1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 ------------------------------------------ OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM to -------------------------- -------------------------- Commission file number 0-12247 ---------------- SOUTHSIDE BANCSHARES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) TEXAS 75-1848732 - --------------------------------- ---------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1201 S. Beckham, Tyler, Texas 75701 - --------------------------------- ---------------------------- (Address of principal executive (Zip Code) offices) (Registrant's telephone number, including area code) 903-531-7111 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- The number of shares outstanding of each of the issuer's classes of capital stock, as of the latest practicable date, was 3,489,252 shares of Common Stock, par value $2.50, outstanding at October 27, 1997.
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share amounts) <TABLE> <CAPTION> September 30, December 31, 1997 1996 ------------ ------------ <S> <C> <C> ASSETS Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,723 $ 31,653 Investment securities: Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,563 56,091 Held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 932 1,734 ------------ ----------- Total Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,495 57,825 Mortgage-backed and related securities: Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113,967 90,574 Held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,136 23,782 ------------ ----------- Total Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,103 114,356 Marketable equity securities: Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,304 2,220 Loans: Loans, net of unearned discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287,794 258,167 Less: Reserve for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,348) (3,249) ------------ ----------- Net Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284,446 254,918 Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,405 13,695 Other real estate owned, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364 273 Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,359 3,300 Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401 464 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,764 3,990 ------------ ----------- TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 527,364 $ 482,694 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 98,840 $ 98,901 Interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345,474 327,049 ------------ ----------- Total Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 444,314 425,950 Short-term obligations: Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,668 4,800 Note payable - FHLB Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000 Long-term obligations: Note payable - FHLB Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,997 9,096 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,046 6,244 ------------ ----------- TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 488,025 446,090 ------------ ----------- Shareholders' equity: Common stock: ($2.50 par, 6,000,000 shares authorized, 3,489,252 and 3,316,127 shares issued and outstanding) . . . . . . . . . . . . . . . 8,723 8,290 Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,182 18,501 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,497 9,628 Treasury stock (105,799 and 62,986 shares at cost) . . . . . . . . . . . . . . . . . . . (1,626) (777) Net unrealized gains on securities available for sale . . . . . . . . . . . . . . . . . 1,563 962 ------------ ----------- TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,339 36,604 ------------ ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . $ 527,364 $ 482,694 ============ =========== </TABLE> The accompanying notes are an integral part of the financial statements. 1
3 SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands, except per share data) <TABLE> <CAPTION> Quarter Ended Nine Months Ended September 30, September 30, ----------------- ----------------- 1997 1996 1997 1996 ------- ------- ------- ------- <S> <C> <C> <C> <C> Interest income Loans ............................................................... $ 6,138 $ 5,455 $17,497 $15,786 Investment securities ............................................... 745 827 2,576 2,621 Mortgage-backed and related securities .............................. 1,911 1,711 5,602 4,977 Other interest earning assets ....................................... 104 64 214 216 ------- ------- ------- ------- Total interest income ........................................... 8,898 8,057 25,889 23,600 Interest expense Time and savings deposits ........................................... 3,795 3,457 10,899 10,061 Short-term obligations .............................................. 283 29 570 108 Long-term obligations ............................................... 61 173 370 537 ------- ------- ------- ------- Total interest expense .......................................... 4,139 3,659 11,839 10,706 ------- ------- ------- ------- Net interest income .................................................... 4,759 4,398 14,050 12,894 Provision for loan losses .............................................. 250 150 650 350 ------- ------- ------- ------- Net interest income after provision for loan losses .................... 4,509 4,248 13,400 12,544 ------- ------- ------- ------- Noninterest income Deposit services .................................................... 1,193 702 2,817 2,061 Gains (losses) on securities available for sale ..................... 9 (2) 161 135 Other ............................................................... 354 302 975 848 ------- ------- ------- ------- Total noninterest income ........................................ 1,556 1,002 3,953 3,044 ------- ------- ------- ------- Noninterest expense Salaries and employee benefits ...................................... 2,432 2,399 7,514 7,100 Net occupancy expense ............................................... 532 459 1,529 1,287 Equipment expense ................................................... 108 83 309 229 Advertising, travel & entertainment ................................. 226 221 711 644 Supplies ............................................................ 109 112 313 331 FDIC insurance ...................................................... 13 38 1 Postage ............................................................. 86 77 246 221 Other ............................................................... 732 570 1,887 1,655 ------- ------- ------- ------- Total noninterest expense ....................................... 4,238 3,921 12,547 11,468 ------- ------- ------- ------- Income before federal tax expense ...................................... 1,827 1,329 4,806 4,120 Provision for tax expense .............................................. 478 322 1,224 1,037 ------- ------- ------- ------- Net Income ............................................................. $ 1,349 $ 1,007 $ 3,582 $ 3,083 ======= ======= ======= ======= Earnings Per Share Net Income ............................................................. $ .39 $ .29 $ 1.04 $ .90 ======= ======= ======= ======= </TABLE> The accompanying notes are an integral part of the financial statements. 2
4 SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) (in thousands) <TABLE> <CAPTION> Nine Months Ended September 30, ------------------ 1997 1996 ------- -------- <S> <C> <C> OPERATING ACTIVITIES: Net income ................................................................. $ 3,582 $ 3,083 Adjustments to reconcile net cash provided by operations: Depreciation and amortization ............................................. 1,937 1,662 Accretion of discount and loan fees ....................................... (638) (601) Provision for loan losses ................................................. 650 350 (Increase) decrease in interest receivable ................................ (59) 329 Decrease (increase) in other receivables and prepaids ..................... 1,076 (220) (Increase) in deferred tax asset .......................................... (203) (162) Increase in interest payable .............................................. 256 32 (Gain) on sales of securities available for sale .......................... (161) (135) (Gain) on sale of assets .................................................. (12) (6) Increase (decrease) in other payables ...................................... 6,546 (3,185) ------- ------- Net cash provided by operating activities ............................... 12,974 1,147 INVESTING ACTIVITIES: Proceeds from sales of investment securities available for sale ............ 24,987 15,780 Proceeds from sales of mortgage-backed securities available for sale ....... 31,542 18,991 Proceeds from maturities of investment securities available for sale ....... 14,481 28,890 Proceeds from maturities of mortgage-backed securities available for sale .. 22,517 13,070 Proceeds from maturities of investment securities held to maturity ......... 809 872 Proceeds from maturities of mortgage-backed securities held to maturity .... 7,720 7,075 Purchases of investment securities available for sale ...................... (37,381) (27,772) Purchases of mortgage-backed securities available for sale ................. (77,424) (47,779) Purchases of marketable equity securities available for sale ............... (84) (81) Net (increase) in loans .................................................... (30,993) (21,491) Purchases of premises and equipment ........................................ (4,612) (2,249) Proceeds from sales of premises and equipment .............................. 17 25 Proceeds from sales of repossessed assets .................................. 777 913 Proceeds from sales of other real estate owned ............................. 98 ------- ------- Net cash (used) in investing activities ................................. (47,546) (13,756) </TABLE> The accompanying notes are an integral part of the financial statements. 3
5 SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (continued) (UNAUDITED) (in thousands) <TABLE> <CAPTION> Nine Months Ended September 30, ------------------ 1997 1996 -------- ------- <S> <C> <C> FINANCING ACTIVITIES: Net increase in demand and savings accounts ............................... $ 7,323 $ 2,610 Net increase in certificates of deposit ................................... 11,041 18,334 Net increase (decrease) in federal funds purchased ........................ 1,868 (2,525) Purchase of treasury stock ................................................ (960) (418) Proceeds from sale of treasury stock ...................................... 77 97 Net increase (decrease) in notes payable .................................. 14,901 (4,206) Proceeds from the issuance of common stock ................................ 201 189 Dividends paid ............................................................ (809) (772) ------- ------- Net cash provided by financing activities ............................ 33,642 13,309 ------- ------- Net (decrease) increase in cash and cash equivalents ....................... (930) 700 Cash and cash equivalents at beginning of period ........................... 31,653 26,321 ------- ------- Cash and cash equivalents at end of period ................................. $30,723 $27,021 ======= ======= SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION: Interest paid ............................................................. $11,677 $10,674 Income taxes paid ......................................................... $ 1,500 $ 1,255 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisition of OREO and other repossessed assets through foreclosure ...... $ 815 $ 896 </TABLE> The accompanying notes are an integral part of the financial statements. 4
6 SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) (in thousands) <TABLE> <CAPTION> Net Unrealized Total Common Paid in Retained Treasury Gains Shareholders' Stock Capital Earnings Stock (Losses) Equity -------- ----------- ----------- ----------- ---------- ------------ <S> <C> <C> <C> <C> <C> <C> Balance at December 31, 1995 . . . . . . $ 7,853 $ 16,209 $ 9,123 $ (486) $ 653 $ 33,352 Net Income . . . . . . . . . . . . . . . 3,083 3,083 Cash dividend ($.25 per share) . . . . . (772) (772) Common stock issued (12,375 shares) . . . 31 158 189 Stock dividend . . . . . . . . . . . . . 388 2,017 (2,405) Purchase of 27,215 shares of Treasury stock . . . . . . . . . . . . . (418) (418) Sale of 14,083 shares of Treasury stock . . . . . . . . . . . . . (36) 133 97 Net unrealized (losses) on securities available for sale (net of tax) . . . . (695) (695) -------- --------- --------- ---------- ---------- ------------ Balance at September 30, 1996 . . . . . . $ 8,272 $ 18,384 $ 8,993 $ (771) $ (42) $ 34,836 ======== ========= ========= ========== ========== ============ Balance at December 31, 1996 . . . . . . $ 8,290 $ 18,501 $ 9,628 $ (777) $ 962 $ 36,604 Net Income . . . . . . . . . . . . . . . 3,582 3,582 Cash dividend ($.25 per share) . . . . . (809) (809) Common stock issued (11,413 shares) . . . 29 172 201 Stock dividend . . . . . . . . . . . . . 404 2,466 (2,870) Purchase of 54,513 shares of Treasury stock . . . . . . . . . . . . . (960) (960) Sale of 11,700 shares of Treasury stock . . . . . . . . . . . . . (34) 111 77 Net unrealized gains on securities available for sale (net of tax) . . . . 601 601 FAS109-Incentive Stock Options . . . . . 43 43 -------- --------- --------- ---------- ---------- ------------ Balance at September 30, 1997 . . . . . . $ 8,723 $ 21,182 $ 9,497 $ (1,626) $ 1,563 $ 39,339 ======== ========= ========= ========== ========== ============ </TABLE> The accompanying notes are an integral part of the financial statements. 5
7 SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 1. Basis of Presentation The consolidated balance sheet as of September 30, 1997, and the related consolidated statements of income, shareholders' equity and cash flow for the nine month periods ended September 30, 1997 and 1996 are unaudited; in the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted only of normal recurring items. Interim results are not necessarily indicative of results for a full year. These financial statements should be read in conjunction with the financial statements and notes thereto in the Company's latest report on Form 10-K. 2. Earnings Per Share All per share data has been adjusted to give retroactive recognition to the effect of stock dividends. As of September 30, 1997 and 1996, the number of shares used to calculate earnings per share was 3,443,531 and 3,434,210 respectively, adjusted for the dilutive effect of stock options. 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 is required to adopt in December 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. As of September 30, 1997, the adoption of FAS 128 did not have a material impact on the Company. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). This statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. It requires (a) classification of items of other comprehensive income by their nature in financial statements and (b) display of the accumulated balance of other comprehensive income separate from retained earnings and additional paid-in capital in the equity section of a statement of financial position. The Company plans to adopt FAS 130 for the quarter ending March 31, 1998. 6
8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Quarter and nine months ended September 30, 1997 compared to September 30, 1996. The following is a discussion of the consolidated financial condition, changes in financial condition, and results of operations of Southside Bancshares, Inc. (the "Company"), and should be read and reviewed in conjunction with the financial statements, and the notes thereto, in this presentation and in the Company's latest report on Form 10-K. The Company reported an increase in net income for the quarter and nine months ended September 30, 1997 compared to the same period in 1996. Net income for the quarter and nine months ended September 30, 1997 was $1,349,000 and $3,582,000, as compared to $1,007,000 and $3,083,000 for the same period in 1996. Net Interest Income Net interest income for the quarter and nine months ended September 30, 1997 was $4,759,000 and $14,050,000, an increase of $361,000 and $1,156,000 or 8.2% and 9.0%, respectively, when compared to the same periods in 1996. Average interest earning assets increased $38,150,000 or 9.2%, while the net interest spread remained unchanged at 3.5% at September 30, 1997. During the nine months ended September 30, 1997, Average Loans, funded primarily by the growth in average deposits, increased $28,857,000 or 12.0%, compared to the same period in 1996. The average yield on loans decreased slightly from 8.8% at September 30, 1996 to 8.7% at September 30, 1997. Average Securities increased $9,424,000 or 5.6% for the nine months ended September 30, 1997 when compared to the same period in 1996. The overall yield on Average Securities increased to 6.7% during the nine months ended September 30, 1997, from 6.6% during the same period in 1996. Total interest expense increased $1,133,000 or 10.6% to $11,839,000 during the nine months ended September 30, 1997 as compared to $10,706,000 during the same period in 1996. The increase was attributable to an increase in Average Interest Bearing Liabilities of $30,270,000 or 9.2% and an increase in the average yield on interest bearing liabilities from 4.3% at September 30, 1996 to 4.4% at September 30, 1997. 7
9 The analysis below shows average interest earning assets and interest bearing liabilities together with the average yield on the interest earning assets and the average cost of the interest bearing liabilities. <TABLE> <CAPTION> SUMMARY OF INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES ------------------------------------------------------------------- AVERAGE YIELD OR AVERAGE YIELD OR VOLUME INTEREST RATE PAID VOLUME INTEREST RATE PAID ------------------------------------ ------------------------------------ (Dollars in thousands) Nine Months Ended September 30, 1997 Nine Months Ended September 30, 1996 ------------------------------------ ------------------------------------ <S> <C> <C> <C> <C> <C> <C> INTEREST EARNING ASSETS: Loans $ 269,384 $ 17,497 8.7% $ 240,527 $ 15,786 8.8% Investment Securities(1) 61,751 3,278 7.1% 64,360 3,301 6.9% Mortgage-backed Securities 116,451 5,602 6.4% 104,418 4,977 6.4% Other Interest Earning Assets 5,168 214 5.5% 5,299 216 5.4% ---------- --------- ---------- ---------- TOTAL INTEREST EARNING ASSETS $ 452,754 $ 26,591 7.9% $ 414,604 $ 24,280 7.8% ========== ========= ========== ========== INTEREST BEARING LIABILITIES: Deposits $ 337,856 $ 10,899 4.3% $ 314,186 $ 10,061 4.3% Fed Funds Purchased and Other Interest Bearing Liabilities 13,990 570 5.4% 2,924 108 4.9% Long Term Interest Bearing Liabilities - FHLB Dallas 8,479 370 5.8% 12,945 537 5.5% ---------- --------- ---------- ---------- TOTAL INTEREST BEARING LIABILITIES $ 360,325 $ 11,839 4.4% $ 330,055 $ 10,706 4.3% ========== ========= ----- ========== ========== ----- NET INTEREST SPREAD 3.5% 3.5% ===== ===== (1) Interest income includes taxable-equivalent adjustments of $702 and $680 as of September 30, 1997 and 1996, respectively. </TABLE> Noninterest Income Noninterest income was $3,953,000 for the nine months ended September 30, 1997 compared to $3,044,000 for the same period in 1996. Deposit services income increased $756,000 or 36.7% for the nine months ended September 30, 1997 when compared to the same period in 1996. The increase was primarily attributable to an increase in overdraft and return check fee income as a result of an overdraft privilege program fully introduced during the third quarter of 1997 and overall bank deposit growth. Other noninterest income increased $127,000 or 15.0% for the nine months ended September 30, 1997 primarily as a result of increases in mortgage servicing release fees received. Gains on sales of securities increased $26,000 for the nine months ended September 30, 1997 compared to the same period in 1996. Sales of securities available for sale were the result of changes in economic conditions and a change in the mix of the securities portfolio. The market value of the entire securities portfolio at September 30, 1997 was $187,944,000 with a net unrealized gain on that date of $2,629,000. The net unrealized gain is comprised of $2,828,000 in unrealized gains and $199,000 in unrealized losses. 8
10 Noninterest Expense Noninterest expense was $12,547,000 for the nine months ended September 30, 1997, compared to $11,468,000 for the same period of 1996, representing an increase of $1,079,000 or 9.4% for the period. Salaries and employee benefits increased $414,000 or 5.8% during the nine months ended September 30, 1997 when compared to the same period in 1996. Increased direct salary expense including payroll taxes of $630,000 was offset by lower retirement expense for the nine months ended September 30, 1997 when compared to the same period in 1996. FDIC insurance increased $37,000 for the nine months ended September 30, 1997 compared to the same period of 1996. Future FDIC insurance assessments will be determined by the FDIC based on the funding status of the Bank Insurance Fund. During 1996, Congress passed legislation which increased FDIC insurance expense in 1997 to pay for a portion of the Savings & Loan bailout. Net occupancy increased $242,000 or 18.8% for the nine months ended September 30, 1997 compared to the same period in 1996. Net occupancy expense increased as a direct result of the opening of three new grocery store branches in the second half of 1996 and expansion of other branch facilities. Other expense increased $232,000 or 14.0% for the nine months ended September 30, 1997 when compared to the same period in 1996. Professional fees increased $114,000 or 96.5% as a result of the Company outsourcing portions of the compliance, internal audit and computer programming functions. Other increases occurred in overdraft losses, up $55,000, which was more than offset by the increase in overdraft fees. In addition, telephone expense was up $32,000, due to the addition of new branches in 1996. Provision for Income Taxes The provision for tax expense ratio for the nine months ended September 30, 1997 was 25.5% compared to 25.2% for the nine months ended September 30, 1996. The increase is due to an increase in higher pre-tax income when comparing the two periods. Capital Resources Total shareholders' equity for the Company at September 30, 1997, of $39,339,000 was up $2,735,000 from December 31, 1996, and represented 7.5% and 7.6% of total assets at September 30, 1997 and December 31, 1996, respectively. Increases to shareholders' equity during the nine months ended September 30, 1997 were net income of $3,582,000, common stock (11,413 shares) issued through dividend reinvestment of $201,000, an increase of $77,000 due to the sale of 11,700 shares of treasury stock and an increase of $601,000 in net unrealized gains on securities available for sale. Decreases to shareholders' equity consisted of $809,000 in dividends paid to shareholders and the purchase of 54,513 shares of treasury stock for $960,000. 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. The Federal Reserve Board also requires bank holding companies to comply with the minimum leverage ratio guidelines. The leverage ratio is a ratio of 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 average of three percent for bank holding companies that meet certain specified criteria. Failure to meet minimum capital regulations can initiate certain mandatory and possibly additional discretionary actions by regulation, that if undertaken, could have a direct material effect on the Bank's financial statements. At September 30, 1997, the Company and Southside Bank exceeded all regulatory minimum capital requirements. 9
11 The Federal Reserve 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 on how its capital levels compare to various capital measures and certain other factors, as established by regulation. It is management's intention to maintain the Company's capital at a level acceptable to all regulatory authorities and future dividend payments will be determined accordingly. Regulatory authorities require that any dividend payments made by either the Company or Southside Bank not exceed earnings for that year. Liquidity and Interest Rate Sensitivity The primary functions of asset/liability management are to assure adequate liquidity and maintain an appropriate balance between interest sensitive earning assets and interest bearing liabilities. Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing funds to meet their credit needs. Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of new interest income through periods of changing interest rates. Through this process, market value volatility is also a key consideration. Cash, Interest Earning Deposits, Federal Funds Sold and short-term investments with maturities or repricing characteristics of one year or less are the principal sources of asset liquidity. At September 30, 1997, these investments were 15.2% of Total Assets. Historically, the overall liquidity of the Company has been enhanced by a significant aggregate amount of core deposits and by the lack of dependence on significant amounts of public fund deposits. Composition of Loans The Company's main objective is to seek attractive lending opportunities in Smith County, Texas and adjoining counties. Total Average Loans increased $28,857,000 or 12.0% from the nine months ended September 30, 1996 to September 30, 1997. The majority of the increase is in Real Estate Loans and Commercial Loans. 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. Loan Loss Experience and Reserve for Loan Losses For the third quarter and nine months ended September 30, 1997, loan charge-offs were $369,000 and $783,000 and recoveries were $90,000 and $232,000, respectively, resulting in net charge-offs of $279,000 and $551,000. For the third quarter and nine months ended September 30, 1996, net charge-offs were $167,000 and $371,000, respectively. 10
12 The loan loss reserve is based on the most current review of the loan portfolio at that time. An internal loan review officer of the Company is responsible for an ongoing review of Southside Bank's entire loan portfolio with specific goals set for the volume of loans to be reviewed on an annual basis. A list of loans which are graded as having more than the normal degree of risk associated with them are maintained by the internal loan review officer. This list is updated on a periodic basis but no less than quarterly by the servicing officer in order to properly allocate necessary reserves and keep management informed on the status of attempts to correct the deficiencies noted in the credit. While management is aware of certain risk factors within segments of the loan portfolio, reserve allocations have been made on an individual loan basis. An additional reserve is maintained on the remainder of the portfolio of at risk loans that is based on tracking of the Company's loan losses on loans that have not been previously identified as problems. Nonperforming Assets The categories of nonperforming assets consist of delinquent loans over 90 days past due, nonaccrual and restructured loans, other real estate owned and repossessed assets. Delinquent loans over 90 days past due represent loans for which the payment of principal or interest has not been received in a timely manner. The full collection of both the principal and interest is still expected but is being withheld due to negotiation or other items expected to be resolved in the near future. Generally, a loan is categorized as nonaccrual when principal or interest is past due 90 days or more, unless, in the determination of management, the principal and interest on the loan are well secured and in the process of collection. In addition, a loan is placed on nonaccrual when, in the opinion of management, the future collectibility of interest and principal is in serious doubt. When a loan is categorized as nonaccrual, the accrual of interest is discontinued and any remaining accrued interest is reversed in that period; thereafter, interest income is recorded only when actually received. Restructured loans represent loans which have been renegotiated to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrowers. Categorization of a loan as nonperforming is not in itself a reliable indicator of potential loan loss. Other factors, such as the value of collateral securing the loan and the financial condition of the borrower must be considered in judgments as to potential loan loss. Other Real Estate Owned (OREO) represents real estate taken in full or partial satisfaction of debts previously contracted. The OREO consists primarily of raw land and oil and gas interests. The Company is actively marketing all properties and none are being held for investment purposes. Total nonperforming assets at September 30, 1997 were $3,928,000, up $861,000 or 28.1% from $3,067,000 at September 30, 1996. The increase is primarily due to two commercial and agricultural loans. Consumer bankruptcies and significant loan growth over the last few years are also factors of this increase. To the best of management's knowledge, reserves have already been set aside to cover potential losses in these credits. Based on current economic data, consumer bankruptcies should remain at current levels. From September 30, 1996 to September 30, 1997, loans 90 days past due or more increased $420,000 or 78.2% to $957,000. OREO increased $91,000 or 33.3% from September 30, 1997 to September 30, 1996. Nonaccrual loans increased $411,000 or 24.9% to $2,062,000. Restructured loans increased $51,000 or 13.3% to $434,000, while repossessed assets decreased $112,000 or 50.2% to $111,000. Expansion The Company purchased the Gentry Parkway facility that was previously being leased. The Company plans to remodel and occupy the entire facility. Remodeling and expansion of the main bank headquarters on South Beckham was completed during the third quarter of 1997. 11
13 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable ITEM 2. CHANGES IN SECURITIES Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit No. ------- 3 - Bylaws as amended. 27 - Financial Data Schedule for the nine months ended September 30, 1997. (b) Reports on Form 8-K - None 12
14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOUTHSIDE BANCSHARES, INC. (Registrant) BY: /s/ B.G. HARTLEY ----------------------------------------- B.G. Hartley, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) DATE: 11-13-97 ---------------- /s/ LEE R. GIBSON ----------------------------------------- Lee R. Gibson, Executive Vice President (Principal Financial and Accounting Officer) DATE: 11-13-97 ---------------- 13
15 EXHIBIT INDEX Exhibit No Description - ---------- ----------- 3 Bylaws as amended. 27 Financial Data Schedule for the nine months ended September 30, 1997