<PAGE> 1
===============================================================================
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, 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 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 5, 1997, 3,316,127 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 $42,564,043.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Proxy Statement to be filed for the Annual Meeting of
Shareholders to be held April 23, 1997. (Part III)
===============================================================================
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
Southside Bancshares, Inc. (the "Company"), a Texas corporation, is a
bank holding company organized in 1982, which at December 31, 1996, owned all
of the capital stock of one commercial bank in Texas, Southside Bank, and one
nonbank subsidiary, which did not conduct any business in 1996. As a bank
holding company, the Company may own or control more than one bank and furnish
services for such banks. Unless the context otherwise requires, references in
this Report to the Company include Southside Bank and the nonbank subsidiary.
The Company provides its subsidiaries with advice and coordination of
activities in the area of accounting, public relations and business
development. Southside Bank operates under the day-to-day management of its own
officers and directors; and, it formulates its own policies with respect to
lending practice, investment activities, asset liability management, service
charges and other banking matters. At this time the Company conducts no
business except with respect to Southside Bank and the nonbank subsidiary.
FORWARD-LOOKING INFORMATION
The statements contained in this Annual Report on Form 10-K ("Annual
Report") that are not historical facts, including, but not limited to,
statements found in this "Item 1. Business" and "Item. 7". Management's
Discussion and Analysis of Financial Condition and Results of Operations, are
forward-looking statements that involve a number of risks and uncertainties.
The actual results of the future events described in such forward-looking
statements in this Annual Report could differ materially from those stated in
such forward-looking statements. Among the factors that could cause actual
results to differ materially are: general economic conditions, competition,
government regulations and possible future litigation, as well as the risks and
uncertainties discussed in this Annual Report, including, without limitation,
the portions referenced above, and the uncertainties set forth from time to
time in the Company's other public reports and filings and public statements.
EXPANSION
The Company opened three full service grocery store branches during the
second half of 1996. The branch locations are inside of the Super One Food
Store on Troup Highway in Tyler, the Brookshire's Food Store in Tyler at Rice
Road and South Broadway and the Brookshire's Food Store in Lindale. In May
1996, the Company also opened a new seven-lane motorbank next to the Company's
Gentry Parkway branch.
Remodeling and expansion of the main bank headquarters on South Beckham
began during the second half of 1996 and should be completed during 1997.
SERVICE AREAS
Southside Bank is the largest Tyler-based bank in total deposits in the
Tyler Metropolitan Area, which includes Smith County. The Tyler Metropolitan
Area has a population of approximately 151,000. Tyler is a major retail center
in East Texas and also has considerable oil and gas related industry as well as
manufacturing interests. In addition, it is the medical center of East Texas
with three major hospitals serving the area.
1
<PAGE> 3
BANKING SERVICES
Southside Bank offers a full range of financial services to commercial,
industrial, financial and individual customers, including short-term and
medium-term loans, inventory and accounts receivable financing, equipment
financing, real estate lending, safe deposit services, savings accounts and
various savings programs, interest and noninterest bearing checking accounts
and other personal loans. Southside Bank makes automobile and other installment
loans as well as home improvement and mortgage loans to its customers. The Bank
also offers its own credit card. Southside Bank also makes indirect automobile
loans through area auto dealers. Through its affiliate, BSC Securities, L.C.,
which is 20% owned by Southside Bank, the bank offers full retail brokerage
securities services. Southside Bank offers automatic teller machine facilities
and services through a statewide system known as "Moneymaker." The Company also
expects to begin offering home banking and debit cards during 1997. Operating
as a subsidiary of the bank, Southside will open a finance company in Tyler to
provide basic financial services such as lending, check cashing, and money
orders to an expanding market.
Trust services are provided by Southside Bank, primarily to individuals
and to a lesser extent partnerships and corporations. Such services include
investment, management, administration and advisory services for trust
accounts. Southside Bank can act as trustee of living, testamentary, and
employee benefit trusts and as executor or administrator of estates.
THE BANKING INDUSTRY IN TEXAS
The banking industry is affected by general economic conditions such as
inflation, recession, unemployment and other factors beyond the Company's
control. During the mid to late 1980's, declining oil prices had an indirect
effect on the Company's business, and the deteriorating real estate market
caused a significant portion of the increase in the Company's nonperforming
assets during that period. During the early 1990's a mild recovery appeared to
be underway in East Texas and much of the nation. This recovery continued into
1995 and 1996 and at this time the economic activity in the State and East
Texas appears to be improving with some growth areas resulting. One area of
concern is the personal bankruptcy rate occurring nationwide. Management
expects this trend to have some effect on the Company's net chargeoffs.
Management of the Company, however, cannot predict whether current economic
conditions will improve, remain the same or decline.
COMPETITION
The activities engaged in by the Company and its subsidiary, Southside
Bank, are highly competitive. In the past few years other financial
institutions such as savings and loan associations, credit unions, consumer
finance companies, insurance companies, brokerage companies and other financial
institutions with varying degrees of regulatory restrictions have begun to
compete more vigorously for a share of the financial services market. Brokerage
companies continue to become more competitive in the financial services arena
and pose an ever increasing challenge to banks. Legislative changes also
greatly affect the level of competition the Company faces. The Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 removes state law
barriers to acquisitions in all states and allows multi-state banking
operations to merge into a single bank with interstate branches. A state can
pass laws either to opt in early or to opt out completely, as long as they act
before June 1, 1997. The Texas Legislature has voted to opt out until 1999.
When Texas opts in, the conditions described above will enhance an already
attractive environment for the large out-of-state money center banking
organizations to expand into Texas and specifically into the service area of
the Company. Currently, the Company must compete against some institutions
located in Tyler, Texas and elsewhere in the Company's service area which have
capital
2
<PAGE> 4
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, 1996, the Company employed approximately 252 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.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and Southside Bank as of December
31, 1996, were as follows:
B. G. Hartley (Age 67), 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 64), 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 49), 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 63), 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 40), 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 52), Executive Vice President and Director of the Company's
subsidiary, Southside Bank, since 1987. He joined Southside Bank in 1965.
Jeryl Story (Age 45), 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 43), 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 56), 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 its subsidiaries at the pleasure of the Board of Directors.
3
<PAGE> 5
SUPERVISION AND REGULATION
As a bank holding company, the Company is subject to regulation by the
Board of Governors of the Federal Reserve System (the "Board") and is required
to file with the Board an annual report and such other material as the Board
may require pursuant to the Bank Holding Company Act of 1956 (the "Act"). The
Company and its subsidiaries are subject to examination by the Board. The
Company must obtain prior approval of the Board for the acquisition of more
than 5% of the voting shares or substantially all the assets of any bank or
bank holding company. After an application to acquire a state or national bank
in Texas has been accepted for filing by the Board, the Company must submit a
copy of that application to the Texas Banking Commissioner (the "Commissioner")
pursuant to the Texas Banking Code of 1943 (the "Code"). The Commissioner must
advise the Board of her recommendations. If the Commissioner recommends that
the application be denied, the applicant is entitled to request a hearing. The
Company is prohibited from acquiring the assets or more than 5% of the voting
shares of a bank located outside Texas unless the acquisition is specifically
authorized by the statutes of the state in which said bank is located.
The Company is, with limited exceptions, prohibited from acquiring
direct or indirect ownership or control of more than 5% of the voting shares of
any company not a bank or bank holding company and from engaging in activities
other than banking, managing or controlling banks or furnishing services to its
subsidiaries. The Company may, however, engage in, and may own shares of
companies engaged in, certain activities found by the Board to be "so closely
related to banking or managing or controlling banks as to be a proper incident
thereto." After an application to engage in any of these activities has been
accepted for filing by the Board, the Company must submit a copy of that
application to the Commissioner, pursuant to the Code, for a determination as
to whether the application should be approved. The Commissioner is required to
deny the application, unless she finds the proposed activities will produce
benefits to the public, such as greater convenience or increased competition,
that outweigh possible adverse effects, such as unfair competition, conflicts
of interest or unsound banking practices.
Under the Act and the Board's regulations, a bank holding company and
its subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit or lease or sale of property or
furnishing of services. The Board has subpoena powers with respect to
applications and other proceedings under the Act and possesses cease and desist
powers over bank holding companies and their nonbank subsidiaries with respect
to actions deemed to represent unsafe and unsound practices or violations of
applicable laws. In addition, the Board can require a bank holding company to
terminate any nonbank activity, or divest any nonbank subsidiary, if it deems
that the activity or subsidiary constitutes a serious risk to the financial
safety, soundness or stability of any of its subsidiary banks.
The Federal Deposit Insurance Corporation Improvement Act of 1991 made a
number of changes in the legal environment for insured banks, including
reduction in insurance coverage for certain kinds of deposits, increases in
consumer-oriented requirements, and major revisions in the process of
supervision and examination of depository institutions. Deposit insurance
changes impose new limits on brokered deposits, coverage of certain pension
deposits and foreign branch and uninsured deposits that had previously received
de facto protection under the "too big to fail" policy.
4
<PAGE> 6
The operations of Southside Bank are also subject to numerous laws and
regulations relating to the extension of credit and making of loans to
individuals. Such laws include the Federal Consumer Credit Protection Act,
which regulates, among other things, disclosure of credit terms, credit
advertising, credit billing and collection, and expansion of credit, and the
Texas Consumer Credit Code and Texas Consumer Protection Code, which regulate,
among other things, interest rates, disclosure of credit terms and practices
relating to the extension and collection of credit. In addition, remedies to
the borrower and penalties to the lender are provided for failure of the lender
to comply with such laws and regulations. The scope and requirements of such
laws and regulations have been expanded significantly in recent years.
CAPITAL GUIDELINES
Southside Bank is regulated by the Texas Department of Banking (the
"State") and the Federal Deposit Insurance Corporation (the "FDIC"). The State
requires Southside Bank to maintain capital at a minimum of 6% of total assets.
The FDIC requires minimum levels of Tier 1 capital and risk-based capital for
FDIC-insured institutions. The FDIC requires a minimum leverage ratio of 3% of
adjusted total assets for the highest rated banks. Other banks are required to
meet a leverage standard of 4% or more, determined on a case-by-case basis.
On December 31, 1996, 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, 1996 were
in excess of the minimum requirements.
Also see discussion of "Capital Resources" under Item 7.
USURY LAWS
Texas usury laws limit the rate of interest that may be charged by state
banks. Certain Federal laws provide a limited preemption of Texas usury laws.
The maximum rate of interest that Southside Bank may charge on direct business
loans under Texas law varies between 18% per annum and (i) 28% per annum for
business and agricultural loans above $250,000 or (ii) 24% per annum for other
direct loans. Texas floating usury ceilings are tied to the 26-week United
States Treasury Bill Auction rate. Other ceilings apply to open-end credit card
loans and dealer paper purchased by Southside Bank. A Federal statute removes
interest ceilings under usury laws for loans by Southside Bank which are
secured by first liens on residential real property.
ECONOMIC ENVIRONMENT
The monetary policies of regulatory authorities, including the Board,
have a significant effect on the operating results of bank holding companies
and their subsidiaries. The Board regulates the national supply of bank credit.
Among the means available to the Board are open market operations in United
States Government Securities, changes in the discount rate on member bank
borrowings, changes in reserve requirements against member and nonmember bank
deposits, and loans and limitations on interest rates which member banks may
pay on time or demand deposits. These methods are used in varying combinations
to influence overall growth and distribution of bank loans, investments and
deposits. Their use may affect interest rates charged on loans or paid for
deposits.
Also see discussion of "Banking Industry in Texas" under Item 1.
5
<PAGE> 7
ITEM 2. PROPERTIES
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 New Motor Bank facility adjacent to the bank's North Tyler
Gentry Parkway branch.
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, 1996, there were no meetings,
annual or special, of the shareholders of the Company. No matters were
submitted to a vote of the shareholders, nor were proxies solicited by
management or any other person.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's common stock is not actively traded on any established
public trading market. The high/low prices shown below were acquired from
shareholders voluntarily advising the transfer agent. Accordingly, the market
information is incomplete. However, the per share prices listed below are, to
the Company's knowledge, generally representative of transactions for the
periods reported. During the third quarter of 1996, 1995 and 1994, the Company
declared and paid a 5% stock dividend.
<TABLE>
<CAPTION>
Year Ended 1st qtr. 2nd qtr. 3rd qtr. 4th qtr.
- ---------------------- ------------------- -------------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1996 $ 15.50 - 14.50 $15.50 - 15.50 $ 16.50 - 15.50 $ 17.50 - 15.50
December 31, 1995 $ 10.00 - 9.50 $12.00 - 10.00 $ 12.50 - 12.00 $ 13.50 - 12.50
</TABLE>
See "Item 7. Capital Resources" for a discussion of the Company's common
stock repurchase program.
STOCKHOLDERS
There were approximately 1,166 holders of record of the Company's common
stock, the only class of equity securities currently issued and outstanding, as
of March 5, 1997.
DIVIDENDS
Cash dividends declared and paid were $.40 per share for the year ended
December 31, 1996 and $.35 and $.25 per share for each of the years ended
December 31, 1995 and 1994, respectively. Stock dividends of 5% were also
declared and paid during each of the years ended December 31, 1996, 1995 and
1994. Future dividends will depend on the Company's earnings, financial
condition and other factors which the Board of Directors of the Company
considers to be relevant.
ITEM 6. SELECTED FINANCIAL DATA
This information should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," as set forth in this report (in thousands, except per share data).
<TABLE>
<CAPTION>
As of and For the Years Ended December 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest & Deposit Service Income ........... $ 34,593 $ 32,342 $ 28,822 $ 26,812 $ 27,700
============ ============ ============ ============ ============
Investment Securities ....................... $ 57,825 $ 76,919 $ 82,720 $ 69,220 $ 59,086
============ ============ ============ ============ ============
Mortgage-backed and Related Securities ...... $ 114,356 $ 99,407 $ 88,080 $ 116,451 $ 120,245
============ ============ ============ ============ ============
Loans, Net of Allowance for Loan Loss ....... $ 254,918 $ 225,461 $ 197,853 $ 180,763 $ 158,197
============ ============ ============ ============ ============
Deposits .................................... $ 425,950 $ 388,308 $ 385,102 $ 352,355 $ 350,416
============ ============ ============ ============ ============
Long-term Obligations ....................... $ 9,096 $ 13,686 $ 7,997 $ 8,850 $
============ ============ ============ ============ ============
Net Income .................................. $ 4,205 $ 4,532 $ 3,519 $ 4,015 $ 2,586
============ ============ ============ ============ ============
Net Income Per Common Share ................. $ 1.29 $ 1.39 $ 1.08 $ 1.24 $ .81
============ ============ ============ ============ ============
Cash Dividends Declared Per Common Share .... $ .40 $ .35 $ .25 $ .25 $ .25
============ ============ ============ ============ ============
Total Assets ................................ $ 482,694 $ 448,673 $ 426,221 $ 404,216 $ 376,949
============ ============ ============ ============ ============
</TABLE>
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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, 1996 and 1995
and financial condition as of December 31, 1996, 1995, and 1994. 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.
December 31, 1996 compared to December 31, 1995
OVERVIEW
During the year ended December 31, 1996, the Company's net income
decreased $327,000 or 7.2% to $4,205,000, from $4,532,000 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.
EARNING ASSETS
Average Interest Earning Assets, totaling $418.1 million at December 31,
1996, increased $32.3 million or 8.4% over December 31, 1995 primarily as a
result of increases in Average Loans. During the year ended December 31, 1996
the mix of the Company's Interest Earning Assets reflected an increase in Loans
compared to the prior year end as Loans averaged 58.3% of Total Average
Interest Earning Assets compared to 54.2% during 1995. Securities averaged
40.7% of the total and Other Interest Earning Asset categories averaged 1.0%
for December 31, 1996. During 1995 the comparable mix was 43.2% in Securities
and 2.6% in the Other Interest Earning Asset categories.
Average Loans increased during 1996, by $34.8 million or 16.6% from 1995
with increases occurring primarily in real estate and commercial loans.
Average Securities increased $3.6 million or 2.2% during the year ended
December 31, 1996 compared to 1995. The mix of Average Securities between
taxable and tax-exempt securities changed to 77.8% taxable and 22.2% tax-exempt
for the year ended 1996 from 82% taxable and 18% tax-exempt for 1995. Average
Other Interest Earning Assets, consisting primarily of Federal Funds Sold,
decreased $6.1 million or 60.7% during the year ended December 31, 1996
compared to 1995. The decrease in Federal Funds balances are 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 62.2% of the total
securities portfolio for 1996 compared to 53.5% for 1995.
The table on the following page represents loan maturities and
sensitivity to changes in interest rates. The amounts of total loans
outstanding at December 31, 1996, which, based on remaining scheduled
repayments of principal, are due in (1) one year or less*, (2) more than one
year but less than five years, and (3) more than five years*, are shown in the
following table. The amounts due after one year are classified according to the
sensitivity to changes in interest rates.
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<PAGE> 10
<TABLE>
<CAPTION>
After One
Due in One but within After Five
Year or Less Five Years Years
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Construction Loans ................ $ 6,476 $ 738 $ 607
Real Estate Loans-Other ........... 37,491 52,992 29,071
Commercial and Financial Loans .... 39,458 10,456 1,393
All Other Loans ................... 36,373 42,882 230
---------- ---------- ----------
Total Loans ................. $ 119,798 $ 107,068 $ 31,301
========== ========== ==========
</TABLE>
<TABLE>
<S> <C> <C>
Loans with Maturities After
One Year for Which: Interest Rates are Fixed or Predetermined $ 136,836
Interest Rates are Floating or Adjustable $ 24,713
</TABLE>
*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.
The following table sets forth the carrying amount of Investment
Securities, Mortgage-backed Securities and Marketable Equity Securities for the
years ended December 31, 1996, 1995 and 1994 (in thousands).
<TABLE>
<CAPTION>
December 31,
------------------------------
Available for Sale: 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
U. S. Treasury ..................... $ 5,054 $ 7,064 $ 9,854
U. S. Government Agencies .......... 8,457 25,464 14,930
Mortgage-backed Securities:
Direct Govt. Agency Issues ...... 74,442 61,988 26,231
Other Private Issues ............ 16,132 3,435 1,423
State and Political Subdivisions ... 39,629 40,291 911
Other Stocks and Bonds ............. 5,171 3,577 2,005
-------- -------- --------
Total ........................ $148,885 $141,819 $ 55,354
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------
Held to Maturity: 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
U. S. Treasury ..................... $ $ $ 7,016
U. S. Government Agencies .......... 1,124 1,665 20,124
Mortgage-backed Securities:
Direct Govt. Agency Issues ...... 23,782 32,675 58,340
Other Private Issues ............ 1,309 2,086
State and Political Subdivisions ... 610 970 29,633
Other Stocks and Bonds ............. 252
-------- -------- --------
Total ........................ $ 25,516 $ 36,619 $117,451
======== ======== ========
</TABLE>
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<PAGE> 11
The maturities classified according to the sensitivity to changes in
interest rates of the December 31,1996 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.
<TABLE>
<CAPTION>
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
--------- ---- --------- ---- --------- ---- --------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury .................. $ $ 5,054 6.19% $ $
U.S. Government Agencies ....... 3,348 5.91% 5,109 5.91%
Mortgage-backed Securities ..... 33,166 7.07% 49,862 6.78% 7,546 6.58%
State and Political Subdivisions 2,950 7.54% 12,007 7.86% 7,996 7.53% 16,676 7.66%
Other Stocks and Bonds ......... 3,231 6.04% 1,591 6.48% 349 3.02%
--------- --------- --------- ---------
Total ..................... $ 42,695 6.93% $ 73,623 6.85% $ 15,542 7.07% $ 17,025 7.56%
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
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
--------- ---- --------- ---- ------- ---- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Agencies ....... $ 480 5.42% $ 644 5.42% $ $
Mortgage-backed Securities ..... 12,388 5.45% 10,914 6.06% 480 5.87%
State and Political Subdivisions 610 6.30%
----------- -------- ----- -------
Total .......................... $ 13,478 5.49% $ 11,558 6.02% $ 480 5.87% $
=========== ======== ===== =======
</TABLE>
DEPOSITS AND BORROWED FUNDS
Deposits provide a financial institution with its chief source of funds.
The increase of $26.0 million or 6.9% in Average Total Deposits during 1996
provided the Company with funds for the growth in earning assets discussed
previously. Average Time Deposits increased $17.9 million or 10.4% during 1996
compared to 1995. Average Noninterest Bearing Demand Deposits increased during
1996 $7.1 million or 9.1%. Average Interest Bearing Demand Deposits decreased
during 1996 by $.9 million or .8% while Average Saving Deposits increased $.2
million or 1.2%. The latter three categories, which are considered the lowest
cost deposits, comprised 52.8% of total average deposits during the year ended
December 31, 1996 compared to 54.3% during 1995 and 56.3% during 1994. The
increase in Average Total Deposits is reflective of overall bank growth and
branch expansion and was the primary source of funding the increase in Average
Loans.
10
<PAGE> 12
The following table sets forth the Company's deposit averages by
category for the years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
COMPOSITION OF DEPOSITS
(dollars in thousands)
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
AVG. AVG. AVG. AVG. AVG. AVG.
BALANCE RATE BALANCE RATE BALANCE RATE
-------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Noninterest Bearing Demand Deposits .... $ 85,453 N/A $ 78,338 N/A $ 74,918 N/A
Interest Bearing Demand Deposits ....... 111,950 2.76% 111,063 2.78% 117,116 2.63%
Savings Deposits ....................... 15,105 2.76% 14,931 2.76% 15,295 2.57%
Time Deposits .......................... 190,094 5.30% 172,228 5.11% 161,000 4.09%
-------- -------- --------
Total Deposits .................... $402,602 3.37% $376,560 3.26% $368,329 2.73%
======== ======== ========
</TABLE>
Average borrowed funds consisting of Short-Term Borrowings, primarily in
the form of Federal Funds Purchased, increased $.9 million or 49.2% during 1996
when compared to 1995.
Average Long Term Obligations consisting of Federal Home Loan Bank
("FHLB") Dallas Advances increased in 1996 to $12 million compared to $8.9
million in 1995. The advances were obtained from FHLB Dallas to fund long-term
loans. FHLB advances are collateralized by FHLB stock, nonspecified real estate
loans and mortgage-backed securities.
During the year ended December 31, 1996 total certificates of deposit of
$100,000 or more increased $11.4 million or 25.8% from December 31, 1995. This
increase was due to overall bank growth.
The table below sets forth the maturity distribution of certificates of
deposit of $100,000 or more issued by the Company at December 31, 1996 and 1995
(in thousands).
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
---------------------------------------- ----------------------------------
Time Other Time Other
Certificates Time Certificates Time
of Deposit Deposit Total of Deposit Deposit Total
------------- ------------ ------------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Three months or less................ $ 15,767 $ 4,482 $ 20,249 $ 8,157 $ 377 $ 8,534
Over three to six months............ 9,170 4,000 13,170 9,717 1,623 11,340
Over six to twelve months........... 9,270 9,270 8,859 8,859
Over twelve months.................. 13,069 13,069 15,606 15,606
------------- ------------ ------------- ------------ ------------ -------
Total..................... $ 47,276 $ 8,482 $ 55,758 $ 42,339 $ 2,000 $44,339
============= ============ ============= ============ ============ =======
</TABLE>
The tables on the following page present average balance sheet amounts
and average yields for the years ended December 31, 1996, 1995 and 1994. The
information should be reviewed in conjunction with the other financial
statements in this presentation. Two major components affecting the Company's
earnings are the Interest Earning Assets and Interest Bearing Liabilities. A
summary of Average Interest Earning Assets and Interest Bearing Liabilities is
set forth below, together with the average yield on the Interest Earning Assets
and the average cost of the Interest Bearing Liabilities.
11
<PAGE> 13
<TABLE>
<CAPTION>
AVERAGE BALANCES AND INTEREST RATES
(dollars in thousands)
Years Ended
---------------------------------------------------------------------------------------
December 31, 1996 December 31, 1995 December 31, 1994
---------------------------- --------------------------- ---------------------------
AVG. AVG. AVG AVG. AVG. AVG.
ASSETS BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- --------- ---- --------- --------- ---- --------- --------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans(1)................... $ 243,925 $ 21,314 8.74% $ 209,141 $ 18,861 9.02% $ 196,436 $ 16,714 8.51%
Securities:
Inv. Sec. (Taxable)........ 24,398 1,476 6.05% 45,452 2,839 6.25% 40,672 2,134 5.25%
Inv. Sec. (Tax-Exempt)(2).. 37,721 1,898 5.03% 29,965 1,504 5.02% 28,802 1,433 4.98%
Mortgage-backed Sec. ...... 105,923 6,756 6.38% 89,151 5,673 6.36% 94,389 5,255 5.57%
Marketable Equity Sec...... 2,179 119 5.46% 2,068 121 5.85% 1,976 102 5.16%
Interest Earning Deposits.. 381 21 5.51% 411 25 6.08% 341 12 3.52%
Federal Funds Sold......... 3,547 188 5.30% 9,576 567 5.92% 12,045 522 4.33%
--------- --------- --------- --------- --------- ---------
Total Interest
Earning Assets............ 418,074 31,772 7.60% 385,764 29,590 7.67% 374,661 26,172 6.99%
------ ------ ------
NONINTEREST EARNING ASSETS:
Cash and Due From Banks.... 22,160 20,899 20,368
Bank Premises and
Equipment................. 12,325 10,717 7,172
Other Assets............... 7,257 7,574 10,245
Less: Allowance
for Loan Loss........... (3,282) (3,323) (3,025)
--------- --------- ---------
Total Assets............... $ 456,534 $ 421,631 $ 409,421
========= ========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
INTEREST BEARING
LIABILITIES:
Savings Deposits.......... $ 15,105 417 2.76% $ 14,931 412 2.76% $ 15,295 393 2.57%
Time Deposits............. 190,094 10,083 5.30% 172,228 8,793 5.11% 161,000 6,578 4.09%
Interest Bearing
Demand Deposits.......... 111,950 3,093 2.76% 111,063 3,085 2.78% 117,116 3,083 2.63%
Federal Funds Purchased
And Other Interest
Bearing Liabilities...... 2,671 132 4.94% 1,790 94 5.25% 2,518 84 3.34%
Long Term Interest
Bearing Liabilities
FHLB Dallas.............. 12,010 672 5.60% 8,912 453 5.08% 8,380 406 4.84%
--------- --------- --------- --------- --------- ---------
Total Interest Bearing
Liabilities.............. 331,830 14,397 4.34% 308,924 12,837 4.16% 304,309 10,544 3.46%
--------- --------- ---------
NONINTEREST BEARING
LIABILITIES:
Demand Deposits............ 85,453 78,338 74,918
Other Liabilities.......... 4,788 4,184 3,039
--------- --------- ---------
Total Liabilities.......... 422,071 391,446 382,266
SHAREHOLDERS' EQUITY....... 34,463 30,185 27,155
--------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY...... $ 456,534 $ 421,631 $ 409,421
========= ========= =========
NET INTEREST INCOME........ $ 17,375 $ 16,753 $ 15,628
========= ========= =========
NET YIELD ON AVERAGE
EARNING ASSETS............ 4.16% 4.34% 4.17%
===== ===== =====
</TABLE>
(1) Loans are shown net of unearned discount. Interest on loans includes fees
on loans which are not material in amount.
(2) Interest and rates on securities which are nontaxable for Federal Income
Tax purposes are not presented on a taxable equivalent basis.
Note: For the years ended December 31, 1996, 1995, and 1994, loans totaling
$1,533,000, $1,256,000 and $627,000, respectively, were on nonaccrual
status. The current policy is to reverse previously accrued, but unpaid
interest on nonaccrual loans; thereafter, interest income is recorded to
the extent received when appropriate.
12
<PAGE> 14
MANAGEMENT OF LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity management involves the ability to meet the funds flow
requirements of borrowers, fulfilling credit requirements and customers
withdrawing their funds. Liquidity is provided by short-term investments that
can be readily liquidated with a minimum risk of loss. Cash, Interest Earning
Deposits, Federal Funds Sold and short-term investments with maturities or
repricing characteristics of one year or less continue to be a substantial
percentage of total assets. At December 31, 1996 these investments were 18.2%
of Total Assets, as compared with 22.7% for December 31, 1995, and 23.8% for
December 31, 1994. Liquidity is further provided through the matching, by time
period, of rate sensitive interest earning assets with rate sensitive interest
bearing liabilities.
The primary objective of monitoring the Company's interest rate
sensitivity, or risk, is to provide management the tools necessary to manage
the balance sheet to minimize adverse changes in net interest income as a
result of changes in the direction and level of interest rates. Federal Reserve
Board monetary control efforts, the effects of deregulation and legislative
changes have been significant factors affecting the task of managing interest
sensitivity positions in recent years.
Interest rate sensitivity is a function of the repricing characteristics
of the Company's portfolio of assets and liabilities. These repricing
characteristics are the time frames at which interest earning assets and
interest bearing liabilities are subject to changes in interest rates either at
repricing replacement or maturity. Sensitivity is measured as the difference
between the volume of assets and liabilities in the Company's current portfolio
that are subject to repricing in future time periods. The differences are
referred to as interest sensitivity gaps and are usually calculated separately
for various segments of time and on a cumulative basis. Any excess of assets or
liabilities results in an interest sensitivity gap. A positive gap denotes
asset sensitivity and a negative gap represents liability sensitivity. The
table on page 15 shows interest sensitivity gaps for four different intervals
as of December 31, 1996.
SECURITIES
The securities portfolio of the Company plays a primary role in
management of the interest rate sensitivity of the Company and, therefore, is
managed in the context of the overall balance sheet. The Securities portfolio
generates a substantial percentage of the Company's interest income and serves
as a necessary source of liquidity.
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.
Trading Securities. Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are
classified as trading securities and reported at market value, with
unrealized gains and losses included in earnings.
13
<PAGE> 15
Prudent management of the investment securities portfolio serves to
optimize portfolio yields. Management attempts to deploy investable funds into
instruments which are expected to increase the overall return of the portfolio
given the current assessment of economic and financial conditions.
The combined Investment Securities, Mortgage-backed Securities, and
Marketable Equity Securities portfolio decreased to $174.4 million on December
31, 1996, compared to $178.4 million on December 31, 1995, a decrease of $4.0
million or 2.3%. Mortgage-backed Securities secured by agency guaranteed
mortgages increased $14.9 million or 15.0% during 1996 when compared to 1995.
State and Political Subdivisions decreased $1.0 million or 2.5% during 1996.
U.S. Treasury securities decreased during 1996 when compared to 1995 by $2.0
million or 28.5%, U.S. Government Agency securities decreased $17.5 million or
64.7% and Other Stocks and Bonds increased $1.6 million or 44.6% in 1996
compared to 1995. 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 first half
of 1996 rates increased significantly. During the second half of 1996 rates
decreased slightly but remained in a relatively tight trading range. The
company continued to use the barbell approach adopted in 1995 during most of
1996. Intermediate term securities were purchased during the summer of 1996
when rates were near the highs. In order to implement and maintain this
strategy, a change in the securities portfolio mix was required and resulted in
the changes discussed above during 1995 and 1996.
The market value of the Securities portfolio at December 31, 1996 was
$174.5 million, which represents a net unrealized gain on that date of $1.9
million. The net unrealized gain is comprised of $2.2 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, 1996.
14
<PAGE> 16
The following table sets forth certain information as of December 31,
1996 with respect to rate sensitive assets and liabilities and interest
sensitivity GAP's (dollars in thousands):
<TABLE>
<CAPTION>
Rate Sensitive Assets (RSA) 1-3 Mos. 4-12 Mos. 1-5 Yrs. Over 5 Yrs. Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Loans(1) ............................. $ 76,218 $ 43,580 $ 107,068 $ 29,768 $ 256,634
Securities ........................... 19,677 36,496 85,181 33,047 174,401
Other Interest
Earning Assets ..................... 609 609
--------- --------- --------- --------- ---------
Total Rate Sensitive Assets .......... $ 96,504 $ 80,076 $ 192,249 $ 62,815 $ 431,644
========= ========= ========= ========= =========
Rate Sensitive Liabilities (RSL)
Interest Bearing Deposits (3) ........ $ 186,069 $ 85,337 $ 55,479 $ 164 $ 327,049
Other Interest
Bearing Liabilities ................ 7,258 1,026 4,415 3,232 15,931
--------- --------- --------- --------- ---------
Total Rate Sensitive Liabilities ..... $ 193,327 $ 86,363 $ 59,894 $ 3,396 $ 342,980
========= ========= ========= ========= =========
GAP (2) .............................. (96,823) (6,287) 132,355 59,419 88,664
Cumulative GAP ....................... (96,823) (103,110) 29,245 88,664
Cumulative Ratio of RSA
to RSL ............................. .50 .63 1.09 1.26 1.26
Gap/Total Earning Assets ............. (22.4%) (1.5%) 30.7% 13.8% 20.5%
</TABLE>
- -------------------------------------------------------------------------------
(1) Amount is equal to total loans net of unearned discount less nonaccrual
loans at December 31, 1996.
(2) GAP equals Total RSA minus Total RSL.
(3) All Savings, Now and MMDA deposit accounts are included in the 1-3 Mos.
column.
The Asset Liability Management Committee of Southside Bank closely monitors
the desired GAP along with various liquidity ratios to insure a satisfactory
liquidity position for the Company. Management continually evaluates the
condition of the economy, the pattern of market interest rates and other
economic data to determine the types of investments that should be made and at
what maturities. Using this analysis, management from time to time assumes
calculated interest sensitivity GAP positions to maximize net interest income
based upon anticipated movements in the general level of interest rates.
Regulatory authorities also monitor the Bank's GAP position along with other
liquidity ratios. In addition, the Bank utilizes a simulation model to
determine the impact of net interest income under several different interest
rate scenarios. By utilizing this technology, the Bank can determine changes
that need to be made to the asset and liability mixes to minimize the change in
net interest income under these various interest rate scenarios.
CAPITAL RESOURCES
Total Shareholders' Equity at December 31, 1996, of $36,604,000
increased 9.8% or $3,252,000 from December 31, 1995 and represented 7.6% of
total assets at December 31, 1996 compared to 7.4% at December 31, 1995.
Net income for 1996 of $4,205,000 was the major contributor to the
increase in Shareholders' Equity at December 31, 1996 along with unrealized
gains of $309,000 on securities available for sale. In addition, the Company
issued $308,000 in common stock (19,557 shares) through the Company's dividend
reinvestment plan and sold $97,000 of treasury stock (14,083 shares). Decreases
to Shareholders' Equity consisted of $1,258,000 in dividends paid and the
15
<PAGE> 17
purchase of $425,000 in treasury stock (27,648 shares). The Company purchased
treasury stock pursuant to a common stock repurchase plan instituted in late
1994. Under the repurchase plan, the Board of Directors establishes, on a
quarterly basis, total dollar limitations and price per share for stock to be
repurchased. The Board reviews this plan in conjunction with the capital needs
of the Company and Southside Bank and may, at it's discretion, modify or
discontinue the plan. During the third quarter of 1996, the Company issued a 5%
stock dividend, which had no net effect on Shareholders' Equity. The Company's
dividend policy requires that any dividend payments made by the Company not
exceed consolidated earnings for that year.
Under the Federal Reserve Board's risk-based capital guidelines for bank
holding companies, the minimum ratio of total capital to risk-adjusted assets
(including certain off-balance sheet items, such as standby letters of credit)
is currently eight percent. The minimum Tier 1 capital to risk-adjusted assets
is four percent. Through implementation of its capital policies, the
corporation has achieved a sound capital position. The Federal Reserve Board
also requires bank holding companies to comply with minimum leverage ratio
guidelines. The leverage ratio is a ratio of a bank holding company's Tier 1
capital to its total consolidated quarterly average assets, less goodwill and
certain other intangible assets. The guidelines require a minimum leverage
ratio of three percent for bank holding companies that meet certain specified
criteria. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulations that, if
undertaken, could have a direct material effect on the Bank's financial
statements. At December 31, 1996, the Company and Southside Bank exceeded all
regulatory minimum capital requirements.
The Federal Deposit Insurance Act requires bank regulatory agencies to
take "prompt corrective action" with respect to FDIC-insured depository
institutions that do not meet minimum capital requirements. A depository
institution's treatment for purposes of the prompt corrective action provisions
will depend upon how its capital levels compare to various capital measures and
certain other factors, as established by regulation.
As of December 31, 1996, the most recent notification from the FDIC
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. There are no conditions or events since that notification that
management believes have changed the institution's category.
The table below summarizes key equity ratios for the Company for the
years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Percentage of Net Income to:
Average Total Assets ........................................... .92% 1.07% .86%
Average Shareholders' Equity ................................... 12.20% 15.01% 12.96%
Percentage of Dividends Declared Per Common
Share to Net Income Per Common Share ........................... 31.01% 23.81% 21.01%
Percentage of Average Shareholders'
Equity to Average Total Assets ................................. 7.55% 7.16% 6.63%
Leverage - Tier 1 capital to Adjusted Average Total Assets ....... 7.63% 7.52% 7.02%
Total Risk-based Capital ......................................... 13.74% 13.63% 13.26%
Tier 1 Capital ................................................... 12.59% 12.43% 12.07%
</TABLE>
16
<PAGE> 18
LOANS
The Company's main objective is to seek attractive lending opportunities
in Smith County, Texas and adjoining counties. Total Loans as of December 31,
1996 increased $29,389,000 or 12.8% while the average balance was up
$34,784,000 or 16.6% when compared to 1995. Real Estate Loans as of December
31, 1996 reflected an increase of $18,472,000 or 17.0% from December 31, 1995.
Loans to individuals increased $3,827,000 or 5.1% from December 31, 1995 and
Commercial, Financial and Agricultural loans increased $7,090,000 or 16.0%. The
increase in Real Estate Loans is due to a stronger real estate market, interest
rates and an increased commitment in 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 with the bank's branch locations. In the
portfolio, loans dependent upon private household income represent a
significant concentration. Due to the number of customers involved who work in
all sectors of our economy, the risk in this portion of the portfolio is spread
throughout the economic community.
The average yield on loans for the year ended December 31, 1996
decreased to 8.7% from 9.0% for the year ended December 31, 1995. This decrease
was reflective of the repricing characteristics of the loans.
LOANS TO AFFILIATED PARTIES
In the normal course of business the Company's subsidiary, Southside
Bank makes loans to certain of its officers, directors, employees and their
related interests. As of December 31, 1996 and 1995 these loans totaled
$9,900,000 and $9,913,000, or 27.0% and 29.7% of Shareholders' Equity,
respectively. Such loans are made in the normal course of business at normal
credit terms, including interest rate and collateral requirements and do not
represent more than normal credit risks contained in the rest of the loan
portfolio for loans of similar types.
LOAN PORTFOLIO COMPOSITION AND ASSOCIATED RISK
For purposes of this discussion, the Company's loans are divided into
three categories: Real Estate Loans; Commercial, Financial and Agricultural
Loans; and Loans to Individuals.
REAL ESTATE LOANS
Real estate loans represent the Company's greatest concentration of
loans. However, the amount of risk associated with this group of loans is
mitigated in part due to the type of loans involved. For example, of the $127.4
million in Real Estate Loans, $62.4 million or 49.0% represent loans secured by
residential dwellings that are primarily owner occupied. Historically, the
amount of losses suffered on this type of loan have been significantly less
than those on other properties. A significant portion of the remaining Real
Estate Loans are secured primarily with owner occupied commercial real estate.
The Company's loan policy requires appraisal prior to funding any real estate
loans and also outlines the requirements for appraisals on renewals.
The real estate market in the late 1980's and early 1990's in Texas, and
more specifically in East Texas, experienced a significant decline in market
value. During 1995 and 1996, new appraisals of real estate in the market area
appeared to indicate improved real estate values for residential and improved
properties.
17
<PAGE> 19
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.
COMMERCIAL, FINANCIAL AND AGRICULTURAL LOANS
Commercial, Financial and Agricultural Loans have traditionally
generated the largest volume of loan losses in the portfolio. Management does
not consider there to be any material concentration of risk in any one industry
type in this loan category since no industry classification represents over 10%
of loans. As the economy in the Company's trade territory has improved, the
volume of losses associated with this group of loans has decreased.
LOANS TO INDIVIDUALS
Loans to Individuals for the most part represent vehicle and general
loans to consumers. Southside Bank is a major consumer lender in its trade
territory and has been for many years. The largest concentration of loans to
individuals represent vehicle loans. A significant portion of these loans were
obtained through the Company's indirect dealer loan program which has continued
to grow. At this point, the economy in Southside Bank's trade territory appears
stable. One area of concern is the personal bankruptcy rate occuring
nationwide. Management expects this trend to have some effect on the Company's
net chargeoffs. 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.
SUMMARY LOAN PORTFOLIO COMPOSITION AND ASSOCIATED RISK
As noted above, Southside Bank is a major consumer lender holding a
diverse portfolio. The major concentration of loans is consumer loans and is
reflected throughout the portfolio. These loans are the 1-4 Family Residential
Loans and the Loans to Individuals. Due to the diversity of the customer base,
major industry concentrations in the loan portfolio have been avoided although
collateral concentrations in real estate do exist. The area economy and its
health will have a major impact on the volume of loan losses experienced by the
Company's subsidiary, Southside Bank.
The following table sets forth loan totals by category for the years
presented (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Real Estate Loans:
Construction ................. $ 7,821 $ 4,558 $ 6,118 $ 4,739 $ 3,064
1-4 Family Residential ....... 62,356 49,909 38,563 34,982 29,647
Other ........................ 57,198 54,436 53,881 46,457 41,128
Commercial, Financial and
Agricultural Loans ........... 51,307 44,217 39,707 40,860 41,473
Loans to Individuals .......... 79,485 75,658 62,721 56,571 45,596
-------- -------- -------- -------- --------
Total Loans .................. $258,167 $228,778 $200,990 $183,609 $160,908
======== ======== ======== ======== ========
</TABLE>
18
<PAGE> 20
LOAN LOSS EXPERIENCE AND RESERVE FOR LOAN LOSSES
For the year ended December 31, 1996, the Company's subsidiary,
Southside Bank, had net charge-offs on 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
occured primarily as a result of significant recoveries realized during 1995.
Also contributing to the increase was an increase in charged-off loans.
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, 1996, the Company's review of the loan portfolio
indicates that a loan loss reserve of $3,249,000 is adequate.
The Company adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" (FAS114) and Statement of
Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures" (FAS118), on January 1, 1995.
Under these standards, a loan is considered impaired, based on current
information and events, if it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. Substantially all of the Company's
impaired loans are collateral-dependent, and as such, are measured for
impairment based on the fair value of the collateral. The adoption of FAS114
and FAS118 resulted in no additional provision for credit losses.
The table on the following page summarizes the average amount of net
loans outstanding; changes in the reserve for loan losses arising from loans
charged-off and recoveries on loans previously charged-off; additions to the
reserve which have been charged to operating expense; the ratio of net loans
charged-off to average loans outstanding; and an allocation of the reserve for
loan loss.
19
<PAGE> 21
LOAN LOSS EXPERIENCE AND RESERVE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average Net Loans Outstanding ...................... $ 243,925 $ 209,141 $ 196,436 $ 170,409 $ 157,260
========= ========= ========= ========= =========
Balance of Reserve for Loan Loss at
Beginning of Period .............................. $ 3,317 $ 3,137 $ 2,846 $ 2,711 $ 2,535
--------- --------- --------- --------- ---------
Loan Charge-Offs:
Real Estate-Construction ........................... (246)
Real Estate-Other .................................. (36) (6) (494) (79)
Commercial, Financial and Agricultural Loans ....... (70) (61) (129) (95) (365)
Loans to Individuals ............................... (768) (502) (395) (284) (335)
--------- --------- --------- --------- ---------
Total Loan Charge-Offs ............................. (838) (599) (530) (873) (1,025)
--------- --------- --------- --------- ---------
Recovery on Loans Previously Charged off:
Real Estate-Construction ...........................
Real Estate-Other .................................. 7 272 93 4 99
Commercial, Financial and Agricultural Loans ....... 78 546 326 287 150
Loans to Individuals ............................... 185 261 152 117 102
--------- --------- --------- --------- ---------
Total Recovery of Loans Previously Charged-Off ..... 270 1,079 571 408 351
--------- --------- --------- --------- ---------
Net Loan (Charge-Offs) Recoveries .................. (568) 480 41 (465) (674)
Additions (Reductions) to Reserve
Charged (Credited) to Operating Expense .......... 500 (300) 250 600 850
--------- --------- --------- --------- ---------
Balance at End of Period ........................... $ 3,249 $ 3,317 $ 3,137 $ 2,846 $ 2,711
========= ========= ========= ========= =========
Ratio of Net Charge-Offs (Recoveries)
to Average Loans Outstanding ..................... .23% (.23%) (.02%) .27% .43%
========= ========= ========= ========= =========
</TABLE>
Allocation of Reserve for Loan Loss (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- -------------
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate-Construction ....................... $ 39 1.2% $ 23 .7% $ 31 1.0% $ 7 .2% $ 31 1.2%
Real Estate-Other .............................. 1,059 32.6% 1,209 36.4% 1,127 35.9% 1,172 41.2% 1,026 37.8%
Commercial, Financial and Agricultural Loans ... 1,037 31.9% 911 27.5% 809 25.8% 1,018 35.8% 964 35.6%
Loans to Individuals ........................... 1,040 32.0% 1,082 32.6% 1,085 34.6% 642 22.6% 640 23.6%
Unallocated .................................... 74 2.3% 92 2.8% 85 2.7% 7 .2% 50 1.8%
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Balance at End of Period ....................... $3,249 100% $3,317 100% $3,137 100% $2,846 100% $2,711 100%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
20
<PAGE> 22
NONPERFORMING ASSETS
The primary categories of nonperforming assets consist of delinquent
loans over 90 days past due, nonaccrual loans, other real estate owned and
restructured loans. Nonaccrual loans are those loans which are more than 90
days delinquent and collection in full of both the principal and interest is in
doubt. Additionally, some loans may be placed in nonaccrual status that are not
delinquent due to doubts about full collection of principal or interest. When a
loan is categorized as nonaccrual, the accrual of interest is discontinued and
the accrued balance is reversed for financial statement purposes. Other Real
Estate Owned (OREO) represents real estate taken in full or partial
satisfaction of debts previously contracted. Previously included in the
appropriate categories of nonperforming assets were loans meeting the
in-substance foreclosure criteria. As a result of the adoption of FAS114, the
Company reclassified in-substance foreclosed assets in these categories to
loans. These loans had balances of $807,000 for December 31, 1994 and
$1,849,000 for December 31, 1993. The OREO consists primarily of raw land and
oil and gas interests. The Company is actively marketing all properties and
none are being held for investment purposes. Restructured loans represent loans
which have been renegotiated to provide a reduction or deferral of interest or
principal because of deterioration in the financial position of the borrowers.
Categorization of a loan as nonperforming is not in itself a reliable indicator
of potential loan loss. Other factors, such as the value of collateral securing
the loan and the financial condition of the borrower must be considered in
judgments as to potential loan loss.
The following table of nonperforming assets is classified according to
bank regulatory call report guidelines.
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
(dollars in thousands)
December 31,
----------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Loans 90 Days Past Due:
Real Estate ...................... $ 214 $ 266 $ 51 $ 342 $ 3
Installment ...................... 170 203 52 90 86
Commercial ....................... 88 183 59 70 63
------ ------ ------ ------ ------
472 652 162 502 152
------ ------ ------ ------ ------
Loans on Nonaccrual:
Real Estate ...................... 646 486 424 711 961
Installment ...................... 113 116 179 175 138
Commercial ....................... 774 654 24 213 458
------ ------ ------ ------ ------
1,533 1,256 627 1,099 1,557
------ ------ ------ ------ ------
Restructured Loans:
Real Estate ...................... 230 243 563 590 510
Installment ...................... 108 49 51 52 101
Commercial ....................... 62 44 43 115 164
------ ------ ------ ------ ------
400 336 657 757 775
------ ------ ------ ------ ------
Total Nonperforming Loans ........... 2,405 2,244 1,446 2,358 2,484
Other Real Estate Owned ............. 273 273 1,134 2,745 4,760
Repossessed Assets .................. 262 240 256 203 458
------ ------ ------ ------ ------
Total Nonperforming Assets .......... $2,940 $2,757 $2,836 $5,306 $7,702
====== ====== ====== ====== ======
Percentage of Total Assets .......... .6% .6% .7% 1.3% 2.0%
Percentage of Loans and Leases,
Net of Unearned Income ........... 1.1% 1.2% 1.4% 2.9% 4.8%
</TABLE>
21
<PAGE> 23
Total nonperforming assets increased $183,000 between December 31, 1995
and December 31, 1996. Nonperforming assets as a percentage of assets remained
unchanged from the previous year and as a percentage of loans decreased .1%.
Nonperforming assets represent a continued drain on the earning ability of the
Company. Earnings losses are due both to the loss of interest income and the
costs associated with maintaining the OREO, for taxes, insurance and other
operating expenses. In addition to the nonperforming assets, at December 31,
1996 in the opinion of management, the Company had $528,000 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):
<TABLE>
<CAPTION>
Valuation Carrying
Total Allowance Value
--------- --------- ---------
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
For the year ended December 31, 1996, the average recorded investment in
impaired loans was approximately $1,468,000. During the year ended December 31,
1996, 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 $97,000, $78,000 and $260,000 for the years
ended December 31, 1996, 1995 and 1994. If these loans had been accruing
interest at their original contracted rates, related income would have been
$216,000, $273,000 and $126,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
The following is a summary of the Allowance for Losses on Other Real
Estate Owned for the years presented (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year ..... $ 946 $ 1,291 $ 2,594
Provision for Losses ......... 43
Losses on sales .............. (1,442)
Gains on sales ............... 96
Other ........................ (345)
--------- --------- ---------
Balance at end of year ........... $ 946 $ 946 $ 1,291
========= ========= =========
</TABLE>
Prior to January 1, 1995, the Company classified certain loans meeting
the in-substance foreclosure criteria as OREO. Upon the adoption of FAS114, the
Company reclassified in-substance foreclosed assets to loans. The "Other"
category above reflects the effect of this reclassification.
22
<PAGE> 24
RESULTS OF OPERATIONS
ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
The following tables set forth the dollar amount of increase (decrease)
in interest income and interest expense resulting from changes in the volume of
interest earning assets and interest bearing liabilities and from changes in
yields and rates (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
1996 Compared to 1995
--------------------------------------
Average Average Increase
Volume Rate (Decrease)
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
Loans ...................................... $ 3,055 $ (602) $ 2,453
Investment Securities (Taxable) ............ (1,276) (87) (1,363)
Investment Securities (Tax-Exempt) (1) ..... 390 4 394
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 .................... 2,920 (738) 2,182
---------- ---------- ----------
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 Advances .............................. 170 49 219
---------- ---------- ----------
Total Interest Expense ................... 1,181 379 1,560
---------- ---------- ----------
Net Interest Earnings ...................... $ 1,739 $ (1,117) $ 622
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1995 Compared to 1994
--------------------------------------
Average Average Increase
Volume Rate (Decrease)
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
Loans ...................................... $ 1,958 $ 189 $ 2,147
Investment Securities (Taxable) ............ 269 436 705
Investment Securities (Tax-Exempt) (1) ..... 59 12 71
Mortgage-backed Securities ................. (303) 721 418
Marketable Equity Securities ............... 5 14 19
Federal Funds Sold ......................... (57) 102 45
Interest Earning Deposits .................. 2 11 13
---------- ---------- ----------
Total Interest Income .................... 1,933 1,485 3,418
---------- ---------- ----------
INTEREST EXPENSE:
Savings Deposits ........................... (10) 29 19
Time Deposits .............................. 484 1,731 2,215
Interest Bearing Demand Deposits ........... (164) 166 2
Federal Funds Purchased and Other
Interest Bearing Liabilities ............. (10) 20 10
FHLB Advances .............................. 26 21 47
---------- ---------- ----------
Total Interest Expense ................... 326 1,967 2,293
---------- ---------- ----------
Net Interest Earnings ...................... $ 1,607 $ (482) $ 1,125
========== ========== ==========
</TABLE>
(1) Interest rates on securities which are nontaxable for Federal Income Tax
purposes are not presented on a taxable equivalent basis.
NOTE: Volume/Rate variances (change in volume times change in rate) have been
allocated to amounts attributable to changes in volumes and to changes in rates
in proportion to the amounts directly attributable to those changes.
23
<PAGE> 25
NET INTEREST INCOME
Net interest income is the principal source of a financial institution's
earnings stream and represents the difference or spread between interest and
fee income generated from earning assets and the interest expense paid on
deposits and borrowed funds. Fluctuations in interest rates as well as volume
and mix changes in earning assets and interest bearing liabilities materially
impact net interest income.
Net interest income increased for the year ended December 31, 1996
$622,000 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 Earning Assets during the year. The
average yield on the Average Earning Assets decreased 7 basis points during the
year ended December 31, 1996 as compared to 1995. The increase in interest
income on Loans of $2,453,000 or 13.0% was the result of the increase in
Average Loans during 1996. Interest income on securities increased $112,000 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.
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, 1996
and the comparable year ended December 31, 1995 and indicates the percentage
changes (dollars in thousands):
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------- Percent
1996 1995 Change
------- ------- -------
<S> <C> <C> <C>
Deposit services ........................... $ 2,821 $ 2,752 2.5%
Gains on securities available for sale ..... 132 221 (40.3%)
Other ...................................... 1,180 901 31.0%
------- -------
Total noninterest income ................... $ 4,133 $ 3,874 6.7%
======= =======
</TABLE>
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, 1996 increased 6.7% or
$259,000 compared to 1995. Securities gains decreased $89,000 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
24
<PAGE> 26
$279,000 or 31% primarily as a result of increases in trust income, credit life
commissions 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, 1996
and the comparable year ended December 31, 1995 and indicates the percentage
changes (dollars in thousands):
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------- Percent
1996 1995 Change
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Salaries and employee benefits ............ $ 9,382 $ 8,545 9.8%
Net occupancy expense ..................... 1,749 1,636 6.9%
Equipment expense ......................... 321 302 6.3%
Advertising, travel and entertainment ..... 956 888 7.7%
Supplies .................................. 436 388 12.4%
FDIC insurance ............................ 2 434 (99.5%)
Postage ................................... 301 303 (.7%)
Other ..................................... 2,219 2,186 1.5%
--------- ---------
Total noninterest expense ................. $ 15,366 $ 14,682 4.7%
========= =========
</TABLE>
Noninterest expense for the year ended December 31, 1996 increased
$684,000 or 4.7% when compared to the year ended December 31, 1995. Salaries
and employee benefits increased $837,000 or 9.8% due to several factors. Higher
direct salary expense including payroll taxes represented $660,000 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 $187,000 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 $113,000 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 the three new branches opened in 1996 and the opening of the new
motor bank facility at Gentry.
Advertising expense increased $68,000 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 the 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 $432,000 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 cents per hundred
dollars of deposits insured to 4 cents 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. Congress
25
<PAGE> 27
recently passed legislation which will increase FDIC insurance expense in 1997
to pay for a portion of the Savings and Loan bailout. This expense is
anticipated to increase to $1.29 per hundred dollar of deposits.
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.
YEAR 2000 COMPLIANCE
The Company has and will continue to make certain investments in its
software systems and applications to ensure the Company is year 2000 compliant.
The financial impact to the Company has not been and is not anticipated to be
material to its financial position or results of operations in any given year.
OTHER ACCOUNTING ISSUES
In 1996, the Company adopted the provisions of the Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" (FAS
122). FAS 122 eliminates the accounting distinction of rights to service
mortgage loans whether they are acquired through loan origination activities or
through purchase transactions. The adoption of FAS 122 did not have a material
impact on the Company's financial statements.
In 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123). This statement 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 chose 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
in its 1996 financial statements.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS
128). This statement, which the Company will be required to adopt in 1997,
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 will not have a material
impact on the Company.
EFFECTS OF INFLATION
The effects of inflation on the Company can be minimized by management
of the interest income and interest expense or simply by controlling the
interest rates paid for borrowed funds versus the interest rates earned on
funds loaned to customers.
26
<PAGE> 28
December 31, 1995 compared to December 31, 1994
OVERVIEW
During the year ended December 31, 1995, the Company's net income
increased $1,013,000 or 28.8% to $4,532,000, compared to $3,519,000 for the
same period in 1994. The change in net income was primarily attributable to an
increase in net interest income, a negative provision in the reserve for loan
losses, a significant reduction in FDIC insurance expense and an increase in
the gain on the sale of securities available for sale.
NET INTEREST INCOME
Net interest income is the principal source of a financial institution's
earnings stream and represents the difference or spread between interest and
fee income generated from earning assets and the interest expense paid on
deposits and borrowed funds. Fluctuations in interest rates as well as volume
and mix changes in earning assets and interest bearing liabilities materially
impact net interest income.
Net interest income increased for the year ended December 31, 1995
$1,125,000 or 7.2% compared to the same period in 1994. Interest income for the
year ended December 31, 1995 increased $3.4 million or 13.1% to $29.6 million
compared to the same period in 1994. The increased interest income in 1995 was
attributable to the increase in average yield as well as higher Average Earning
Assets during the year. The average yield on the Average Earning Assets
increased 68 basis points during the year ended December 31, 1995 as compared
to 1994. The increase in interest income on Loans of $2,147,000 or 12.8% was
the result of the increase in Average Loans and average yield during 1995.
Interest income on securities increased $1,213,000 in 1995 or 13.6% compared to
1994 primarily due to the increase in the average yield during 1995.
The increase in interest expense for the year ended December 31, 1995 of
$2.3 million or 21.7% was attributable to an increase in Average Interest
Bearing Liabilities of $4.6 million or 1.5% along with the increase in the
average rate paid on Interest Bearing Liabilities of 70 basis points. Average
Time Deposits increased $11.2 million or 7.0% while the average rate paid
increased 102 basis points more than offsetting the decrease in Average
Interest Bearing Demand Deposits of $6.1 million. Average Long Term Interest
Bearing Liabilities increased $.5 million which contributed to the higher
interest expense in 1995.
PROVISION FOR LOAN LOSSES
The provision for loan losses for December 31, 1995 was ($300,000)
compared to $250,000 for December 31, 1994. For the year ended December 31,
1995, the Company's subsidiary, Southside Bank, had net recoveries on loans of
$480,000 an increase of 1070.7% compared to December 31, 1994. For the year
ended December 31, 1994, net recoveries on loans were $41,000.
27
<PAGE> 29
NONINTEREST INCOME
Total noninterest income for the year ended December 31, 1995 increased
7.7% or $278,000 compared to 1994. Securities gains increased $196,000 or
784.0% from 1994. Of the $221,000 in net securities gains from the AFS
portfolio in 1995, there were $450,000 in realized gains and $229,000 in
realized losses. The Company sold securities out of its AFS portfolio to
accomplish ALCO and investment portfolio objectives aimed at maximizing the
total return of the securities portfolio. The increase in deposit services
income of $102,000 or 3.8% was a result of increased deposit activity. Other
noninterest income increased $20,000 or 2.2%.
NONINTEREST EXPENSE
Noninterest expense for the year ended December 31, 1995 increased
$429,000 or 3.0% when compared to the year ended December 31, 1994. Salaries
and employee benefits increased $361,000 or 4.4% due to several factors. Higher
direct salary expense including payroll taxes represented $408,000 of the
increase. The increase is reflective of staff additions during 1995 as a result
of overall bank growth and pay increases and the increased commitment to
residential mortgage lending. Health insurance expense decreased $185,000 or
21.2% in 1995 compared to the same period in 1994. The decrease occurred as a
result of lowered health claims due to changing the Bank's overall health
coverage to a Preferred Provider Organization which provided significant cost
savings. Retirement expense increased $138,000 or 20.7% for the year ended
December 31, 1995 as a result of lower than expected returns on the retirement
plan assets in 1994, increased personnel and increased contributions to the
ESOP plan.
Net occupancy expense increased $197,000 or 13.7% for the year ended
December 31, 1995 compared to the same period in 1994, largely due to higher
real estate taxes, depreciation expense and associated operating costs as a
result of the new South Broadway branch opened in April 1995 and the opening of
the new motor bank facility at South Broadway and the operations facility late
in 1994.
Advertising expense increased $136,000 or 18.1% for the year ended
December 31, 1995 compared to the same period in 1994. The increase occurred
due to increases in direct advertising during 1995 as a result of the opening
of the new South Broadway branch in 1995 and the new motor bank facility late
in 1994. Donations also increased during the year ended December 31, 1995 and
are included in this total.
FDIC insurance decreased $357,000 or 45.1% for the year ended December
31, 1995 compared to the year ended December 31, 1994. During August 1995, the
FDIC announced a decrease in the insurance premiums from $.23 per hundred
dollars of deposits insured to $.04 per hundred dollars insured effective June
1, 1995. As a result, Southside Bank received a refund of $230,000 in September
1995 and the monthly expense for the remainder of the year decreased
significantly.
28
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth in Part
IV.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF
THE REGISTRANT
Certain of the information required under this item appears
beginning on page 2 of the Company's definitive proxy statement
for the Annual Meeting of Shareholders to be held April 23, 1997,
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item appears beginning on
page 5 of the Company's definitive proxy statement for the Annual
Meeting of Shareholders to be held April 23, 1997, 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 23, 1997, 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 23, 1997, and is
incorporated herein by reference.
29
<PAGE> 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)
1. Financial Statements
The following consolidated financial statements of Southside
Bancshares, Inc. and its subsidiaries are filed as part of this
report.
Consolidated Balance Sheets as of December 31, 1996 and 1995.
Consolidated Statements of Income for the years ended
December 31, 1996, 1995, and 1994.
Consolidated Statements of Cash Flow for the years ended
December 31, 1996, 1995 and 1994.
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1996, 1995 and 1994.
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
<TABLE>
<CAPTION>
Exhibit
No.
---
<S> <C>
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).
</TABLE>
30
<PAGE> 32
<TABLE>
<S> <C>
** 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).
** 10 (e) - Form of Deferred Compensation Agreements dated June 30, 1994 with each of
Sam Dawson, Lee Gibson, Titus Jones, Jeryl Story and Andy Wall as amended
November 13, 1995. (filed as Exhibit 10(e) to the Registrant's Form 10-K
for the year ended December 31, 1995 and incorporated herein).
22 - Subsidiaries of the Registrant (filed as Exhibit 22 to the Registrant's Form
10-K for the year ended December 31, 1994).
* 27 - Financial Data Schedule for the year ended December 31, 1996.
</TABLE>
- --------------------
* 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, 1996.
31
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SOUTHSIDE BANCSHARES, INC.
BY: /s/ B. G. HARTLEY
-------------------------------------
B. G. Hartley, Chairman of the
Board and Director (Principal
Executive Officer)
/s/ LEE R. GIBSON
--------------------------------------
Lee R. Gibson, CPA, Executive Vice
President (Principal Financial
DATED: March 24, 1997 Officer and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ B. G. HARTLEY Chairman of the Board March 24, 1997
---------------------------
(B. G. Hartley) and Director
/s/ ROBBIE N. EDMONSON President and Director March 24, 1997
---------------------------
(Robbie N. Edmonson)
/s/ FRED E. BOSWORTH Director March 24, 1997
---------------------------
(Fred E. Bosworth)
/s/ HERBERT C. BUIE Director March 24, 1997
---------------------------
(Herbert C. Buie)
/s/ ROLLINS CALDWELL Director March 24, 1997
---------------------------
(Rollins Caldwell)
/s/ W. D. (JOE) NORTON Director March 24, 1997
---------------------------
(W. D. (Joe) Norton)
/s/ WILLIAM SHEEHY Director March 24, 1997
---------------------------
(William Sheehy)
/s/ MURPH WILSON Director March 24, 1997
---------------------------
(Murph Wilson)
</TABLE>
32
<PAGE> 34
Report of Independent Accountants
To the Shareholders and Board of Directors
Southside Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of Southside
Bancshares, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity, and cash flow
for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the
consolidated results of their operations and their cash flow for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
Dallas, Texas
March 18, 1997
33
<PAGE> 35
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
--------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks ........................................ $ 31,653 $ 26,321
Investment securities:
Available for sale .......................................... 56,091 74,284
Held to maturity ............................................ 1,734 2,635
--------- ---------
Total Investment securities ............................... 57,825 76,919
Mortgage-backed and related securities:
Available for sale .......................................... 90,574 65,423
Held to maturity ............................................ 23,782 33,984
--------- ---------
Total Mortgage-backed securities .......................... 114,356 99,407
Marketable equity securities:
Available for sale .......................................... 2,220 2,112
Loans:
Loans, net of unearned discount ............................ 258,167 228,778
Less: Reserve for loan losses .............................. (3,249) (3,317)
--------- ---------
Net Loans ................................................. 254,918 225,461
Premises and equipment, net .................................... 13,695 11,669
Other real estate owned, net ................................... 273 273
Interest receivable ............................................ 3,300 3,095
Deferred tax asset ............................................. 464 412
Other assets ................................................... 3,990 3,004
--------- ---------
TOTAL ASSETS .............................................. $ 482,694 $ 448,673
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing ......................................... $ 98,901 $ 84,706
Interest bearing ............................................ 327,049 303,602
--------- ---------
Total Deposits ............................................ 425,950 388,308
Short-term obligations:
Federal funds purchased ..................................... 4,800 4,600
Long-term obligations:
Note payable - FHLB Dallas .................................. 9,096 13,686
Other liabilities .............................................. 6,244 8,727
--------- ---------
TOTAL LIABILITIES ......................................... 446,090 415,321
--------- ---------
Shareholders' equity:
Common stock: ($2.50 par, 6,000,000 shares authorized,
3,316,127 and 3,141,393 shares issued) ..................... 8,290 7,853
Paid-in capital ............................................. 18,501 16,209
Retained earnings ........................................... 9,628 9,123
Treasury stock (62,986 and 49,421 shares at cost) ........... (777) (486)
Net unrealized gains on securities available for sale ....... 962 653
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 36,604 33,352
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............... $ 482,694 $ 448,673
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
34
<PAGE> 36
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Interest income
Loans ................................................ $ 21,314 $ 18,861 $ 16,714
Investment securities ................................ 3,374 4,343 3,567
Mortgage-backed and related securities ............... 6,756 5,673 5,255
Marketable equity securities ......................... 119 121 102
Other interest earning assets ........................ 209 592 534
-------- -------- --------
Total interest income .......................... 31,772 29,590 26,172
-------- -------- --------
Interest expense
Time and savings deposits ............................ 13,593 12,290 10,054
Short-term obligations ............................... 132 94 84
Long-term obligations ................................ 672 453 406
-------- -------- --------
Total interest expense ......................... 14,397 12,837 10,544
-------- -------- --------
Net interest income ..................................... 17,375 16,753 15,628
Provision for loan losses ............................... 500 (300) 250
-------- -------- --------
Net interest income after provision for loan losses ..... 16,875 17,053 15,378
-------- -------- --------
Noninterest income
Deposit services ..................................... 2,821 2,752 2,650
Gains on securities available for sale ............... 132 221 25
Other ................................................ 1,180 901 921
-------- -------- --------
Total noninterest income ....................... 4,133 3,874 3,596
-------- -------- --------
Noninterest expense
Salaries and employee benefits ....................... 9,382 8,545 8,184
Net occupancy expense ................................ 1,749 1,636 1,439
Equipment expense .................................... 321 302 282
Advertising, travel & entertainment .................. 956 888 752
Supplies ............................................. 436 388 375
FDIC insurance ....................................... 2 434 791
Postage .............................................. 301 303 274
Other ................................................ 2,219 2,186 2,156
-------- -------- --------
Total noninterest expense ...................... 15,366 14,682 14,253
-------- -------- --------
Income before federal tax expense ....................... 5,642 6,245 4,721
-------- -------- --------
Provision (benefit)for federal tax expense
Current .............................................. 1,648 1,429 899
Deferred ............................................. (211) 284 303
-------- -------- --------
Total income taxes ............................. 1,437 1,713 1,202
-------- -------- --------
Net Income .............................................. $ 4,205 $ 4,532 $ 3,519
======== ========= ========
Earnings Per Share
Net Income ........................................... $ 1.29 $ 1.39 $ 1.08
</TABLE>
The accompanying notes are an integral part of the financial statements.
35
<PAGE> 37
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ...................................................................... $ 4,205 $ 4,532 $ 3,519
Adjustments to reconcile net cash provided by operations:
Depreciation and amortization ................................................. 2,250 1,563 1,792
Accretion of discount and loan fees ........................................... (737) (846) (850)
Provision for loan losses ..................................................... 500 (300) 250
Deferred loan origination cost ................................................ (72) (44)
(Gain) on securities .......................................................... (132) (221) (25)
(Gain) on premises and equipment .............................................. (6) (10) (10)
(Gain) loss on other real estate owned ........................................ (20) 43
(Increase) decrease in interest receivable .................................... (205) (514) 112
(Increase) decrease in other receivables and prepaids ......................... (964) 563 (805)
(Increase) decrease in deferred tax asset ..................................... (210) 284 303
Increase in interest payable .................................................. 103 217 173
Increase (decrease) in other payables ......................................... (2,586) 2,912 1,178
-------- -------- --------
Net cash provided by operating activities ................................. 2,218 8,088 5,636
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale ............... 19,928 33,457 18,593
Proceeds from sales of mortgage-backed securities available for sale .......... 18,991 16,555 27,414
Proceeds from sales of marketable equity securities available for sale ........ 2
Proceeds from maturities of investment securities available for sale .......... 33,920 20,582 11,575
Proceeds from maturities of mortgage-backed securities available for sale ..... 18,529 5,994 16,454
Proceeds from maturities of investment securities held to maturity ............ 941 17,510 11,754
Proceeds from maturities of mortgage-backed securities held to maturity ....... 10,398 6,403 5,749
Purchases of investment securities available for sale ......................... (35,098) (63,663) (27,977)
Purchases of mortgage-backed securities available for sale .................... (63,353) (38,299) (18,891)
Purchases of marketable equity securities available for sale .................. (108) (107) (67)
Purchases of investment securities held to maturity ........................... (27,577)
Purchases of mortgage-backed securities held to maturity ...................... (5,971)
Net (increase) decrease in federal funds sold ................................. 11,100 (11,100)
Net (increase) in loans ....................................................... (31,144) (27,486) (18,483)
Purchases of premises and equipment ........................................... (3,070) (2,822) (3,877)
Proceeds from sales of premises and equipment ................................. 25 42 31
Proceeds from sales of repossessed assets ..................................... 1,165 1,002 991
Proceeds from sales of other real estate owned ................................ 145 1,711
-------- -------- --------
Net cash used in investing activities ..................................... (28,876) (19,587) (19,669)
</TABLE>
The accompanying notes are an integral part of the financial statements.
36
<PAGE> 38
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (continued)
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Net increase (decrease) in demand and savings accounts .................... $ 16,332 $ (6,388) $ 19,721
Net increase in certificates of deposit ................................... 21,310 9,594 13,026
Proceeds from the issuance of common stock ................................ 308 258 195
Net increase (decrease) in notes payable .................................. (4,590) 5,689 (853)
Net (decrease) in securities sold under agreement to repurchase ........... (3,923)
Net increase (decrease) in federal funds purchased ........................ 200 4,600 (7,600)
Purchase of treasury stock ................................................ (425) (267) (219)
Sale of treasury stock .................................................... 134
Loss on sale of treasury stock ............................................ (37)
FAS 109-incentive stock plan .............................................. 16
Dividends paid ............................................................ (1,258) (1,047) (725)
-------- -------- --------
Net cash provided by financing activities ........................... 31,990 12,439 19,622
-------- -------- --------
Net increase in cash and cash equivalents ................................. 5,332 940 5,589
Cash and cash equivalents at beginning of year ............................ 26,321 25,381 19,792
-------- -------- --------
Cash and cash equivalents at end of year .................................. $ 31,653 $ 26,321 $ 25,381
======== ======== ========
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION:
Interest paid ............................................................. $ 14,294 $ 12,620 $ 10,312
Income taxes paid ......................................................... $ 1,623 $ 1,440 $ 878
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of OREO and repossessed assets through foreclosure ............ $ 1,187 $ 986 $ 1,187
Transfer of securities available for sale to held to maturity ............. $ 54,907
Transfer of securities to available for sale .............................. $ 57,584
FAS114 reclassification ................................................... $ 807
</TABLE>
The accompanying notes are an integral part of the financial statements.
37
<PAGE> 39
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(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, 1993 .................... $ 7,029 $ 13,358 $ 6,066 $ $ 788 $ 27,241
Net Income ...................................... 3,519 3,519
Cash dividend ($.25 per share) .................. (725) (725)
5% Stock dividend ............................... 354 1,026 (1,380)
Common stock issued (20,132 shares) ............. 50 145 195
Purchase of 23,082 shares of
treasury stock ................................. (219) (219)
Net increase in unrealized (losses) on
securities available for sale (net of tax) ..... (2,487) (2,487)
-------- -------- -------- -------- -------- --------
Balance at December 31, 1994 .................... 7,433 14,529 7,480 (219) (1,699) 27,524
Net Income ...................................... 4,532 4,532
Cash dividend ($.35 per share) .................. (1,047) (1,047)
5% Stock dividend ............................... 368 1,474 (1,842)
Common stock issued (20,800 shares) ............. 52 206 258
Purchase of 26,339 shares of
treasury stock ................................. (267) (267)
Net increase in unrealized gains on
securities available for sale (net of tax) ..... 2,352 2,352
-------- -------- -------- -------- -------- --------
Balance at December 31, 1995 .................... 7,853 16,209 9,123 (486) 653 33,352
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
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
38
<PAGE> 40
NOTES TO FINANCIAL STATEMENTS Southside Bancshares, Inc. and Subsidiaries
-----------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
The significant accounting and reporting policies of Southside
Bancshares, Inc. (the "Company"), and its wholly owned subsidiaries,
Southside Bank and the nonbank subsidiary, are summarized below.
Organization and Basis of Presentation. The consolidated financial
statements include the accounts of the Company, Southside Bank and the
nonbank subsidiary, which did not conduct any business in 1996. Southside
Bank offers a full range of financial services to commercial, industrial,
financial and individual customers. All significant intercompany accounts
and transactions are eliminated in consolidation. The preparation of
these consolidated financial statements in conformity with generally
accepted accounting principles requires the use of management's
estimates. These estimates are subjective in nature and involve matters
of judgment. Actual amounts could differ from these estimates.
Cash Equivalents. Cash equivalents for purposes of reporting cash flow,
include cash and amounts due from banks.
Loans. All loans are stated at principal outstanding net of unearned
income. Interest income on installment loans is recognized primarily on
the level yield method. Interest income on other loans is credited to
income based primarily on the principal outstanding at contract rates of
interest. The Company adopted Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan" (FAS114) and
Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures"
(FAS118), on January 1, 1995. Under these standards, a loan is considered
impaired, based on current information and events, if it is probable that
the Company will be unable to collect the scheduled payments of principal
or interest when due according to the contractual terms of the loan
agreement. Substantially all of the Company's impaired loans are
collateral-dependent, and as such, are measured for impairment based on
the fair value of the collateral. The adoption of FAS114 and FAS118
resulted in no additional provision for credit losses.
Reserve for Loan Losses. A reserve for loan losses is provided through
charges to income in the form of a provision for loan losses. Loans which
management believes are uncollectible are charged against this account
with subsequent recoveries, if any, credited to the account. The amount
of the current allowance for loan losses is determined by management's
evaluation of the quality and inherent risks in the loan portfolio,
economic conditions and other factors which warrant current recognition.
Nonaccrual Loans. A loan is placed on nonaccrual when principal or
interest is past due 90 days or more unless, in the determination of
management, the principal and interest on the loan are well
collateralized and in the process of collection. In addition, a loan is
placed on nonaccrual when, in the opinion of management, the future
collectibility of interest and principal is in serious doubt. When
classified as nonaccrual, accrued interest receivable on the loan is
reversed and the future accrual of interest is suspended. Payments of
contractual interest are recognized as income only to the extent that
full recovery of the principal balance of the loan is reasonably certain.
Other Real Estate Owned. Other Real Estate Owned includes real estate
acquired in full or partial settlement of loan obligations. Prior to
January 1, 1995, the Company classified certain loans meeting the
in-substance foreclosure criteria as Other Real Estate Owned (OREO). Upon
the adoption of FAS114, the Company reclassified in-substance foreclosed
assets to loans. Other Real
39
<PAGE> 41
Estate Owned is carried at the lower of (1) the recorded amount of the
loan for which the foreclosed property previously served as collateral or
(2) the fair market value of the property. Prior to foreclosure, the
recorded amount of the loan is written down, if necessary, to the
appraised fair market value of the real estate to be acquired, less
selling costs, by charging the allowance for loan losses. Any subsequent
reduction in fair market value is charged to results of operations
through the Allowance for Losses on Other Real Estate account. Costs of
maintaining and operating foreclosed properties are expensed as incurred.
Expenditures to complete or improve foreclosed properties are capitalized
only if expected to be recovered; otherwise, they are expensed.
Mortgage Servicing Rights. The Company adopted Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights"
(FAS122) on January 1, 1996. FAS122 eliminates the accounting distinction
of rights to service certain mortgage loans whether they are acquired
through loan origination activities or through purchase transactions. The
adoption of FAS122 did not have a material impact on the Company's
financial statements.
Securities. The Company uses the specific identification method to
determine the basis for computing realized gain or loss. 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.
Trading Securities. Debt and equity securities that are bought and
held principally for the purpose of selling them in the near term are
classified as trading securities and reported at market value, with
unrealized gains and losses included in earnings.
Premises and Equipment. Bank premises and equipment are stated at cost,
net of accumulated depreciation. Depreciation is computed on a straight
line basis over the estimated useful lives of the related assets. Useful
lives are estimated to be 20 to 40 years for premises and 3 to 10 years
for equipment. Maintenance and repairs are charged to income as incurred
while major improvements and replacements are capitalized.
Loan Fees. The Company treats loan fees, net of direct costs, as an
adjustment to the yield of the related loan over its term.
Income Taxes. The Company files a consolidated Federal income tax return.
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(FAS109). Under FAS109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled.
40
<PAGE> 42
The effect on deferred tax assets and liabilities of changes in tax rates
is recognized in income in the period the change occurs.
Earnings Per Share. Earnings per share have been adjusted to give
retroactive recognition to stock dividends. The weighted average number
of shares during the years ended December 31, 1996, 1995 and 1994 were
3,272,027, 3,252,194, and 3,261,294, respectively.
Stock Options. The Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock- Based Compensation" (FAS123) on
January 1, 1996. FAS123 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 in its 1996 financial statements.
General. Certain prior period amounts have been reclassified to conform
to current year presentation.
2. CASH AND DUE FROM BANKS
The Company is required to maintain reserve balances with the Federal
Reserve Bank. The reserve balances were $3,788,000 and $4,570,000 as of
December 31, 1996 and 1995, respectively.
41
<PAGE> 43
3. INVESTMENT, MORTGAGE-BACKED AND MARKETABLE EQUITY SECURITIES
The amortized cost and estimated market value of investment, mortgage-backed
and marketable equity securities as of December 31, 1996 and 1995 were (in
thousands):
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
-------------------------------------------------
Gross Gross Estimated
December 31, Amortized Unrealized Unrealized Market
1996 Cost Gains Losses Value
---- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
HELD TO MATURITY
-------------------------------------------------
Gross Gross Estimated
December 31, Amortized Unrealized Unrealized Market
1996 Cost Gains Losses Value
---- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
========== ========== ========== ==========
</TABLE>
42
<PAGE> 44
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
-------------------------------------------------
Gross Gross Estimated
December 31, Amortized Unrealized Unrealized Market
1995 Cost Gains Losses Value
---- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury .................... $ 7,029 $ 41 $ 6 $ 7,064
U.S. Government Agencies ......... 25,410 77 23 25,464
Mortgage-backed Securities:
Direct Govt. Agency Issues ..... 61,280 726 18 61,988
Other Private Issues ........... 3,326 109 3,435
State and Political
Subdivisions ................... 39,482 834 25 40,291
Other Stocks and Bonds ........... 3,575 2 3,577
---------- ---------- ---------- ----------
Total .......................... $ 140,102 $ 1,789 $ 72 $ 141,819
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
HELD TO MATURITY
-------------------------------------------------
Gross Gross Estimated
December 31, Amortized Unrealized Unrealized Market
1995 Cost Gains Losses Value
---- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government Agencies ......... $ 1,665 $ $ 9 $ 1,656
Mortgage-backed Securities:
Direct Govt. Agency Issues ..... 32,675 499 136 33,038
Other Private Issues ........... 1,309 10 1,299
State and Political
Subdivisions ................... 970 8 978
---------- ---------- ---------- ----------
Total .......................... $ 36,619 $ 507 $ 155 $ 36,971
========== ========== ========== ==========
</TABLE>
Interest income recognized on securities for the years presented (in
thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
U.S. Treasury .......................... $ 397 $ 713 $ 900
U.S. Government Agencies ............... 858 2,039 1,111
Mortgage-backed Securities ............. 6,756 5,673 5,255
State and Political Subdivisions ....... 2,000 1,581 1,467
Other Stocks and Bonds ................. 238 131 191
--------- --------- ---------
Total interest income on securities .... $ 10,249 $ 10,137 $ 8,924
========= ========= =========
</TABLE>
43
<PAGE> 45
In October 1995, the Financial Accounting Standards Board issued an
implementation guide to FAS115 which allowed entities to reclassify their
securities among the three categories provided in FAS115. Transfers were
permitted after October 1995, but no later than December 31, 1995. As a result,
on November 16, 1995 the Company transferred a total of $57,584,000 from HTM to
AFS at the amortized cost at date of transfer. Of this total, $37,308,000 were
investment securities. The remaining $20,276,000 transferred were
mortgage-backed securities. The unrealized loss on the securities transferred
from HTM to AFS was $419,000, net of tax, at date of transfer. The transfer was
done according to the guidelines set forth in the implementation guide to
FAS115. There were no securities transferred from AFS to HTM or sales from the
HTM portfolio during the year ended December 31, 1996.
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. Of the $221,000
in net securities gains from the AFS portfolio in 1995, there were $450,000 in
realized gains and $229,000 in realized losses. The $25,000 in net securities
gains from the AFS portfolio in 1994 were comprised of $164,000 in realized
gains and $139,000 in realized losses.
The scheduled maturities of AFS and HTM securities as of December 31, 1996 are
presented below. Mortgage-backed securities are presented in total by category.
<TABLE>
<CAPTION>
Amortized Aggregate
Cost Fair Value
---------- ----------
(in thousands)
<S> <C> <C>
Held to maturity securities:
Due in one year or less .................. $ 1,090 $ 1,085
Due after one year through five years .... 644 636
---------- ----------
1,734 1,721
Mortgage-backed securities .................. 23,782 23,853
---------- ----------
Total ................................. $ 25,516 $ 25,574
========== ==========
Available for sale securities:
Due in one year or less .................. $ 9,520 $ 9,529
Due after one year through five years .... 23,440 23,761
Due after five years through ten years ... 7,768 7,996
Due after ten years ...................... 16,508 17,025
---------- ----------
57,236 58,311
Mortgage-backed securities .................. 89,813 90,574
---------- ----------
Total ................................. $ 147,049 $ 148,885
========== ==========
</TABLE>
Investment securities with book values of $17,474,000 and $20,042,000 were
pledged as of December 31, 1996 and 1995, respectively, to secure public and
trust deposits or for other purposes as required by law.
44
<PAGE> 46
4. LOANS AND RESERVE FOR POSSIBLE LOAN LOSSES
Loans in the accompanying consolidated statement of condition are classified as
follows (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
---------- ----------
<S> <C> <C>
Real Estate Loans:
Construction .................................. $ 7,821 $ 4,558
1-4 family residential ........................ 62,356 49,909
Other ......................................... 57,198 54,436
Commercial, financial and agricultural loans ..... 51,514 44,436
Loans to individuals ............................. 85,758 83,478
---------- ----------
Total loans ...................................... 264,647 236,817
Less: Unearned income ........................ 6,480 8,039
Reserve for loan losses ................ 3,249 3,317
---------- ----------
Net loans ........................................ $ 254,918 $ 225,461
========== ==========
</TABLE>
The following is a summary of the Reserve for Loan Losses for the years ended
December 31, 1996, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year ............ $ 3,317 $ 3,137 $ 2,846
Provision for loan losses ............. 500 (300) 250
Loans charged off ................... (838) (599) (530)
Recoveries of loans charged off ..... 270 1,079 571
--------- --------- ---------
Net loan (losses) recoveries ...... (568) 480 41
--------- --------- ---------
Balance at end of year .................. $ 3,249 $ 3,317 $ 3,137
========= ========= =========
</TABLE>
Nonaccrual loans at December 31, 1996 and 1995 were $1,533,000 and $1,256,000,
respectively. Loans with terms modified in troubled debt restructuring at
December 31, 1996 and 1995 were $400,000 and $336,000, 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):
<TABLE>
<CAPTION>
Valuation Carrying
Total Allowance Value
--------- --------- ---------
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
45
<PAGE> 47
For the year ended December 31, 1996, the average recorded investment in
impaired loans was approximately $1,468,000. During the year ended December 31,
1996, 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
$97,000, $78,000 and $260,000 for the years ended December 31, 1996, 1995 and
1994, respectively. If these loans had been accruing interest at their original
contracted rates, related income would have been $216,000, $273,000 and
$126,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
5. BANK PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
--------- ---------
(in thousands)
<S> <C> <C>
Bank premises .................... $ 14,681 $ 12,912
Furniture and equipment .......... 8,542 7,492
--------- ---------
23,223 20,404
Less accumulated depreciation .... 9,528 8,735
--------- ---------
Total ................ $ 13,695 $ 11,669
========= =========
</TABLE>
Depreciation expense was $1,025,000, $997,000 and $953,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
6. OTHER REAL ESTATE OWNED
The following is a summary of the Allowance for Losses on Other Real Estate
Owned for the periods presented (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year ..... $ 946 $ 1,291 $ 2,594
Provision for Losses ......... 43
Losses on sales .............. (1,442)
Gains on sales ............... 96
Other ........................ (345)
--------- --------- ---------
Balance at end of year ........... $ 946 $ 946 $ 1,291
========= ========= =========
</TABLE>
As stated in Note 1, prior to January 1, 1995, the Company classified certain
loans meeting the in-substance foreclosure criteria as OREO. Upon the adoption
of FAS114, the Company reclassified in-substance foreclosed assets to loans.
The "Other" category above reflects the effect of this reclassification.
For the years ended December 31, 1996, 1995 and 1994, income from OREO
properties exceeded the provision and other expenses by $35,000, $34,000 and
$32,000, respectively.
46
<PAGE> 48
7. DOMESTIC TIME DEPOSITS
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
---------- ----------
(in thousands)
<S> <C> <C>
Savings deposits ........................................... $ 15,213 $ 14,806
Money Market demand deposits ............................... 51,872 52,408
Now demand deposits ........................................ 61,085 58,819
Certificates and other time deposits
of $100,000 or more ....................................... 55,758 44,339
Certificates and other time
deposits under $100,000 ................................... 143,121 133,230
---------- ----------
Total .......................................... $ 327,049 $ 303,602
========== ==========
</TABLE>
For the years ended December 31, 1996, 1995 and 1994, interest expense on time
certificates of deposit of $100,000 or more aggregated $2,518,000, $2,083,000
and $1,675,000, respectively.
8. SHORT TERM BORROWINGS (dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Federal funds purchased
Balance at end of period ................................. $ 4,800 $ 4,600 $
Average amount outstanding during the period (1) ......... 1,367 611 959
Maximum amount outstanding during the period ............. 10,725 5,350 4,750
Weighted average interest rate during the period (2) ..... 5.1% 6.1% 3.4%
Interest rate at end of period ........................... 6.9% 6.0%
Securities sold under agreements to repurchase
Balance at end of period ................................. $ $ $
Average amount outstanding during the period (1) ......... 191 395
Maximum amount outstanding during the period ............. 1,980 6,083
Weighted average interest rate during the period (2) ..... 5.24% 3.2%
Interest rate at end of period
Treasury tax and loan funds
Balance at end of period ................................. $ 2,035 $ 1,352 $ 1,653
Average amount outstanding during the period (1) ......... 1,113 1,180 1,164
Maximum amount outstanding during the period ............. 2,731 2,907 2,475
Weighted average interest rate during the period (2) ..... 4.6% 4.8% 3.4%
Interest rate at end of period ........................... 5.2% 5.2% 5.2%
</TABLE>
(1) The average amount outstanding during the period was computed by
dividing the total month-end outstanding principal balances by the
number of months in the period.
(2) The weighted average interest rate during the period was computed by
dividing the actual interest expense (annualized) by average
short-term debt outstanding.
47
<PAGE> 49
9. LONG TERM OBLIGATIONS (dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Federal Home Loan Bank - Advances
Balance at end of period ................................ $ 9,096 $ 13,686 $ 7,997
Average amount outstanding during the period (1) ........ 12,010 8,912 8,380
Maximum amount outstanding during the period ............ 13,686 13,766 8,850
Weighted average interest rate during the period (2) .... 5.6% 5.1% 4.8%
Interest rate at end of period .......................... 5.8% 5.5% 4.8%
</TABLE>
(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 advances by remaining maturity at December 31 are:
<TABLE>
<CAPTION>
Under Due Due Over 1996
1 Year 1-5 Years 6-10 Years 10 Years Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Fixed rate ....................... $ 1,449 $ 4,415 $ 2,359 $ 873 $ 9,096
--------- --------- --------- --------- ---------
Total Long-term Obligations .... $ 1,449 $ 4,415 $ 2,359 $ 873 $ 9,096
========= ========= ========= ========= =========
</TABLE>
FHLB advances are collateralized by FHLB stock, nonspecified real estate loans
and mortgage-backed securities.
10. RETIREMENT AND OTHER BENEFIT PLANS
Southside Bank has a deferred compensation agreement with seven of its
executive officers, which generally provides for payment of an aggregate amount
of $2,660,000 over a maximum period of fifteen years after retirement or death.
Deferred compensation expense was $96,000, $97,000 and $99,000 for the years
ended December 31, 1996, 1995 and 1994, 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 $760,000, $628,000 and $736,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. There was 1 retiree
participating in the health insurance plan as of December 31, 1996 and 1995.
48
<PAGE> 50
The Company has an Employee Stock Ownership Plan which covers substantially all
employees. Contributions to the plan are at the sole discretion of the Board of
Directors. Contributions to the plan for the years ended December 31, 1996,
1995 and 1994 were $75,000, $150,000 and $120,000, respectively. At December
31, 1996 and 1995, 90,109 and 84,783 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 57,135 shares of Southside
Bancshares, Inc. stock purchased at fair market value as of December 31, 1996
and 1995. The number of shares have been adjusted as a result of stock
dividends.
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
---------- ----------
(in thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of ($6,944) and ($5,850) respectively ......................... $ 7,758 $ 6,642
========== ==========
Projected benefit obligation for service rendered to date ....... $ (10,086) $ (9,644)
Plan assets at fair value, primarily stocks, bonds and CD's ..... 9,049 7,570
---------- ----------
Plan assets over (under) projected benefit obligation ........... (1,037) (2,074)
Unrecognized net loss ........................................... 829 1,878
Unrecognized net asset being amortized over 16.55 years ......... (324) (370)
---------- ----------
Net pension liability included in other liabilities ........... $ (532) $ (566)
========== ==========
</TABLE>
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 7.75% and 4.50% and 7.25% and 4.50% for December 31, 1996 and
1995, respectively. The assumed long-term rate of return on plan assets was
9.0% for December 31, 1996 and 1995.
49
<PAGE> 51
Net periodic pension cost for the years ended December 31, 1996, 1995 and 1994
included the following components (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Service cost - benefits earned during the period ..... $ 547 $ 436 $ 433
Interest cost on projected benefit obligation ........ 691 623 531
Actual return on plan assets ......................... (992) (1,212) 149
Net amortization and deferral ........................ 326 652 (726)
---------- ---------- ----------
Net periodic pension cost ............................ $ 572 $ 499 $ 387
========== ========== ==========
</TABLE>
The Company has a nonfunded supplemental retirement plan (restoration plan) for
its employees whose benefits under the principal retirement plan are reduced
because of compensation deferral elections or limitations under federal tax
laws. The accumulated benefit obligation for this plan was $584,000 and
$490,000 as of December 31, 1996 and 1995, respectively. The expense for this
plan for the years ended December 31, 1996, 1995 and 1994 was $52,000, $59,000
and $62,000, respectively.
11. SHAREHOLDERS' EQUITY
Cash dividends declared and paid were $.40 per share, $.35 per share and $.25
per share for the years ended December 31, 1996, 1995 and 1994, 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, 1996 was
$9,628,000.
Under the Federal Reserve Board's risk-based capital guidelines for bank
holding companies, the minimum ratio of total capital to risk-adjusted assets
(including certain off-balance sheet items, such as standby letters of credit)
is currently eight percent. The minimum Tier 1 capital to risk-adjusted assets
is four percent. Through implementation of its capital policies, the
corporation has achieved a sound capital position. The Federal Reserve Board
also requires bank holding companies to comply with minimum leverage ratio
guidelines. The leverage ratio is a ratio of a bank holding company's Tier 1
capital to its total consolidated quarterly average assets, less goodwill and
certain other intangible assets. The guidelines require a minimum leverage
ratio of three percent for bank holding companies that meet certain specified
criteria. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulations that, if
undertaken, could have a direct material effect on the Bank's financial
statements. At December 31, 1996, the Company and Southside Bank exceeded all
regulatory minimum capital requirements.
The Federal Deposit Insurance Act requires bank regulatory agencies to take
"prompt corrective action" with respect to FDIC-insured depository
institution's that do not meet minimum capital requirements. A depository
institution's treatment for purposes of the prompt corrective action provisions
will depend upon how its capital levels compare to various capital measures and
certain other factors, as established by regulation.
50
<PAGE> 52
As of December 31, 1996, the most recent notification from the FDIC 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. There are no conditions or events since that notification that
management believes have changed the institution's category.
The table below summarizes key equity ratios for the Company for the years
ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Percentage of Net Income to:
Average Total Assets ......................................... .92% 1.07% .86%
Average Shareholders' Equity ................................. 12.20% 15.01% 12.96%
Percentage of Dividends Declared Per Common
Share to Net Income Per Common Share ......................... 31.01% 23.81% 21.01%
Percentage of Average Shareholders'
Equity to Average Total Assets ............................... 7.55% 7.16% 6.63%
Leverage - Tier 1 capital to Adjusted Average Total Assets ..... 7.63% 7.52% 7.02%
Total Risk-based Capital ....................................... 13.74% 13.63% 13.26%
Tier 1 Capital ................................................. 12.59% 12.43% 12.07%
</TABLE>
Stock Based Compensation Plans
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.
Had the compensation cost for the Plan been determined consistent with SFAS
123, the effect on the Company's net income and net income per common share for
1995 and 1996 would not have been material.
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.
Incentive Stock Options
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 1993, 1995, and in 1996. The stock
options granted in 1993, 1995 and 1996 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 1993, 1995, and 1996.
51
<PAGE> 53
A summary of the status of the Company's stock options as of December 31, 1995
and December 31, 1996 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, 1996):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
INCENTIVE STOCK OPTIONS
- ----------------------------------------------------------------------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
# SHARES OF WEIGHTED # SHARES OF WEIGHTED
UNDERLYING AVERAGE UNDERLYING AVERAGE
OPTIONS EXERCISE PRICES OPTIONS EXERCISE PRICES
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of the year 151,393 $8.33 89,653 $6.58
- ----------------------------------------------------------------------------------------------------------------------------------
Granted 73,500 $14.29 61,740 $10.88
- ----------------------------------------------------------------------------------------------------------------------------------
Exercised 14,083 $6.58 0 N/A
- ----------------------------------------------------------------------------------------------------------------------------------
Forfeited 704 $6.58 0 N/A
- ----------------------------------------------------------------------------------------------------------------------------------
Expired 0 N/A 0 N/A
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 210,106 $10.54 151,393 $8.33
- ----------------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year 51,353 $7.61 35,861 $6.58
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted-average FV of options $2.65 - $2.14 -
granted during the year
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 and 1996, respectively:
dividend yield of 2.1% and 1.7%, risk-free interest rates of 5.99% and 5.41% and
expected lives of 6 years. In determining the "minimum value" SFAS 123 does not
require the volatility of the Company's common stock underlying the options to
be calculated or considered because the company was not publicly-traded when
the options were granted.
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ -----------------------------
NUMBER WEIGHTED AVG. NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED AVG EXERCISABLE WEIGHTED AVG.
EXERCISE PRICES AT 12/31/96 CONTR. LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
<S> <C> <C> <C> <C> <C> <C> <C>
$ 6.58 to $11.00 136,606 7.32 $ 8.33 57,268 $7.51
$ 11.01 to $14.29 73,500 9.01 $14.29 0 $ 0
----------------- -------- ---- ------ ------- ------
$ 6.58 to $14.29 210,106 7.91 $10.54 57,268 $7.51
</TABLE>
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 the Plan.
52
<PAGE> 54
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, 1996, 19,557 shares were sold under this plan
at an average price of $15.74 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 1996, 27,648 shares of treasury stock were purchased under this plan at
a cost of $425,000.
Shareholders should not anticipate a continuation of the cash dividend simply
because of the implementation of a dividend reinvestment program. The payment
of dividends will depend upon future earnings, the financial condition of the
Company, and other related factors.
13. INCOME TAXES
The provisions for federal income taxes included in the accompanying statements
consist of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Current tax provision ................................... $ 1,648 $ 1,429 $ 899
Deferred tax provision (benefit) ........................ (211) 284 303
---------- ---------- ----------
Provision for tax expense charged to operations ......... 1,437 1,713 1,202
Shareholders' Equity - Unrealized gains (losses) on
securities available for sale ....................... 159 1,212 (1,281)
---------- ---------- ----------
Comprehensive provision (benefit) for income tax ........ $ 1,596 $ 2,925 $ (79)
========== ========== ==========
</TABLE>
53
<PAGE> 55
Deferred income taxes result from timing differences in the recognition of
revenues and expenses for tax and book purposes. These differences and the tax
effect of each of the major categories are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Provision for loan losses .............. $ (170) $ 102 $ (85)
Provision for OREO losses .............. 117 443
Depreciation ........................... 57 31 (9)
Retirement and other benefit plans ..... (123) (41) (78)
FHLB Stock dividends ................... 37 37 31
Loan origination costs ................. 2 25 15
Other .................................. (14) 13 (14)
------ ------ ------
Deferred tax provision (benefit) ....... $ (211) $ 284 $ 303
====== ====== ======
</TABLE>
The Company has a $267,000 capital loss carryforward remaining for tax purposes
at December 31, 1996. If unused, $77,000 of this carryforward will expire on
January 1, 1997 and the remaining $190,000 will expire on January 1, 1998.
The components of the net deferred tax asset as of December 31, 1996 are
summarized below (in thousands):
<TABLE>
<CAPTION>
Assets Liabilities
-------- --------
<S> <C> <C>
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 Stock Dividends .................................. (105)
Other ................................................. (1)
-------- --------
Gross deferred tax assets (liabilities) ............ 1,392 (928)
-------- --------
Net deferred tax asset .......................... $ 464
========
</TABLE>
54
<PAGE> 56
A reconciliation of tax at statutory rates and total tax expense is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
Percent Percent Percent
of of of
Pre-Tax Pre-Tax Pre-Tax
Amount Income Amount Income Amount Income
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Calculated Tax Expense ........................... $ 1,918 34.0% $ 2,123 34.0% $ 1,605 34.0%
Increase (Decrease) in Taxes from:
Tax Exempt Interest .............................. (650) (11.5%) (518) (8.3%) (492) (10.4%)
Other Net ........................................ 169 3.0% 108 1.7% 89 1.8%
------- ------- ------- ------- ------- -------
Provision for Tax Expense Charged to
Operations .................................... 1,437 25.5% 1,713 27.4% 1,202 25.4%
Shareholders' Equity - Unrealized gains
(losses) on securities available for sale ..... 159 2.8% 1,212 19.4% (1,281) (27.1%)
------- ------- ------- ------- ------- -------
Comprehensive Provision (benefit) for
Income Tax .................................... $ 1,596 28.3% $ 2,925 46.8% $ (79) (1.7%)
======= ======= ======= ======= ======= =======
</TABLE>
14. CONTINGENCIES
Other than litigation in the normal course of business, to which the Company,
or its subsidiaries, is subject, management of the Company, after consulting
with its legal counsel, believes that liability resulting from any of these
actions will not have a material effect on the financial position of the
Company or its subsidiaries.
15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business the Company is a party to certain financial
instruments, with off-balance-sheet risk, to meet the financing needs of its
customers. These off-balance-sheet instruments include commitments to extend
credit and standby letters of credit. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
reflected in the financial statements. The contract or notional amounts of
these instruments reflect the extent of involvement and exposure to credit loss
the Company has in these particular classes of financial instruments.
Commitments to extend credit are agreements to lend to a customer provided that
the terms established in the contract are met. Commitments generally have fixed
expiration dates and may require payment of 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 of $27,172,000
and $27,203,000 at December 31, 1996 and 1995, respectively. The Company had
outstanding standby letters of credit of $202,000 and $1,124,000 at December
31, 1996 and 1995, respectively.
55
<PAGE> 57
In the normal course of business the Company buys and sells securities. At
December 31, 1996 and 1995, the Company had commitments to purchase $322,000
and $3,616,000 in securities, respectively.
The Company applies the same credit policies in making commitments and standby
letters of credit as it does for on- balance-sheet instruments. The Company
evaluates each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary, upon extension of credit is based
on management's credit evaluation of the borrower. Collateral held varies but
may include real estate, accounts receivable, inventory, property, plant, and
equipment.
16. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
The economy of the Company's market area, East Texas, is directly tied to the
Oil and Gas Industry. Oil prices have had an indirect effect on the Company's
business. Although the Company has a diversified loan portfolio, a significant
portion of its loans are secured by real estate. Repayment of these loans is in
part dependent upon the economic conditions in the market area. Part of the
risk associated with Real Estate Loans has been mitigated since 45.8% of this
group represents loans secured by residential dwellings that are primarily
owner occupied. Losses on this type of loan have historically been less than
those on speculative properties. Many of the remaining Real Estate Loans are
secured primarily with owner occupied commercial real estate.
The Mortgage-backed Securities held by the Company consist solely of Government
agency pass-through securities which are either directly or indirectly backed
by the full faith and credit of the United States Government.
17. RELATED PARTY TRANSACTIONS
Loan activity of executive officers, directors, and their affiliates for the
years ended December 31, 1996 and 1995 were (in thousands):
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1996 1995
---------- ----------
<S> <C> <C>
Beginning Balance of Loans ....... $ 7,127 $ 8,417
Additional Loans ............... 2,331 2,224
Payments ....................... (2,459) (3,514)
---------- ----------
Ending Balance of Loans .......... $ 6,999 $ 7,127
========== ==========
</TABLE>
Other indebtedness of officers and employees as of December 31, 1996 and 1995
was $2,901,000 and $2,786,000, respectively.
The Company incurred legal costs of $141,000, $152,000 and $146,000 during the
years ended December 31, 1996, 1995 and 1994, respectively, from a law firm of
which an outside director of the Company is a partner. The Company paid
approximately $57,000, $75,000 and $78,000 in insurance premiums during the
years ended December 31, 1996, 1995 and 1994, respectively, to companies of
which two outside directors are officers. The Company paid approximately
$106,000, $49,000 and $7,000 in architectural fees during the years ended
December 31, 1996, 1995, and 1994, respectively, to a company of which an
outside director is an officer.
56
<PAGE> 58
18. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet,
for which it is practicable to estimate that value. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other estimation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. Such techniques and assumptions, as they apply
to individual categories of the Company's financial instruments, are as
follows:
Cash and due from banks: The carrying amounts for cash and due from
banks is a reasonable estimate of those assets' fair value.
Investment, mortgage-backed and marketable equity securities: Fair
values for these securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are
based on quoted market prices for similar securities.
Loans receivable: For adjustable rate loans that reprice frequently
and with no significant change in credit risk, the carrying amounts
are a reasonable estimate of those assets' fair value. The fair value
of other types of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities. Nonperforming loans are valued based upon the underlying
value of the collateral.
Accrued interest receivable: The carrying amount of accrued interest
approximates its fair value.
Deposit liabilities: The fair value of demand deposits, savings
accounts, and certain money market deposits is the amount on demand at
the reporting date, that is, the carrying value. Fair values for fixed
rate certificates of deposits are estimated using a discounted cash
flow calculation that applies interest rates currently being offered
for deposits of similar remaining maturities.
Federal funds purchased and securities sold under agreement to
repurchase: Federal funds purchased and securities sold under
agreement to repurchase generally have an original term to maturity of
one day and thus are considered short-term borrowings. Consequently,
their carrying value is a reasonable estimate of fair value.
Commitments to extend credit: The carrying amounts of commitments to
extend credit and standby letters of credit are a reasonable estimate
of those assets' fair value.
Notes payable FHLB - Dallas: The fair value of these notes is
estimated by discounting the future cash flows using rates at which
notes would be made to borrowers with similar credit ratings and for
the same remaining maturities.
57
<PAGE> 59
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).
<TABLE>
<CAPTION>
At December 31, 1996 At December 31, 1995
----------------------- -----------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks .................. $ 31,653 $ 31,653 $ 26,321 $ 26,321
Investment securities:
Available for sale ..................... 56,091 56,091 74,284 74,284
Held to maturity ....................... 1,734 1,720 2,635 2,634
Mortgage-backed and related securities:
Available for sale ..................... 90,574 90,574 65,423 65,423
Held to maturity ....................... 23,782 23,853 33,984 34,337
Marketable equity securities:
Available for sale ..................... 2,220 2,220 2,112 2,112
Loans, net .................................. 254,918 259,648 225,461 231,818
Interest receivable ......................... 3,300 3,300 3,095 3,095
Nonfinancial assets:
Other real estate owned .................. 273 273 273 273
Premises and equipment ................... 13,695 13,695 11,669 11,669
Other assets ............................. 4,454 4,454 3,416 3,416
---------- ---------- ---------- ----------
Total Assets ................................ $ 482,694 $ 487,481 $ 448,673 $ 455,382
========== ========== ========== ==========
Financial liabilities:
Retail deposits .......................... $ 425,950 $ 426,570 $ 388,308 $ 389,908
Federal funds purchased .................. 4,800 4,800 4,600 4,600
Notes payable - FHLB Dallas .............. 9,096 8,572 13,686 13,024
Nonfinancial liabilities:
Other liabilities ........................ 6,244 6,244 8,727 8,727
---------- ---------- ---------- ----------
Total liabilities ........................... $ 446,090 $ 446,186 $ 415,321 $ 416,259
========== ========== ========== ==========
</TABLE>
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.
58
<PAGE> 60
19. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Southside Bancshares, Inc. (parent company
only) was as follows (dollars in thousands):
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
----------- ------------
ASSETS 1996 1995
---------- ----------
<S> <C> <C>
Cash and due from banks ................................... $ 347 $ 267
Investment in Southside Bank at equity in
underlying net assets ................................... 36,292 33,116
Investment in service subsidiary at equity in
underlying net assets ................................... 15 15
Other assets .............................................. 2 9
---------- ----------
TOTAL ASSETS ...................................... $ 36,656 $ 33,407
========== ==========
LIABILITIES
Other liabilities ......................................... $ 52 $ 55
---------- ----------
TOTAL LIABILITIES ................................. 52 55
---------- ----------
SHAREHOLDERS' EQUITY
Common Stock ($2.50 par, 6,000,000 shares authorized:
3,316,127 and 3,141,393 and shares issued) ............. 8,290 7,853
Paid-in Capital ........................................... 18,501 16,209
Retained earnings ......................................... 9,628 9,123
Treasury Stock (62,986 and 49,421 shares) ................. (777) (486)
Net unrealized gains on securities available for sale ..... 962 653
---------- ----------
TOTAL SHAREHOLDERS' EQUITY ........................ 36,604 33,352
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........ $ 36,656 $ 33,407
========== ==========
</TABLE>
59
<PAGE> 61
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
INCOME
Dividends from subsidiary ............................ $ 1,458 $ 1,197 $ 975
-------- -------- --------
TOTAL INCOME .................................... 1,458 1,197 975
-------- -------- --------
EXPENSE
Salaries and employee benefits ....................... 75 150 120
Taxes other than income .............................. 40 39 38
Other ................................................ 43 84 60
-------- -------- --------
TOTAL EXPENSE ................................... 158 273 218
-------- -------- --------
Income before federal income tax expense ............. 1,300 924 757
Benefit for federal income tax expense ............... 53 93 74
-------- -------- --------
Income before equity in undistributed
earnings of subsidiaries .......................... 1,353 1,017 831
Equity in undistributed earnings of subsidiaries ..... 2,852 3,515 2,688
-------- -------- --------
NET INCOME ...................................... $ 4,205 $ 4,532 $ 3,519
======== ======== ========
</TABLE>
CONDENSED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income ............................................. $ 4,205 $ 4,532 $ 3,519
Adjustments to reconcile net income
to cash provided by operations:
Equity in undistributed earnings of subsidiaries ..... (2,852) (3,515) (2,688)
(Increase) decrease in taxes receivable .............. 7 (2) 5
Increase (decrease) in other liabilities ............. (3) 49 (2)
--------- --------- ---------
Net cash provided by operating activities ....... 1,357 1,064 834
INVESTING ACTIVITIES:
Investments in subsidiaries ............................
--------- --------- ---------
Net cash used in investing activities
FINANCING ACTIVITIES:
Dividends paid ......................................... (1,258) (1,047) (725)
Purchase of treasury stock ............................. (327) (267) (219)
Common Stock Issued .................................... 308 258 195
--------- --------- ---------
Net cash used in financing activities ........... (1,277) (1,056) (749)
Net increase in cash and cash equivalents .............. 80 8 85
Cash and cash equivalents at beginning of year ......... 267 259 174
--------- --------- ---------
Cash and cash equivalents at end of year ............... $ 347 $ 267 $ 259
========= ========= =========
</TABLE>
60
<PAGE> 62
SOUTHSIDE BANCSHARES, INC.
Exhibit Index for the Year
Ended December 31, 1996
<TABLE>
<CAPTION>
Exhibit
Number Description Reference for Filing
- ------- ----------- --------------------
<S> <C> <C>
3(a)(i) Article of Incorporation as amended and in effect on This exhibit is incorporated herein by reference
December 31, 1992, of SoBank, Inc. (now named to the December 31, 1992 Form 10K.
Southside Bancshares, Inc.).
3(a)(ii) Articles of Amendment effective May 9, 1994 to Articles of This exhibit is incorporated herein by reference
Incorporation of SoBank, Inc. (now named Southside to the December 31, 1994 Form 10K.
Bancshares, Inc.).
3(b) Bylaws as amended and in effect on March 23, 1995 of This exhibit is incorporated herein by reference
Southside Bancshares, Inc. to the December 31, 1994 Form 10K.
10(a)(i) Deferred Compensation Plan for B. G. Hartley effective This exhibit is incorporated herein by reference
effective February13, 1984, as amended June 28, 1990 and to the December 31, 1994 Form 10K.
December 15, 1994.
10(a)(ii) Deferred Compensation Plan for Robbie N. Edmonson This exhibit is incorporated herein by reference
effective February 13, 1984, as amended June 28, to the December 31, 1995 Form 10K.
1990 and March 16, 1995.
10(b) Officers Long Term Disability Income Plan effective June This exhibit is incorporated herein by reference
25, 1990. to the June 30, 1990 Form 10K.
10(c) Retirement Plan Restoration Plan for the subsidiaries of This exhibit is incorporated herein by reference
SoBank, Inc. (now named Southside Bancshares, Inc.). to the December 31, 1992 Form 10K.
10(d) Incentive Stock Option Plan effective April 1, 1993 of This exhibit is incorporated herein by reference
SoBank, Inc. (now named Southside Bancshares, Inc.). to the December 31, 1994 Form 10K.
10(e) Form of Deferred Compensation Agreements dated June This exhibit is incorporated herein by reference
30, 1994 with each of Sam Dawson, Lee Gibson, Titus to the December 31, 1995 Form 10K.
Jones, Jeryl Story and Andy Wall as amended November
13, 1995.
22 Subsidiaries of the Registrant. This exhibit is incorporated herein by reference
to the December 31, 1994 Form 10K.
27 Financial Data Schedule for the year ended Filed herewith.
December 31, 1996.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 31,653
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 148,885
<INVESTMENTS-CARRYING> 25,516
<INVESTMENTS-MARKET> 25,574
<LOANS> 258,167
<ALLOWANCE> 3,249
<TOTAL-ASSETS> 482,694
<DEPOSITS> 425,950
<SHORT-TERM> 4,800
<LIABILITIES-OTHER> 6,244
<LONG-TERM> 9,096
0
0
<COMMON> 8,290
<OTHER-SE> 28,314
<TOTAL-LIABILITIES-AND-EQUITY> 482,694
<INTEREST-LOAN> 21,314
<INTEREST-INVEST> 10,249
<INTEREST-OTHER> 209
<INTEREST-TOTAL> 31,772
<INTEREST-DEPOSIT> 13,593
<INTEREST-EXPENSE> 14,397
<INTEREST-INCOME-NET> 17,375
<LOAN-LOSSES> 500
<SECURITIES-GAINS> 132
<EXPENSE-OTHER> 15,366
<INCOME-PRETAX> 5,642
<INCOME-PRE-EXTRAORDINARY> 5,642
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,205
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 1.29
<YIELD-ACTUAL> 4.16
<LOANS-NON> 1,533
<LOANS-PAST> 472
<LOANS-TROUBLED> 400
<LOANS-PROBLEM> 528
<ALLOWANCE-OPEN> 3,317
<CHARGE-OFFS> 838
<RECOVERIES> 270
<ALLOWANCE-CLOSE> 3,249
<ALLOWANCE-DOMESTIC> 3,249
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 74
</TABLE>
