<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1996
-------------------
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 0-10849
SOUTHSIDE BANCSHARES CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
MISSOURI 43-1262037
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3606 GRAVOIS AVENUE, ST. LOUIS, MISSOURI 63116
---------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (314) 776-7000
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
At May 14, 1996, the number of shares outstanding of the registrant's
registrant's common stock was 2,847,450.
<PAGE>
SOUTHSIDE BANCSHARES CORP.
INDEX
Page
----
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at March 31,
1996 and December 31, 1995 3
Condensed Consolidated Statements of Income for
the three months ended March 31, 1996 and
March 31, 1995 4
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1996 and
March 31, 1995 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1996 and December 31, 1995
(dollars in thousands except share data)
(unaudited)
<TABLE>
<CAPTION>
MARCH 31, December 31,
1996 1995
ASSETS --------- ------------
<S> <C> <C>
Cash and due from banks $ 17,705 $ 16,912
Due from banks - interest-bearing 17 18
Federal funds sold 23,675 19,100
Investments in debt securities:
Available-for-sale, at market value 57,086 50,152
Held-to-maturity, at amortized cost (approximate market
value of $109,378 in 1996, and $110,494 in 1995) 109,066 109,622
-------- --------
Total investments in debt securities 166,152 159,774
-------- --------
Loans, net of unearned discount 291,813 303,824
Less allowance for possible loan losses (5,644) (5,635)
-------- --------
Loans, net 286,169 298,189
-------- --------
Bank premises and equipment 10,652 10,777
Other assets 7,955 8,138
-------- --------
TOTAL ASSETS $512,325 $512,908
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 56,800 $ 60,999
Interest-bearing demand and savings 183,362 183,758
Time deposits 214,429 212,810
-------- --------
Total deposits 454,591 457,567
Short-term borrowings 2,140 779
Debt of employee stock ownership plan 1,779 2,987
Other liabilities 4,465 4,275
-------- --------
Total liabilities 462,975 465,608
-------- --------
Commitments and contingent liabilities
Shareholders' equity:
Cumulative preferred stock, no par value, 1,000,000 shares
authorized and unissued - -
Common stock, $1 par value, 5,000,000 shares authorized,
2,859,010 shares issued and outstanding in 1996 and 1995 2,859 2,859
Surplus 5,775 5,766
Retained earnings 42,930 41,655
Unearned employee stock ownership plan shares (1,730) (2,688)
Treasury stock, 9,360 shares in 1996 and 1995 (167) (167)
Net unrealized holding losses on available-for-sale securities (317) (125)
-------- --------
Total shareholders' equity 49,350 47,300
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $512,325 $512,908
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(dollars in thousands except share data)
(unaudited)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans
Interest on investments in debt securities: $ 6,691 $ 6,609
Taxable
Exempt from Federal income taxes 1,985 2,113
Interest on short-term investments 324 328
236 113
TOTAL INTEREST INCOME --------- ---------
9,236 9,163
--------- ---------
INTEREST EXPENSE:
Interest on interest-bearing demand and savings deposits 1,360 1,479
Interest on time deposits 2,899 2,485
Interest on short-term borrowings 29 81
Interest on ESOP debt 58 -
Interest on subordinated capital notes - 101
--------- ---------
TOTAL INTEREST EXPENSE 4,346 4,146
--------- ---------
NET INTEREST INCOME 4,890 5,017
Provision for possible loan losses 15 25
--------- ---------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 4,875 4,992
--------- ---------
NONINTEREST INCOME:
Trust department 217 223
Service charges on deposit accounts 306 300
Net gains (losses) on sales of other real estate
owned and other foreclosed property 12 (186)
Settlement of litigation - 1,400
Gain on sale of Bay-Hermann-Berger Bank - 825
Other 220 129
--------- ---------
TOTAL NONINTEREST INCOME 755 2,691
--------- ---------
NONINTEREST EXPENSES:
Salaries and employee benefits 1,758 1,744
Net occupancy and equipment expense 580 503
Data processing 93 148
Federal Deposit Insurance Corporation assessment 33 276
Attorney fees 46 335
Other 961 1,122
--------- ---------
TOTAL NONINTEREST EXPENSES 3,471 4,128
--------- ---------
INCOME BEFORE FEDERAL INCOME TAX EXPENSE 2,159 3,555
Federal income tax expense 611 977
--------- ---------
NET INCOME $ 1,548 $ 2,578
========= =========
SHARE DATA:
Earnings per common share $ 0.58 $ 0.99
========= =========
Dividends paid per common share $ 0.10 $ 0.065
========= =========
Average common shares outstanding 2,668,965 2,591,440
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(dollars in thousands)
(unaudited)
<TABLE>
1996 1995
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,548 $ 2,578
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 509 468
Provision for possible loan losses 15 25
Gain on sale of Bay-Hermann-Berger Bank - (825)
Other operating activities, net 136 427
-------- -------
Total adjustments 660 95
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,208 2,673
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in Federal funds sold (4,575) (7,700)
Proceeds from maturities of and principal payments on debt
securities 10,115 5,685
Purchases of debt securities (16,939) (2,165)
Net (increase) decrease in loans 11,786 (2,419)
Recoveries of loans previously charged off 210 136
Proceeds from the sale of Bay-Hermann-Berger Bank, net of
cash transferred - 2,213
Proceeds from sales of other real estate owned and other
foreclosed property 36 72
Purchases of bank premises and equipment (160) (414)
-------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 473 (4,592)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand and savings deposits (4,595) (7,959)
Net increase in time deposits 1,619 11,025
Net increase (decrease) in short-term borrowings 1,361 (2,227)
Cash dividends paid (274) (168)
-------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,889) 671
-------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 792 (1,248)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 16,930 19,028
-------- -------
CASH AND CASH EQUIVALENTS, END OF QUARTER $ 17,722 $17,780
======== =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowings $ 4,219 $ 3,735
Income taxes 325 535
======== =======
Noncash transactions:
Transfers to other real estate owned in settlement of loans $ 23 $ 476
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
SOUTHSIDE BANCSHARES CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. They do not include all information and footnotes
required by generally accepted accounting principles for complete consolidated
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation have
been included. For further information, refer to Southside Bancshares Corp.'s
(the Company) Annual Report on Form 10-K for the year ended December 31, 1995.
Operating results for the three months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1996.
2. LITIGATION
On February 27, 1995, the Company settled a lawsuit in which the Company's
subsidiary, South Side National Bank in St. Louis (South Side), was the
plaintiff. Under the terms of the settlement agreement executed by the parties,
South Side received a cash payment of $1,400,000, which was offset by remaining
legal expenses of approximately $300,000. The litigation arose from a
$1,500,000 payment made by the Company in 1992 (and charged to earnings in
1991). The settlement amount is included in the 1995 condensed consolidated
statement of income as "Settlement of litigation" in noninterest income. The
related legal fees have been included in noninterest expense as part of
"Attorney fees".
3. SALE OF BAY-HERMANN-BERGER BANK
On March 17, 1995, the Company sold its wholly owned subsidiary, Bay-
Hermann-Berger Bank (the Bank), in an all cash transaction with an unaffiliated
institution. The purchasing institution paid approximately $3,145,000 for all
of the Bank's common stock, which resulted in a pretax gain to the Company of
$825,000. This gain is disclosed in the 1995 condensed consolidated statement of
income as a separate component of noninterest income. Bay-Hermann-Berger Bank
was the smallest of the Company's five subsidiary banks, and with total assets
of $24,157,000 as of December 31, 1994, represented only 4.67% of total
consolidated assets as of that date. Accordingly, the sale of the Bank did not
represent the disposition of a significant segment of the Company's business, as
defined in paragraph 13 of Accounting Principles Board Opinion No. 30.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
This discussion is presented to provide an understanding of Southside
Bancshares Corp. and subsidiaries (the "Company" or "Registrant") consolidated
financial condition and the results of operations for the three months ended
March 31, 1996 and 1995.
The Company's net income is derived primarily from the net interest income
of its subsidiary banks. Net interest income is the difference (or spread)
between the interest income the subsidiary banks receive from their loan and
investment portfolios and their cost of funds, consisting primarily of the
interest paid on deposits and borrowings. Net income is also affected by the
levels of provisions for possible loan losses, noninterest income, and
noninterest expense.
6
<PAGE>
Item 2. (continued)
FINANCIAL HIGHLIGHTS
COMPARISON OF SELECTED FINANCIAL DATA
(dollars in thousands except share data)
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended Three Months Ended
March 31, 1996 December 31, 1995 March 31, 1995
------------------ ------------------- ------------------
<S> <C> <C> <C>
EARNINGS
Total interest income $ 9,236 $ 37,263 $ 9,163
Total interest expense 4,346 17,335 4,146
---------- ---------- ----------
Net interest income 4,890 19,928 5,017
Provision for possible loan losses 15 70 25
---------- ---------- ----------
Net interest income after provision for possible
loan losses
Net income $ 4,875 $ 19,858 $ 4,992
========== ========== ==========
SHARE DATA/(1)/ $ 1,548 $ 6,734 $ 2,578
Net income ========== ========== ==========
Dividends paid $ 0.58 $ 2.55 $ 0.99
Book value .10 .365 .065
Tangible book value 18.00 17.64 15.96
Shares outstanding 17.86 17.49 15.78
2,849,650 2,849,650 2,591,440
FINANCIAL POSITION
Total assets $ 512,325 $ 512,908 $ 517,118
Total deposits 454,591 457,567 484,308
Total loans, net of unearned discount 291,813 303,824 308,231
Allowance for possible loan losses 5,644 5,635 8,334
Short-term borrowings 2,140 779 3,558
Debt of employee stock ownership plan 1,779 2,987 -
Subordinated capital notes - - 4,190
Total shareholders' equity 49,350 47,300 37,668
</TABLE>
SELECTED RATIOS
The table below summarizes various selected ratios as of the end of the periods
indicated.
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended Three Months Ended
March 31, 1996/2/ December 31, 1995 March 31, 1995/2/
------------------ ------------------- ------------------
<S> <C> <C> <C>
Loan-to-deposit ratio 64.19% 66.40% 64.87%
Allowance for possible loan losses to total
loans 1.93 1.85 2.29
Return on average assets 1.22 1.33(3) 2.04(3)
Return on average shareholders' equity 12.89 15.47(3) 25.99(3)
Net interest margin on average interest-
earning assets 4.28 4.41 4.45
Average shareholders' equity to average total
assets 9.49 8.62 7.83
Tier I leverage capital to adjusted total
consolidated assets less intangibles 9.71 9.27 8.43
Tier I capital to risk-weighted assets 16.21 14.94 13.94
Total capital to risk-weighted assets 17.47 16.20 16.59
</TABLE>
/(1)/ Share Data has been adjusted on a retroactive basis to reflect the effects
of the ten for one stock split on February 15, 1996.
/(2)/ Statistical information is annualized where applicable.
/(3)/ Includes the gain on sale of Bay-Hermann-Berger Bank and the net
litigation settlement. Excluding the after-tax effect of these two nonrecurring
items, the return on average assets and shareholders' equity as of December 31,
1995 would have been 1.06% and 12.32%, respectively and as of March 31, 1995
would have been 1.05% and 12.45%, respectively.
7
<PAGE>
Item 2. (continued)
FINANCIAL POSITION
Total consolidated assets of the Company remained relatively unchanged at
$512,325,000 at March 31, 1995 compared to $512,908,000 at December 31, 1995.
LOAN PORTFOLIO
The Company's loan portfolio consists of business loans to small and medium
size companies, commercial and residential real estate loans, and consumer
loans. Traditionally, the majority of the loan portfolio has focused on real
estate as an integral component of a credit's underlying source of repayment.
The following table is a breakdown of the Company's loan portfolio as of the
end of the periods indicated.
SUMMARY OF LOAN PORTFOLIO COMPONENTS
<TABLE>
<CAPTION>
(in thousands)
March 31, 1996 December 31, 1995 March 31, 1995
-------------- ----------------- --------------
<S> <C> <C> <C>
Commercial, financial and agricultural $ 57,185 $ 62,214 $ 65,025
Real estate-commercial 86,704 88,321 80,336
Real estate-construction 14,062 15,510 12,878
Real estate-residential 97,916 102,418 106,247
Consumer 16,991 17,626 16,716
Industrial revenue bonds 7,352 7,789 8,349
Other 11,603 9,946 2,041
-------- -------- --------
$291,813 $303,824 $291,592
======== ======== ========
</TABLE>
The Company's loan portfolio totaled $291,813,000 at March 31, 1996. The
portfolio declined by approximately $12 million during the first quarter. Of
the decline, $5 million was in the commercial, financial and agricultural
category. This decline was largely the result of two commercial loan payoffs
which totalled $4.3 million. As competition for commercial borrowing
relationships continues to increase, management continues to weigh both the
short and long-term effects of retaining lending relationships, and while the
Company would prefer to retain one hundred percent of these relationships, doing
so can result in unacceptable long-term results. Commercial real estate loans
declined by $1.6 million and construction real estate loans declined by $1.4
million during the first quarter. Both declines are due to normal activity.
Included in both categories are lines of credit. Depending on the borrowers
funding needs, these lines of credit are subject to periodic paydowns, and in
the case of construction loans, they are also subject to paydown upon completion
of the construction phase of the project. Residential real estate loans declined
by $4.5 million due in part to a few large residential real estate loan payoffs,
as well as a general decline in this lending category. With the increased
secondary market competition over the past five years, new mortgage loan
originations have continued to decline. Because existing loans continue to pay
down or be refinanced in the normal course of business, and with fewer new loans
being originated, residential real estate loans continue to represent a smaller
percentage of the Company's loan portfolio.
8
<PAGE>
Item 2. (continued)
SUMMARY OF ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
(dollars in thousands)
Three Months Ended Twelve Months Ended Three Months Ended
March 31, 1996 December 31, 1995 March 31, 1995
------------------ ---------------------- ------------------
<S> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD $ 5,635 $ 7,144 $7,144
Provision charged to expense 15 70 25
Loans charged off (216) (2,174) (303)
Recoveries 210 922 136
Adjustment due to sale of Bay-Hermann-
Berger Bank -- (327) (327)
------- ------- ------
BALANCE AT END OF PERIOD $ 5,644 $ 5,635 $6,675
======= ======= ======
RATIOS:
Allowance for possible loan losses as
% of total loans 1.93% 1.85% 2.29%
Allowance for possible loan losses as
% of nonperforming loans 139.25 172.11 130.93
Allowance for possible loan losses as
multiple of net charge-offs (1) 235.2X 4.5x 10.0x
</TABLE>
- ------------------
(1) Statistical information is annualized where applicable.
The balance of the allowance for possible loan losses remained relatively
unchanged during the first quarter of 1996. Net charge offs for the first
quarter were only $6,000, as $216,000 in charge offs were offset by $210,000 in
recoveries. Because of the minimal level of net charge offs, and the fact that
the Company's internal analysis of the adequacy of the allowance for possible
loan losses indicates the level is adequate to cover actual and potential losses
in the loan portfolio under current conditions, the provision for possible loan
losses for the first quarter was minimal.
With the decrease in the loan portfolio, the ratio of allowance for
possible loan losses as a percentage of total loans increased to 1.93% as of
March 31, 1996, compared to 1.85% at December 31, 1995. However, due to an
increase in nonperforming loans during the quarter, the ratio of the allowance
for possible loan losses to nonperforming loans declined to 139.25% at March 31,
1996, compared to 172.11% as of December 31, 1995, yet remained above the ratio
from March 31, 1995 of 130.93%.
9
<PAGE>
Item 2. (continued)
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
(dollars in thousands)
March 31, 1996 December 31, 1995 March 31, 1995
------------------ ---------------------- ------------------
<S> <C> <C> <C>
Nonaccrual loans $2,495 $1,811 $2,496
Loans past due 90 days and still accruing interest 1,558 1,463 2,602
------ ------ ------
TOTAL NONPERFORMING LOANS 4,053 3,274 5,098
Other real estate owned 556 554 2,051
------ ------ ------
TOTAL NONPERFORMING ASSETS $4,609 $3,828 $7,149
====== ====== ======
RATIOS:
Total nonperforming loans as % of total loans 1.39% 1.08% 1.75%
Nonperforming assets as % of total loans and
other real estate owned 1.58 1.26 2.43
Nonperforming assets as % of total assets 0.90 0.75 1.43
</TABLE>
Nonperforming assets totaled $4,609,000 or 0.90% of total assets at March
31, 1996 compared to $3,828,000 or 0.75% and $7,149,000 or 1.43% at December 31,
1995 and March 31, 1995, respectively. The increase in nonperforming assets
during the first quarter was due to three moderate sized commercial lending
relationships which management has classified as potential problem credits. Two
of the relationships have been placed on nonaccrual status, and the third is in
the 90 day delinquency category, while management determines the proper
disposition of this credit relationship. While management understands that
nonperforming asset levels are going to fluctuate periodically throughout the
year, it is management's commitment to continue to monitor and maintain an
acceptable level of nonperforming assets.
Other real estate owned remained relatively unchanged during the first
quarter. These properties are recorded at the lower of cost or their estimated
net realizable value, which means the properties are recorded on the balance
sheet of the Company at an amount no greater than the amount of the net proceeds
expected to be received upon the sale of the property.
Any loans classified for regulatory purposes, but not included above in
nonperforming loans, do not represent material credits, about which management
is aware of any information which causes management to have serious doubts as to
the borrower's ability to comply with the loan repayment terms or which
management reasonably expects will materially impact future operating results or
capital resources. As of March 31, 1996, there were no concentrations of loans
exceeding 10% of total loans which were not disclosed as a category of loans
detailed on page 8.
INVESTMENTS IN DEBT SECURITIES
Investments in debt securities have increased approximately $6.4 million
since December 31, 1995. With the decrease in the loan portfolio in the first
quarter, the Company had additional funds available to invest in the Company's
investment portfolio during 1996. In addition, the yield curve steepened during
the first quarter, which resulted in a wider spread between short-term and
intermediate-term investment securities. This increased spread made the
purchase of securities in the intermediate-term category more attractive, and
therefore, management took advantage of this situation.
The portfolio contains a mixture of debt securities in terms of the types
of securities, interest rates, and maturity distribution. Management believes
this diversity, as well as its conservative philosophy towards risk
10
<PAGE>
Item 2. (continued)
management, has resulted in a solid investment portfolio.
The following table summarizes the amortized cost and estimated market
value of the Company's available-for-sale and held-to-maturity debt securities
at March 31, 1996.
<TABLE>
<CAPTION>
(in thousands)
Available-for-sale Held-to-maturity
------------------------------ ----------------
Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- -------- --------- ----------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. Government agencies and corporations $17,018 $16,857 $ 82,827 $ 82,310
Obligations of states and political subdivisions 531 540 22,234 22,994
Other debt securities 100 102 977 977
------- ------- -------- --------
17,649 17,499 106,038 106,281
Mortgage-backed securities 40,005 39,587 3,028 3,097
------- ------- -------- --------
$57,654 $57,086 $109,066 $109,378
======= ======= ======== ========
</TABLE>
DEPOSITS
Total deposits declined approximately $3 million during the first quarter
of 1996. This decrease was due largely to a decline in noninterest bearing
demand deposits. Depending on the funding needs of the Company's customers, the
balances in these accounts can fluctuate significantly on a daily basis.
The following table presents deposits by category as of the end of the
periods indicated.
<TABLE>
(in thousands)
March 31, 1996 December 31, 1995 March 31, 1995
-------------- ----------------- --------------
<S> <C> <C> <C>
Noninterest-bearing demand deposits $ 56,800 $ 60,999 $ 65,025
Interest-bearing demand deposits 122,386 123,624 119,779
Savings deposits 60,976 60,134 65,996
Time deposits under $100,000 174,901 176,200 173,407
-------- -------- --------
Total core deposits 415,063 420,957 424,207
Time deposits $100,000 and over/(1)/ 39,528 36,610 25,275
-------- -------- --------
Total deposits $454,591 $457,567 $449,482
======== ======== ========
</TABLE>
(1) Deposits which are generally deemed highly interest rate sensitive.
SHORT-TERM BORROWINGS
Short-term borrowings consist of securities sold under agreements to
repurchase and a U.S. Treasury tax and loan note account. The following is a
summary of short-term borrowings as of the end of the periods indicated.
<TABLE>
(in thousands)
March 31, 1996 December 31, 1995 March 31, 1995
-------------- ----------------- --------------
<S> <C> <C> <C>
Securities sold under agreements to repurchase $ 353 $307 $404
U.S. Treasury tax and loan note account 1,787 472 536
------ ---- ----
$2,140 $779 $940
====== ==== ====
</TABLE>
11
<PAGE>
Item 2. (continued)
The increase in other short-term borrowings was due to an increase in the
U. S. Treasury tax and loan note account. This account houses federal tax
deposits on an interim basis. Based on the cash flow needs of the
U. S. Treasury Department, they periodically draw down the balance in this
account, and then allow it to be replenished. The maximum balance in the
account is $2 million, however, the current balance is below that level.
ASSET/LIABILITY MANAGEMENT
The table on the following page is an analysis of the Company's interest
rate-sensitive assets and liabilities as of March 31, 1996. Because such an
analysis does not capture all of the factors which determine interest rate risk,
the Company also utilizes a simulation model to measure its exposure to changes
in interest rates. Under different rate and growth assumptions, these
projections enable the Company to adjust its strategies to protect the net
interest margin against significant rate fluctuations. Uniform sensitivity
reports and guidelines are used by all subsidiary banks of the Company. Based
on the Company's historical analysis, interest-bearing demand and savings
deposits have proven to be very stable core deposits even with significant
interest rate fluctuations. Accordingly, management believes these deposits are
not 100% rate-sensitive within the period of three months or less. As a result,
these deposits have been allocated between four repricing categories as follows:
three months or less - 35%, over three months through 12 months - 20%, over one
year through five years - 25%, and over five years - 20%.
As reflected on the Repricing and Interest Rate Sensitivity Analysis on the
following page, the Company has a reasonably well-balanced, interest rate
sensitivity position. The Company's current one-year cumulative gap is 1.03x.
Generally, a one-year cumulative gap ratio in a range of 0.80x - 1.20x indicates
an entity is not subject to undue interest rate risk. A one-year cumulative gap
ratio of 1.00x indicates that an institution has an equal amount of assets and
liabilities repricing within twelve months. A ratio in excess of 1.00x indicates
more assets than liabilities will be repriced during the period indicated, and a
ratio less than 1.00x indicates more liabilities than assets will be repriced
during the period indicated. However, actual experience may differ because of
the assumptions used in the allocation of deposits and other factors which are
beyond management's control. Additionally, the following analysis includes the
available-for-sale securities spread throughout their respective repricing
and/or maturity horizons, even though such securities are available for
immediate liquidity should the need arise in any particular time horizon.
12
<PAGE>
Item 2. (continued)
REPRICING AND INTEREST RATE SENSITIVITY ANALYSIS
(dollars in thousands)
MARCH 31, 1996
<TABLE>
<CAPTION>
Over Over
3 months 1 year
3 months through through Over
or less 12 months 5 years 5 years Total
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Due from banks - interest-bearing $ 17 $ - $ - $ - $ 17
Federal funds sold 23,675 - - - 23,675
Investments available-for-sale 7,860 5,012 37,034 7,180 57,086
Investments held-to-maturity 5,100 17,919 59,860 26,187 109,066
Loans, net of unearned discount /(1)/ 116,053 66,514 100,316 8,930 291,813
-------- -------- -------- -------- --------
Total interest-earning assets 152,705 89,445 197,210 42,297 481,657
-------- -------- -------- -------- --------
Cumulative interest-earning assets
152,705 242,150 439,360 481,657 481,657
-------- -------- -------- -------- --------
Interest-bearing liabilities:
Interest-bearing demand deposits 42,835 24,477 30,597 24,477 122,386
Savings deposits 21,342 12,195 15,244 12,195 60,976
Time deposits under $100,000 35,754 60,708 78,439 - 174,901
Time deposits $100,000 and over 11,495 23,333 4,700 - 39,528
Short-term borrowings 2,140 - - - 2,140
Debt of employee stock ownership plan 1,779 - - - 1,779
-------- -------- -------- -------- --------
Total interest-bearing liabilities 115,345 120,713 128,980 36,672 401,710
-------- -------- -------- -------- --------
Cumulative interest-bearing liabilities 115,345 236,058 365,038 401,710 401,710
-------- -------- -------- ------- --------
Gap analysis:
Interest sensitivity gap $ 37,360 $(31,268) $ 68,230 $ 5,625 $ 79,947
======== ======== ======== ======== ========
Cumulative interest
sensitivity gap $ 37,360 $ 6,092 $ 74,322 $ 79,947 $ 79,947
======== ======== ======== ======== ========
Cumulative gap ratio of interest-
earning assets to interest-bearing
liabilities 1.32x 1.03x 1.20x 1.20x 1.20x
========= ======== ======== ======== ========
</TABLE>
/(1)/ Nonaccrual loans are reported in the "Over 1 year through 5 years"
column.
CAPITAL RESOURCES
The regulatory capital guidelines require banking organizations to maintain
a minimum total capital ratio of 8% of risk-weighted assets (of which at least
4% must be Tier I capital). The Company's total capital ratios under the risk-
weighted guidelines were 17.47%, 16.21% and 16.59% as of March 31, 1996,
December 31, 1995, and March 31, 1995, respectively, which included Tier I
capital ratios of 16.21%, 14.96%, and 13.94%, respectively. These ratios are
well above the minimum risk-weighted capital requirements.
In addition, the Company and its subsidiary banks must maintain a minimum
Tier I leverage ratio (Tier I capital to total adjusted consolidated assets) of
at least 3%. Capital, as defined under these guidelines, is total shareholders'
equity less goodwill and excluding unrealized holding gains and losses on
available-for-sale
13
<PAGE>
Item 2. (continued)
securities of the Company. The Company's Tier I leverage ratios were 9.71%,
9.29%, and 8.33% at March 31, 1996, December 31, 1995, and March 31, 1995,
respectively.
Management reviews the various capital measures monthly and takes
appropriate action to ensure that they are within internal and external
guidelines as established by law. Management believes that the Company's
current capital and liquidity positions are adequate to support its banking
operations.
RESULTS OF OPERATIONS
EARNINGS SUMMARY
Net income was $1,548,000 for the three months ended March 31, 1996
compared to $2,578,000 for the three months ended March 31, 1995. This decrease
can be attributed to the effects of two nonrecurring items which occurred during
the first quarter of 1995. The first item was the gain on the sale of Bay-
Hermann-Berger Bank of $825,000, with the resulting net after-tax gain being
$640,000. The second item was the litigation settlement received by South Side
National Bank of $1,400,000, from which attorney fees of approximately $300,000
were paid. After factoring in the estimated taxes due, the after-tax net gain
was approximately $730,000. Excluding these two nonrecurring item, core net
earnings for the first quarter of 1995 were $1,208,000. Therefore, excluding
the effects of these nonrecurring items, the Company achieved a $340,000, or
28%, increase in the 1996 first quarter core net earnings versus the first
quarter of 1995. Because these nonrecurring items occurred in the first quarter
of the prior year, they will distort the comparisons for the remainder of 1996.
The Company will continue to measure its current year performance against both
scenarios throughout 1996.
Earnings per common share were $ .58 for the first quarter of 1996 compared
to $ .99 for the first quarter of 1995, or $ .47 after consideration of the
aforementioned nonrecurring items. The earnings per common share amounts have
been retroactively adjusted for the ten for one stock split which occurred on
February 15, 1996. The first quarter net income results in an annualized return
on average assets (ROA) of 1.22% and a return on average shareholders' equity of
12.89%. While these ratios are below the comparable ratios from the first
quarter of 1995 because of the aforementioned nonrecurring items, they still
compare favorably to our peers in the industry.
NET INTEREST INCOME
As reflected in the Selected Statistical Information table on the following
page, net interest income on a tax-equivalent basis decreased by $151,000 in the
first quarter of 1996 when compared to the first quarter of 1995, which was the
result of a decrease in the net interest margin from 4.45% to 4.28%. The decline
in the net interest margin can be attributed to a combination of factors. First,
the Company has experienced a shift in the deposit mix, with more time deposits
than in the previous year. In the first quarter of 1995, time deposits
represented 50% of total interest-bearing deposits. During the first quarter of
1996, that ratio had increased to 54%. Because time deposits typically pay a
higher rate of interest than savings or NOW accounts, the shift in the deposit
mix resulted in a higher cost of funds in the first quarter of 1996. Secondly,
competitive pressure for new loans resulted in only a small increase in the
average loan balance in the first quarter of 1996 over the first quarter of
1995. Because there was not a proportionate increase in the loan portfolio to
offset the higher cost of funds, the net interest margin was negatively
effected.
14
<PAGE>
Item 2. (continued)
SELECTED STATISTICAL INFORMATION
The following is selected statistical information for Southside Bancshares Corp.
and subsidiaries.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES
AND INTEREST DIFFERENTIAL
CONDENSED CONSOLIDATED AVERAGE BALANCE SHEET AND AVERAGE INTEREST RATES
(dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
- --------------------------------------------------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------------------------------------------------
Average Average
Interest Rates Interest Rates
Average Income\ Earned\ Average Income\ Earned\
Balance Expense Paid(3) Balance Expense Paid(3)
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans, net of unearned discount (1) (2) (3) $300,880 $6,754 8.98% $297,730 $6,694 8.99%
Investments in debt securities:
Taxable(4) 137,253 1,985 5.78 145,119 2,113 5.82
Exempt from Federal income tax (3) (4) 22,870 491 8.59 22,981 497 8.65
Short-term investments 17,381 236 5.43 7,475 113 6.05
Total interest-earning assets/interest -------- ------ -------- ------
income/overall yield (3) 478,384 9,466 7.91 473,305 9,417 7.96
------ ==== ------ ====
Allowance for possible loan losses (5,627) (7,020)
Cash and due from banks 15,293 18,072
Other assets 18,455 22,132
TOTAL ASSETS -------- --------
$506,505 $506,489
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing demand and savings deposits $178,723 1,360 3.04% $191,897 1,479 3.08%
Time deposits 215,276 2,899 5.39 200,596 2,485 4.95
Short-term borrowings 2,173 29 5.34 5,111 81 6.34
Debt of employee stock ownership plan 2,780 58 8.35 - - -
Subordinated capital notes - - - 4,190 101 9.65
-------- ------ -------- -----
Total interest-bearing liabilities/interest-
expense/overall rate 398,952 4,346 4.36 401,794 4,146 4.13
------ ==== ------ ====
Non-interest-bearing demand deposits 54,827 61,011
Other liabilities 4,675 4,004
Shareholders' equity 48,051 39,680
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $506,505 $506,489
======== ========
NET INTEREST INCOME $5,120 $5,271
====== ======
NET INTEREST MARGIN ON AVERAGE INTEREST-EARNING
ASSETS 4.28% 4.45%
==== ====
</TABLE>
(1) Interest income includes loan origination fees.
(2) Average balance includes nonaccrual loans.
(3) Interest yields are presented on a tax-equivalent basis. Nontaxable income
has been adjusted upward by the amount of Federal income tax that would have
been paid if the income tax had been taxable at a rate of 34%, adjusted
downward by the disallowance of the interest cost to carry nontaxable loans
and securities subsequent to December 31, 1982.
(4) Includes investments available-for-sale.
15
<PAGE>
Item 2. (continued)
ANALYSIS OF CHANGES IN NET INTEREST INCOME
DUE TO CHANGES IN VOLUME AND CHANGES IN RATES
The following table sets forth on a tax-equivalent basis, for the periods
indicated, a summary of the changes in interest income and interest expense
resulting from changes in the volume and changes in rates. The change in
interest due to both volume and rate has been allocated in proportion to the
relationship of the absolute dollar amounts of the change in each.
FIRST THREE MONTHS 1996 COMPARED TO FIRST THREE MONTHS 1995
(in thousands)
<TABLE>
<CAPTION>
Increase (decrease)
due to change in
--------------------
Net
Increase Average Average
(Decrease) Volume Rate
---------- --------- ---------
<S> <C> <C> <C>
Changes in interest income on:
Loans $ 60 $ 68 $ (8)
Investments in debt securities:
Taxable (128) (114) (14)
Nontaxable (6) (2) (4)
Short-term investments 123 136 (13)
----- ----- -----
TOTAL INTEREST INCOME 49 88 (39)
----- ----- -----
Changes in interest expense on:
Interest-bearing demand and savings deposits
Time deposits (119) (100) (19)
Short-term borrowings 414 187 227
Debt of employee stock ownership plan (52) (41) (11)
Subordinated capital notes 58 58 -
(101) (101) -
TOTAL INTEREST EXPENSE ----- ----- -----
200 3 197
CHANGE IN NET INTEREST INCOME ----- ----- -----
$(151) $ 85 $(236)
===== ===== =====
</TABLE>
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses remained at a relatively low level
during the first three months of 1996, at $15,000. Based on the Company's
analysis of the adequacy of the allowance for possible loan losses, management
determined it was not necessary to record significant provisions for possible
loan losses. Management will continue to assess the adequacy of the allowance
for possible loan losses on a regular basis throughout the year.
NONINTEREST INCOME
Noninterest income decreased $1,937,000 when comparing 1996 first quarter
income to the first quarter of 1995; however, the decrease was due to the
$825,000 gain on the sale of Bay-Hermann-Berger Bank (described in Note 3) and
the $1,400,000 litigation settlement received by South Side National Bank
(described in Note 2). Excluding the effects of these two items, noninterest
income increased by $288,000 primarily due to a decrease in net losses on the
sale of other real estate owned. Other income also increased as a result of
additional revenue generated by the Company's merchant charge card operations.
16
<PAGE>
Item 2. (continued)
NONINTEREST EXPENSE
Noninterest expense for the first quarter of 1996 was $657,000 less than
the comparable expense from the prior year. This decrease can largely be
attributed to decreases in data processing expense, FDIC assessment, attorney
fees and other expense, which were partially offset by an increase in occupancy
and equipment expense. The reduction in data processing expense was due to the
data processing conversion completed in 1995. One of the objectives of the
conversion was to reduce the monthly data processing expense, although a portion
of this savings has been offset by an increase in equipment expense. The
decrease in the FDIC assessment was a result of the Bank Insurance Fund
achieving its federally-mandated fully funded level in 1995. When this
occurred, the FDIC assessment rate paid by most institutions dropped to the
minimum level required by law. The Company does, however, still have a small
portion of deposits, which were acquired from the Resolution Trust Corporation
in 1990, which are covered by the Savings Association Insurance Fund. The
Company is assessed a higher premium on these deposits. Attorney fees in 1995
included the $300,000 in fees pertaining to the litigation settlement at South
Side National Bank. Excluding those fees, the expense was comparable between
the two quarters. The increase in occupancy and equipment expense can be
partially attributed to the increased equipment cost associated with the data
processing conversion. The remainder of the increase was the result of a new
facility opened by South Side National Bank on February 1, 1996. This is the
seventh location for the Company's lead bank and makes thirteen locations in
total for the organization.
INCOME TAXES
Federal income tax expense for the first quarter of 1996 was $611,000
compared to $977,000 in the first quarter of 1995. The decrease was due to a
decline in the first quarter pretax earnings. The effective tax rate increased
to 28.30% in 1996 from 27.48% in 1995. This increase was largely due to the
gain on the sale of Bay-Hermann-Berger Bank during 1995. Because of differences
between the book and tax basis of this asset, the effective tax rate on the
sale, on a book basis, was approximately 22%. Without any comparable event in
the current year, the effective tax rate increased.
EFFECT OF NEW ACCOUNTING STANDARDS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121").
SFAS 121 provides guidance for recognition and measurement of impairment of
long-lived assets, certain identifiable intangibles, and goodwill related both
to assets to be held and used and assets to be disposed of. The statement
requires entities to perform separate calculations for assets to be held and
used to determine whether recognition of an impairment loss is required and, if
so, to measure impairment. If the sum of the expected future cash flows,
undiscounted and without interest charges, is less than the asset's carrying
amount, an impairment loss can be recognized. If the sum of the expected future
cash flows is more than the asset's carrying amount, an impairment loss cannot
be recognized. Measurement of an impairment loss is based on the fair value of
the asset. SFAS 121 also requires long-lived assets and certain identifiable
intangibles to be disposed of to be reported at the lower of carrying amount or
fair value less cost to sell.
As of the adoption date of January 1, 1996, the Company had no impaired
long-lived or intangible assets affected by this statement.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123").
17
<PAGE>
Item 2. (continued)
SFAS 123 provides guidance for accounting and reporting standards for
stock-based employee compensation plans. SFAS 123 defines a fair value based
method of accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost for those plans using the intrinsic value
based method of accounting prescribed by APB Opinion No. 25, Accounting for
Stock Issued to Employees. Entities electing to remain with the accounting in
Opinion 25 must make pro forma disclosures of net income and, if presented,
earnings per share, as if the fair value based method of accounting defined in
SFAS 123 and been applied. Under the fair value based method, compensation cost
is measured at the grant date on the value of the award and is recognized over
the service period, which is usually the vesting period. Under the intrinsic
value based method, compensation cost is the excess, if any, of the quoted
market price of the stock at grant date or other measurement date over the
amount an employee must pay to acquire the stock.
The Company has elected to continue to use the intrinsic value based method
of accounting, and will disclose the effect of the fair value based method in
the 1996 annual report Form 10-K.
COMMON STOCK - MARKET PRICE AND DIVIDENDS
The table below sets forth the high and low closing bid prices of the
Company's common stock for the periods presented. The Company's common stock is
traded on the National Association of Securities Dealers Automated Quotation
System/Small-Cap Market System ("NASDAQ/SCM") under the symbol SBCO.
Accordingly, information included below represents the high and low bid prices
of the common stock reported on NASDAQ/SCM. The information presented has been
retroactively adjusted to reflect the effects of the ten for one stock split on
February 15, 1996.
<TABLE>
Book Dividends Paid
High Bid Low Bid Close Value Market/Book Per Common Share
-------- ------- ------ ------ ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter - 1996 $21.00 $19.00 $19.00 $18.00 105.56% $0.10
4th Quarter - 1995 20.00 17.80 20.00 17.64 113.38 0.10
3rd Quarter - 1995 17.80 17.50 17.80 17.15 103.79 0.10
2nd Quarter - 1995 17.00 16.00 17.00 16.75 101.49 0.10
1st Quarter - 1995 16.00 16.00 16.00 15.96 100.25 0.065
</TABLE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of business, the Company had certain routine lawsuits
pending at March 31, 1996. In the opinion of management, after consultation with
legal counsel, none of these lawsuits will have a material adverse effect on the
consolidated financial condition of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHSIDE BANCSHARES CORP.
----------------------------
May 14, 1996 /s/ Thomas M. Teschner
- ------------ -------------------------------------
Thomas M. Teschner
President
(Principal Executive Officer)
May 14, 1996 /s/ Joseph W. Pope
- ------------ -------------------------------------
Joseph W. Pope
Senior Vice President and Chief
Financial Officer (Principal Financial
Officer, Controller, and Principal
Accounting Officer)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 17,705
<INT-BEARING-DEPOSITS> 17
<FED-FUNDS-SOLD> 23,675
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 57,086
<INVESTMENTS-CARRYING> 109,066
<INVESTMENTS-MARKET> 109,378
<LOANS> 291,813
<ALLOWANCE> (5,644)
<TOTAL-ASSETS> 512,325
<DEPOSITS> 454,591
<SHORT-TERM> 2,140
<LIABILITIES-OTHER> 4,465
<LONG-TERM> 1,779<F1>
<COMMON> 2,859
0
0
<OTHER-SE> 46,491
<TOTAL-LIABILITIES-AND-EQUITY> 512,325
<INTEREST-LOAN> 6,691
<INTEREST-INVEST> 2,309
<INTEREST-OTHER> 236
<INTEREST-TOTAL> 9,236
<INTEREST-DEPOSIT> 4,259
<INTEREST-EXPENSE> 4,346
<INTEREST-INCOME-NET> 4,890
<LOAN-LOSSES> 15
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,471
<INCOME-PRETAX> 2,159
<INCOME-PRE-EXTRAORDINARY> 2,159
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,548
<EPS-PRIMARY> .58
<EPS-DILUTED> .58
<YIELD-ACTUAL> 4.28
<LOANS-NON> 2,429
<LOANS-PAST> 1,558
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,635
<CHARGE-OFFS> 216
<RECOVERIES> 210
<ALLOWANCE-CLOSE> 5,644
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1> Represents debt of the Company's Employee Stock Ownership Plan, which
is reflected on the Company's Financial statements according to
Generally Accepted Accounting Principles.
</FN>
</TABLE>
