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