<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 0-12247
----------------
SOUTHSIDE BANCSHARES, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 75-1848732
- ----------------------------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1201 S. Beckham, Tyler, Texas 75701
- ----------------------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) 903-531-7111
------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
----- -----
The number of shares outstanding of each of the issuer's classes of
capital stock, as of the latest practicable date, was 3,153,768 shares of
Common Stock, par value $2.50, outstanding at June 30, 1996.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
--------------- ---------------
<S> <C> <C>
ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,551 $ 26,321
Investment securities:
Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,085 74,284
Held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,965 2,635
--------------- ---------------
Total Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . 62,050 76,919
Mortgage-backed and related securities:
Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,040 65,423
Held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,420 33,984
--------------- ---------------
Total Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . 106,460 99,407
Marketable equity securities:
Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,167 2,112
Loans:
Loans, net of unearned discount . . . . . . . . . . . . . . . . . . . . . . . . 246,038 228,778
Less: Reserve for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . (3,313) (3,317)
--------------- ---------------
Net Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242,725 225,461
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,871 11,669
Other real estate owned, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 273 273
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,134 3,095
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,171 412
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,901 3,004
--------------- ---------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 461,303 $ 448,673
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90,856 $ 84,706
Interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315,125 303,602
--------------- ---------------
Total Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 405,981 388,308
Short-term obligations:
Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,450 4,600
Long-term obligations:
Note payable - FHLB Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,873 13,686
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,659 8,727
--------------- ---------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427,963 415,321
--------------- ---------------
Shareholders' equity:
Common stock: ($2.50 par, 6,000,000 shares authorized,
3,153,768 and 3,141,393 shares issued and outstanding) . . . . . . . . . . . . 7,884 7,853
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,367 16,209
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,397 9,123
Treasury stock (61,137 and 49,421 shares at cost) . . . . . . . . . . . . . . . (734) (486)
Net unrealized gains (losses) on securities available for sale . . . . . . . . . (574) 653
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . 33,340 33,352
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . $ 461,303 $ 448,673
=============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
1
<PAGE> 3
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(in thousands, except per share data) Quarter Ended June 30, Six Months Ended June 30,
----------------------------- ------------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest income
Loans . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,220 $ 4,599 $ 10,331 $ 9,037
Investment securities . . . . . . . . . . . . . . . . . 850 1,176 1,794 2,288
Mortgage-backed and related securities . . . . . . . . . 1,702 1,303 3,266 2,699
Other interest earning assets . . . . . . . . . . . . . 81 212 152 364
------------- ------------- ------------- -------------
Total interest income . . . . . . . . . . . . . . . 7,853 7,290 15,543 14,388
Interest expense
Time and savings deposits . . . . . . . . . . . . . . . 3,348 3,034 6,604 5,892
Short-term obligations . . . . . . . . . . . . . . . . . 37 19 79 43
Long-term obligations . . . . . . . . . . . . . . . . . 179 92 364 186
------------- ------------- ------------- -------------
Total interest expense . . . . . . . . . . . . . . . 3,564 3,145 7,047 6,121
------------- ------------- ------------- -------------
Net interest income . . . . . . . . . . . . . . . . . . . . 4,289 4,145 8,496 8,267
Provision for loan losses . . . . . . . . . . . . . . . . . 125 (300) 200 (300)
------------- ------------- ------------- -------------
Net interest income after provision for loan losses . . . . 4,164 4,445 8,296 8,567
------------- ------------- ------------- -------------
Noninterest income
Deposit services . . . . . . . . . . . . . . . . . . . . 690 685 1,359 1,361
Gains on securities available for sale . . . . . . . . . 11 223 137 233
Other . . . . . . . . . . . . . . . . . . . . . . . . . 272 210 546 416
------------- ------------- ------------- -------------
Total noninterest income . . . . . . . . . . . . . . 973 1,118 2,042 2,010
------------- ------------- ------------- -------------
Noninterest expense
Salaries and employee benefits . . . . . . . . . . . . . 2,344 2,209 4,701 4,344
Net occupancy expense . . . . . . . . . . . . . . . . . 416 409 828 817
Equipment expense . . . . . . . . . . . . . . . . . . . 71 78 146 153
Advertising, travel & entertainment . . . . . . . . . . 197 211 423 412
Supplies . . . . . . . . . . . . . . . . . . . . . . . . 114 101 219 203
FDIC insurance . . . . . . . . . . . . . . . . . . . . . 209 1 419
Postage . . . . . . . . . . . . . . . . . . . . . . . . 75 75 144 149
Other . . . . . . . . . . . . . . . . . . . . . . . . . 542 515 1,085 994
------------- ------------- ------------- -------------
Total noninterest expense . . . . . . . . . . . . . 3,759 3,807 7,547 7,491
------------- ------------- ------------- -------------
Income before federal tax expense . . . . . . . . . . . . . 1,378 1,756 2,791 3,086
Provision for tax expense . . . . . . . . . . . . . . . . . 351 514 715 876
------------- ------------- ------------- -------------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 1,027 $ 1,242 $ 2,076 $ 2,210
============= ============= ============= =============
Earnings Per Share
Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ .33 $ .40 $ .67 $ .71
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 4
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,076 $ 2,210
Adjustments to reconcile net cash provided by operations:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . 1,067 750
Accretion of discount and loan fees . . . . . . . . . . . . . . . . . . . . . (409) (430)
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . 200 (300)
(Increase) in interest receivable . . . . . . . . . . . . . . . . . . . . . . (39) (132)
Decrease in other receivables and prepaids . . . . . . . . . . . . . . . . . 88 962
(Increase) decrease in deferred tax asset . . . . . . . . . . . . . . . . . . (113) 208
Increase in interest payable . . . . . . . . . . . . . . . . . . . . . . . . 29 47
(Gain) on sales of securities available for sale . . . . . . . . . . . . . . (137) (233)
(Gain) on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . (6) (10)
(Gain) on sales of other real estate owned . . . . . . . . . . . . . . . . . (20)
(Decrease) in other payables . . . . . . . . . . . . . . . . . . . . . . . . (1,097) (783)
Net decrease in student loans held for resale . . . . . . . . . . . . . . . . 117
------------ ------------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . 1,659 2,386
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale . . . . . . . 15,016 23,919
Proceeds from sales of mortgage-backed securities available for sale . . . . . 18,991 10,249
Proceeds from maturities of investment securities available for sale . . . . . 24,172 6,084
Proceeds from maturities of mortgage-backed securities available for sale . . 7,863 2,925
Proceeds from maturities of investment securities held to maturity . . . . . . 692 7,206
Proceeds from maturities of mortgage-backed securities held to maturity . . . 4,670 2,504
Purchases of investment securities available for sale . . . . . . . . . . . . (25,900) (28,711)
Purchases of mortgage-backed securities available for sale . . . . . . . . . . (39,610) (14,953)
Purchases of marketable equity securities available for sale . . . . . . . . . (55) (50)
Net (increase) in federal funds sold . . . . . . . . . . . . . . . . . . . . . (275)
Net (increase) in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,060) (3,366)
Purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . . (1,693) (2,390)
Proceeds from sales of premises and equipment . . . . . . . . . . . . . . . . 25 42
Proceeds from sales of repossessed assets . . . . . . . . . . . . . . . . . . 611 554
Proceeds from sales of other real estate owned . . . . . . . . . . . . . . . . 145
------------ ------------
Net cash provided (used) in investing activities . . . . . . . . . . . . . (13,278) 3,883
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 5
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (continued)
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
FINANCING ACTIVITIES:
Net increase (decrease) in demand and savings accounts . . . . . . . . . . . . $ 3,293 $ (9,427)
Net increase in certificates of deposit . . . . . . . . . . . . . . . . . . . 14,380 4,081
Net increase (decrease) in federal funds purchased . . . . . . . . . . . . . . (3,150) 500
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . (359) (267)
Sale of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Loss on sale of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . (30)
Net (decrease) in notes payable . . . . . . . . . . . . . . . . . . . . . . . (813) (396)
Proceeds from the issuance of common stock . . . . . . . . . . . . . . . . . . 189 147
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (772) (585)
------------ ------------
Net cash provided (used) by financing activities . . . . . . . . . . . . 12,849 (5,947)
------------ ------------
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . 1,230 322
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . 26,321 25,381
------------ ------------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . $ 27,551 $ 25,703
============ ============
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,018 $ 6,075
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 850 $ 575
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of OREO and repossessed assets through foreclosure . . . . . . . . $ 596 $ 430
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 6
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Net
Unrealized Total
Common Paid in Retained Treasury Gains Shareholders'
Stock Capital Earnings Stock (Losses) Equity
---------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 . . . . . . $ 7,433 $ 14,529 $ 7,480 $ (219) $ (1,699) $ 27,524
Net Income . . . . . . . . . . . . . . . 2,210 2,210
Cash dividend ($.20 per share) . . . . . (585) (585)
Common stock issued (12,302 shares) . . . 31 116 147
Purchase of 26,339 shares of
Treasury stock . . . . . . . . . . . . . (267) (267)
Net unrealized gains on securities
available for sale (net of tax) . . . . 1,085 1,085
---------- --------- --------- ---------- ---------- ----------
Balance at June 30, 1995 . . . . . . . . $ 7,464 $ 14,645 $ 9,105 $ (486) $ (614) $ 30,114
========== ========= ========= ========== ========== ==========
Balance at December 31, 1995 . . . . . . $ 7,853 $ 16,209 $ 9,123 $ (486) $ 653 $ 33,352
Net Income . . . . . . . . . . . . . . . 2,076 2,076
Cash dividend ($.25 per share) . . . . . (772) (772)
Common stock issued (12,375 shares) . . . 31 158 189
Purchase of 23,399 shares of
Treasury stock . . . . . . . . . . . . . (359) (359)
Sale of 11,683 shares of
Treasury stock . . . . . . . . . . . . . (30) 111 81
Net unrealized (losses) on securities
available for sale (net of tax) . . . . (1,227) (1,227)
---------- --------- --------- ---------- ---------- ----------
Balance at June 30, 1996 . . . . . . . . $ 7,884 $ 16,367 $ 10,397 $ (734) $ (574) $ 33,340
========== ========= ========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 7
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated balance sheet as of June 30, 1996, and the related
consolidated statements of income, shareholders' equity and cash flow for the
six month periods ended June 30, 1996 and 1995 are unaudited; in the opinion of
management, all adjustments necessary for a fair presentation of such financial
statements have been included. Such adjustments consisted only of normal
recurring items. Interim results are not necessarily indicative of results for
a full year. These financial statements should be read in conjunction with the
financial statements and notes thereto in the Company's latest report on Form
10-K.
2. Earnings Per Share
All per share data has been adjusted to give retroactive recognition to the
effect of stock dividends. As of June 30, 1996 and 1995, the number of shares
used to calculate earnings per share was 3,113,397 and 3,093,306, respectively.
6
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Quarter and six months ended June 30, 1996
compared to June 30, 1995.
The following is a discussion of the consolidated financial condition, changes
in financial condition, and results of operations of Southside Bancshares, Inc.
(the "Company"), and should be read and reviewed in conjunction with the
financial statements, and the notes thereto, in this presentation and in the
Company's latest report on Form 10-K.
The Company reported a decrease in net income for the quarter and six months
ended June 30, 1996 compared to the same period in 1995. Net income for the
quarter and six months ended June 30, 1996 was $1,027,000 and $2,076,000, as
compared to $1,242,000 and $2,210,000 for the same period in 1995.
Net Interest Income
Net interest income for the quarter and six months ended June 30, 1996 was
$4,289,000 and $8,496,000, an increase of $144,000 and $229,000 or 3.5% and
2.8%, respectively, when compared to the same periods in 1995. Average
interest earning assets increased $32,014,000 or 8.4%, while the net interest
spread decreased from 3.7% to 3.3% from June 30, 1995 to June 30, 1996.
During the six months ended June 30, 1996, Average Loans, funded primarily by
the growth in average deposits and average FHLB advances, increased $34,437,000
or 17.0%, compared to the same period in 1995. The average yield on loans
decreased from 9.0% at June 30, 1995 to 8.8% at June 30, 1996.
Average Securities increased $4,432,000 or 2.7% for the six months ended June
30, 1996 when compared to the same period in 1995. The overall yield on
Average Securities decreased to 6.0% during the six months ended June 30, 1996,
from 6.1% during the same period in 1995.
Interest income from federal funds and other interest earning assets decreased
$212,000 or 58.2% for the six months ended June 30, 1996 when compared to 1995
as a result of the average balance decrease of 55.3%. The average yield
decreased from 5.9% at June 30, 1995 to 5.5% at June 30, 1996.
Total interest expense increased $926,000 or 15.1% to $7,047,000 during the six
months ended June 30, 1996 as compared to $6,121,000 during the same period in
1995. The increase was attributable to an increase in Average Interest Bearing
Liabilities of $21,920,000 or 7.2% and an increase in the average yield on
interest bearing liabilities from 4.0% at June 30, 1995 to 4.3% at June 30,
1996.
7
<PAGE> 9
The analysis below shows average interest earning assets and interest bearing
liabilities together with the average yield on the interest earning assets and
the average cost of the interest bearing liabilities.
<TABLE>
<CAPTION>
SUMMARY OF INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES
-------------------------------------------------------------------
AVERAGE YIELD OR AVERAGE YIELD OR
VOLUME INTEREST RATE PAID VOLUME INTEREST RATE PAID
-------------------------------------------------------------------------------
(Dollars in thousands)
Six Months Ended June 30, 1996 Six Months Ended June 30, 1995
------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING
ASSETS:
Loans $ 236,654 $ 10,331 8.8% $ 202,217 $ 9,037 9.0%
Investment Securities 66,220 1,794 5.4% 79,406 2,288 5.8%
Mortgage-backed Securities 102,701 3,266 6.4% 85,083 2,699 6.4%
Other Interest Earning
Assets 5,539 152 5.5% 12,394 364 5.9%
---------- --------- ---------- ----------
TOTAL INTEREST EARNING
ASSETS $ 411,114 $ 15,543 7.6% $ 379,100 $ 14,388 7.7%
========== ========= ========== ==========
INTEREST BEARING LIABILITIES:
Deposits $ 311,005 $ 6,604 4.3% $ 296,053 $ 5,892 4.0%
Fed Funds Purchased and
Other Interest Bearing
Liabilities 3,201 79 5.0% 1,679 43 5.2%
Long Term Interest Bearing
Liabilities - FHLB Dallas 13,211 364 5.5% 7,765 186 4.8%
---------- --------- ---------- ----------
TOTAL INTEREST BEARING
LIABILITIES $ 327,417 $ 7,047 4.3% $ 305,497 $ 6,121 4.0%
========== ========= ----- ========== ========== -----
NET INTEREST SPREAD 3.3% 3.7%
===== =====
</TABLE>
Noninterest Income
Noninterest income was $2,042,000 for the six months ended June 30, 1996
compared to $2,010,000 for the same period in 1995. Other noninterest income
increased $130,000 for the six months ended June 30, 1996 primarily as a result
of increases in trust income, credit life commissions and mortgage servicing
release fees. Gains on sales of securities decreased $96,000 for the six
months ended June 30, 1996 compared to the same period in 1995. Sales of
securities available for sale were the result of changes in economic conditions
and a change in the mix of the securities portfolio.
The market value of the entire securities portfolio at June 30, 1996 was
$170,554,000 with a net unrealized loss on that date of $466,000. The net
unrealized loss is comprised of $1,304,000 in unrealized losses and $838,000 in
unrealized gains.
8
<PAGE> 10
Noninterest Expense
Noninterest expense was $7,547,000 for the six months ended June 30, 1996,
compared to $7,491,000 for the same period of 1995, representing an increase of
$56,000 for the period.
Salaries and employee benefits increased $357,000 or 8.2% during the six months
ended June 30, 1996 when compared to the same period in 1995. Increased direct
salary expense including payroll taxes represented $288,000 of the increase
while higher retirement and health insurance expense accounted for the
remainder of the change.
FDIC insurance decreased $418,000 or 99.8% for the six months ended June 30,
1996 compared to the same period of 1995. During the six months ended June 30,
1995, the FDIC insurance assessment was $.23 per hundred dollar of deposits.
With the Bank Insurance Fund currently fully funded the insurance expense has
been reduced to $500 per quarter at present. Future FDIC insurance assessments
will be determined by the FDIC based on the funding status of the Bank
Insurance Fund.
Other expense was $1,085,000 for the six months ended June 30, 1996, an
increase of $91,000 or 9.2% when compared to the same period in 1995.
Professional fees have increased as a result of the Company outsourcing
portions of the compliance, internal audit and computer programming functions
rather than increasing personnel. Costs associated with growth in the mortgage
and indirect auto lending portfolios also contributed to the increase.
Provision for Income Taxes
The provision for tax expense ratio for the six months ended June 30, 1996 was
25.6% compared to 28.4% for the six months ended June 30, 1995. The reduction
is due to an increase in average tax free municipal securities and lower pre-
tax income when comparing the two periods.
Capital Resources
Total shareholders' equity for the Company at June 30, 1996, of $33,340,000 was
down $12,000 from December 31, 1995, and represented 7.2% and 7.4% of total
assets at June 30, 1996 and December 31, 1995, respectively. Increases to
shareholders' equity during the six months ended June 30, 1996 were net income
of $2,076,000, common stock (12,375 shares) issued through dividend
reinvestment of $189,000 and an increase of $81,000 due to the sale of 11,683
shares of treasury stock. Decreases to shareholders' equity consisted of
$1,227,000 in net unrealized losses on securities available for sale, $772,000
in dividends paid to shareholders and the purchase of 23,399 shares of treasury
stock for $359,000.
The Federal Reserve Board has risk-based capital guidelines for bank holding
companies. As of June 30, 1996, the minimum ratio of capital to risk-adjusted
assets (including certain off-balance sheet items, such as standby letters of
credit) was 8%. At least half of the total capital must be comprised of common
equity, retained earnings and a limited amount of perpetual preferred stock,
after subtracting goodwill and certain other adjustments ("Tier 1 capital").
The remainder may consist of perpetual debt, mandatory convertible debt
securities, a limited amount of subordinated debt, other preferred stock and a
limited amount of loan loss reserves ("Tier 2 capital"). The maximum amount of
supplementary capital elements that qualifies as Tier 2 capital is limited to
100% of Tier 1 capital net of goodwill. The Federal Reserve Board also has
adopted a minimum leverage ratio (Tier 1 capital to average total assets) of 3%
for bank holding companies that meet certain specified criteria. The rule
indicates that the minimum leverage ratio should be at least 1.0% to 2.0%
higher for holding companies that do not have the highest rating or that are
undertaking major expansion programs. The Company's state chartered banking
subsidiary is subject to similar capital and risk-based capital
9
<PAGE> 11
requirements adopted by the FDIC and Texas Banking Department, respectively.
The leverage capital requirement adopted by the Texas Banking Department is 6%.
At June 30, 1996, the Company and Southside Bank exceeded all regulatory
minimum capital ratios.
It is management's intention to maintain the Company's capital at a level
acceptable to all regulatory authorities and future dividend payments will be
determined accordingly. Regulatory authorities require that any dividend
payments made by either the Company or Southside Bank not exceed earnings for
that year.
Liquidity and Interest Rate Sensitivity
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest sensitive
earning assets and interest bearing liabilities. Liquidity management involves
the ability to meet the cash flow requirements of customers who may be either
depositors wanting to withdraw funds or borrowers needing funds to meet their
credit needs. Interest rate sensitivity management seeks to avoid fluctuating
net interest margins and to enhance consistent growth of new interest income
through periods of changing interest rates. Through this process, market value
volatility is also a key consideration.
Cash, Interest Earning Deposits, Federal Funds Sold and short-term investments
with maturities or repricing characteristics of one year or less are the
principal sources of asset liquidity. At June 30, 1996, these investments were
19.0% of Total Assets. Historically, the overall liquidity of the Company has
been enhanced by a significant aggregate amount of core deposits and by the
lack of dependence on public fund deposits.
Composition of Loans
The Company's main objective is to seek attractive lending opportunities in
Smith County, Texas and adjoining counties. Total Average Loans increased
$34,437,000 or 17.0% from the six months ended June 30 1995 to June 30, 1996.
The majority of the increase is in Real Estate Loans and Loans to Individuals
which have increased due to expanded 1-4 family mortgage loan products and
additional penetration achieved with the new branch locations in the Company's
market area.
Loan Loss Experience and Reserve for Loan Losses
For the second quarter and six months ended June 30, 1996, loan charge-offs
were $170,000 and $370,000 and recoveries were $99,000 and $166,000,
respectively, resulting in net charge-offs of $71,000 and $204,000. During the
second quarter ended June 30, 1995, the Company reduced its reserve for loan
losses by $300,000. This was due to significant recoveries realized during the
quarter and based on the Company's review of the loan loss reserve.
The loan loss reserve is based on the most current review of the loan portfolio
at that time. An internal loan review officer of the Company is responsible
for an ongoing review of Southside Bank's entire loan portfolio with specific
goals set for the volume of loans to be reviewed on an annual basis.
A list of loans which are graded as having more than the normal degree of risk
associated with them are maintained by the internal loan review officer. This
list is updated on a periodic basis but no less than quarterly by the servicing
officer in order to properly allocate necessary reserves and keep management
informed on the status of attempts to correct the deficiencies noted in the
credit.
10
<PAGE> 12
While management is aware of certain risk factors within segments of the loan
portfolio, reserve allocations have been made on an individual loan basis. An
additional reserve is maintained on the remainder of the portfolio of at risk
loans that is based on tracking of the Company's loan losses on loans that have
not been previously identified as problems.
Nonperforming Assets
The categories of nonperforming assets consist of delinquent loans over 90 days
past due, nonaccrual and restructured loans, other real estate owned and
repossessed assets. Delinquent loans over 90 days past due represent loans for
which the payment of principal or interest has not been received in a timely
manner. The full collection of both the principal and interest is still
expected but is being withheld due to negotiation or other items expected to be
resolved in the near future. Generally, a loan is categorized as nonaccrual
when principal or interest is past due 90 days or more, unless, in the
determination of management, the principal and interest on the loan are well
secured and in the process of collection. In addition, a loan is placed on
nonaccrual when, in the opinion of management, the future collectibility of
interest and principal is in serious doubt. When a loan is categorized as
nonaccrual, the accrual of interest is discontinued and any remaining accrued
interest is reversed in that period; thereafter, interest income is recorded
only when actually received. Restructured loans represent loans which have
been renegotiated to provide a reduction or deferral of interest or principal
because of deterioration in the financial position of the borrowers.
Categorization of a loan as nonperforming is not in itself a reliable indicator
of potential loan loss. Other factors, such as the value of collateral
securing the loan and the financial condition of the borrower must be
considered in judgements as to potential loan loss.
OREO represents real estate taken in full or partial satisfaction of debts
previously contracted. 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.
Total nonperforming assets at June 30, 1996 were $2,583,000, up $71,000 or 2.8%
from $2,512,000 at June 30, 1995. From June 30, 1995 to June 30 ,1996, loans
90 days past due or more increased $59,000 or 18.3% to $382,000, restructured
loans increased $23,000 or 6.4% to $382,000, and nonaccrual loans decreased
$104,000 or 7.3% to $1,321,000. Repossessed assets increased $93,000 or 70.5%
to $225,000.
Expansion
During 1995, the Company acquired land adjacent to the bank's existing North
Tyler branch and began construction on a new seven lane motor bank facility.
The new motor bank facility was completed and opened during the second quarter
of 1996.
Remodeling and expansion of the main bank headquarters on South Beckham began
on April 24, 1996. During the second half of 1996, the Company plans to open
three full service grocery store branches. The branches will be located inside
two grocery stores in Tyler and one grocery store in Lindale. The first
grocery store branch at Super One Food Store in Tyler opened July 31, 1996.
The remaining Tyler branch is targeted to open late in the third quarter with
the Lindale branch anticipated opening late in the fourth quarter.
11
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No.
-------
27 - Financial Data Schedule for the six months ended
June 30, 1996.
(b) Reports on Form 8-K - None
12
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHSIDE BANCSHARES, INC.
(Registrant)
BY: /s/ B.G. HARTLEY
-----------------------------------------
B.G. Hartley, Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
DATE: 08-12-96
------------
/s/ LEE R. GIBSON
-----------------------------------------
Lee R. Gibson, Executive Vice
President (Principal Financial
and Accounting Officer)
DATE: 08-12-96
------------
13
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 27,551
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 139,292
<INVESTMENTS-CARRYING> 31,385
<INVESTMENTS-MARKET> 31,262
<LOANS> 246,038
<ALLOWANCE> 3,313
<TOTAL-ASSETS> 461,303
<DEPOSITS> 405,981
<SHORT-TERM> 1,450
<LIABILITIES-OTHER> 7,659
<LONG-TERM> 12,873
<COMMON> 7,884
0
0
<OTHER-SE> 25,456
<TOTAL-LIABILITIES-AND-EQUITY> 461,303
<INTEREST-LOAN> 10,331
<INTEREST-INVEST> 5,060
<INTEREST-OTHER> 152
<INTEREST-TOTAL> 15,543
<INTEREST-DEPOSIT> 6,604
<INTEREST-EXPENSE> 7,047
<INTEREST-INCOME-NET> 8,496
<LOAN-LOSSES> 200
<SECURITIES-GAINS> 137
<EXPENSE-OTHER> 7,547
<INCOME-PRETAX> 2,791
<INCOME-PRE-EXTRAORDINARY> 2,791
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,076
<EPS-PRIMARY> .67
<EPS-DILUTED> .67
<YIELD-ACTUAL> 4.16
<LOANS-NON> 1,321
<LOANS-PAST> 382
<LOANS-TROUBLED> 382
<LOANS-PROBLEM> 441
<ALLOWANCE-OPEN> 3,317
<CHARGE-OFFS> 370
<RECOVERIES> 166
<ALLOWANCE-CLOSE> 3,313
<ALLOWANCE-DOMESTIC> 3,313
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 22
</TABLE>
