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, 1995 ------------------------------------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM to ---------------------- ---------------------- Commission file number 0-12247 ------------------ SOUTHSIDE BANCSHARES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) TEXAS 75-1848732 - ------------------------------------------- ------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1201 S. Beckham, Tyler, Texas 75701 - ------------------------------------------- ------------------------------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) 903-531-7111 ----------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . ---- ---- The number of shares outstanding of each of the issuer's classes of capital stock, as of the latest practicable date, was 3,132,895 shares of Common Stock, par value $2.50, Outstanding at September 30, 1995.
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, 1995 1994 ---------------- ---------------- <S> <C> <C> ASSETS Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,997 $ 25,381 Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,975 11,100 Investment securities: Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,297 25,695 Held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,014 57,025 --------------- --------------- Total Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . 67,311 82,720 Mortgage-backed and related securities: Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,498 27,654 Held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,506 60,426 --------------- --------------- Total Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . 91,004 88,080 Marketable equity securities: Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,112 2,005 Loans: Total Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216,135 201,797 Less: Reserve for loan losses . . . . . . . . . . . . . . . . . . . . . . . . (3,254) (3,137) --------------- --------------- Net Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212,881 198,660 Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,554 9,875 Other real estate owned, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 273 398 Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,537 2,581 Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 986 1,909 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,708 3,512 --------------- --------------- TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 428,338 $ 426,221 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 82,906 $ 88,008 Interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297,004 297,094 --------------- --------------- Total Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379,910 385,102 Short-term obligations: Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . 550 Long-term obligations: Note payable - FHLB Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,910 7,997 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,566 5,598 --------------- --------------- TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396,936 398,697 --------------- --------------- Shareholders' equity: Common stock: ($2.50 par, 6,000,000 shares authorized, 3,132,895 and 2,973,234 shares issued and outstanding) . . . . . . . . . . . . 7,832 7,433 Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,119 14,529 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,397 7,480 Treasury stock (49,421 and 23,082 shares at cost) . . . . . . . . . . . . . . . (486) (219) Net unrealized (losses) on securities available for sale . . . . . . . . . . . . (460) (1,699) --------------- --------------- TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . 31,402 27,524 --------------- --------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . $ 428,338 $ 426,221 =============== =============== </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, --------------------------- ---------------------------- 1995 1994 1995 1994 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Interest income Loans . . . . . . . . . . . . . . . . . . . . . . . . $ 4,817 $ 4,491 $ 13,854 $ 12,352 Investment securities . . . . . . . . . . . . . . . . . 1,054 965 3,342 2,494 Mortgage-backed and related securities . . . . . . . . . 1,460 1,251 4,159 3,912 Other interest earning assets . . . . . . . . . . . . . 174 197 538 470 -------- ---------- ---------- ---------- Total interest income . . . . . . . . . . . . . . . 7,505 6,904 21,893 19,228 Interest expense Time and savings deposits . . . . . . . . . . . . . . . 3,160 2,612 9,052 7,262 Short-term obligations . . . . . . . . . . . . . . . . . 121 113 350 378 -------- ---------- ---------- ---------- Total interest expense . . . . . . . . . . . . . . . 3,281 2,725 9,402 7,640 -------- ---------- ---------- ---------- Net interest income . . . . . . . . . . . . . . . . . . . . 4,224 4,179 12,491 11,588 Provision for loan losses . . . . . . . . . . . . . . . . . 50 (300) 250 -------- ---------- ---------- ---------- Net interest income after provision for loan losses . . . . 4,224 4,129 12,791 11,338 -------- ---------- ---------- ---------- Noninterest income Deposit services . . . . . . . . . . . . . . . . . . . . 693 659 2,054 1,993 Gains on securities available for sale . . . . . . . . . 11 1 244 25 Other . . . . . . . . . . . . . . . . . . . . . . . . . 193 243 609 719 -------- ---------- ---------- ---------- Total noninterest income . . . . . . . . . . . . . . 897 903 2,907 2,737 -------- ---------- ---------- ---------- Noninterest expense Salaries and employee benefits . . . . . . . . . . . . . 2,143 2,118 6,487 6,231 Net occupancy expense . . . . . . . . . . . . . . . . . 406 361 1,223 1,010 Equipment expense . . . . . . . . . . . . . . . . . . . 73 74 226 212 Advertising, travel & entertainment . . . . . . . . . . 241 171 653 557 Supplies . . . . . . . . . . . . . . . . . . . . . . . . 82 94 285 280 FDIC insurance . . . . . . . . . . . . . . . . . . . . . (21) 202 398 588 Postage . . . . . . . . . . . . . . . . . . . . . . . . 73 66 222 209 Other . . . . . . . . . . . . . . . . . . . . . . . . . 549 423 1,543 1,615 -------- ---------- ---------- ---------- Total noninterest expense . . . . . . . . . . . . . 3,546 3,509 11,037 10,702 -------- ---------- ---------- ---------- Income before federal tax expense . . . . . . . . . . . . . 1,575 1,523 4,661 3,373 Provision for tax expense . . . . . . . . . . . . . . . . . 441 444 1,317 879 -------- ---------- ---------- ---------- Net Income . . . . . . . . . . . . . . . . . . . . . . . $ 1,134 $ 1,079 $ 3,344 $ 2,494 ========= ========== ========== ========== Earnings Per Share Net Income . . . . . . . . . . . . . . . . . . . . . . . $ .37 $ .35 $ 1.08 $ .80 ========= ========== ========== ========== </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, -------------------------- 1995 1994 ----------- ------------ <S> <C> <C> OPERATING ACTIVITIES: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,344 $ 2,494 Adjustments to reconcile net cash provided by operations: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . 1,119 1,412 Accretion of discount and loan fees . . . . . . . . . . . . . . . . . . . . . (623) (564) Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . (300) 250 Decrease in interest receivable . . . . . . . . . . . . . . . . . . . . . . . 44 349 (Increase) decrease in other receivables and prepaids . . . . . . . . . . . . 862 (2,665) Decrease in deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . 284 Increase in interest payable . . . . . . . . . . . . . . . . . . . . . . . . 74 66 (Gain) on sale of securities available for sale . . . . . . . . . . . . . . . (244) (25) (Gain) on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . (10) (10) (Gain) loss on other real estate owned . . . . . . . . . . . . . . . . . . . (20) 28 Increase in other payables . . . . . . . . . . . . . . . . . . . . . . . . . 894 487 Net decrease in student loans held for resale . . . . . . . . . . . . . . . . 117 27 ------------ ------------ Net cash provided by operating activities . . . . . . . . . . . . . . . . . 5,541 1,849 INVESTING ACTIVITIES: Proceeds from sales of investment securities available for sale . . . . . . . 28,940 18,593 Proceeds from sales of mortgage-backed securities available for sale . . . . . 13,118 27,414 Proceeds from sales of marketable equity securities available for sale . . . . 2 Proceeds from maturities of investment securities available for sale . . . . . 11,457 4,430 Proceeds from maturities of mortgage-backed securities available for sale . . 4,490 15,131 Proceeds from maturities of investment securities held to maturity . . . . . . 13,393 10,038 Proceeds from maturities of mortgage-backed securities held to maturity . . . 4,095 4,145 Purchases of investment securities available for sale . . . . . . . . . . . . (37,233) (17,742) Purchases of mortgage-backed securities available for sale . . . . . . . . . . (23,397) (17,926) Purchases of marketable equity securities available for sale . . . . . . . . . (107) (47) Purchases of investment securities held to maturity . . . . . . . . . . . . . (24,048) Purchases of mortgage-backed securities held to maturity . . . . . . . . . . . (5,971) Net (increase) in federal funds sold . . . . . . . . . . . . . . . . . . . . . (2,875) (9,250) Net (increase) in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,916) (17,013) Purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . . (2,463) (1,009) Proceeds from sales of premises and equipment . . . . . . . . . . . . . . . . 42 31 Proceeds from sales of repossessed assets . . . . . . . . . . . . . . . . . . 820 804 Proceeds from sales of other real estate owned . . . . . . . . . . . . . . . . 145 1,517 ------------ ------------ Net cash used in investing activities . . . . . . . . . . . . . . . . . . . (4,491) (10,901) </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, -------------------------- 1995 1994 ---------- ---------- <S> <C> <C> FINANCING ACTIVITIES: Net increase (decrease) in demand and savings accounts . . . . . . . . . . . . (11,655) 7,477 Net increase in certificates of deposit . . . . . . . . . . . . . . . . . . . 6,463 15,071 Net increase (decrease) in federal funds purchased . . . . . . . . . . . . . . 550 (7,400) Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . (267) Net increase (decrease) in notes payable . . . . . . . . . . . . . . . . . . . 1,913 (648) Net (decrease) in securities sold under agreement to repurchase . . . . . . . (3,923) Proceeds from the issuance of common stock . . . . . . . . . . . . . . . . . . 147 84 Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (585) (281) ------------ ------------ Net cash provided (used) by financing activities . . . . . . . . . . . . (3,434) 10,380 ------------ ------------ Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . (2,384) 1,328 Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . 25,381 19,792 ------------ ------------ Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . $ 22,997 $ 21,120 ============ ============ SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION: Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,329 $ 7,574 Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 990 $ 553 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisition of OREO and repossessed assets through foreclosure . . . . . . . . $ 807 $ 710 </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, 1993 . . . . . . $ 7,029 $ 13,358 $ 6,066 $ $ 788 $ 27,241 Net Income . . . . . . . . . . . . . . . 2,494 2,494 Dividends ($.10 per share) . . . . . . . (281) (281) Stock Dividend . . . . . . . . . . . . . 354 1,026 (1,380) Common stock issued (8,444 shares) . . . 21 63 84 Net unrealized (losses) on securities available for sale (net of tax) . . . . (2,197) (2,197) ---------- --------- --------- ---------- ---------- ---------- Balance at September 30, 1994 . . . . . . $ 7,404 $ 14,447 $ 6,899 $ $ (1,409) $ 27,341 ========== ========= ========= ========== ========== ========== Balance at December 31, 1994 . . . . . . $ 7,433 $ 14,529 $ 7,480 $ (219) $ (1,699) $ 27,524 Net Income . . . . . . . . . . . . . . . 3,344 3,344 Dividends ($.20 per share) . . . . . . . (585) (585) Stock Dividend . . . . . . . . . . . . . 368 1,474 (1,842) Common stock issued (12,302 shares) . . . 31 116 147 Purchase of 26,339 shares of Treasury stock . . . . . . . . . . . . . (267) (267) Net unrealized gains on securities available for sale (net of tax) . . . . 1,239 1,239 ---------- --------- --------- ---------- ---------- ---------- Balance at September 30, 1995 . . . . . . $ 7,832 $ 16,119 $ 8,397 $ (486) $ (460) $ 31,402 ========== ========= ========= ========== ========== ========== </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, 1995, and the related consolidated statements of income, shareholders' equity and cash flow for the nine month periods ended September 30, 1995 and 1994 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, 1995 and 1994, the number of shares used to calculate earnings per share was 3,083,511 and 3,104,553, respectively. 3. Loans. The Company adopted FAS114, "Accounting by Creditors for Impairment of a Loan," on January 1, 1995. Under the new standard, 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. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. The adoption of FAS114 resulted in no additional provision for credit losses. Loans, including impaired loans, are 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 is recognized as income only to the extent that full recovery of the principal balance of the loan is reasonably certain. At September 30, 1995, the recorded investment in loans (primarily nonaccrual loans) for which impairment has been recognized in accordance with FAS114 totaled $1,348,000 with a corresponding valuation allowance of $394,000. For the nine months ended September 30, 1995, the average recorded investment in impaired loans was approximately $1,355,000. During the nine months ended September 30, 1995, 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. In prior years, 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 that were not in its possession to loans. Prior periods have been reclassified for comparative purposes. 6
8 During the second quarter of 1995, the Company reduced its reserve for loan losses by $300,000. As reflected in the chart below, the bank realized significant recoveries primarily in the second quarter on loans previously charged off or placed in nonearning assets. The following is a summary of the Reserve for Loan Losses for the nine months ended September 30, 1995 and 1994 (in thousands): <TABLE> <CAPTION> September 30, ------------------------ 1995 1994 ---------- ---------- <S> <C> <C> Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,137 $ 2,846 Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . (300) 250 Loans charged off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (458) (399) Recoveries of loans charged off . . . . . . . . . . . . . . . . . . . . . . 875 326 ------------ ------------ Net loan (losses) recoveries . . . . . . . . . . . . . . . . . . . . . . 417 (73) ------------ ------------ Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,254 $ 3,023 ============ ============ </TABLE> 7
9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Quarter and nine months ended September 30, 1995 compared to September 30, 1994. 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, 1995 compared to the same period in 1994. Net income for the quarter and nine months ended September 30, 1995 was $1,134,000 and $3,344,000, as compared to $1,079,000 and $2,494,000 for the same period in 1994. Net Interest Income Net interest income for the quarter and nine months ended September 30, 1995 was $4,224,000 and $12,491,000, an increase of $45,000 and $903,000 or 1.1% and 7.8%, respectively, when compared to the same periods in 1994. The net interest spread increased from 3.5% to 3.6% from September 30, 1994 to September 30, 1995. During the nine months ended September 30, 1995, Average Loans, funded primarily by average deposit growth, increased $9,170,000 or 4.7%, compared to the same period in 1994. The average yield on loans increased from 8.4% at September 30, 1994 to 9.0% at September 30, 1995 reflecting the higher average overall interest rates. Average Securities increased $2,127,000 or 1.3% for the nine months ended September 30, 1995 when compared to 1994. The overall yield on Average Securities increased to 6.1% during the nine months ended September 30, 1995, up from 5.3% during the same period in 1994 as a result of the higher overall average interest rates. The net result during the first nine months of 1995 was an increase in interest income from Securities of $1,095,000 or 17.1% compared to the same period in 1994 as a direct result of higher average overall yields. Interest income from federal funds and other interest earning assets increased $68,000 or 14.5% for the nine months ended September 30, 1995 when compared to 1994. During this time the average balance decreased 19.2% and the yield increased from 4.2% in 1994 to 5.9% in 1995. The change is primarily a result of an average overall increase in the yield on Federal Funds Sold. Total interest expense increased $1,762,000 or 23.1% to $9,402,000 during the nine months ended September 30, 1995 as compared to $7,640,000 during the same period in 1994. The increase was attributable to higher average interest rates along with an increase in Average Interest Bearing Liabilities of $3,421,000 or 1.1%. The average rate of interest bearing liabilities increased to 4.1% in 1995 from 3.4% in 1994. 8
10 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, 1995 Nine Months Ended September 30, 1994 -------------------------------------- ------------------------------------ <S> <C> <C> <C> <C> <C> <C> INTEREST EARNING ASSETS: Loans $ 204,720 $ 13,854 9.0% $ 195,550 $ 12,352 8.4% Investment Securities 76,932 3,342 5.8% 65,623 2,494 5.1% Mortgage-backed Securities 87,084 4,159 6.4% 96,266 3,912 5.4% Other Interest Earning Assets 12,127 538 5.9% 15,005 470 4.2% ---------- --------- ---------- ---------- TOTAL INTEREST EARNING ASSETS 380,863 21,893 7.7% 372,444 19,228 6.9% ========== ========= ========== ========== INTEREST BEARING LIABILITIES: Deposits $ 296,890 $ 9,052 4.1% $ 291,537 $ 7,262 3.3% Other Interest Bearing Liabilities 9,505 350 4.9% 11,437 378 4.4% ---------- --------- ---------- ---------- TOTAL INTEREST BEARING LIABILITIES 306,395 9,402 4.1% 302,974 7,640 3.4% ========== ========= ----- ========== ========== ----- NET INTEREST SPREAD 3.6% 3.5% ===== ===== </TABLE> Noninterest Income Noninterest income was $897,000 and $2,907,000 for the quarter and nine months ended September 30, 1995 compared to $903,000 and $2,737,000 for the same period in 1994. A $219,000 increase in gains on sales of securities available for sale, occurring primarily during the second quarter of 1995, accounted for most of the change when comparing the nine 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 decreased $50,000 and $110,000 for the quarter and nine months ended September 30, 1995 due to decreases in income from other real estate owned and other recoveries. The number of OREO properties on the Company's books has continued to decrease and some properties were sold at a gain during the quarter and nine months ended September 30, 1994. The market value of the entire securities portfolio at September 30, 1995 was $161,427,000 with a net unrealized gain on that date of $1,613,000. The net unrealized gain is comprised of $2,103,000 in unrealized gains and $490,000 in unrealized losses. Noninterest Expense Noninterest expense was $3,546,000 and $11,037,000 for the quarter and nine months ended 9
11 September 30, 1995, compared to $3,509,000 and $10,702,000 for the same period of 1994, representing an increase of $37,000 and $335,000 for the respective periods. Salaries and employee benefits increased $256,000 or 4.1% during the nine months ended September 30, 1995 when compared to the same period in 1994. Increased direct salary and retirement expense due to additional personnel accounted for most of this change. Net occupancy expense increased $213,000 or 21.1% during the nine months ended September 30, 1995 when compared to the same period in 1994. The opening of the new motor bank facility and the operations annex during the fourth quarter of 1994 contributed to the increase. FDIC insurance decreased $223,000 and $190,000 or 110.4% and 32.3% for the quarter and nine months ended September 30, 1995 compared to the same periods of 1994. During August 1995, the FDIC announced a decrease in the insurance premiums from .23 per hundred dollar of deposits insured to .04 per hundred dollar insured effective June 1, 1995. As a result, Southside Bank received a refund of $230,000 in September 1995. Advertising, travel and entertainment expense was $241,000 and $653,000 for the quarter and nine months ended September 30, 1995, compared to $171,000 and $557,000 for the same period of 1994, representing an increase of $70,000 and $96,000 or 40.9% and 17.2%. Increases in direct advertising and donations accounted for most of this change for the quarter and nine months. Other expense was $549,000 and $1,543,000 for the quarter and nine months ended September 30, 1995, an increase for the quarter of $126,000 and a decrease of $72,000 for the nine month period. Professional fees have increased as a result of the Company opting to outsource various functions such as compliance, internal audit and computer programming rather than increasing personnel. Also contributing to the increase for the quarter was an increase in net OREO expenses due to OREO gains realized during the third quarter of 1994. Provision for Income Taxes The provision for tax expense ratio for the nine months ended September 30, 1995 was 28.3% compared to 26.1% for the nine months ended September 30, 1994. The increased income tax expense is a result of higher pre-tax income with relatively little change in tax-free income for the nine months ended September 30, 1995 compared to September 30, 1994. Capital Resources Total shareholders' equity for the Company at September 30, 1995, of $31,402,000 was up 14.1% or $3,878,000 from December 31, 1994, and represented 7.3% of total assets versus 6.5% at December 31, 1994. Items increasing shareholders' equity during the nine months ended September 30, 1995 were net income of $3,344,000, common stock issued through dividend reinvestment of $147,000 and $1,239,000 in net unrealized gains on securities available for sale. Decreases to shareholders' equity consisted of $585,000 in dividends paid to shareholders during the second quarter and the purchase of 26,339 shares of treasury stock for $267,000. During the third quarter of 1995, the Company issued a 5% stock dividend, which had no effect on Total Shareholders' Equity. The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies. As of September 30, 1995, 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 10
12 of perpetual debt, mandatory convertible debt securities, a limited amount of subordinated debt, other preferred stock and a limited amount of loan loss reserves ("Tier 2 capital"). The maximum amount of supplementary capital elements that qualifies as Tier 2 capital is limited to 100% of Tier 1 capital net of goodwill. The Federal Reserve Board also has adopted a minimum leverage ratio (Tier 1 capital to average total assets) of 3% for bank holding companies that meet certain specified criteria. The rule indicates that the minimum leverage ratio should be at least 1.0% to 2.0% higher for holding companies that do not have the highest rating or that are undertaking major expansion programs. The Company's state chartered banking subsidiary is subject to similar capital and risk-based capital requirements adopted by the FDIC and Texas Banking Department, respectively. The leverage capital requirement adopted by the Texas Banking Department is 6%. At September 30, 1995, 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 September 30, 1995, these investments were 23.8% 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 $9,170,000 or 4.7% from the nine months ended September 30, 1994 to September 30, 1995. The majority of the increase is in Real Estate Loans and Loans to Individuals which have increased due to expanded mortgage loan products, favorable real estate market conditions 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 third quarter and nine months ended September 30, 1995, loan charge-offs were $228,000 and $458,000 and recoveries were $57,000 and $875,000, respectively, resulting in net charge-offs of $171,000 and net recoveries of $417,000 for the quarter and nine months ended September 30, 1995. For the nine months ended September 30, 1994, loan charge-offs exceeded recoveries by $74,000. During the second quarter of 1995, the Company reduced its reserve for loan losses by $300,000. This was due to the significant recoveries realized during the quarter and based on the Company's review of the loan loss reserve. 11
13 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. Effective January 1, 1995, the Company adopted the provisions of Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (FAS114). This standard requires that impaired loans within the scope of this statement be measured based on the present value of expected future cash flows. In October 1994, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 118 which amends FAS114 to allow creditors to use existing methods for recognizing interest income on an impaired loan. The impact of these statements did not result in any additional provisions for loan losses or changes in earnings. 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. 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. The OREO consists of primarily 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, 1995 were $2,401,000, down $714,000 or 22.9% from $3,115,000 at September 30, 1994. The balance of OREO at September 30, 1995 decreased $191,000 or 41.2% since September 30, 1994 as a result of sales. From September 30, 1994 to September 30, 1995 nonaccrual loans decreased $337,000 or 20% and restructured loans decreased $363,000 or 51.3%. 12
14 Expansion The Company's new South Broadway branch opened on April 24, 1995. Construction began during the third quarter of 1995 on the expansion of the North Tyler branch motor bank facility. Remodeling and expansion of the main bank facilities on South Beckham is also currently in the planning phase. 13
15 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 <TABLE> <CAPTION> Exhibit No. --------- <S> <C> 27 - Financial Data Schedule for the nine months ended September 30, 1995. </TABLE> (b) Reports on Form 8-K - None 14
16 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. <TABLE> <S> <C> SOUTHSIDE BANCSHARES, INC. (Registrant) BY: /s/ B.G. HARTLEY ---------------------------------------------------- B.G. Hartley, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) DATE: 11-09-95 --------------------------------- /s/ LEE R. GIBSON ----------------------------------------------------- Lee R. Gibson, Executive Vice President (Principal Financial and Accounting Officer) DATE: 11-09-95 --------------------------------- </TABLE> 15
17 INDEX TO EXHIBITS <TABLE> <CAPTION> Exhibit Description - ------- ----------- <S> <C> 27 Financial Data Schedule for the nine months ended September 30, 1995. </TABLE>