, except per share amounts):
54
56
Years Ended December 31,
-------------------------------
1997 1996 1995
----------- --------- ---------
Basic net earnings per share
Net income ....................................................... $ 5,006 $ 4,205 $ 4,532
Weighted average shares outstanding .............................. 3,394 3,409 3,401
----------- --------- ---------
$ 1.47 $ 1.23 $ 1.33
=========== ========= =========
Diluted net earnings per share
Net income ....................................................... $ 5,006 $ 4,205 $ 4,532
Weighted average shares outstanding plus
assumed conversions ........................................... 3,490 3,487 3,450
----------- --------- ---------
$ 1.43 $ 1.21 $ 1.31
=========== ========= =========
Calculation of weighted average shares outstanding plus
assumed conversions
Weighted average share outstanding ............................... 3,394 3,409 3,401
Effect of dilutive securities options ............................ 96 78 49
----------- --------- ---------
3,490 3,487 3,450
=========== ========= =========
Stock Options. The Financial Accounting Standards Board published Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS123) on January 1, 1996 which 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
elected to provide the pro forma disclosures for 1995, 1996 and 1997.
Recent Accounting Pronouncements. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (FAS 130). This statement, which the
Company will be required to adopt in 1998, establishes standards for
reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. The new standard requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company will adopt FAS 130 beginning
January 1, 1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (FAS 131). This statement, which the
Company will be required to adopt in 1998, supersedes FAS 14, Financial
Reporting for Segments of a Business Enterprise, but retains the
requirement to report information about major customers. The new standard
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. In the initial year of
application, comparative information for earlier years is to be restated.
The Company will adopt FAS 131 in the year ending December 31, 1998.
55
57
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" (FAS 132). This statement,
which the Company will be required to adopt in 1998, amends FAS 87,
Employers' Accounting for Pension, FAS 88, Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits and FAS 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions. The new standard revises employers'
disclosures about pension and other postretirement benefit plans without
changing the measurement or recognition of those plans. It standardizes the
disclosure requirements for pension and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures. The Company will
adopt FAS 132 beginning January 1, 1998.
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 cash reserve balances with the Federal
Reserve Bank. The reserve balances were $2,816,000 and $3,788,000 as of December
31, 1997 and 1996, respectively.
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, 1997 and 1996 were (in
thousands):
AVAILABLE FOR SALE
------------------------------------------------
December 31, Gross Gross Estimated
------------ Amortized Unrealized Unrealized Market
1997 Cost Gains Losses Value
---- ------ ------- -------- -------
U.S. Treasury ..................... $ 19,958 $ 6 $ 8 $ 19,956
U.S. Government Agencies .......... 629 2 631
Mortgage-backed Securities:
Direct Govt. Agency Issues ...... 93,829 339 187 93,981
Other Private Issues ............ 33,333 439 2 33,770
State and Political
Subdivisions .................... 45,938 1,728 8 47,658
Other Stocks and Bonds ............ 6,041 3 6,044
-------- -------- -------- --------
Total ........................... $199,728 $ 2,517 $ 205 $202,040
======== ======== ======== ========
HELD TO MATURITY
--------------------------------------------
December 31, Gross Gross Estimated
------------ Amortized Unrealized Unrealized Market
1997 Cost Gains Losses Value
---- ----- ------- -------- -------
U.S. Government Agencies .......... $ 804 $ $ 5 $ 799
Mortgage-backed Securities:
Direct Govt. Agency Issues ...... 13,662 129 103 13,688
------- ------- ------- -------
Total ........................... $14,466 $ 129 $ 108 $14,487
======= ======= ======= =======
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AVAILABLE FOR SALE
-------------------------------------------------------
December 31, Gross Gross Estimated
------------ Amortized Unrealized Unrealized Market
1996 Cost Gains Losses Value
---- -------- ------- -------- -------
U.S. Treasury ..................... $ 5,026 $ 28 $ $ 5,054
U.S. Government Agencies .......... 8,492 10 45 8,457
Mortgage-backed Securities:
Direct Govt. Agency Issues ...... 74,005 479 42 74,442
Other Private Issues ............ 15,808 328 4 16,132
State and Political
Subdivisions .................... 38,555 1,095 21 39,629
Other Stocks and Bonds ............ 5,163 8 5,171
---------- ---------- ---------- ----------
Total ........................... $ 147,049 $ 1,948 $ 112 $ 148,885
========== ========== ========== ==========
HELD TO MATURITY
-------------------------------------------------------
December 31, Gross Gross Estimated
------------ Amortized Unrealized Unrealized Market
1996 Cost Gains Losses Value
---- ------ ------- -------- -------
U.S. Government Agencies ............. $ 1,124 $ $ 14 $ 1,110
Mortgage-backed Securities:
Direct Govt. Agency Issues ......... 23,782 212 141 23,853
State and Political
Subdivisions ....................... 610 1 611
---------- ---------- ---------- ----------
Total .............................. $ 25,516 $ 213 $ 155 $ 25,574
========== ========== ========== ==========
Interest income recognized on securities for the years presented (in thousands):
Years Ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
U.S. Treasury ...................................................... $ 461 $ 397 $ 713
U.S. Government Agencies ........................................... 578 858 2,039
Mortgage-backed Securities ......................................... 7,729 6,756 5,673
State and Political Subdivisions ................................... 2,067 2,000 1,581
Other Stocks and Bonds ............................................. 322 238 131
-------- -------- --------
Total interest income on securities ................................ $ 11,157 $ 10,249 $ 10,137
======== ======== ========
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, 1997 or 1996.
57
59
Of the $233,000 in net securities gains from the AFS portfolio in 1997, there
were $376,000 in realized gains and $143,000 in realized losses. Of the $132,000
in net securities gains from the AFS portfolio in 1996, there were $199,000 in
realized gains and $67,000 in realized losses. The $221,000 in net securities
gains from the AFS portfolio in 1995 were comprised of $450,000 in realized
gains and $229,000 in realized losses.
The scheduled maturities of AFS and HTM securities as of December 31, 1997 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 ..................................................... $ $
Due after one year through five years ....................................... 804 799
-------- --------
804 799
Mortgage-backed securities ..................................................... 13,662 13,688
-------- --------
Total .................................................................... $ 14,466 $ 14,487
======== ========
Available for sale securities:
Due in one year or less ..................................................... $ 26,930 $ 26,938
Due after one year through five years ....................................... 11,680 11,913
Due after five years through ten years ...................................... 8,869 9,172
Due after ten years ......................................................... 25,087 26,266
-------- --------
72,566 74,289
Mortgage-backed securities ..................................................... 127,162 127,751
-------- --------
Total .................................................................... $199,728 $202,040
======== ========
Investment securities with book values of $32,844,000 and $17,474,000 were
pledged as of December 31, 1997 and 1996, respectively, to collateralize public
and trust deposits or for other purposes as required by law.
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60
4. LOANS AND RESERVE FOR POSSIBLE LOAN LOSSES
Loans in the accompanying consolidated balance sheets are classified as follows
(in thousands):
December 31, December 31,
1997 1996
------------ ------------
Real Estate Loans:
Construction ...................................................... $ 10,299 $ 7,821
1-4 family residential ............................................ 76,243 62,356
Other ............................................................. 55,802 57,198
Commercial loans ..................................................... 62,161 51,514
Loans to individuals ................................................. 96,432 85,758
-------- --------
Total loans .......................................................... 300,937 264,647
Less: Unearned income ............................................ 4,902 6,480
Reserve for loan losses .................................... 3,370 3,249
-------- --------
Net loans ............................................................ $292,665 $254,918
======== ========
The following is a summary of the Reserve for Loan Losses for the years ended
December 31, 1997, 1996 and 1995 (in thousands):
Years Ended December 31,
----------------------------------
1997 1996 1995
------- --------- --------
Balance at beginning of year ......................................... $ 3,249 $ 3,317 $ 3,137
Provision for loan losses .......................................... 1,005 500 (300)
Loans charged off ................................................ (1,229) (838) (599)
Recoveries of loans charged off .................................. 345 270 1,079
------- ------- -------
Net loan (losses) recoveries ................................... (884) (568) 480
------- ------- -------
Balance at end of year ............................................... $ 3,370 $ 3,249 $ 3,317
======= ======= =======
Nonaccrual loans at December 31, 1997 and 1996 were $1,344,000 and $1,533,000,
respectively. Loans with terms modified in troubled debt restructuring at
December 31, 1997 and 1996 were $435,000 and $400,000, respectively.
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 ................................................. $ 108 $ 27 $ 81
Commercial Loans .................................................. 1,059 185 874
Loans to Individuals .............................................. 177 12 165
------ ------ ------
Balance at December 31, 1997 ...................................... $1,344 $ 224 $1,120
====== ====== ======
Valuation Carrying
Total Allowance Value
------- ----------- ---------
Real Estate Loans ................................................. $ 646 $ 128 $ 518
Commercial Loans .................................................. 774 199 575
Loans to Individuals .............................................. 113 18 95
------ ------ ------
Balance at December 31, 1996 ...................................... $1,533 $ 345 $1,188
====== ====== ======
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61
For the years ended December 31, 1997 and 1996, the average recorded investment
in impaired loans was approximately $1,450,000 and $1,468,000, respectively.
During the year ended December 31, 1997, 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
$110,000, $97,000 and $78,000 for the years ended December 31, 1997, 1996 and
1995, respectively. If these loans had been accruing interest at their
original contracted rates, related income would have been $336,000, $216,000
and $273,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
5. BANK PREMISES AND EQUIPMENT
December 31, December 31,
1997 1996
------------ ------------
(in thousands)
Bank premises .................................................................. $18,713 $14,681
Furniture and equipment ........................................................ 9,559 8,542
------- -------
28,272 23,223
Less accumulated depreciation .................................................. 10,645 9,528
------- -------
Total .............................................................. $17,627 $13,695
======= =======
Depreciation expense was $1,215,000, $1,025,000 and $997,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
Future minimum rental commitments under noncancelable leases are (in thousands):
1998 $ 121,914
1999 122,839
2000 128,840
2001 115,638
2002 49,668
Thereafter 25,332
------------
$ 564,231
============
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,
------------------------
1997 1996
--------- ---------
Balance at beginning of year .......................................... $ 946 $ 946
Provision for Losses ..............................................
Losses on sales ...................................................
Gains on sales ....................................................
Disposition of OREO ............................................... (274)
--------- ---------
Balance at end of year ................................................ $ 672 $ 946
========= =========
For the years ended December 31, 1997, 1996 and 1995, income from OREO
properties exceeded the provision and other expenses by $23,000, $35,000 and
$34,000, respectively.
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7. TIME DEPOSITS
December 31, December 31,
1997 1996
------------ ------------
(in thousands)
Savings deposits .................................................. $ 16,155 $ 15,213
Money Market demand deposits ...................................... 57,493 51,872
NOW demand deposits ............................................... 64,368 61,085
Certificates and other time deposits
of $100,000 or more .............................................. 62,152 55,758
Certificates and other time
deposits under $100,000 .......................................... 149,007 143,121
-------- --------
Total ................................................. $349,175 $327,049
======== ========
For the years ended December 31, 1997, 1996 and 1995, interest expense on time
certificates of deposit of $100,000 or more aggregated $2,922,000, $2,518,000
and $2,083,000, respectively.
At December 31, 1997, the scheduled maturities of CDs are as follows (in
thousands):
1998 $ 154,699
1999 36,146
2000 9,972
2001 2,887
2002 and thereafter 7,455
------------
$ 211,159
============
The aggregate amount of demand deposits that has been reclassified as loans
were $.5 million and $.4 million for December 31, 1997 and 1996, respectively.
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8. SHORT-TERM BORROWINGS (dollars in thousands)
Information related to short-term borrowings for the three years ended December
31 is provided in the table below.
Years Ended December 31,
----------------------------------
1997 1996 1995
------- ------- --------
Federal funds purchased
Balance at end of period ........................................ $ 3,884 $ 4,800 $ 4,600
Average amount outstanding during the period (1) ................ 2,695 1,367 611
Maximum amount outstanding during the period .................... 12,384 7,700 5,350
Weighted average interest rate during the period (2) ............ 5.7% 5.1% 6.1%
Interest rate at end of period .................................. 7.8% 6.9% 6.0%
Securities sold under agreements to repurchase
Balance at end of period ........................................ $ $ $
Average amount outstanding during the period (1) ................ 3,649 191
Maximum amount outstanding during the period .................... 13,027 1,980
Weighted average interest rate during the period (2) ............ 5.2% 5.2%
Interest rate at end of period ..................................
Treasury tax and loan funds
Balance at end of period ........................................ $ 1,647 $ 2,035 $ 1,352
Average amount outstanding during the period (1) ................ 1,080 1,113 1,180
Maximum amount outstanding during the period .................... 2,850 2,731 2,907
Weighted average interest rate during the period (2) ............ 5.2% 4.6% 4.8%
Interest rate at end of period .................................. 5.3% 5.2% 5.2%
Federal Home Loan Bank ("FHLB") Dallas Advances
Balance at end of period ........................................ $29,000 $ $
Average amount outstanding during the period (1) ................ 6,798
Maximum amount outstanding during the period .................... 29,000
Weighted average interest rate during the period (2) ............ 5.5%
Interest rate at end of period .................................. 4.9%
(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.
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9. LONG TERM OBLIGATIONS (dollars in thousands)
Years Ended December 31,
--------------------------------
1997 1996 1995
------- -------- ------
FHLB Dallas Advances
Balance at end of period ........................................ $28,547 $ 9,096 $13,686
Average amount outstanding during the period (1) ................ 12,151 12,010 8,912
Maximum amount outstanding during the period .................... 28,547 13,686 13,766
Weighted average interest rate during the period (2) ............ 5.9% 5.6% 5.1%
Interest rate at end of period .................................. 6.0% 5.8% 5.5%
(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.
FHLB Dallas Long-term advances based on scheduled repayments at December 31 are:
Under Due Due Over 1997
1 Year 1-5 Years 6-10 Years 10 Years Total
------- --------- ---------- --------- -------
Fixed rate ........................ $ 1,320 $15,920 $10,654 $ 653 $28,547
------- ------- ------- ------- -------
Total Long-term Obligations ..... $ 1,320 $15,920 $10,654 $ 653 $28,547
======= ======= ======= ======= =======
FHLB Dallas advances are collateralized by FHLB Dallas stock, nonspecified real
estate loans and mortgage-backed securities.
10. EMPLOYEE BENEFITS
Southside Bank has a deferred compensation agreement with eight of its
executive officers, which generally provides for payment of an aggregate amount
of $3.4 million over a maximum period of fifteen years after retirement or
death. Deferred compensation expense was $43,000, $96,000 and $97,000 for the
years ended December 31, 1997, 1996 and 1995, 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 $792,000, $760,000 and $628,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. There was one retiree
participating in the health insurance plan as of December 31, 1997 and 1996.
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65
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. There were no contributions to the plan for the year ended
December 31, 1997. Contributions to the plan for the years ended December 31,
1996 and 1995 were $75,000 and $150,000, respectively. At December 31, 1997
and 1996, 93,851 and 94,615 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 59,992 shares of
Southside Bancshares, Inc. stock purchased at fair market value as of December
31, 1997 and 1996. The number of shares have been adjusted as a result of
stock dividends.
December 31, December 31,
1997 1996
------------ ------------
(in thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $8,000 and $6,944 respectively ............................... $ 9,042 $ 7,758
======== ========
Projected benefit obligation for service rendered to date ......... $(11,853) $(10,086)
Plan assets at fair value, primarily stocks, bonds and CD's ....... 10,233 9,049
-------- --------
Plan assets (under) projected benefit obligation .................. (1,620) (1,037)
Unrecognized net loss ............................................. 1,143 829
Unrecognized net asset being amortized over 16.55 years ........... (278) (324)
-------- --------
Net pension liability included in other liabilities ............. $ (755) $ (532)
======== ========
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 7.75% and 4.50% at December 31, 1997 and
1996, respectively. The assumed long-term rate of return on plan assets was
9.0% at December 31, 1997 and 1996.
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66
Net periodic pension cost for the years ended December 31, 1997, 1996 and 1995
included the following components (in thousands):
Years Ended December 31,
-----------------------------------
1997 1996 1995
-------- ------- --------
Service cost - benefits earned during the period .............. $ 510 $ 547 $ 436
Interest cost on projected benefit obligation ................. 778 691 623
Actual return on plan assets .................................. (1,415) (992) (1,212)
Net amortization and deferral ................................. 563 326 652
------- ------- -------
Net periodic pension cost ..................................... $ 436 $ 572 $ 499
======= ======= =======
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 expense for this plan for the years ended December 31, 1997, 1996
and 1995 was $45,000, $52,000 and $59,000, respectively.
Net periodic postretirement benefit cost for the years ended December 31, 1997,
1996 and 1995 includes the following components (in thousands):
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- -----
Service cost .................................................. $ $ 1 $ 6
Interest cost ................................................. 37 38 41
Net amortization and deferral on
unrecognized transition obligation .......................... 3 3 3
Net amortization and deferral on
unrecognized net loss ...................................... 3 10 9
--- --- ---
Net periodic postretirement benefit cost ...................... $43 $52 $59
=== === ===
Accrued postretirement benefit cost at December 31, 1997 and 1996 is composed
of the following (in thousands):
Years Ended
December 31,
--------------------------------
1997 1996
------------ -------------
Accumulated benefit obligation, including vested benefits
of $491 and $584, respectively ............................................ $ (510) $ (584)
Unrecognized net transition obligation ...................................... 26 29
Unrecognized actuarial loss ................................................. 130 181
Additional minimum liability ................................................ (156) (210)
------------ -------------
Accrued postretirement benefit cost ......................................... $ (510) $ (584)
============ =============
Assumed discount rate ....................................................... 7.25% 7.75%
============ =============
Compensation increase rate .................................................. 4.50% 4.50%
============ =============
65
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Incentive Stock Options
In April 1993, the company adopted the Southside Bancshares, Inc. 1993
Incentive Stock Option Plan ("the Plan"), a stock-based incentive compensation
plan. The Company applies APB Opinion 25 and related Interpretations in
accounting for the Plan. In 1995, the FASB issued FASB Statement No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123"), which, if fully adopted
by the Company, would change the methods the Company applies in recognizing the
cost of the Plan. Adoption of the cost recognition provisions of SFAS 123 is
optional and the Company has decided not to elect these provisions of SFAS 123.
However, pro forma disclosures as if the Company adopted the cost recognition
provisions of SFAS 123 in 1995 are required by SFAS 123 and are presented
below.
Under the Plan, the Company is authorized to issue shares of Common Stock
pursuant to "Awards" granted in the form of incentive stock options (intended
to qualify under Section 422 of the Internal Revenue Code of 1986, as amended).
Awards may be granted to selected employees and directors of the Company or any
subsidiary.
The Plan provides that the exercise price of any stock option may not be less
than the fair market value of the Common Stock on the date of grant. The
Company granted incentive stock options in 1995, 1996 and 1997. The stock
options granted in 1995, 1996 and 1997 have contractual terms of 10 years. All
options vest on a graded schedule, 20% per year for 5 years, beginning on the
first anniversary date of the grant date. In accordance with APB 25, the
Company has not recognized any compensation cost for these stock options
granted in 1995, 1996 and 1997.
A summary of the status of the Company's stock options as of December 31, 1997,
1996 and 1995 and the changes during the year ended on those dates is presented
below (For presentation purposes, all options are adjusted for all stock
dividends declared through December 31, 1997):
- -------------------------------------------------------------------------------------------------------------
INCENTIVE STOCK OPTIONS
- -------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
# SHARES WEIGHTED # SHARES WEIGHTED # SHARES WEIGHTED
OF AVERAGE OF AVERAGE OF AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES
- -------------------------------------------------------------------------------------------------------------
Outstanding at beginning
of the year 220,611 $10.02 158,964 $7.94 94,137 $6.27
- -------------------------------------------------------------------------------------------------------------
Granted 75,602 $16.90 77,175 $13.61 64,827 $10.37
- -------------------------------------------------------------------------------------------------------------
Exercised 11,700 $6.58 14,083 $6.91 0 N/A
- -------------------------------------------------------------------------------------------------------------
Forfeited 1,635 $13.10 1,445 $6.42 0 N/A
- -------------------------------------------------------------------------------------------------------------
Expired 0 N/A 0 N/A 0 N/A
- -------------------------------------------------------------------------------------------------------------
Outstanding at end of
year 282,878 $12.01 220,611 $10.02 158,964 $7.94
- -------------------------------------------------------------------------------------------------------------
Exercisable at end of
year 88,865 $8.74 53,930 $7.26 37,656 $6.27
- -------------------------------------------------------------------------------------------------------------
Weighted-average FV of
options granted during
the year $5.12 $3.55 $2.49
- -------------------------------------------------------------------------------------------------------------
The fair value of each stock option granted is estimated on the date of grant
using the minimum value method of option pricing with the following
weighted-average assumptions for grants in 1995, 1996 and 1997, respectively:
dividend yield of 3.9%, 2.9%, and 2.4%; risk-free interest rates of 5.99%,
5.41%, and 6.52%; the expected lives of 6 years; the expected volatility is
26.56%.
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68
The following table summarizes information about stock options outstanding at
December 31, 1997:
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------------
NUMBER WEIGHTED AVG. NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED AVG EXERCISABLE WEIGHTED AVG.
EXERCISE PRICES AT 12/31/97 CONTR. LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
$ 6.27 to $11.00 131,151 7.00 $ 8.30 88,865 $ 8.74
$11.01 to $16.90 151,727 8.80 $15.23 0 $ 0
---------------- ------- ---- ------ --------- -------
$ 6.27 to $16.90 282,878 8.00 $12.01 88,865 $ 8.74
Pro Forma Net Income and Net Income Per Common Share
Had the compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS 123, the Company's net income and net income
per common share for 1995, 1996, and 1997 would approximate the pro forma
amounts below (in thousands, net of taxes):
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
12/31/97 12/31/97 12/31/96 12/31/96 12/31/95 12/31/95
---------- ---------- ---------- ---------- ---------- ----------
SFAS 123 Charge . . . . . . . . $ 0 $ 93 $ 0 $ 62 $ 0 $ 9
Net Income . . . . . . . . . . $5,006 $4,913 $4,205 $4,143 $4,532 $4,523
Net Income per Common
Share-Basic . . . . . . . . . $ 1.47 $ 1.45 $ 1.23 $ 1.22 $ 1.33 $ 1.33
Net Income per Common
Share-Diluted . . . . . . . . $ 1.43 $ 1.41 $ 1.21 $ 1.19 $ 1.31 $ 1.31
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995,
and the Company anticipates making awards in the future under its stock-based
compensation plan.
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69
11. SHAREHOLDERS' EQUITY
Cash dividends declared and paid were $.40 per share, $.40 per share and $.35
per share for the years ended December 31, 1997, 1996 and 1995, respectively.
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, 1997 was
$10,414,000.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of Total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1997,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum Total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table. There are no conditions
or events since that notification that management believes have changed the
institution's category.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ------------------------------ ------------------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------- -------------- ----------- -------------- ------------
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) ... $41,965 12.89% > or = $26,038 > or = 8.0% > or = $32,547 > or = 10.0%
Tier 1 Capital
(to Risk Weighted Assets) ... $38,595 11.86% > or = $13,019 > or = 4.0% > or = $19,528 > or = 6.0%
Tier 1 Capital
(to Average Assets) (1) ..... $38,595 7.25% > or = $21,283 > or = 4.0% > or = $26,604 > or = 5.0%
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) ... $38,891 13.74% > or = $22,640 > or = 8.0% > or = $28,300 > or = 10.0%
Tier 1 Capital
(to Risk Weighted Assets) ... $35,642 12.59% > or = $11,320 > or = 4.0% > or = $16,980 > or = 6.0%
Tier 1 Capital
(to Average Assets) (1) ..... $35,642 7.63% > or = $14,015 > or = 3.0% > or = $23,359 > or = 5.0%
(1) Refers to quarterly average assets as calculated by bank regulatory
agencies.
68
70
Payment of dividends by the Bank is limited under regulation. The amount that
can be paid in any calendar year without prior approval of the Bank's
regulatory agencies cannot exceed the lesser of net profits (as defined) for
that year plus the net profits for the preceding two calendar years, or
retained earnings.
The table below summarizes key equity ratios for the Company for the years
ended December 31, 1997, 1996 and 1995.
Years Ended December 31,
-------------------------------------
1997 1996 1995
------ ------ ------
Percentage of Net Income to:
Average Total Assets . . . . . . . . . . . . . . . . . . . . . .99% .92% 1.07%
Average Shareholders' Equity . . . . . . . . . . . . . . . . . 13.20% 12.20% 15.01%
Percentage of Dividends Declared Per Common
Share to Net Income Per Common Share-Basic . . . . . . . . . . 27.21% 32.52% 26.32%
Percentage of Dividends Declared Per Common
Share to Net Income Per Common Share-Diluted . . . . . . . . . 27.97% 33.06% 26.72%
Percentage of Average Shareholders'
Equity to Average Total Assets . . . . . . . . . . . . . . . . 7.50% 7.55% 7.16%
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, 1997, 18,430 shares were sold under this plan
at an average price of $17.69 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 1997, 65,464 shares of treasury stock were purchased under this plan at
a cost of $1,154,000.
13. INCOME TAXES
The provisions for federal income taxes included in the accompanying statements
consist of the following (in thousands):
Years Ended December 31,
---------------------------------
1997 1996 1995
------- ------- -------
Current tax provision ............................................. $ 1,914 $ 1,648 $ 1,429
Deferred tax provision (benefit) .................................. (225) (211) 284
------- ------- -------
Provision for tax expense charged to operations ................... 1,689 1,437 1,713
Shareholders' Equity - Unrealized gains on
securities available for sale ................................. 229 159 1,212
------- ------- -------
Comprehensive provision for income tax ............................ $ 1,918 $ 1,596 $ 2,925
======= ======= =======
69
71
Deferred income taxes result from temporary 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,
----------------------------
1997 1996 1995
------ ----- ------
Provision for loan losses ......................................... $(323) $(170) $ 102
Provision for OREO losses ......................................... 83 117
Depreciation ...................................................... 29 57 31
Retirement and other benefit plans ................................ (60) (123) (41)
FHLB Dallas Stock dividends ....................................... 40 37 37
Loan origination costs ............................................ 11 2 25
Other ............................................................. (5) (14) 13
----- ----- -----
Deferred tax provision (benefit) .................................. $(225) $(211) $ 284
===== ===== =====
The components of the net deferred tax asset as of December 31, 1997 and 1996
are summarized below (in thousands):
Assets Liabilities
------ -----------
Allowance for Losses on OREO ................................................ $ 318 $
Reserve for Loan Losses ..................................................... 737
Retirement and Other Benefit Plans .......................................... 640
Unrealized gains on securities available for sale ........................... (725)
Loan Origination Costs ...................................................... (154)
Premises and Equipment ...................................................... (209)
FHLB Dallas Stock Dividends ................................................. (145)
Other ....................................................................... (2)
------- -------
Gross deferred tax assets (liabilities) .................................. 1,695 (1,235)
------- -------
Net deferred tax asset at December 31, 1997 ........................... $ 460
=======
Assets Liabilities
------- ------------
Allowance for Losses on OREO ................................................ $ 401 $
Reserve for Loan Losses ..................................................... 415
Retirement and Other Benefit Plans .......................................... 576
Unrealized gains on securities available for sale ........................... (496)
Loan Origination Costs ...................................................... (143)
Premises and Equipment ...................................................... (183)
FHLB Dallas Stock Dividends ................................................. (105)
Other ....................................................................... (1)
------- -------
Gross deferred tax assets (liabilities) .................................. 1,392 (928)
------- -------
Net deferred tax asset at December 31, 1996 ........................... $ 464
=======
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72
A reconciliation of tax at statutory rates and total tax expense is as follows
(dollars in thousands):
Years Ended December 31,
--------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
Percent Percent Percent
of of of
Pre-Tax Pre-Tax Pre-Tax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
Calculated Tax Expense ........................ $ 2,276 34.0% $ 1,918 34.0% $ 2,123 34.0%
Increase (Decrease) in Taxes from:
Tax Exempt Interest ........................... (706) (10.5)% (650) (11.5)% (518) (8.3)%
Other Net ..................................... 119 1.7% 169 3.0% 108 1.7%
------- ------ ------- ------ ------- ------
Provision for Tax Expense Charged to
Operations ................................. 1,689 25.2% 1,437 25.5% 1,713 27.4%
Shareholders' Equity - Unrealized gains
on securities available for sale ........... 229 3.4% 159 2.8% 1,212 19.4%
------- ------ ------- ------ ------- ------
Comprehensive Provision for Income Tax ........ $ 1,918 28.6% $ 1,596 28.3% $ 2,925 46.8%
======= ====== ======= ====== ======= ======
14. CONTINGENCIES
The Company, or its subsidiaries, is involved with various litigation which
resulted in the normal course of business. Management of the Company, after
consulting with its legal counsel, believes that any liability resulting from
litigation will not have a material effect on the financial position and
results of operations 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 fees. 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 and outstanding
credit card arrangements of $28,313,000 and $27,172,000 at December 31, 1997 and
1996, respectively. The Company had outstanding standby letters of credit of
$277,000 and $202,000 at December 31, 1997 and 1996, respectively.
71
73
In the normal course of business the Company buys and sells securities. At
December 31, 1997 and 1996, the Company had commitments to purchase $624,000
and $322,000 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 collateralized 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
53.6% of this group represents loans collateralized 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 collateralized 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, 1997 and 1996 were (in thousands):
1997 1996
---------- ---------
Beginning Balance of Loans . . . . . . . . . . . . . . . . . . . . $ 6,999 $ 7,127
Additional Loans . . . . . . . . . . . . . . . . . . . . . . . . 2,507 2,331
Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,346) (2,459)
---------- ---------
Ending Balance of Loans . . . . . . . . . . . . . . . . . . . . . . $ 6,160 $ 6,999
========== =========
Other indebtedness of officers and employees as of December 31, 1997 and 1996
was $2,478,000 and $2,901,000, respectively.
The Company incurred legal costs of $148,000, $141,000 and $152,000 during the
years ended December 31, 1997, 1996 and 1995, respectively, from a law firm of
which an outside director of the Company is a partner. The Company paid
approximately $55,000, $57,000 and $75,000 in insurance premiums during the
years ended December 31, 1997, 1996 and 1995, respectively, to companies of
which two outside directors are officers. The Company paid approximately
$50,000, $106,000 and $49,000 in architectural fees during the years ended
December 31, 1997, 1996, and 1995, 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 estimated using discounted cash
flow analyses or underlying value of the collateral where applicable.
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.
FHLB Dallas Advances: 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.
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75
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, 1997 At December 31, 1996
----------------------- ------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ------------ --------- ------------
Financial assets:
Cash and due from banks ..................... $ 36,593 $ 36,593 $ 31,653 $ 31,653
Investment securities:
Available for sale ........................ 71,031 71,031 56,091 56,091
Held to maturity .......................... 804 799 1,734 1,720
Mortgage-backed and related securities:
Available for sale ........................ 127,751 127,751 90,574 90,574
Held to maturity .......................... 13,662 13,688 23,782 23,853
Marketable equity securities:
Available for sale ........................ 3,258 3,258 2,220 2,220
Loans, net ..................................... 292,665 295,097 254,918 259,648
Interest receivable ............................ 3,918 3,918 3,300 3,300
Financial liabilities:
Retail deposits ............................. $462,674 $463,157 $425,950 $426,570
Federal funds purchased ..................... 3,884 3,884 4,800 4,800
FHLB Dallas advances ........................ 57,547 54,753 9,096 8,572
Off-balance sheet liabilities:
Commitments to extend credit ................ 24,036 24,036 23,285 23,285
Standby letters of credit ................... 277 277 202 202
Credit card arrangements .................... 4,277 4,277 3,887 3,887
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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76
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 1997 1996
-------- --------
Cash and due from banks ............................................. $ 222 $ 347
Investment in bank subsidiaries at equity in
underlying net assets ............................................. 39,804 36,292
Investment in nonbank subsidiary at equity in
underlying net assets ............................................. 15 15
Other assets ........................................................ 2 2
-------- --------
TOTAL ASSETS ................................................ $ 40,043 $ 36,656
======== ========
LIABILITIES
Other liabilities ................................................... $ 12 $ 52
-------- --------
TOTAL LIABILITIES ........................................... 12 52
-------- --------
SHAREHOLDERS' EQUITY
Common Stock ($2.50 par, 6,000,000 shares authorized:
3,496,269 and 3,316,127 and shares issued) ....................... 8,740 8,290
Paid-in Capital ..................................................... 21,290 18,501
Retained earnings ................................................... 10,414 9,628
Treasury Stock (116,750 and 62,986 shares) .......................... (1,820) (777)
Net unrealized gains on securities available for sale ............... 1,407 962
-------- --------
TOTAL SHAREHOLDERS' EQUITY .................................. 40,031 36,604
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................. $ 40,043 $ 36,656
======== ========
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CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
----------------------------
1997 1996 1995
------ ------ ------
INCOME
Dividends from subsidiary ......................................... $2,066 $1,458 $1,197
------ ------ ------
TOTAL INCOME ................................................. 2,066 1,458 1,197
------ ------ ------
EXPENSE
Salaries and employee benefits .................................... 75 150
Taxes other than income ........................................... 41 40 39
Other ............................................................. 70 43 84
------ ------ ------
TOTAL EXPENSE ................................................ 111 158 273
------ ------ ------
Income before federal income tax expense .......................... 1,955 1,300 924
Benefit for federal income tax expense ............................ 37 54 93
------ ------ ------
Income before equity in undistributed
earnings of subsidiaries ....................................... 1,992 1,354 1,017
Equity in undistributed earnings of subsidiaries .................. 3,014 2,851 3,515
------ ------ ------
NET INCOME ................................................... $5,006 $4,205 $4,532
====== ====== ======
CONDENSED STATEMENTS OF CASH FLOW
Years Ended December 31,
---------------------------------
1997 1996 1995
------- ------- -------
OPERATING ACTIVITIES:
Net Income ...................................................... $ 5,006 $ 4,205 $ 4,532
Adjustments to reconcile net income
to cash provided by operations:
Equity in undistributed earnings of subsidiaries .............. (3,014) (2,851) (3,515)
(Increase) decrease in taxes receivable ....................... 7 (2)
Increase (decrease) in other liabilities ...................... (40) (3) 49
------- ------- -------
Net cash provided by operating activities ................ 1,952 1,358 1,064
INVESTING ACTIVITIES:
Investments in subsidiaries ..................................... (10)
------- ------- -------
Net cash used in investing activities .................... (10)
FINANCING ACTIVITIES:
Purchase of treasury stock ...................................... (1,154) (425) (267)
Proceeds from sale of treasury stock ............................ 77 97
Proceeds from issuance of Common Stock .......................... 326 308 258
Dividends paid .................................................. (1,316) (1,258) (1,047)
------- ------- -------
Net cash used in financing activities .................... (2,067) (1,278) (1,056)
Net increase (decrease) in cash and cash equivalents ............ (125) 80 8
Cash and cash equivalents at beginning of year .................. 347 267 259
------- ------- -------
Cash and cash equivalents at end of year ........................ $ 222 $ 347 $ 267
======= ======= =======
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INDEX TO EXHIBITS
Exhibit
No. Description
------- -----------
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 10-K 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 10-K 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 10-K for the
year ended December 31, 1994, and incorporated herein).
**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 10-K 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 (filed as
Exhibit 10(a)(ii) to the Registrant's Form 10-K for the year ended December
31, 1995, and incorporated herein).
**10(b) - Officers Long-term Disability Income Plan effective June 25, 1990
(filed as Exhibit 10(b) to the Registrant's Form 10-K 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 10-K 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 10-K for the year ended December 31, 1994, and incorporated
herein).
**10(e) - Form of Deferred Compensation Agreements dated June 30, 1994 with
each of Titus Jones and Andy Wall as amended November 13, 1995. (filed as
Exhibit 10(e) to the Registrant's Form 10-K for the year ended December 31,
1995 and incorporated herein).
*,**10(f) - Form of Deferred Compensation Agreements dated June 30, 1994 with each of Sam
Dawson, Lee Gibson and Jeryl Story as amended October 15, 1997 and Form of
Deferred Compensation Agreement dated October 15, 1997 with Lonny Uzzell.
*22 - Subsidiaries of the Registrant.
*23 - Consent of Independent Accountants.
*27 - Financial Data Schedule for the year ended December 31, 1997.
*27(a) - Restated Financial Data Schedule for the nine months ended September 30, 1997.
*27(b) - Restated Financial Data Schedule for the six months ended June 30, 1997.
*27(c) - Restated Financial Data Schedule for the three months ended March 31, 1997.
*27(d) - Restated Financial Data Schedule for the year ended December 31, 1996.
*27(e) - Restated Financial Data Schedule for the nine months ended September 30, 1996.
*27(f) - Restated Financial Data Schedule for the six months ended June 30, 1996.
*27(g) - Restated Financial Data Schedule for the three months ended March 31, 1996.
*27(h) - Restated Financial Data Schedule for the year ended December 31, 1995.
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* Filed herewith.
** Compensation plan, benefit plan or employment contract or
arrangement.