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 March 31, 1996 ------------------------------------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________to ________ Commission file number 0-12247 --------- SOUTHSIDE BANCSHARES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) TEXAS 75-1848732 - ---------------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1201 S. Beckham, Tyler, Texas 75701 - ---------------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) 903-531-7111 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- The number of shares outstanding of each of the issuer's classes of capital stock, as of the latest practicable date, was Shares of Common Stock, par value $2.50, Outstanding were 3,146,274 at March 31, 1996.
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> March 31, December 31, 1996 1995 --------- ----------- <S> <C> <C> ASSETS Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,262 $26,321 Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,675 Investment securities: Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,486 74,284 Held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,173 2,635 --------- --------- Total Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . 60,659 76,919 Mortgage-backed and related securities: Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,659 65,423 Held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,519 33,984 --------- --------- Total Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . 105,178 99,407 Marketable equity securities: Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,167 2,112 Loans: Loans, net of unearned discount . . . . . . . . . . . . . . . . . . . . . . . . . 234,499 228,778 Less: Reserve for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . (3,258) (3,317) --------- --------- Net Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231,241 225,461 Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,595 11,669 Other real estate owned, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273 273 Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,670 3,095 Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 776 412 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,554 3,004 --------- --------- TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 449,050 $ 448,673 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 85,747 $84,706 Interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309,942 303,602 --------- --------- Total Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395,689 388,308 Short-term obligations: Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900 4,600 Long-term obligations: Note payable - FHLB Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,275 13,686 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,773 8,727 --------- --------- TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 415,637 415,321 --------- --------- Shareholders' equity: Common stock: ($2.50 par, 6,000,000 shares authorized, 3,146,274 and 3,141,393 shares issued and outstanding) . . . . . . . . . . . . . 7,865 7,853 Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,270 16,209 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,863 9,123 Treasury stock (57,448 and 49,421 shares at cost) . . . . . . . . . . . . . . . . (607) (486) Net unrealized gains on securities available for sale . . . . . . . . . . . . . . 22 653 --------- --------- TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . 33,413 33,352 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . $ 449,050 $ 448,673 ========= ========= </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> Three Months Ended March 31, -------------------------- 1996 1995 ------------ ------------ <S> <C> <C> Interest income Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,111 $ 4,438 Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 944 1,112 Mortgage-backed and related securities . . . . . . . . . . . . . . . . . . . 1,564 1,396 Other interest earning assets . . . . . . . . . . . . . . . . . . . . . . . 71 152 ------------ ------------ Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . 7,690 7,098 Interest expense Time and savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . 3,256 2,858 Short-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 24 Long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 94 ------------ ------------ Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . 3,483 2,976 ------------ ------------ Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,207 4,122 Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 ------------ ------------ Net interest income after provision for loan losses . . . . . . . . . . . . . . 4,132 4,122 ------------ ------------ Noninterest income Deposit services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 669 676 Gains on securities available for sale . . . . . . . . . . . . . . . . . . . 126 10 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274 206 ------------ ------------ Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . 1,069 892 ------------ ------------ Noninterest expenses Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . 2,357 2,135 Net occupancy expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 412 408 Equipment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 75 Advertising, travel & entertainment . . . . . . . . . . . . . . . . . . . . 226 201 Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 102 FDIC insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 210 Postage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 74 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 543 479 ------------ ------------ Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . 3,788 3,684 ------------ ------------ Income before federal tax expense . . . . . . . . . . . . . . . . . . . . . . . 1,413 1,330 Provision for tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 364 362 ------------ ------------ Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,049 $ 968 ============ ============ Earnings Per Share Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .34 $ .31 ============ ============ </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> Three Months Ended March 31, -------------------------- 1996 1995 ------------ ------------ <S> <C> <C> OPERATING ACTIVITIES: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,049 $ 968 Adjustments to reconcile net cash provided by operations: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . 503 379 Accretion of discount and loan fees . . . . . . . . . . . . . . . . . . . . . (202) (223) Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Decrease in interest receivable . . . . . . . . . . . . . . . . . . . . . . . 425 36 (Increase) in other receivables and prepaids . . . . . . . . . . . . . . . . (476) (571) (Increase) decrease in deferred tax asset . . . . . . . . . . . . . . . . . . (38) 110 (Decrease) in interest payable . . . . . . . . . . . . . . . . . . . . . . . (15) (18) (Gain) on sale of securities available for sale . . . . . . . . . . . . . . . (126) (10) (Gain) on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . (5) (10) Increase (decrease) in other payables . . . . . . . . . . . . . . . . . . . . (2,939) 3,374 ------------ ------------ Net cash provided by operating activities . . . . . . . . . . . . . . . . . (1,749) 4,035 INVESTING ACTIVITIES: Proceeds from sales of investment securities available for sale . . . . . . . 3,451 6,060 Proceeds from sales of mortgage-backed securities available for sale . . . . . 16,004 7,153 Proceeds from maturities of investment securities available for sale . . . . . 19,602 3,052 Proceeds from maturities of mortgage-backed securities available for sale . . 2,647 1,503 Proceeds from maturities of investment securities held to maturity . . . . . . 474 5,675 Proceeds from maturities of mortgage-backed securities held to maturity . . . 2,518 1,109 Purchases of investment securities available for sale . . . . . . . . . . . . (7,739) (18,198) Purchases of mortgage-backed securities available for sale . . . . . . . . . . (27,366) (2,464) Purchases of marketable equity securities available for sale . . . . . . . . . (55) (24) Net (increase) in federal funds sold . . . . . . . . . . . . . . . . . . . . . (3,675) (6,425) Net (increase) decrease in loans . . . . . . . . . . . . . . . . . . . . . . . (6,266) 310 Purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . . (179) (165) Proceeds from sales of premises and equipment . . . . . . . . . . . . . . . . 24 42 Proceeds from sales of repossessed assets . . . . . . . . . . . . . . . . . . 337 277 ------------ ------------ Net cash used in investing activities . . . . . . . . . . . . . . . . . . . (223) (2,095) </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> Three Months Ended March 31, -------------------------- 1996 1995 ------------ ------------ <S> <C> <C> FINANCING ACTIVITIES: Net increase (decrease) in demand and savings accounts . . . . . . . . . . . . $ 1,209 $ (9,365) Net increase in certificates of deposit . . . . . . . . . . . . . . . . . . . 6,172 1,699 Proceeds from the issuance of common stock . . . . . . . . . . . . . . . . . . 73 Net increase (decrease) in federal funds purchased . . . . . . . . . . . . . . (3,700) 650 Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . (121) (212) Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (309) Net (decrease) in notes payable . . . . . . . . . . . . . . . . . . . . . . . (411) (201) ------------ ------------ Net cash provided by financing activities . . . . . . . . . . . . . . . . 2,913 (7,429) ------------ ------------ Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . 941 (5,489) Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . 26,321 25,381 ------------ ------------ Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . $ 27,262 $ 19,892 ============ ============ SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION: Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,498 $ 2,995 Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80 $ 75 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisition of OREO and repossessed assets through foreclosure . . . . . . . . $ 411 $ 232 </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, 1994 . . . . . . $ 7,433 $ 14,529 $ 7,480 $ (219) $ (1,699) $ 27,524 Net Income . . . . . . . . . . . . . . . 968 968 Purchase of 21,344 shares of Treasury stock . . . . . . . . . . . . . (212) (212) Net unrealized gains on securities available for sale (net of tax) . . . . 768 768 ---------- --------- --------- ---------- ---------- ---------- Balance at March 31, 1995 . . . . . . . . $ 7,433 $ 14,529 $ 8,448 $ (431) $ (931) $ 29,048 ========== ========= ========= ========== ========== ========== Balance at December 31, 1995 . . . . . . $ 7,853 $ 16,209 $ 9,123 $ (486) $ 653 $ 33,352 Net Income . . . . . . . . . . . . . . . 1,049 1,049 Cash dividend ($.10 per share) . . . . . (309) (309) Common stock issued (4,881 shares) . . . 12 61 73 Purchase of 8,027 shares of Treasury stock . . . . . . . . . . . . . (121) (121) Net unrealized (losses) on securities available for sale (net of tax) . . . . (631) (631) ---------- --------- --------- ---------- ---------- ---------- Balance at March 31, 1996 . . . . . . . . $ 7,865 $ 16,270 $ 9,863 $ (607) $ 22 $ 33,413 ========== ========= ========= ========== ========== ========== </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 March 31, 1996, and the related consolidated statements of income, shareholders' equity and cash flow for the three month periods ended March 31, 1996 and 1995 are unaudited; in the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted only of normal recurring items. Interim results are not necessarily indicative of results for a full year. These financial statements should be read in conjunction with the financial statements and notes thereto in the Company's latest report on Form 10-K. 2. Earnings Per Share All per share data has been adjusted to give retroactive recognition to the effect of stock dividends. As of March 31, 1996 and 1995, the number of shares used to calculate earnings per share was 3,090,155 and 3,091,356, respectively. 6
8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Quarter ended March 31, 1996 compared to March 31, 1995. The following is a discussion of the consolidated financial condition, changes in financial condition, and results of operations of Southside Bancshares, Inc. (the "Company"), and should be read and reviewed in conjunction with the financial statements, and the notes thereto, in this presentation and in the Company's latest report on Form 10-K. The Company reported an increase in net income for the quarter ended March 31, 1996 compared to the same period in 1995. Net income for the quarter ended March 31, 1996 was $1,049,000 as compared to $968,000 for the same period in 1995. Net Interest Income Net interest income for the quarter ended March 31, 1996 was $4,207,000, an increase of $85,000 or 2.1% when compared to the same period in 1995. Average interest earning assets increased $27,891,000 or 7.4%, while the net interest spread decreased from 3.7% to 3.3% from March 31, 1995 to March 31, 1996. During the three months ended March 31, 1996, Average Loans, funded primarily by the growth in average deposits and average FHLB advances, increased $32,303,000 or 16.1%, compared to the same period in 1995. The average yield on loans decreased from 9.0% at March 31, 1995 to 8.8% at March 31, 1996. Average Securities increased $1,538,000 or .9% for the three months ended March 31, 1996 when compared to the same period in 1995. The overall yield on Average Securities decreased to 6.0% during the three months ended March 31, 1996, from 6.1% during the same period in 1995. Interest income from federal funds and other interest earning assets decreased $81,000 or 53.3% for the three months ended March 31, 1996 when compared to 1995 as a result of the average balance decrease of 54.8%. The average yield increased slightly from 5.7% in 1995 to 5.8% in 1996. Total interest expense increased $507,000 or 17.0% to $3,483,000 during the three months ended March 31, 1996 as compared to $2,976,000 during the same period in 1995. The increase was attributable to an increase in Average Interest Bearing Liabilities of $17,555,000 or 5.7% and an increase in the average yield on interest bearing liabilities from 3.9% in 1995 to 4.3% in 1996. 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) Three Months Ended March 31, 1996 Three Months Ended March 31, 1995 ----------------------------------- ----------------------------------- <S> <C> <C> <C> <C> <C> <C> INTEREST EARNING ASSETS: Loans $ 232,867 $ 5,111 8.8% $ 200,564 $ 4,438 9.0% Investment Securities 70,167 944 5.4% 78,556 1,112 5.7% Mortgage-backed Securities 98,025 1,564 6.4% 88,098 1,396 6.4% Other Interest Earning Assets 4,898 71 5.8% 10,848 152 5.7% ---------- --------- ---------- ---------- TOTAL INTEREST EARNING ASSETS 405,957 7,690 7.6% 378,066 7,098 7.6% ========== ========= ========== ========== INTEREST BEARING LIABILITIES: Deposits $ 306,972 $ 3,256 4.3% $ 296,328 $ 2,858 3.9% Fed Funds Purchased and Other Interest Bearing Liabilities 3,415 42 4.9% 2,053 24 4.7% Long Term Interest Bearing Liabilities - FHLB Dallas 13,413 185 5.5% 7,864 94 4.8% ---------- --------- ---------- ---------- TOTAL INTEREST BEARING LIABILITIES 323,800 3,483 4.3% 306,245 2,976 3.9% ========== ========= ----- ========== ========== ----- NET INTEREST SPREAD 3.3% 3.7% ===== ===== </TABLE> Noninterest Income Noninterest income was $1,069,000 for the quarter ended March 31, 1996 compared to $892,000 for the same period in 1995. A $116,000 increase in gains on sales of securities available for sale accounted for most of the change when comparing the three month periods. Sales of securities available for sale were the result of changes in economic conditions and a change in the mix of the securities portfolio. Other noninterest income increased $68,000 for the quarter ended March 31, 1996 primarily as a result of increases in trust income, credit life commissions and other fee income. The market value of the entire securities portfolio at March 31, 1996 was $168,138,000 with a net unrealized gain on that date of $799,000. The net unrealized gain is comprised of $1,550,000 in unrealized gains and $751,000 in unrealized losses. 8
10 Noninterest Expense Noninterest expense was $3,788,000 for the quarter ended March 31, 1996, compared to $3,684,000 for the same period of 1995, representing an increase of $104,000 for the period. Salaries and employee benefits increased $222,000 or 10.4% during the three months ended March 31, 1996 when compared to the same period in 1995. Increased direct salary expense including payroll taxes represented $148,000 of the increase while higher retirement and health insurance expense accounted for the remainder of the change. Advertising, travel and entertainment expense was $226,000 for the quarter ended March 31, 1996, compared to $201,000 for the same period of 1995, representing an increase of $25,000 or 12.4%. Increases in donations and professional education accounted for most of the change for the quarter. FDIC insurance decreased $209,000 or 100.0% for the quarter ended March 31, 1996 compared to the same period of 1995. During the quarter ended March 31, 1995, the FDIC insurance assessment was $.23 per hundred dollar of deposits. With the Bank Insurance Fund currently fully funded the insurance expense has been reduced to $500 per quarter at present. Future FDIC insurance assessments will be determined by the FDIC based on the funding status of the Bank Insurance Fund. Other expense was $543,000 for the quarter ended March 31, 1996, an increase of $64,000 or 13.4% when compared to the same period in 1995. Professional fees have increased as a result of the Company choosing to outsource portions of the compliance, internal audit and computer programming functions rather than increasing personnel. Costs associated with growth in the mortgage and indirect auto lending portfolios also contributed to the increase. Provision for Income Taxes The provision for tax expense ratio for the three months ended March 31, 1996 was 25.8% compared to 27.2% for the three months ended March 31, 1995. The reduction is due to an increase in average tax free municipal securities when comparing the two periods. Capital Resources Total shareholders' equity for the Company at March 31, 1996, of $33,413,000 was up .2% or $61,000 from December 31, 1995, and represented 7.4% of total assets at March 31, 1996 and December 31, 1995. Increases to shareholders' equity during the three months ended March 31, 1996 were net income of $1,049,000 and common stock (4,881 shares) issued through dividend reinvestment of $73,000. Decreases to shareholders' equity consisted of $631,000 in net unrealized losses on securities available for sale, $309,000 in dividends paid to shareholders and the purchase of 8,027 shares of treasury stock for $121,000. The Federal Reserve Board has risk-based capital guidelines for bank holding companies. As of March 31, 1996, the minimum ratio of capital to risk-adjusted assets (including certain off-balance sheet items, such as standby letters of credit) was 8%. At least half of the total capital must be comprised of common equity, retained earnings and a limited amount of perpetual preferred stock, after subtracting goodwill and certain other adjustments ("Tier 1 capital"). The remainder may consist of perpetual debt, mandatory convertible debt securities, a limited amount of subordinated debt, other preferred stock and a limited amount of loan loss reserves ("Tier 2 capital"). The maximum amount of supplementary capital elements that qualifies as Tier 2 capital is limited to 100% of Tier 1 capital net of goodwill. The Federal Reserve Board also has adopted a minimum leverage ratio (Tier 1 capital to average total assets) of 3% for bank holding companies that meet certain specified criteria. The 9
11 rule indicates that the minimum leverage ratio should be at least 1.0% to 2.0% higher for holding companies that do not have the highest rating or that are undertaking major expansion programs. The Company's state chartered banking subsidiary is subject to similar capital and risk-based capital requirements adopted by the FDIC and Texas Banking Department, respectively. The leverage capital requirement adopted by the Texas Banking Department is 6%. At March 31, 1996, the Company and Southside Bank exceeded all regulatory minimum capital ratios. It is management's intention to maintain the Company's capital at a level acceptable to all regulatory authorities and future dividend payments will be determined accordingly. Regulatory authorities require that any dividend payments made by either the Company or Southside Bank not exceed earnings for that year. Liquidity and Interest Rate Sensitivity The primary functions of asset/liability management are to assure adequate liquidity and maintain an appropriate balance between interest sensitive earning assets and interest bearing liabilities. Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing funds to meet their credit needs. Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of new interest income through periods of changing interest rates. Through this process, market value volatility is also a key consideration. Cash, Interest Earning Deposits, Federal Funds Sold and short-term investments with maturities or repricing characteristics of one year or less are the principal sources of asset liquidity. At March 31, 1996, these investments were 20.7% of Total Assets. Historically, the overall liquidity of the Company has been enhanced by a significant aggregate amount of core deposits and by the lack of dependence on public fund deposits. Composition of Loans The Company's main objective is to seek attractive lending opportunities in Smith County, Texas and adjoining counties. Total Average Loans increased $32,303,000 or 16.1% from the three months ended March 31 1995 to March 31, 1996. The majority of the increase is in Real Estate Loans and Loans to Individuals which have increased due to expanded 1-4 family mortgage loan products and additional penetration achieved with the new branch locations in the Company's market area. Loan Loss Experience and Reserve for Loan Losses For the first quarter ended March 31, 1996, loan charge-offs were $200,000 and recoveries were $66,000, resulting in net charge-offs of $134,000 for the quarter ended March 31, 1996. For the three months ended March 31, 1995, loan recoveries exceeded charge-offs by $37,000. The loan loss reserve is based on the most current review of the loan portfolio at that time. An internal loan review officer of the Company is responsible for an ongoing review of Southside Bank's entire loan portfolio with specific goals set for the volume of loans to be reviewed on an annual basis. A list of loans which are graded as having more than the normal degree of risk associated with them are maintained by the internal loan review officer. This list is updated on a periodic basis but no less than quarterly by the servicing officer in order to properly allocate necessary reserves and keep management informed on the status of attempts to correct the deficiencies noted in the credit. 10
12 While management is aware of certain risk factors within segments of the loan portfolio, reserve allocations have been made on an individual loan basis. An additional reserve is maintained on the remainder of the portfolio of at risk loans that is based on tracking of the Company's loan losses on loans that have not been previously identified as problems. Nonperforming Assets The categories of nonperforming assets consist of delinquent loans over 90 days past due, nonaccrual and restructured loans, other real estate owned and repossessed assets. Delinquent loans over 90 days past due represent loans for which the payment of principal or interest has not been received in a timely manner. The full collection of both the principal and interest is still expected but is being withheld due to negotiation or other items expected to be resolved in the near future. Generally, a loan is categorized as nonaccrual when principal or interest is past due 90 days or more, unless, in the determination of management, the principal and interest on the loan are well secured and in the process of collection. In addition, a loan is placed on nonaccrual when, in the opinion of management, the future collectibility of interest and principal is in serious doubt. When a loan is categorized as nonaccrual, the accrual of interest is discontinued and any remaining accrued interest is reversed in that period; thereafter, interest income is recorded only when actually received. Restructured loans represent loans which have been renegotiated to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrowers. Categorization of a loan as nonperforming is not in itself a reliable indicator of potential loan loss. Other factors, such as the value of collateral securing the loan and the financial condition of the borrower must be considered in judgements as to potential loan loss. OREO represents real estate taken in full or partial satisfaction of debts previously contracted. The OREO consists primarily of raw land and oil and gas interests. The Company is actively marketing all properties and none are being held for investment purposes. Total nonperforming assets at March 31, 1996 were $2,649,000, down $1,257,000 or 32.2% from $3,906,000 at March 31, 1995. From March 31, 1995 to March 31 ,1996, loans 90 days past due or more decreased $807,000 or 70.9% to $331,000, restructured loans decreased $283,000 or 42.6% to $381,000, other real estate decreased $125,000 or 31.4% to $273,000 and nonaccrual loans decreased $145,000 or 9.7% to $1,350,000. Repossessed assets increased $103,000 or 48.8% to $314,000. Expansion During 1995, the Company acquired land adjacent to the bank's existing North Tyler branch and began construction on a new seven lane motor bank facility. The new motor bank facility is due to be completed during the second quarter of 1996. Remodeling and expansion of the main bank headquarters on South Beckham began on April 24, 1996. Also during 1996, the Company plans to open three new branches. The branches will be located inside two grocery stores in Tyler and one grocery store in Lindale. 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 (a) An annual meeting of shareholders was held on April 24, 1996. (b) The election of three directors (term expiring at the 1999 Annual Meeting) were as follows: <TABLE> <CAPTION> FOR AGAINST WITHHELD --------- ------- -------- <S> <C> <C> <C> Rollins Caldwell 2,029,042 202 56,378 William Sheehy 2,026,386 2,858 56,378 Murph Wilson 2,026,473 2,771 56,378 </TABLE> Directors continuing until the 1997 Annual Meeting are as follows: Herbert C. Buie Robbie N. Edmonson W. D. (Joe) Norton Directors continuing until the 1998 Annual Meeting are as follows: Fred E. Bosworth B. G. Hartley (c) The matters voted upon and the results of the voting were as follows: The shareholders voted 2,084,594 shares in the affirmative, 371 shares in the negative, and 657 abstentions to ratify the selection of Coopers and Lybrand as Southside Bancshares, Inc.'s Independent Auditors for the year ending December 31, 1996. The shareholders voted 2,050,639 shares in the affirmative, 23,329 shares in the negative, and 11,654 abstentions to approve the amendment to increase the number of shares authorized for issuance under the 1993 Incentive Stock Option Plan. ITEM 5. OTHER INFORMATION Not Applicable 12
14 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit No. ------- 27 - Financial Data Schedule for the three months ended March 31, 1996. (b) Reports on Form 8-K - None 13
15 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: 5-13-96 -------------------- /s/ LEE R. GIBSON ----------------------------------- Lee R. Gibson, Executive Vice President (Principal Financial and Accounting Officer) DATE: 5-13-96 -------------------- 14
16 EXHIBIT INDEX Exhibit No. Description - ----------- ------------ 27 - Financial Data Schedule for the three months ended March 31, 1996.