-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EcZPMlbST8FYS137aSnto0IoyFbe08CD+ZbtSVLSW5gsZ18NMYXs9AnDekpqjVqO aRRwB2eK/jBwB9KwJh10Jw== 0000950134-96-001026.txt : 19960401 0000950134-96-001026.hdr.sgml : 19960401 ACCESSION NUMBER: 0000950134-96-001026 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHSIDE BANCSHARES INC CENTRAL INDEX KEY: 0000705432 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 751848732 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12247 FILM NUMBER: 96541674 BUSINESS ADDRESS: STREET 1: 1201 S BECKHAM CITY: TYLER STATE: TX ZIP: 75701 BUSINESS PHONE: 9035317111 FORMER COMPANY: FORMER CONFORMED NAME: SOBANK INC DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1995 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ______________________ Form 10-K (MARK ONE) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE - ---------- SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE YEAR ENDED DECEMBER 31, 1995 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE - ---------- SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM____________TO____________ COMMISSION FILE NUMBER 0-12247 Southside Bancshares, Inc. (Exact name of registrant as specified in its charter) TEXAS 75-1848732 (State of incorporation) (I.R.S. Employer Identification No.) 1201 S. BECKHAM, TYLER, TEXAS 75701 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (903) 531-7111 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- NONE NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK (Title of Class) Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 8, 1996, 3,141,393 shares of common stock of Southside Bancshares, Inc. were outstanding and the aggregate market value of such common stock held by nonaffiliates (based upon the last transaction known by registrant on or before that date) was $34,150,155. DOCUMENTS INCORPORATED BY REFERENCE (a) Registrant's Proxy Statement to be filed for the Annual Meeting of Shareholders to be held April 24, 1996. (Part III) ================================================================================ 2 PART I ITEM 1. BUSINESS GENERAL Southside Bancshares, Inc. (the "Company"), a Texas corporation, is a bank holding company organized in 1982, which at December 31, 1995, owned all of the capital stock of one commercial bank in Texas, Southside Bank, and one nonbank subsidiary, which did not conduct any business in 1995. As a bank holding company, the Company may own or control more than one bank and furnish services for such banks. Unless the context otherwise requires, references in this Report to the Company include Southside Bank and the nonbank subsidiary. The Company provides its subsidiaries with advice and coordination of activities in the area of accounting, public relations and business development. Southside Bank operates under the day-to-day management of its own officers and directors; and, it formulates its own policies with respect to lending practice, investment activities, asset liability management, service charges and other banking matters. At this time the Company conducts no business except with respect to Southside Bank and the nonbank subsidiary. FORWARD-LOOKING INFORMATION The statements contained in this Annual Report on Form 10K ("Annual Report") that are not historical facts, including, but not limited to, statements found in this Item 1. Business and Item. 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements that involve a number of risks and uncertainties. The actual results of the future events described in such forward-looking statements in this Annual Report could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: general economic conditions, competition, government regulations and possible future litigation, as well as the risks and uncertainties discussed in this Annual Report, including, without limitation, the portions referenced above, and the uncertainties set forth from time to time in the Company's other public reports and filings and public statements. EXPANSION The Company's new South Broadway branch facility opened April 24, 1995 replacing the smaller existing facility. During the year ended December 31, 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. Remodeling and expansion of the main bank headquarters on South Beckham will begin during 1996. SERVICE AREAS Southside Bank is the largest Tyler based bank in total deposits in the Tyler Metropolitan Area, which includes Smith County. The Tyler Metropolitan Area has a population of approximately 151,000. Tyler is the retail center of East Texas and also has considerable oil and gas related industry as well as manufacturing interests. In addition, it is the medical center of East Texas with three major hospitals serving the area. BANKING SERVICES Southside Bank offers a full range of financial services to commercial, industrial, financial and individual customers, including short-term and medium-term loans, inventory and accounts 1 3 receivable financing, equipment financing, real estate lending, safe deposit services, savings accounts and various savings programs, interest and noninterest bearing checking accounts and other personal loans. Southside Bank makes automobile and other installment loans as well as home improvement and mortgage loans to its customers. The Bank also offers its own credit card. Southside Bank also makes indirect automobile loans through area auto dealers. Through its affiliate, BSC Securities, L.C., which is partially owned by Southside Bank, the bank offers full retail brokerage securities services. Southside Bank offers automatic teller machine facilities and services through a statewide system known as "Moneymaker." Trust services are provided by Southside Bank, primarily to individuals and to a lesser extent partnerships and corporations. Such services include investment, management, administration and advisory services for trust accounts. Southside Bank can act as trustee of living, testamentary, and employee benefit trusts and as executor or administrator of estates. THE BANKING INDUSTRY IN TEXAS The banking industry is affected by general economic conditions such as inflation, recession, unemployment and other factors beyond the Company's control. During the mid to late 1980's, declining oil prices had an indirect effect on the Company's business, and the deteriorating real estate market caused a significant portion of the increase in the Company's nonperforming assets during that period. During the early 1990's a mild recovery appeared to be underway in East Texas and much of the nation. This recovery continued into 1994 and 1995 and at this time the economic activity in the State and East Texas appears to be improving with some growth areas resulting. Management of the Company, however, cannot predict whether current economic conditions will improve, remain the same or decline. COMPETITION The activities engaged in by the Company and its subsidiary, Southside Bank, are highly competitive. In the past few years other financial institutions such as savings and loan associations, credit unions, consumer finance companies, insurance companies, brokerage companies and other financial institutions with varying degrees of regulatory restrictions have begun to compete more vigorously for a share of the financial services market. Brokerage companies continue to become more competitive in the financial services arena and pose an ever increasing challenge to banks. Legislative changes also greatly affect the level of competition the Company faces. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 removes state law barriers to acquisitions in all states and allows multi-state banking operations to merge into a single bank with interstate branches. The interstate branching provisions will become effective on June 1, 1997 unless a state takes action before that time. A state can pass laws either to opt in early or to opt out completely, as long as they act before June 1, 1997. The Texas Legislature has voted to opt out until 1999. When Texas opts in, the conditions described above will enhance an already attractive environment for the large out-of-state money center banking organizations to expand into Texas and specifically into the service area of the Company. Currently, the Company must compete against some institutions located in Tyler, Texas and elsewhere in the Company's service area which have capital resources and legal loan limits substantially in excess of those available to the Company and Southside Bank. The Company expects the competition it faces to continue to increase. EMPLOYEES At December 31, 1995, the Company employed 236 full time equivalent persons. None of the employees are represented by any unions or similar groups, and the Company has not experienced any type of strike or labor dispute. The Company considers its relationship with its employees to be good. 2 4 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company and Southside Bank as of December 31, 1995, were as follows: B. G. Hartley (Age 66), Chairman of the Board of the Company since 1983. He was elected President of the Company in 1982. He also serves as Chairman of the Board, President and Chief Executive Officer of the Company's subsidiary, Southside Bank, having served in these capacities since the bank's inception in 1960. Robbie N. Edmonson (Age 63), President of the Company since 1983. He is currently Vice Chairman of the Board and Chief Administrative Officer of the Company's subsidiary, Southside Bank. He joined Southside Bank as a vice president in 1968. Sam Dawson (Age 48), Executive Vice President and Secretary of the Company and Executive Vice President and Trust Officer of the Company's subsidiary, Southside Bank. He became an officer of the Company in 1982 and of Southside Bank during 1975. James F. Deakins (Age 62), Senior Vice President - Loan Review of the Company since 1988. He joined Southside Bank in 1987 as a Vice President in commercial lending. Lee R. Gibson (Age 39), Executive Vice President and Chief Accounting Officer of the Company and Executive Vice President of the Company's subsidiary, Southside Bank. He became an officer of the Company in 1985 and of Southside Bank during 1984. Titus E. Jones (Age 51), Executive Vice President and Director of the Company's subsidiary, Southside Bank, since 1987. Mr. Jones served as the President of Southside Bank's branch at South Broadway while it was a separately chartered bank from 1984 to 1987. Jeryl Story (Age 44), Executive Vice President - Loan Administration of the Company's subsidiary, Southside Bank, since 1985. He joined Southside Bank in 1979 as an officer in Loan Documentation. H. Andy Wall (Age 55), Executive Vice President and Director of the Company's subsidiary, Southside Bank, since 1984. Mr. Wall joined Southside Bank in 1968 and became an officer in 1969. All the individuals named above serve in their capacity as officers of the Company and its subsidiaries at the pleasure of the Board of Directors. 3 5 SUPERVISION AND REGULATION As a bank holding company, the Company is subject to regulation by the Board of Governors of the Federal Reserve System (the "Board") and is required to file with the Board an annual report and such other material as the Board may require pursuant to the Bank Holding Company Act of 1956 (the "Act"). The Company and its subsidiaries are subject to examination by the Board. The Company must obtain prior approval of the Board for the acquisition of more than 5% of the voting shares or substantially all the assets of any bank or bank holding company. After an application to acquire a state or national bank in Texas has been accepted for filing by the Board, the Company must submit a copy of that application to the Texas Banking Commissioner (the "Commissioner") pursuant to the Texas Banking Code of 1943 (the "Code"). The Commissioner must advise the Board of her recommendations. If the Commissioner recommends that the application be denied, the applicant is entitled to request a hearing. The Company is prohibited from acquiring the assets or more than 5% of the voting shares of a bank located outside Texas unless the acquisition is specifically authorized by the statutes of the state in which said bank is located. The Company is, with limited exceptions, prohibited from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company not a bank or bank holding company and from engaging in activities other than banking, managing or controlling banks or furnishing services to its subsidiaries. The Company may, however, engage in, and may own shares of companies engaged in, certain activities found by the Board to be "so closely related to banking or managing or controlling banks as to be a proper incident thereto." After an application to engage in any of these activities has been accepted for filing by the Board, the Company must submit a copy of that application to the Commissioner, pursuant to the Code, for a determination as to whether the application should be approved. The Commissioner is required to deny the application, unless she finds the proposed activities will produce benefits to the public, such as greater convenience or increased competition, that outweigh possible adverse effects, such as unfair competition, conflicts of interest or unsound banking practices. Under the Act and the Board's regulations, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or lease or sale of property or furnishing of services. The Board has subpoena powers with respect to applications and other proceedings under the Act and possesses cease and desist powers over bank holding companies and their nonbank subsidiaries with respect to actions deemed to represent unsafe and unsound practices or violations of applicable laws. In addition, the Board can require a bank holding company to terminate any nonbank activity, or divest any nonbank subsidiary, if it deems that the activity or subsidiary constitutes a serious risk to the financial safety, soundness or stability of any of its subsidiary banks. The Federal Deposit Insurance Corporation Improvement Act of 1991 made a number of changes in the legal environment for insured banks, including reduction in insurance coverage for certain kinds of deposits, increases in consumer-oriented requirements, and major revisions in the process of supervision and examination of depository institutions. Deposit insurance changes impose new limits on brokered deposits, coverage of certain pension deposits and foreign branch and uninsured deposits that had previously received de facto protection under the "too big to fail" policy. 4 6 The operations of Southside Bank are also subject to numerous laws and regulations relating to the extension of credit and making of loans to individuals. Such laws include the Federal Consumer Credit Protection Act, which regulates, among other things, disclosure of credit terms, credit advertising, credit billing and collection, and expansion of credit, and the Texas Consumer Credit Code and Texas Consumer Protection Code, which regulate, among other things, interest rates, disclosure of credit terms and practices relating to the extension and collection of credit. In addition, remedies to the borrower and penalties to the lender are provided for failure of the lender to comply with such laws and regulations. The scope and requirements of such laws and regulations have been expanded significantly in recent years. CAPITAL GUIDELINES Southside Bank is regulated by the Texas Department of Banking (the "State") and the Federal Deposit Insurance Corporation (the "FDIC"). The State requires Southside Bank to maintain capital at a minimum of 6% of total assets. The FDIC requires minimum levels of Tier 1 capital and risk-based capital for FDIC-insured institutions. The FDIC requires a minimum leverage ratio of 3% of adjusted total assets for the highest rated banks. Other banks are required to meet a leverage standard of 4% or more, determined on a case-by-case basis. On December 31, 1995, the minimum ratio for qualifying total risk-based capital was 8% of which 4% must be Tier 1 capital. Southside Bank's actual capital to total assets and risk-based capital ratios at December 31, 1995 were in excess of the minimum requirements. Also see discussion of "Capital Resources" under Item 7. USURY LAWS Texas usury laws limit the rate of interest that may be charged by state banks. Certain Federal laws provide a limited preemption of Texas usury laws. The maximum rate of interest that Southside Bank may charge on direct business loans under Texas law varies between 18% per annum and (i) 28% per annum for business and agricultural loans above $250,000 or (ii) 24% per annum for other direct loans. Texas floating usury ceilings are tied to the 26-week United States Treasury Bill Auction rate. Other ceilings apply to open-end credit card loans and dealer paper purchased by Southside Bank. A Federal statute removes interest ceilings under usury laws for loans by Southside Bank which are secured by first liens on residential real property. ECONOMIC ENVIRONMENT The monetary policies of regulatory authorities, including the Board, have a significant effect on the operating results of bank holding companies and their subsidiaries. The Board regulates the national supply of bank credit. Among the means available to the Board are open market operations in United States Government Securities, changes in the discount rate on member bank borrowings, changes in reserve requirements against member and nonmember bank deposits, and loans and limitations on interest rates which member banks may pay on time or demand deposits. These methods are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits. Their use may affect interest rates charged on loans or paid for deposits. Also see discussion of "Banking Industry in Texas" under Item 1. 5 7 ITEM 2. PROPERTIES Southside Bank owns the following properties: - A two story building in Tyler, Texas, at 1201 South Beckham Avenue, a parking lot across the street and the property adjacent to the main bank building, known as the Southside Bank Annex. These properties house the executive offices of Southside Bancshares, Inc.. - Property and a building directly adjacent to the building housing the Southside Bank Annex. The building is referred to as the Operations Annex, where various back office lending and accounts payable operations take place. - Land and building located at 1010 East First Street in Tyler where the Motor Bank facilities are located and which includes fourteen drive-thru teller stations. - 4.05 acres of land located at the intersection of South Broadway and Grande Boulevard in Tyler. The entire tract is occupied by Southside Bank's South Broadway branch, which currently provides a full line of banking services. - Property near its South Broadway branch where the new Motor Bank facility is located. The new Motor Bank facility opened October 17, 1994. This property was previously held in other real estate owned by Southside Bank. - Nine Automatic Teller Machine (ATM) facilities located throughout Tyler and Smith County. - Building located in the downtown square of Tyler which houses Southside Bank's Downtown branch, providing a full line of banking services. - Land immediately adjacent to the bank's North Tyler branch on which drive-thru facilities will be built. ITEM 3. LEGAL PROCEEDINGS Southside Bank is party to legal proceedings arising in the normal conduct of business. Management of the Company, after consulting with its legal counsel, believes that liability resulting from any of these proceedings will not have a material effect on the financial position or results of operations of the Company or Southside Bank. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the three months ended December 31, 1995, there were no meetings, annual or special, of the shareholders of the Company. No matters were submitted to a vote of the shareholders, nor were proxies solicited by management or any other person. 6 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's common stock is not actively traded on any established public trading market. The high/low prices shown below were acquired from shareholders voluntarily advising the transfer agent. Accordingly, the market information is incomplete. However, the per share prices listed below are, to the Company's knowledge, generally representative of transactions for the periods reported. During the third quarter of 1995, 1994 and 1993, the Company declared and paid a 5% stock dividend.
Year Ended 1st qtr. 2nd qtr. 3rd qtr. 4th qtr. - ----------------- ---------------- ---------------- ----------------- ----------------- December 31, 1995 $ 10.00 - 9.50 $ 12.00 - 10.00 $ 12.50 - 12.00 $ 13.50 - 12.50 December 31, 1994 $ 11.00 - 10.00 $ 11.00 - 9.88 $ 10.00 - 9.00 $ 9.50 - 9.10
See "Item 7. Capital Resources" for a discussion of the Company's common stock repurchase program. STOCKHOLDERS There were approximately 1,135 holders of record of the Company's common stock, the only class of equity securities currently issued and outstanding, as of December 31, 1995. DIVIDENDS Cash dividends declared and paid were $.35 per share for the year ended December 31, 1995 and $.25 per share for each of the years ended December 31, 1994 and 1993. Stock dividends of 5% were also declared and paid during each of the years ended December 31, 1995, 1994 and 1993. Future dividends will depend on the Company's earnings, financial condition and other factors which the Board of Directors of the Company considers to be relevant. ITEM 6. SELECTED FINANCIAL DATA This information should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," as set forth in this report (in thousands, except per share data).
Six Mos. Year Years Ended Ended Ended December 31, Dec. 31, June 30, ------------------------------------------- --------- --------- 1995 1994 1993 1992 1991 1991 --------- --------- --------- --------- --------- --------- Interest & Deposit Service Income . . . . $ 32,342 $ 28,822 $ 26,812 $ 27,700 $ 14,983 $ 30,149 ========= ========= ========= ========= ========= ========= Investment Securities . . . . . . . . . . $ 76,919 $ 82,720 $ 69,220 $ 59,086 $ 55,504 $ 56,051 ========= ========= ========= ========= ========= ========= Mortgage-backed and Related Securities . $ 99,407 $ 88,080 $ 116,451 $ 120,245 $ 85,589 $ 76,000 ========= ========= ========= ========= ========= ========= Loans, Net of Allowance for Loan Loss . . $ 225,461 $ 197,853 $ 180,763 $ 158,197 $ 153,773 $ 148,116 ========= ========= ========= ========= ========= ========= Deposits . . . . . . . . . . . . . . . . $ 388,308 $ 385,102 $ 352,355 $ 350,416 $ 315,008 $ 306,655 ========= ========= ========= ========= ========= ========= Long-term Obligations . . . . . . . . . . $ 13,686 $ 7,997 $ 8,850 $ $ $ ========= ========= ========= ========= ========= ========= Net Income . . . . . . . . . . . . . . . $ 4,532 $ 3,519 $ 4,015 $ 2,586 $ 715 $ 751 ========= ========= ========= ========= ========= ========= Net Income Per Common Share . . . . . . . $ 1.47 $ 1.13 $ 1.30 $ .85 $ .24 $ .25 ========= ========= ========= ========= ========= ========= Cash Dividends Declared Per Common Share $ .35 $ .25 $ .25 $ .25 $ .10 $ .20 ========= ========= ========= ========= ========= ========= Total Assets . . . . . . . . . . . . . . $ 448,673 $ 426,221 $ 404,216 $ 376,949 $ 342,158 $ 331,693 ========= ========= ========= ========= ========= =========
7 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - December 31, 1995 compared to December 31, 1994 The following discussion and analysis provides a comparison of the Company's results of operations for the years ended December 31, 1995 and 1994 and financial condition as of December 31, 1995 and 1994. This discussion should be read in conjunction with the financial statements and related notes. All share data has been adjusted to retroactively reflect stock dividends paid in September 1995, 1994 and 1993. OVERVIEW During the year ended December 31, 1995, the Company's net income increased $1,013,000 or 28.8% to $4,532,000, compared to $3,519,000 for the same period in 1994. The change in net income was primarily attributable to an increase in net interest income, a negative provision in the reserve for loan losses, a significant reduction in FDIC insurance expense and an increase in the gain on the sale of securities available for sale. EARNING ASSETS Average Interest Earning Assets, totaling $385.8 million at December 31, 1995, increased $11.1 million or 3.0% over December 31, 1994 primarily as a result of increases in Average Loans. During the year ended December 31, 1995 the mix of the Company's Interest Earning Assets reflected an increase in Loans compared to the prior year end as Loans averaged 54.2% of Total Average Interest Earning Assets compared to 52.4% during 1994. Securities averaged 43.2% of the total and Other Interest Earning Asset categories averaged 2.6% for December 31, 1995. During 1994 the comparable mix was 44.3% in Securities and 3.3% in the Other Interest Earning Asset categories. Average Loans increased during 1995, by $12.7 million or 6.5% from 1994 with increases occurring primarily in real estate and loans to individuals. Average Securities increased $.8 million or .5% during the year ended December 31, 1995 compared to 1994. The mix of Average Securities between taxable and tax-exempt securities changed to 82% taxable and 18% tax-exempt for the year ended 1995 from 82.6% taxable and 17.4% tax-exempt for 1994. Average Other Interest Earning Assets, consisting primarily of Federal Funds Sold, decreased $2.4 million or 19.4% during the year ended December 31, 1995 compared to 1994. The decrease in Federal Funds balances contributed to the increase in Average Loans and Average Securities. The mix of taxable securities reflected a decrease in Mortgage-backed Securities. Average Mortgage-backed Securities represented 53.5% of the total securities portfolio for 1995 compared to 56.9% for 1994. The table on the following page represents loan maturities and sensitivity to changes in interest rates. The amounts of total loans outstanding at December 31, 1995, which, based on remaining scheduled repayments of principal, are due in (1) one year or less*, (2) more than one year but less than five years, and (3) more than five years*, are shown in the following table. The amounts due after one year are classified according to the sensitivity to changes in interest rates. 8 10
After One Due in One but within After Five Year or Less Five Years Years --------------- --------------- -------------- (in thousands) Construction Loans . . . . . . . . . . . . . . . . . . $ 3,451 $ 804 $ 303 Real Estate Loans-Other . . . . . . . . . . . . . . . . 41,707 45,198 17,440 Commercial and Financial Loans . . . . . . . . . . . . 34,849 8,107 1,261 All Other Loans . . . . . . . . . . . . . . . . . . . . 33,015 42,328 315 --------------- --------------- -------------- Total Loans . . . . . . . . . . . . . . . . . . . $ 113,022 $ 96,437 $ 19,319 =============== =============== ============== Loans with Maturities After One Year for Which: Interest Rates are Fixed or Predetermined $ 114,227 Interest Rates are Floating or Adjustable $ 1,529
*The volume of commercial and industrial loans due within one year reflects the Company's general policy of limiting such loans to a short term maturity. Loans are shown net of unearned discount. Nonaccrual loans are reflected in the due after five years column. As discussed under "Item 7. Securities," the Company adopted FAS115 effective December 31, 1993 which changed the way the Company classifies and accounts for debt and equity securities. The following table sets forth the carrying amount of Investment Securities, Mortgage-backed Securities and Marketable Equity Securities for the years ended December 31, 1995, 1994 and 1993 (in thousands).
December 31, ------------------------------------------------- Available for Sale: 1995 1994 1993 ---------------- --------------- --------------- U. S. Treasury . . . . . . . . . . . . . . . . . . . . . $ 7,064 $ 9,854 $ 26,235 U. S. Government Agencies . . . . . . . . . . . . . . . . 25,464 14,930 3,668 Mortgage-backed Securities: Direct Govt. Agency Issues . . . . . . . . . . . . . . 61,988 26,231 98,800 Other Private Issues . . . . . . . . . . . . . . . . . 3,435 1,423 4,607 State and Political Subdivisions . . . . . . . . . . . . 40,291 911 5,518 Other Stocks and Bonds . . . . . . . . . . . . . . . . . 3,577 2,005 1,939 ---------------- --------------- --------------- Total . . . . . . . . . . . . . . . . . . . . . . . $ 141,819 $ 55,354 $ 140,767 ================ =============== ===============
December 31, -------------------------------------------------- Held to Maturity: 1995 1994 1993 ---------------- ---------------- ---------------- U. S. Treasury . . . . . . . . . . . . . . . . . . . . . $ $ 7,016 $ 3,115 U. S. Government Agencies . . . . . . . . . . . . . . . . 1,665 20,124 607 Mortgage-backed Securities: Direct Govt. Agency Issues . . . . . . . . . . . . . . 32,675 58,340 13,044 Other Private Issues . . . . . . . . . . . . . . . . . 1,309 2,086 State and Political Subdivisions . . . . . . . . . . . . 970 29,633 27,519 Other Stocks and Bonds . . . . . . . . . . . . . . . . . 252 2,558 ---------------- --------------- --------------- Total . . . . . . . . . . . . . . . . . . . . . . . $ 36,619 $ 117,451 $ 46,843 ================ =============== ===============
9 11 The maturities classified according to the sensitivity to changes in interest rates of the December 31,1995 securities portfolio and the weighted yields are presented below. Tax-exempt obligations are shown on a taxable equivalent basis. Mortgage-backed securities are classified according to repricing frequency and cash flows from street estimates of principal prepayments.
MATURING OR REPRICING ------------------------------------------------------------------------ (dollars in thousands) After 1 But After 5 But Within 1 Yr. Within 5 Yrs. Within 10 Yrs. After 10 Yrs. ---------------- ---------------- ----------------- ------------------- Available For Sale: Amount Yield Amount Yield Amount Yield Amount Yield -------- ------ -------- ------ -------- ------- --------- -------- U.S. Treasury . . . . . . . . . . . $ 5,004 5.39% $ 2,060 5.91% $ $ U.S. Government Agencies . . . . . 22,906 6.24% 2,558 5.92% Mortgage-backed Securities . . . . 27,987 6.75% 21,872 6.57% 15,564 6.78% State and Political Subdivisions . 4,322 7.35% 18,433 7.25% 10,442 7.23% 7,094 7.42% Other Stocks and Bonds . . . . . . 3,228 6.12% 349 3.15% -------- ------- -------- --------- Total . . . . . . . . . . . . $ 63,447 6.47% $44,923 6.78% $ 26,006 6.96% $ 7,443 7.22% ======== ======= ======== =========
MATURING OR REPRICING ---------------------------------------------------------------------- (dollars in thousands) After 1 But After 5 But Within 1 Yr. Within 5 Yrs. Within 10 Yrs. After 10 Yrs. ---------------- ---------------- ---------------- ----------------- Held to Maturity: Amount Yield Amount Yield Amount Yield Amount Yield -------- ------- --------- ------ -------- ------ -------- ------- U.S. Treasury . . . . . . . . . . . $ $ $ $ U.S. Government Agencies . . . . . 461 6.43% 1,204 6.43% Mortgage-backed Securities . . . . 11,208 6.54% 21,670 7.13% 1,106 7.56% State and Political Subdivisions . 397 5.80% 573 6.30% Other Stocks and Bonds . . . . . . -------- ------- -------- --------- Total . . . . . . . . . . . . $ 12,066 6.51% $23,447 7.07% $ 1,106 7.56% $ ======== ======= ======== =========
DEPOSITS AND BORROWED FUNDS Deposits provide a financial institution with its chief source of funds. The increase of $8.2 million or 2.2% in Average Total Deposits during 1995 provided the Company with funds for the growth in earning assets discussed previously. Average Time Deposits increased $11.2 million or 7% during 1995 compared to 1994. Average Noninterest Bearing Demand Deposits increased during 1995 $3.4 million or 4.6%. Average Interest Bearing Demand Deposits decreased during 1995 by $6.1 million or 5.2% while Average Saving Deposits decreased $.4 million or 2.4%. The latter three categories, which are considered the lowest cost deposits, comprised 54.3% of total average deposits during the year ended December 31, 1995 compared to 56.3% during 1994 and 55.2% during 1993. The increase in Average Total Deposits is reflective of overall bank growth and was the primary source of funding the increase in Average Loans. 10 12 The following table sets forth the Company's deposit averages by category for the years ended December 31, 1995, 1994 and 1993.
COMPOSITION OF DEPOSITS (dollars in thousands) Years Ended December 31, ------------------------------------------------------ 1995 1994 1993 ----------------- ----------------- ----------------- AVG. AVG. AVG. AVG. AVG. AVG. BALANCE RATE BALANCE RATE BALANCE RATE -------- ------- --------- ------ --------- ------ Noninterest Bearing Demand Deposits . . . . . . . . . . $ 78,338 N/A $ 74,918 N/A $ 68,401 N/A Interest Bearing Demand Deposits . . . . . . . . . . . 111,063 2.78% 117,116 2.63% 108,899 2.64% Savings Deposits . . . . . . . . . . . . . . . . . . . 14,931 2.76% 15,295 2.57% 14,067 2.65% Time Deposits . . . . . . . . . . . . . . . . . . . . . 172,228 5.11% 161,000 4.09% 155,488 3.80% -------- --------- --------- Total Deposits . . . . . . . . . . . . . . . . . . $376,560 3.26% $ 368,329 2.73% $ 346,855 2.64% ======== ========= =========
Average borrowed funds consisting of Short-Term Borrowings, primarily in the form of Federal Funds Purchased, decreased $.7 million or 28.9% during 1995 when compared to 1994. Average Long Term Obligations consisting of FHLB Dallas Advances increased in 1995 to $8.9 million compared to $8.4 million in 1994. The advances were obtained from FHLB Dallas to fund long-term loans. Federal Home Loan Bank advances are collateralized by Federal Home Loan Bank stock, nonspecified real estate loans and mortgage-backed securities. During the year ended December 31, 1995 total certificates of deposit of $100,000 or more increased $1.6 million or 3.6% from December 31, 1994. This increase was due to overall bank growth. The table below sets forth the maturity distribution of certificates of deposit of $100,000 or more issued by the Company at December 31, 1995 and 1994.
December 31, 1995 December 31, 1994 --------------------------------------- -------------------------------------- Time Other Time Other Certificates Time Certificates Time of Deposit Deposit Total of Deposit Deposit Total ------------ ----------- ------------ ------------ ----------- ------------ (in thousands) Three months or less . . . . . $ 8,157 $ 377 $ 8,534 $ 10,751 $ 1,623 $ 12,374 Over three to six months . . . 9,717 1,623 11,340 9,230 377 9,607 Over six to twelve months . . . 8,859 8,859 7,409 7,409 Over twelve months . . . . . . 15,606 15,606 13,391 13,391 ------------ ----------- ------------ ------------ ----------- ------------ Total . . . . . . . . $ 42,339 $ 2,000 $ 44,339 $ 40,781 $ 2,000 $ 42,781 ============ =========== ============ ============ =========== ============
The tables on the following pages present average balance sheet amounts and average yields for the years ended December 31, 1995, 1994 and 1993. The information should be reviewed in conjunction with the other financial statements in this presentation. Two major components affecting the Company's earnings are the Interest Earning Assets and Interest Bearing Liabilities. A summary of Average Interest Earning Assets and Interest Bearing Liabilities is set forth below, together with the average yield on the Interest Earning Assets and the average cost of the Interest Bearing Liabilities. 11 13
AVERAGE BALANCES AND INTEREST RATES (dollars in thousands) Years Ended --------------------------------------------------------------------------------------- December 31, 1995 December 31, 1994 December 31, 1993 ---------------------------- --------------------------- ---------------------------- AVG. AVG. AVG. AVG. AVG. AVG. ASSETS BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE - ------ --------- ---------- ----- --------- ---------- ----- --------- ---------- ------ INTEREST EARNING ASSETS: Loans(1) . . . . . . . $ 209,141 $ 18,861 9.02% $ 196,436 $ 16,714 8.51% $ 170,409 $ 14,500 8.51% Securities: Inv. Sec. (Taxable) . . 45,452 2,839 6.25% 40,672 2,134 5.25% 34,885 1,851 5.31% Inv. Sec. (Tax-Exempt)(2) . . . 29,965 1,504 5.02% 28,802 1,433 4.98% 24,349 1,247 5.12% Mortgage-backed Sec. . 89,151 5,673 6.36% 94,389 5,255 5.57% 114,281 6,376 5.58% Marketable Equity Sec. 2.068 121 5.85% 1,976 102 5.16% 861 16 1.86% Trading Account Sec. . 147 4 2.72% Interest Earning Deposits . . . . . . . 411 25 6.08% 341 12 3.52% 204 4 1.96% Federal Funds Sold . . 9,576 567 5.92% 12,045 522 4.33% 3,315 99 2.99% --------- --------- --------- --------- --------- --------- Total Interest Earning Assets . . . . 385,764 29,590 7.67% 374,661 26,172 6.99% 348,451 24,097 6.92% --------- --------- --------- NONINTEREST EARNING ASSETS: Cash and Due From Banks 20,899 20,368 18,929 Bank Premises and Equipment . . . . . . 10,717 7,172 6,101 Other Assets . . . . . 7,574 10,245 10,115 Less: Allowance for Loan Loss . . . (3,323) (3,025) (2,965) --------- --------- --------- Total Assets . . . . . $ 421,631 $ 409,421 $ 380,631 ========= ========= ========= LIABILITIES AND SHARE- - ---------------------- HOLDERS' EQUITY: - ---------------- INTEREST BEARING LIABILITIES: Savings Deposits . . . $ 14,931 412 2.76% $ 15,295 393 2.57% $ 14,067 373 2.65% Time Deposits . . . . 172,228 8,793 5.11% 161,000 6,578 4.09% 155,488 5,908 3.80% Interest Bearing Demand Deposits . . . 111,063 3,085 2.78% 117,116 3,083 2.63% 108,899 2,872 2.64% Federal Funds Purchased And Other Interest Bearing Liabilities . 1,790 94 5.25% 2,518 84 3.34% 3,004 86 2.86% Long Term Interest Bearing Liabilities . FHLB Dallas . . . . . 8,912 453 5.08% 8,380 406 4.84% 2,562 125 4.88% --------- --------- --------- --------- --------- --------- Total Interest Bearing Liabilities . . . . . 308,924 12,837 4.16% 304,309 10,544 3.46% 284,020 9,364 3.30% --------- --------- --------- NONINTEREST BEARING LIABILITIES: Demand Deposits . . . . 78,338 74,918 68,401 Other Liabilities . . . 4,184 3,039 3,543 --------- --------- --------- Total Liabilities . . . 391,446 382,266 355,964 SHAREHOLDERS' EQUITY . 30,185 27,155 24,667 --------- --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . $ 421,631 $ 409,421 $ 380,631 ========= ========= ========= NET INTEREST INCOME . . $ 16,753 $ 15,628 $ 14,733 ========= ========= ========= NET YIELD ON AVERAGE EARNING ASSETS . . . . 4.34% 4.17% 4.23% ====== ====== ======
(1) Loans are shown net of unearned discount. Interest on loans includes fees on loans which are not material in amount. (2) Interest and rates on securities which are nontaxable for Federal Income Tax purposes are not presented on a taxable equivalent basis. Note: For the years ended December 31, 1995, 1994, and 1993, loans totaling $1,256,000, $627,000 and $1,099,000, respectively, were on nonaccrual status. The current policy is to reverse previously accrued, but unpaid interest on nonaccrual loans; thereafter, interest income is recorded to the extent received when appropriate. 12 14 MANAGEMENT OF LIQUIDITY AND INTEREST RATE SENSITIVITY Liquidity management involves the ability to meet the funds flow requirements of borrowers, fulfilling credit requirements and customers withdrawing their funds. Liquidity is provided by short-term investments that can be readily liquidated with a minimum risk of loss. Cash, Interest Earning Deposits, Federal Funds Sold and short-term investments with maturities or repricing characteristics of one year or less continue to be a substantial percentage of total assets. At December 31, 1995 these investments were 22.7% of Total Assets, as compared with 23.8% for December 31, 1994, and 21.1% for December 31, 1993. Liquidity is further provided through the matching, by time period, of rate sensitive interest earning assets with rate sensitive interest bearing liabilities. The primary objective of monitoring the Company's interest rate sensitivity, or risk, is to provide management the tools necessary to manage the balance sheet to minimize adverse changes in net interest income as a result of changes in the direction and level of interest rates. Federal Reserve Board monetary control efforts, the effects of deregulation and legislative changes have been significant factors affecting the task of managing interest sensitivity positions in recent years. Interest rate sensitivity is a function of the repricing characteristics of the Company's portfolio of assets and liabilities. These repricing characteristics are the time frames at which interest earning assets and interest bearing liabilities are subject to changes in interest rates either at repricing replacement or maturity. Sensitivity is measured as the difference between the volume of assets and liabilities in the Company's current portfolio that are subject to repricing in future time periods. The differences are referred to as interest sensitivity gaps and are usually calculated separately for various segments of time and on a cumulative basis. Any excess of assets or liabilities results in an interest sensitivity gap. A positive gap denotes asset sensitivity and a negative gap represents liability sensitivity. The table on page 15 shows interest sensitivity gaps for four different intervals as of December 31, 1995. SECURITIES The securities portfolio of the Company plays a primary role in management of the interest rate sensitivity of the Company and, therefore, is managed in the context of the overall balance sheet. The Securities portfolio generates a substantial percentage of the Company's interest income and serves as a necessary source of liquidity. Effective December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (FAS115) and accounts for debt and equity securities as follows: Held to Maturity (HTM). Debt securities that management has the positive intent and ability to hold until maturity are classified as held to maturity and are carried at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the level interest yield method over the estimated remaining term of the underlying security. Available for Sale (AFS). Debt and equity securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity and changes in the availability of and the yield of alternative investments are classified as available for sale. These assets are carried at market value. Market value is determined using published quotes as of the close of business. Unrealized gains and losses are excluded from earnings and reported net of tax as a separate component of shareholders' equity until realized. 13 15 Trading Securities. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at market value, with unrealized gains and losses included in earnings. Prior to the adoption of FAS115, the Company accounted for debt and equity securities as follows: Held for Investment. Debt and equity securities classified as held for investment were carried at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts. Investments and mortgage-backed securities were classified as held for investment when management had the ability and the intent to hold these securities until maturity considering all foreseeable events and conditions. Held for Resale. Debt and equity securities classified as held for resale were carried at lower of cost or market value. Unrealized losses were included in the consolidated statement of operations and retained earnings. Prudent management of the investment securities portfolio serves to optimize portfolio yields. Management attempts to deploy investable funds into instruments which are expected to increase the overall return of the portfolio given the current assessment of economic and financial conditions. The combined Investment Securities, Mortgage-backed Securities, and Marketable Equity Securities portfolio increased to $178.4 million on December 31, 1995, compared to $172.8 million on December 31, 1994, an increase of $5.6 million or 3.3%. Mortgage-backed Securities secured by agency guaranteed mortgages increased $11.3 million or 12.9% during 1995 when compared to 1994. State and Political Subdivisions increased $10.7 million or 35.1% during 1995. U.S. Treasury securities decreased during 1995 when compared to 1994 by $9.8 million or 58.1%, U.S. Government Agency securities decreased $7.9 million or 22.6% and Other Stocks and Bonds increased $1.3 million or 58.5% in 1995 compared to 1994. Due to the significant decrease in interest rates along with the flattening of the yield curve, a change in investment strategy was implemented during 1995. A barbell approach was adopted with respect to securities purchased, i.e., the majority of the securities purchased included short duration premium mortgage-backed securities balanced with longer duration municipal securities. This created the same duration as would have been obtained by purchasing intermediate duration securities. In order to implement this strategy, a change in the securities portfolio mix was required and resulted in the changes discussed above. The market value of the Securities portfolio at December 31, 1995 was $178.8 million, which represents a net unrealized gain on that date of $2.1 million. The net unrealized gain is comprised of $2.3 million in unrealized gains and $.2 million of unrealized losses. Net unrealized gains and losses on securities available for sale, which is a component of Shareholders' Equity on the consolidated balance sheet, can fluctuate significantly as a result of changes in interest rates. Because management cannot predict the future direction of interest rates, the effect on Shareholders' Equity in the future cannot be determined, however; this risk is monitored closely through the use of shock tests on the available for sale securities portfolio using an array of interest rate assumptions. In October 1995, the Financial Accounting Standards Board issued an implementation guide to FAS115 which allowed entities to reclassify their securities among the three categories provided in FAS115. Transfers were permitted after October 1995, but no later than December 31, 1995. As a result, on November 16, 1995 the Company transferred a total of $57,584,000 from HTM to AFS at the amortized cost at date of transfer. Of this total, $37,308,000 were investment securities. The remaining $20,276,000 transferred were mortgage-backed securities. The unrealized loss on the securities transferred from HTM to AFS was $419,000, net of tax, at date of transfer. The 14 16 transfer was done according to the guidelines set forth in the implementation guide to FAS115. There were no securities transferred from AFS to HTM or sales from the HTM portfolio during the year ended December 31, 1995. The following table sets forth certain information as of December 31, 1995 with respect to rate sensitive assets and liabilities and interest sensitivity GAP's (dollars in thousands):
Rate Sensitive Assets (RSA) 1-3 Mos. 4-12 Mos. 1-5 Yrs. Over 5 Yrs. Total ------------ ------------ ------------ ------------ ----------- Loans(1) . . . . . . . . . . . . . . $ 69,865 $ 43,157 $ 96,437 $ 18,063 $ 227,522 Securities . . . . . . . . . . . . . 35,447 40,066 68,370 34,555 178,438 Other Interest Earning Assets . . . . . . . . . . 320 320 ------------ ------------ ------------ ------------ ----------- Total Rate Sensitive Assets . . . . . $ 105,632 $ 83,223 $ 164,807 $ 52,618 $ 406,280 ============ ============ ============ ============ =========== Rate Sensitive Liabilities (RSL) Interest Bearing Deposits (3) . . . . $ 155,855 $ 83,303 $ 64,407 $ 37 $ 303,602 Other Interest Bearing Liabilities . . . . . . . . 6,359 4,183 5,314 3,782 19,638 ------------ ------------ ------------ ------------ ----------- Total Rate Sensitive Liabilities . . $ 162,214 $ 87,486 $ 69,721 $ 3,819 $ 323,240 ============ ============ ============ ============ =========== GAP (2) . . . . . . . . . . . . . . . (56,582) (4,263) 95,086 48,799 83,040 Cumulative GAP . . . . . . . . . . . (56,582) (60,845) 34,241 83,040 Cumulative Ratio of RSA to RSL . . . . . . . . . . . . . . .65 .76 1.11 1.26 1.26 Gap/Total Earning Assets . . . . . . (13.9%) (1.0%) 23.4% 12.0% 20.4%
- -------------------------------------------------------------------------------- (1) Amount is equal to total loans net of unearned discount less nonaccrual loans at December 31, 1995. (2) GAP equals Total RSA minus Total RSL. (3) All Savings, Now and MMDA deposit accounts are included in the 1-3 Mos. column. The Asset Liability Management Committee of Southside Bank closely monitors the desired GAP along with various liquidity ratios to insure a satisfactory liquidity position for the Company. Management continually evaluates the condition of the economy, the pattern of market interest rates and other economic data to determine the types of investments that should be made and at what maturities. Using this analysis, management from time to time assumes calculated interest sensitivity GAP positions to maximize net interest income based upon anticipated movements in the general level of interest rates. Regulatory authorities also monitor the Bank's GAP position along with other liquidity ratios. In addition, the Bank utilizes a simulation model to determine the impact of net interest income under several different interest rate scenarios. By utilizing this technology, the Bank can determine changes that need to be made to the asset and liability mixes to minimize the change in net interest income under these various interest rate scenarios. 15 17 CAPITAL RESOURCES Total Shareholders' Equity at December 31, 1995, of $33,352,000 increased 21.2 % or $5,828,000 from December 31, 1994 and represented 7.4% of total assets at December 31, 1995 compared to 6.5% at December 31, 1994. Net income for 1995 of $4,532,000 was the major contributor to the increase in Shareholders' Equity at December 31, 1995 along with unrealized gains of $2,352,000 on securities available for sale. In addition, the Company issued $258,000 in common stock (20,800 shares) through the Company's dividend reinvestment plan. Decreases to Shareholders' Equity consisted of $1,047,000 in dividends paid and the purchase of $267,000 in treasury stock (26,339 shares). The Company purchased treasury stock pursuant to a common stock repurchase plan instituted in late 1994. Under the repurchase plan, the Board of Directors establishes, on a quarterly basis, total dollar limitations and price per share for stock to be repurchased. The Board reviews this plan in conjunction with the capital needs of the Company and Southside Bank and may, at it's discretion, modify or discontinue the plan. During the third quarter of 1995, the Company issued a 5% stock dividend, which had no net effect on Shareholders' Equity. The Company's dividend policy requires that any dividend payments made by the Company not exceed consolidated earnings for that year. The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies. As of December 31, 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 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, including having the highest regulatory rating. 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 December 31, 1995, the Company and Southside Bank exceeded all regulatory minimum capital ratios. The table below summarizes key equity ratios for the Company for the years ended December 31, 1995, 1994 and 1993.
Years Ended December 31, -------------------------------------- 1995 1994 1993 ---------- ---------- --------- Percentage of Net Income to: Average Total Assets . . . . . . . . . . . . . . . . . . . . . 1.07% .86% 1.05% Average Shareholders' Equity . . . . . . . . . . . . . . . . . 15.01% 12.96% 16.28% Percentage of Dividends Declared Per Common Share to Net Income Per Common Share . . . . . . . . . . . . . 23.81% 21.01% 18.25% Percentage of Average Shareholders' Equity to Average Total Assets . . . . . . . . . . . . . . . . 7.16% 6.63% 6.48% Leverage - Tier 1 capital to Adjusted Average Total Assets . . . 7.32% 6.81% 6.48%
16 18 LOANS The Company's main objective is to seek attractive lending opportunities in Smith County, Texas and adjoining counties. Total Loans as of December 31, 1995 increased $27,788,000 or 13.8% while the average balance was up $12,705,000 or 6.5% when compared to 1994. Real Estate Loans as of December 31, 1995 reflected an increase of $10,341,000 or 10.5% from December 31, 1994. Loans to individuals increased $12,937,000 or 20.6% from December 31, 1994. The increase in Real Estate Loans is due to a strong real estate market, lower interest rates and an increased commitment in residential mortgage lending. Loans to individuals increased due to an increase in indirect dealer loans and additional penetration achieved with the bank's branch locations. In the portfolio, loans dependent upon private household income represent a significant concentration. Due to the number of customers involved who work in all sectors of our economy, the risk in this portion of the portfolio is spread throughout the economic community. The average yield on loans for the year ended December 31, 1995 increased to 9.0% from 8.5% for the year ended December 31, 1994. This increase was reflective of the repricing characteristics of the loans. Some of the fixed rate loans in 1995 repriced at the higher interest rates in 1994 while some of the fixed rate loans on the books in 1994 repriced in 1993 at lower rates. In addition, while rates declined in 1995, the prime rate did not decline until July 1995 and then it only declined 25 basis points. Prime did not decline again until late December 1995 which had little impact on the overall yield. LOANS TO AFFILIATED PARTIES In the normal course of business the Company's subsidiary, Southside Bank makes loans to certain of its officers, directors, employees and their related interests. As of December 31, 1995 and 1994 these loans totaled $9,913,000 and $11,743,000, or 29.7% and 42.7% of Shareholders' Equity, respectively. Such loans are made in the normal course of business at normal credit terms, including interest rate and collateral requirements and do not represent more than normal credit risks contained in the rest of the loan portfolio for loans of similar types. LOAN PORTFOLIO COMPOSITION AND ASSOCIATED RISK For purposes of this discussion, the Company's loans are divided into three categories: Real Estate Loans; Commercial, Financial and Agricultural Loans; and Loans to Individuals. REAL ESTATE LOANS Real estate loans represent the Company's greatest concentration of loans. However, the amount of risk associated with this group of loans is mitigated in part due to the type of loans involved. For example, of the $108.9 million in Real Estate Loans, $49.9 million or 45.8% represent loans secured by residential dwellings that are primarily owner occupied. Historically, the amount of losses suffered on this type of loan have been significantly less than those on other properties. A significant portion of the remaining Real Estate Loans are secured primarily with owner occupied commercial real estate. The Company's loan policy requires appraisal prior to funding any real estate loans and also outlines the requirements for appraisals on renewals. The real estate market in the late 1980's and early 1990's in Texas, and more specifically in East Texas, experienced a significant decline in market value. During 1994 and 1995, new appraisals of real estate in the market area appeared to indicate improved real estate values for residential and improved properties. Due to the volume of real estate loans contained in the Company's portfolio which are owner occupied, and the appraisal and other real estate lending policies in place which evidences the 17 19 collateral on these loans, management does not consider the potential impact on the loan loss reserve to be excessive even though real estate loans constitute the largest percentage of loans outstanding. Management also pursues an aggressive policy of reappraisal on any real estate loan which becomes troubled and potential exposures are recognized and reserved for as soon as they are identified. However, the slow pace of absorption for certain types of properties could adversely affect the volume of nonperforming real estate loans held by the Company. COMMERCIAL, FINANCIAL AND AGRICULTURAL LOANS Commercial, Financial and Agricultural Loans have traditionally generated the largest volume of loan losses in the portfolio. Management does not consider there to be any material concentration of risk in any one industry type in this loan category since no industry classification represents over 10% of loans. As the economy in the Company's trade territory has improved, the volume of losses associated with this group of loans has decreased. LOANS TO INDIVIDUALS Loans to Individuals for the most part represent vehicle and general loans to consumers. Southside Bank is a major consumer lender in its trade territory and has been for many years. The largest concentration of loans to individuals represent vehicle loans. A significant portion of these loans were obtained through the Company's indirect dealer loan program which has continued to grow. At this point, the economy in Southside Bank's trade territory appears stable. If these trends continue the relatively low levels of loan loss for this type of credit should continue. SUMMARY LOAN PORTFOLIO COMPOSITION AND ASSOCIATED RISK As noted above, Southside Bank is a major consumer lender holding a diverse portfolio. The major concentration of loans is consumer loans and is reflected throughout the portfolio. These loans are the 1-4 Family Residential Loans and the Loans to Individuals. Due to the diversity of the customer base, major industry concentrations in the loan portfolio have been avoided although collateral concentrations in real estate do exist. The area economy and its health will have a major impact on the volume of loan losses experienced by the Company's subsidiary, Southside Bank. The following table sets forth loan totals by category for the years ended December 31, 1995, 1994, 1993, 1992, 1991 and the past fiscal year (in thousands):
December 31, June 30, ------------------------------------------------------------- ----------- 1995 1994 1993 1992 1991 1991 ----------- ----------- ----------- ----------- ----------- ----------- Real Estate Loans: Construction . . . . . . . . . $ 4,558 $ 6,118 $ 4,739 $ 3,064 $ 5,551 $ 2,708 1-4 Family Residential . . . . 49,909 38,563 34,982 29,647 27,907 27,856 Other . . . . . . . . . . . . 54,436 53,881 46,457 41,128 39,490 37,785 Commercial, Financial and Agricultural Loans . . . . . . 44,217 39,707 40,860 41,473 43,199 42,709 Loans to Individuals . . . . . 75,658 62,721 56,571 45,596 40,161 39,236 ----------- ----------- ----------- ----------- ----------- ----------- Total Loans . . . . . . . . . $ 228,778 $ 200,990 $ 183,609 $ 160,908 $ 156,308 $ 150,294 =========== =========== =========== =========== =========== ===========
18 20 LOAN LOSS EXPERIENCE AND RESERVE FOR LOAN LOSSES For the year ended December 31, 1995, the Company's subsidiary, Southside Bank, had net recoveries on loans of $480,000, an improvement of 1,070.7% compared to December 31, 1994. For the year ended December 31, 1994, net recoveries on loans were $41,000. These levels are reflective of the economic stability in the Company's market area. The loan loss reserve in place at the end of each year is based on the most current review of the loan portfolio at that time. Several methods are used to maintain the review in the most current manner. First, the servicing officer has the primary responsibility for updating significant changes in a customer's financial position. Accordingly, each officer prepares status updates on any credit deemed to be experiencing repayment difficulties which, in the officer's opinion, would place the collection of principal or interest in doubt. Second, an internal review officer from the Company is responsible for an ongoing review of the Company's entire loan portfolio with specific goals set for the volume of loans to be reviewed on an annual basis. Third, Southside Bank is regulated and examined by both the Federal Deposit Insurance Corporation and, or the Texas Department of Banking on an annual basis. At each review of a credit, a subjective analysis methodology is used to grade the respective loan. Categories of grading vary in severity to include loans which do not appear to have a significant probability of loss at the time of review to grades which indicate a probability that the entire balance of the loan will be uncollectible. If full collection of the loan balance appears unlikely at the time of review, estimates or appraisals of the collateral securing the debt are used to allocate the necessary reserves. A list of loans which are graded as having more than the normal degree of risk associated with them are maintained by the internal review officer. This list is updated on a periodic basis, but no less than quarterly by the servicing officer in order to properly allocate necessary reserves and keep management informed on the status of attempts to correct the deficiencies noted in the credit. In addition to maintaining an ongoing review of the loan portfolio, the internal review officer maintains a history of the loans that have been charged-off without first being identified as problems. This history is used to determine the amount of nonspecifically allocated reserve necessary, in addition to the portion which is specifically allocated by loan. Due to the significant recoveries realized during 1995, the Company reduced its reserve for loan losses by making a negative provision of $300,000. The provision for loan losses for December 31, 1994 was $250,000. As of December 31, 1995, the Company's review of the loan portfolio indicates that a loan loss reserve of $3,317,000 is adequate. The Company adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (FAS114) and Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" (FAS118), on January 1, 1995. Under these standards, a loan is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Substantially all of the Company's impaired loans are collateral-dependent, and as such, are measured for impairment based on the fair value of the collateral. The adoption of FAS114 and FAS118 resulted in no additional provision for credit losses. The table on the following page summarizes the average amount of net loans outstanding; changes in the reserve for loan losses arising from loans charged-off and recoveries on loans previously charged-off; additions to the reserve which have been charged to operating expense; the ratio of net loans charged-off to average loans outstanding; and an allocation of the reserve for loan loss. 19 21 LOAN LOSS EXPERIENCE AND RESERVE FOR LOAN LOSSES
Six Months Year Years Ended Ended Ended December 31, Dec. 31, June 30, ------------------------------------------------ ---------- ----------- 1995 1994 1993 1992 1991 1991 ---------- ----------- ----------- ---------- ---------- ----------- (dollars in thousands) Average Net Loans Outstanding . . . . . $ 209,141 $ 196,436 $ 170,409 $ 157,260 $ 153,284 $ 149,570 ========== =========== =========== ========== ========== =========== Balance of Reserve for Loan Loss at Beginning of Period . . . . . . . . . $ 3,137 $ 2,846 $ 2,711 $ 2,535 $ 2,178 $ 2,102 ---------- ----------- ----------- ---------- ---------- ----------- Loan Charge-Offs: Real Estate-Construction . . . . . . . (246) (38) Real Estate-Other . . . . . . . . . . . (36) (6) (494) (79) (21) (374) Commercial, Financial and Agricultural Loans . . . . . . . . . (61) (129) (95) (365) (52) (376) Loans to Individuals . . . . . . . . . (502) (395) (284) (335) (204) (356) ---------- ----------- ----------- ---------- ---------- ----------- Total Loan Charge-Offs . . . . . . . . (599) (530) (873) (1,025) (277) (1,144) ---------- ----------- ----------- ---------- ---------- ----------- Recovery on Loans Previously Charged off: Real Estate-Construction . . . . . . . Real Estate-Other . . . . . . . . . . . 272 93 4 99 7 24 Commercial, Financial and Agricultural Loans . . . . . . . . . 546 326 287 150 32 108 Loans to Individuals . . . . . . . . . 261 152 117 102 45 88 ---------- ----------- ----------- ---------- ---------- ----------- Total Recovery of Loans Previously Charged-Off . . . . . . . . . . . . . 1,079 571 408 351 84 220 ---------- ----------- ----------- ---------- ---------- ----------- Net Loan (Charge-Offs) Recoveries . . . 480 41 (465) (674) (193) (924) Additions (Reductions) to Reserve Charged (Credited) to Operating Expense . . . . . . . . . . . . . . . (300) 250 600 850 550 1,000 --------- ----------- ----------- ---------- ---------- ----------- Balance at End of Period . . . . . . . $ 3,317 $ 3,137 $ 2,846 $ 2,711 $ 2,535 $ 2,178 ========== =========== =========== ========== ========== =========== Ratio of Net Charge-Offs (Recoveries) to Average Loans Outstanding . . . . (.23%) (.02%) .27% .43% .13% .62% ========== =========== =========== ========== ========== ===========
Allocation of Reserve for Loan Loss:
December 31, June 30, ---------------------------------------------------------------------------- -------------- 1995 1994 1993 1992 1991 1991 -------------- ------------- ------------- ------------- -------------- -------------- % of % of % of % of % of % of Amount Total Amount Total Amount Total Amount Total Amount Total Amount Total ------ ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Real Estate-Construction $ 23 .7% $ 31 1.0% $ 7 .2% $ 31 1.2% $ 30 1.2% $ 20 .9% Real Estate-Other . . . . 1,209 36.4% 1,127 35.9% 1,172 41.2% 1,026 37.8% 780 30.8% 811 37.2% Commercial, Financial and Agricultural Loans 911 27.5% 809 25.8% 1,018 35.8% 964 35.6% 1,137 44.9% 915 42.0% Loans to Individuals . . 1,082 32.6% 1,085 34.6% 642 22.6% 640 23.6% 493 19.4% 409 18.8% Unallocated . . . . . . . 92 2.8% 85 2.7% 7 .2% 50 1.8% 95 3.7% 23 1.1% ------ ----- ----- ------ ----- ------ ------ ------- ------ ------ ------ ----- Balance at End of Period $3,317 100% 3,137 100% 2,846 100% $2,711 100% $2,535 100% $2,178 100% ====== ===== ===== ====== ===== ====== ====== ======= ====== ====== ====== =====
20 22 NONPERFORMING ASSETS The primary categories of nonperforming assets consist of delinquent loans over 90 days past due, nonaccrual loans, other real estate owned and restructured loans. Nonaccrual loans are those loans which are more than 90 days delinquent and collection in full of both the principal and interest is in doubt. Additionally, some loans may be placed in nonaccrual status that are not delinquent due to doubts about full collection of principal or interest. When a loan is categorized as nonaccrual, the accrual of interest is discontinued and the accrued balance is reversed for financial statement purposes. Other Real Estate Owned (OREO) represents real estate taken in full or partial satisfaction of debts previously contracted. Previously included in the appropriate categories of nonperforming assets were loans meeting the in-substance foreclosure criteria. As a result of the adoption of FAS114, the Company reclassified in-substance foreclosed assets in these categories to loans. These loans had balances of $807,000 for December 31, 1994 and $1,849,000 for December 31, 1993. The OREO consists primarily of raw land and oil and gas interests. The Company is actively marketing all properties and none are being held for investment purposes. Restructured loans represent loans which have been renegotiated to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrowers. Categorization of a loan as nonperforming is not in itself a reliable indicator of potential loan loss. Other factors, such as the value of collateral securing the loan and the financial condition of the borrower must be considered in judgments as to potential loan loss. The following table of nonperforming assets is classified according to federal call report guidelines.
NONPERFORMING ASSETS (dollars in thousands) December 31, June 30, --------------------------------------------------------------- ----------- 1995 1994 1993 1992 1991 1991 ------------ ------------ ----------- ----------- ------------ ----------- Loans 90 Days Past Due: Real Estate . . . . . . . . $ 266 $ 51 $ 342 $ 3 $ 40 $ 49 Installment . . . . . . . . 203 52 90 86 31 24 Commercial . . . . . . . . . 183 59 70 63 88 275 ------------ ----------- ----------- ----------- ------------ ----------- 652 162 502 152 159 348 ------------ ----------- ----------- ----------- ------------ ----------- Loans on Nonaccrual: Real Estate . . . . . . . . 486 424 711 961 1,370 892 Installment . . . . . . . . 116 179 175 138 2 Commercial . . . . . . . . . 654 24 213 458 705 122 ------------ ----------- ----------- ----------- ------------ ----------- 1,256 627 1,099 1,557 2,077 1,014 ------------ ----------- ----------- ----------- ------------ ----------- Restructured Loans: Real Estate . . . . . . . . 243 563 590 510 918 859 Installment . . . . . . . . 49 51 52 101 13 14 Commercial . . . . . . . . . 44 43 115 164 118 153 ------------ ----------- ----------- ----------- ------------ ----------- 336 657 757 775 1,049 1,026 ------------ ----------- ----------- ----------- ------------ ----------- Total Nonperforming Loans . . . 2,244 1,446 2,358 2,484 3,285 2,388 Other Real Estate Owned . . . . 273 1,134 2,745 4,760 6,030 7,211 Repossessed Assets . . . . . . 240 256 203 458 322 205 ------------ ----------- ----------- ----------- ------------ ----------- Total Nonperforming Assets . . $ 2,757 $ 2,836 $ 5,306 $ 7,702 $ 9,637 $ 9,804 ============ =========== =========== =========== ============ =========== Percentage of Total Assets . . .6% .7% 1.3% 2.0% 2.8% 3.0% Percentage of Loans and Leases, Net of Unearned Income . . . 1.2% 1.4% 2.9% 4.8% 6.2% 6.5%
21 23 Total nonperforming assets decreased $79,000 between December 31, 1994 and December 31, 1995. Nonperforming assets represent a continued drain on the earning ability of the Company. Earnings losses are due both to the loss of interest income and the costs associated with maintaining the OREO, for taxes, insurance and other operating expenses. In addition to the nonperforming assets, at December 31, 1995 in the opinion of management, the Company had $462,000 of loans identified as potential problem loans. A potential problem loan is a loan where information about possible credit problems of the borrower is known, causing management to have serious doubts about the ability of the borrower to comply with the present loan repayment terms and may result in a future classification of the loan in one of the nonperforming asset categories. The following is a summary of the Company's recorded investment in loans (primarily nonaccrual loans) for which impairment has been recognized in accordance with FAS114 (in thousands):
Valuation Carrying Total Allowance Value ------------- ------------ ------------ Real Estate Loans . . . . . . . . . . . . . . . . . . . . . . . . . $ 486 $ 130 $ 356 Commercial Loans . . . . . . . . . . . . . . . . . . . . . . . . . 654 153 501 Loans to Individuals . . . . . . . . . . . . . . . . . . . . . . . 116 19 97 ------------ ------------ ------------ Balance at December 31, 1995 . . . . . . . . . . . . . . . . . . . $ 1,256 $ 302 $ 954 ============ ============ ============
For the year ended December 31, 1995, the average recorded investment in impaired loans was approximately $1,330,000. During the year ended December 31, 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. The net amount of interest recognized on loans that were nonaccruing or restructured during the year was $78,000, $260,000 and $98,000 for the years ended December 31, 1995, 1994 and 1993. If these loans had been accruing interest at their original contracted rates, related income would have been $273,000, $126,000 and $170,000 for the years ended December 31, 1995, 1994 and 1993, respectively. The OREO total has declined since reaching its high balance in the late 1980's. As a result of FAS114, certain loans classified as in-substance foreclosures were reclassified from OREO to nonaccrual loans which is the primary reason for the increase in nonperforming loans for the year ended December 31, 1995. The following is a summary of the Allowance for Losses on Other Real Estate Owned for the years ended December 31, 1995, 1994 and 1993 (in thousands):
Years Ended December 31, ----------------------------------------- 1995 1994 1993 ------------ ------------ ------------ Balance at beginning of year . . . . . . . . . . . . . . . . . . . $ 1,291 $ 2,594 $ 3,455 Provision for Losses . . . . . . . . . . . . . . . . . . . . . 43 338 Losses on sales . . . . . . . . . . . . . . . . . . . . . . . . (1,442) (1,379) Gains on sales . . . . . . . . . . . . . . . . . . . . . . . . 96 180 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (345) ------------- ------------ ------------ Balance at end of year . . . . . . . . . . . . . . . . . . . . . . $ 946 $ 1,291 $ 2,594 ============= ============ ============
Prior to January 1, 1995, the Company classified certain loans meeting the in-substance foreclosure criteria as OREO. Upon the adoption of FAS114, the Company reclassified in-substance foreclosed assets to loans. The "Other" category above reflects the effect of this reclassification. 22 24 RESULTS OF OPERATIONS ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE The following tables set forth the dollar amount of increase (decrease) in interest income and interest expense resulting from changes in the volume of interest earning assets and interest bearing liabilities and from changes in yields and rates (in thousands):
Years Ended December 31, 1995 Compared to 1994 ----------------------------------------- Average Average Increase Volume Rate (Decrease) ------------ ------------- ------------- INTEREST INCOME: Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,958 $ 189 $ 2,147 Investment Securities (Taxable) . . . . . . . . . . . . . . . . 269 436 705 Investment Securities (Tax-Exempt) (1) . . . . . . . . . . . . 59 12 71 Mortgage-backed Securities . . . . . . . . . . . . . . . . . . (303) 721 418 Marketable Equity Securities . . . . . . . . . . . . . . . . . 5 14 19 Federal Funds Sold . . . . . . . . . . . . . . . . . . . . . . (57) 102 45 Interest Earning Deposits . . . . . . . . . . . . . . . . . . . 2 11 13 ------------ ------------- ------------ Total Interest Income . . . . . . . . . . . . . . . . . . . . 1,933 1,485 3,418 ------------ ------------- ------------ INTEREST EXPENSE: Savings Deposits . . . . . . . . . . . . . . . . . . . . . . . (10) 29 19 Time Deposits . . . . . . . . . . . . . . . . . . . . . . . . . 484 1,731 2,215 Interest Bearing Demand Deposits . . . . . . . . . . . . . . . (164) 166 2 Federal Funds Purchased and Other Interest Bearing Liabilities . . . . . . . . . . . . . . . . (10) 20 10 FHLB Advances . . . . . . . . . . . . . . . . . . . . . . . . . 26 21 47 ------------ ------------- ------------ Total Interest Expense . . . . . . . . . . . . . . . . . . . 326 1,967 2,293 ------------ ------------- ------------ Net Interest Earnings . . . . . . . . . . . . . . . . . . . . . $ 1,607 $ (482) $ 1,125 ============ ============= ============
Years Ended December 31, 1994 Compared to 1993 ---------------------------------------- Average Average Increase Volume Rate (Decrease) ------------ ------------ ------------ INTEREST INCOME: Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,215 $ (1) $ 2,214 Investment Securities (Taxable) . . . . . . . . . . . . . . . . 303 (20) 283 Investment Securities (Tax-Exempt) (1) . . . . . . . . . . . . 222 (36) 186 Mortgage-backed Securities . . . . . . . . . . . . . . . . . . (1,107) (14) (1,121) Marketable Equity Securities . . . . . . . . . . . . . . . . . 36 50 86 Trading Account Securities . . . . . . . . . . . . . . . . . . (2) (2) (4) Federal Funds Sold . . . . . . . . . . . . . . . . . . . . . . 361 62 423 Interest Earning Deposits . . . . . . . . . . . . . . . . . . . (9) 17 8 ------------ ------------ ------------ Total Interest Income . . . . . . . . . . . . . . . . . . . . 2,019 56 2,075 ------------ ------------ ------------ INTEREST EXPENSE: Savings Deposits . . . . . . . . . . . . . . . . . . . . . . . 32 (12) 20 Time Deposits . . . . . . . . . . . . . . . . . . . . . . . . . 214 456 670 Interest Bearing Demand Deposits . . . . . . . . . . . . . . . 216 (5) 211 Federal Funds Purchased and Other Interest Bearing Liabilities . . . . . . . . . . . . . . . . 93 (95) (2) FHLB Advances . . . . . . . . . . . . . . . . . . . . . . . . . 282 (1) 281 ------------ ------------ ------------ Total Interest Expense . . . . . . . . . . . . . . . . . . . 837 343 1,180 ------------ ------------ ------------ Net Interest Earnings . . . . . . . . . . . . . . . . . . . . . $ 1,182 $ (287) $ 895 ============ ============ ============
(1) Interest rates on securities which are nontaxable for Federal Income Tax purposes are not presented on a taxable equivalent basis. NOTE: Volume/Rate variances (change in volume times change in rate) have been allocated to amounts attributable to changes in volumes and to changes in rates in proportion to the amounts directly attributable to those changes. 23 25 NET INTEREST INCOME Net interest income is the principal source of a financial institution's earnings stream and represents the difference or spread between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates as well as volume and mix changes in earning assets and interst bearing liabilities materially impact net interst income. Net interest income increased for the year ended December 31, 1995 $1,125,000 or 7.2% compared to the same period in 1994. Interest income for the year ended December 31, 1995 increased $3.4 million or 13.1% to $29.6 million compared to the same period in 1994. The increased interest income in 1995 was attributable to the increase in average yield as well as higher Average Earning Assets during the year. The average yield on the Average Earning Assets increased 68 basis points during the year ended December 31, 1995 as compared to 1994. The increase in interest income on Loans of $2,147,000 or 12.8% was the result of the increase in Average Loans and average yield during 1995. Interest income on securities increased $1,213,000 in 1995 or 13.6% compared to 1994 primarily due to the increase in the average yield during 1995. The increase in interest expense for the year ended December 31, 1995 of $2.3 million or 21.7% was attributable to an increase in Average Interest Bearing Liablities of $4.6 million or 1.5% along with the increase in the average rate paid on Interest Bearing Liabilities of 70 basis points. Average Time Depositis increased $11.2 million or 7.0% while the average rate paid increased 102 basis points more than offsetting the decrease in Average Interest Bearing Demand Deposits of $6.1 million. Average Long Term Interst Bearing Liabilities increased $.5 million which contributed to the higher interest expense in 1995. NONINTEREST INCOME Noninterest income is an important surce of earnings. The Company intends to maximize noninterest income in the future by looking for new fee income services to provide customers and by continuing to review service charge schedules and by competitively and profitably pricing those services. The following schedule lists the accounts from which noninterest income was derived, gives totals for these accounts for the year ended December 31, 1995 and the comparable year ended December 31, 1994 and indicates the percentage changes (dollars in thousands):
Years Ended December 31, ---------------------- Percent 1995 1994 Change ---------- --------- -------- Deposit services . . . . . . . . . . . $ 2,752 $ 2,650 3.8% Gains on securities available for sale 221 25 784.0% Other . . . . . . . . . . . . . . . . . 901 921 (2.2%) ---------- --------- Total noninterest income . . . . . . . $ 3,874 $ 3,596 7.7% ========== =========
Noninterest income consists of revenues generated from a broad range of financial services and activities including fee based services. Total noninterest income for the year ended December 31, 1995 increased 7.7% or $278,000 compared to 1994. Securities gains increased $196,000 or 784.0% from 1994. Of the $221,000 in net securities gains from the AFS portfolio in 1995, there were $450,000 in realized gains and $229,000 in realized losses. The Company sold securities out of its AFS portfolio to accomplish ALCO and investment portfolio objectives aimed at maximizing to the total return of the securities portfolio. The increase in deposit services income of $102,000 or 3.8% was a result of increased deposit activity. Other noninterest income decreased $20,000 or 2.2% primarily as a result of lower OREO and repo asset income, reflective of the overall decrease in OREO. 24 26 NONINTEREST EXPENSE The following schedule lists the accounts which comprise noninterest expense, gives totals for these accounts for the year ended December 31, 1995 and the comparable year ended December 31, 1994 and indicates the percentage changes (dollars in thousands):
Years Ended December 31, ---------------------------- Percent 1995 1994 Change ------------- ------------ ---------- (in thousands) Salaries and employee benefits . . . . . . . . . . . . . . . $ 8,545 $ 8,184 4.4% Net occupancy expense . . . . . . . . . . . . . . . . . . . . 1,636 1,439 13.7% Equipment expense . . . . . . . . . . . . . . . . . . . . . . 302 282 7.1% Advertising, travel and entertainment . . . . . . . . . . . . 888 752 18.1% Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . 388 375 3.5% FDIC insurance . . . . . . . . . . . . . . . . . . . . . . . 434 791 (45.1%) Postage . . . . . . . . . . . . . . . . . . . . . . . . . . . 303 274 10.6% Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,186 2,156 1.4% ------------- ------------- Total noninterest expense . . . . . . . . . . . . . . . . . . $ 14,682 $ 14,253 3.0% ============= =============
Noninterest expense for the year ended December 31, 1995 increased $429,000 or 3.0% when compared to the year ended December 31, 1994. Salaries and employee benefits increased $361,000 or 4.4% due to several factors. Higher direct salary expense including payroll taxes represented $408,000 of the increase. The increase is reflective of staff additions during 1995 as a result of overall bank growth and pay increases and the increased commitment to residential mortgage lending. Health insurance expense decreased $185,000 or 21.2% in 1995 compared to the same period in 1994. The decrease occurred as a result of lowered health claims due to changing the Bank's overall health coverage to a Preferred Provider Organization which provided significant cost savings. Retirement expense increased $138,000 or 20.7% for the year ended December 31, 1995 as a result of lower than expected returns on the retirement plan assets in 1994, increased personnel and increased contributions to the ESOP plan. Net occupancy expense increased $197,000 or 13.7% for the year ended December 31, 1995 compared to the same period in 1994, largely due to higher real estate taxes, depreciation expense and associated operating costs as a result of the new South Broadway branch opened in April 1995 and the opening of the new motor bank facility at South Broadway and the operations facility late in 1994. Advertising expense increased $136,000 or 18.1% for the year ended December 31, 1995 compared to the same period in 1994. The increase occurred due to increases in direct advertising during 1995 as a result of the opening of the new South Broadway branch in 1995 and the new motor bank facility late in 1994. Donations also increased during the year ended December 31, 1995 and are included in this total. FDIC insurance decreased $357,000 or 45.1% for the year ended December 31, 1995 compared to the year ended December 31, 1994. During August 1995, the FDIC announced a decrease in the insurance premiums from $.23 per hundred dollars of deposits insured to $.04 per hundred dollars insured effective June 1, 1995. As a result, Southside Bank received a refund of $230,000 in September 1995 and the monthly expense for the remainder of the year decreased significantly. 25 27 INCOME TAXES Income tax expense was $1,713,000 for the year ended December 31, 1995 and represented a $511,000 or 42.5% increase from the year ended December 31, 1994. The increased income tax expense primarily is a result of higher pre- tax income in 1995. OTHER ACCOUNTING ISSUES In May 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" (FAS122). This statement, which the Company will be required to adopt in 1996, eliminates the accounting distinction of rights to service mortgage loans whether they are acquired through loan origination activities or through purchase transactions. The impact of the statement has been assessed by management and will not have a material impact on the Company's financial statements. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS123). This statement, which the Company will be required to adopt in 1996, encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options and other equity instruments to employees based on new fair value accounting rules. Companies that choose not to adopt the new rules will continue to apply existing rules, but will be required to disclose pro forma net income and earnings per share under the new method. The Company will elect to provide the pro forma disclosures in its 1996 financial statements. EFFECTS OF INFLATION The effects of inflation on the Company can be minimized by management of the interest income and interest expense or simply by controlling the interest rates paid for borrowed funds versus the interest rates earned on funds loaned to customers. 26 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - December 31, 1994 compared to December 31, 1993 The following discussion and analysis provides a comparison of the Company's results of operations for the years ended December 31, 1994 and 1993 and financial condition as of December 31, 1994 and 1993. This discussion should be read in conjunction with the financial statements and related notes. For a more detailed discussion of these periods, readers should refer to the Company's December 31, 1994 Annual Report. All share data has been adjusted to retroactively reflect the stock dividend paid in September 1995. OVERVIEW During the year ended December 31, 1994, the Company's net income decreased $496,000 or 12.4% to $3,519,000, compared to $4,015,000 for the same period in 1993. The decrease in net income is primarily attributable to nonrecurring gains on the sale of securities during 1993 and a one time increase in income resulting from a change in an accounting principle in 1993. Also affecting earnings were costs associated with opening and operating two new branches, opened in late 1993, and operating costs associated with new facilities opened during 1994. NET INTEREST INCOME Net interest income is the principal source of a financial institution's earnings stream and represents the difference or spread between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates as well as volume and mix changes in earning assets and interest bearing liabilities materially impact net interest income. Net interest income increased for the year ended December 31, 1994 $895,000 or 6.1% compared to the same period in 1993. Interest income for the year ended December 31, 1994 increased $2.1 million or 8.6% to $26.2 million compared to the same period in 1993. The increased interest income in 1994 was primarily attributable to the increase in Average Earning Assets during the year. The average yield on the Average Earning Assets increased 7 basis points during the year ended December 31, 1994 as compared to 1993. The increase in interest income on Loans of $2,214,000 or 15.3% was the result of the increase in Average Loans during 1994. Interest income on securities decreased $570,000 in 1994 or 6.0% compared to 1993 primarily due to lower average securities during 1994. The increase in interest expense for the year ended December 31, 1994 of $1.2 million or 12.6% was attributable to an increase in Average Interest Bearing Liabilities of $20.3 million or 7.1% along with the increase in the average rate paid on Interest Bearing Liabilities of 16 basis points. Average Time Deposits increased $5.5 million or 3.5% while the average rate paid increased 29 basis points. Average Interest Bearing Demand Deposits increased $8.2 million and Average Long Term Interest Bearing Liabilities increased $5.8 million which contributed to the higher interest expense in 1994. PROVISION FOR LOAN LOSSES The provision for loan losses for December 31, 1994 was $250,000 compared to $600,000 for December 31, 1993. For the year ended December 31, 1994, the Company's subsidiary, Southside Bank, had net recoveries on loans of $41,000, an improvement of 108.8% compared to December 31, 1993. For the year ended December 31, 1993, net charge-offs on loans were $465,000. These levels are reflective of the economic stability in the Company's market area. 27 29 NONINTEREST INCOME Total noninterest income for the year ended December 31, 1994 decreased 14.2% or $597,000 compared to 1993. Securities gains decreased $462,000 or 94.9% from 1993. Of the $25,000 in net securities gains from the AFS portfolio in 1994, there were $164,000 in realized gains and $139,000 in realized losses. During 1993, certain securities were sold for asset liability management purposes to restructure a portion of the portfolio. The decrease in deposit services income of $65,000 or 2.4% was a result of a higher earnings credit rate applied to commercial accounts thus reducing service charges. Other noninterest income decreased $70,000 or 7.1% primarily as a result of lower OREO and repo asset income, reflective of the overall decrease in OREO. NONINTEREST EXPENSE Noninterest expense for the year ended December 31, 1994 increased $1,298,000 or 10% when compared to the year ended December 31, 1993. Salaries and employee benefits increased $1,011,000 or 14.1% due to several factors. Direct salary expense including payroll taxes represented $829,000 of the increase. The increase is reflective of staff additions during 1994 as a result of overall bank growth, pay increases and staff additions for branches opened late in 1993. Health insurance expense increased $233,000 or 36.4% in 1994 compared to the same period in 1993. Retirement expense decreased $51,000 or 7.1% for the year ended December 31, 1994. Net occupancy expense increased $243,000 or 20.3% largely due to higher depreciation expense as a result of computer equipment purchased, new motor bank facilities opened and the purchase of an operations facility in 1994. Other occupancy expenses increased due to costs associated with operating these facilities and the new branches opened late in 1993. Equipment expense decreased $44,000 or 13.5% primarily due to maintenance savings realized with the purchase of new computer equipment. Supply expense increased due to supply needs at the new facilities and new forms required due to the bank's computer conversion and regulatory changes during 1994. Other expense decreased $32,000 or 1.5% when comparing the year ended December 31, 1994 to the same period in 1993. Net losses on other real estate decreased 87.3% from $338,000 in the year ended December 31, 1993 to $43,000 for the same period in 1994. In general, the market values of the Company's other real estate stabilized, combined with the overall lower net book balance of other real estate on the Company's books, preventing significant write downs during 1994. The decreased OREO provision was partially offset by increased expenses in 1994 partly due to the bank's computer conversion, higher director fees and additional ATM expense due to openings of new ATM's. 28 30 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is set forth in Part IV. ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE REGISTRANT Certain of the information required under this item appears beginning on page 2 of the Company's definitive proxy statement for the Annual Meeting of Shareholders to be held April 24, 1996, and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required under this item appears beginning on page 6 of the Company's definitive proxy statement for the Annual Meeting of Shareholders to be held April 24, 1996, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required under this item beginning on page 2 of the Company's definitive proxy statement for the Annual Meeting of Shareholders to be held April 24, 1996, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required under this item beginning on page 11 of the Company's definitive proxy statement for the Annual Meeting of Shareholders to be held April 24, 1996, and is incorporated herein by reference. 29 31 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following consolidated financial statements of Southside Bancshares, Inc. and its subsidiaries are filed as part of this report. Consolidated Balance Sheets as of December 31, 1995 and 1994. Consolidated Statements of Income for the years ended December 31, 1995, 1994, and 1993. Consolidated Statements of Cash Flow for the years ended December 31, 1995, 1994 and 1993. Consolidated Statements of Shareholders' Equity for the years ended December 31, 1995, 1994 and 1993. Notes to Consolidated Financial Statements. 2. Financial Statement Schedules All schedules are omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements or notes thereto. 3. Exhibits Exhibit No. ------- 3 (a)(i) - Articles of Incorporation as amended and in effect on December 31, 1992, of SoBank, Inc. (now named Southside Bancshares, Inc.)(filed as Exhibit 3 to the Registrant's Form 10K for the year ended December 31, 1992, and incorporated herein). 3 (a)(ii) - Articles of Amendment effective May 9, 1994 to Articles of Incorporation of SoBank, Inc. (now named Southside Bancshares, Inc.) (filed as Exhibit 3(a)(ii) to the Registrant's Form 10K for the year ended December 31, 1994, and incorporated herein). 3 (b) - Bylaws as amended and in effect on March 23, 1995 of Southside Bancshares, Inc. (filed as Exhibit 3(b) to the Registrant's Form 10K for the year ended December 31, 1994, and incorporated herein). 30 32 ** 10 (a)(i) - Deferred Compensation Plan for B.G. Hartley effective February 13, 1984, as amended June 28, 1990 and December 15, 1994 (filed as Exhibit 10(a)(i) to the Registrant's Form 10K for the year ended December 31, 1994, and incorporated herein). *,** 10 (a)(ii) - Deferred Compensation Plan for Robbie N. Edmonson effective February 13, 1984, as amended June 28, 1990 and March 16, 1995. ** 10 (b) - Officers Long Term Disability Income Plan effective June 25, 1990 (filed as Exhibit 10(b) to the Registrant's Form 10K for the year ended June 30, 1990, and incorporated herein). ** 10 (c) - Retirement Plan Restoration Plan for the subsidiaries of SoBank, Inc. (now named Southside Bancshares, Inc.)(filed as Exhibit 10(c) to the Registrant's Form 10K for the year ended December 31, 1992, and incorporated herein). ** 10 (d) - Incentive Stock Option Plan effective April 1, 1993 of SoBank, Inc. (now named Southside Bancshares, Inc.) (filed as Exhibit 10(d) to the Registrant's Form 10K for the year ended December 31, 1994). *,** 10 (e) - Form of Deferred Compensation Agreements dated June 30, 1994 with each of Sam Dawson, Lee Gibson, Titus Jones, Jeryl Story and Andy Wall as amended November 13, 1995. 22 - Subsidiaries of the Registrant (filed as Exhibit 22 to the Registrant's Form 10K for the year ended December 31, 1994). * 27 - Financial Data Schedule for the year ended December 31, 1995. _______________ * Filed herewith. ** Compensation plan, benefit plan or employment contract or arrangement. (b) Reports on Form 8-K Registrant did not file any Form 8-K's during the three months ended December 31, 1995. 31 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SOUTHSIDE BANCSHARES, INC. BY: /s/ B. G. HARTLEY ---------------------------------------------------- B. G. Hartley, Chairman of the Board and Director (Principal Executive Officer) /s/ LEE R. GIBSON ---------------------------------------------------- Lee R. Gibson, CPA, Executive Vice President (Principal Financial DATED: March 21, 1996 Officer and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title Date --------- ----- ---- /s/ B. G. HARTLEY Chairman of the Board March 21, 1996 - ----------------------------------- and Director (B. G. Hartley) /s/ ROBBIE N. EDMONSON President and Director March 21, 1996 - ----------------------------------- (Robbie N. Edmonson) /s/ FRED E. BOSWORTH Director March 21, 1996 - ----------------------------------- (Fred E. Bosworth) /s/ HERBERT C. BUIE Director March 21, 1996 - ----------------------------------- (Herbert C. Buie) /s/ ROLLINS CALDWELL Director March 21, 1996 - ----------------------------------- (Rollins Caldwell) /s/ W. D. (JOE) NORTON Director March 21, 1996 - ----------------------------------- (W. D. (Joe) Norton) /s/ WILLIAM SHEEHY Director March 21, 1996 - ----------------------------------- (William Sheehy) /s/ MURPH WILSON Director March 21, 1996 - ----------------------------------- (Murph Wilson)
32 34 Report of Independent Accountants To the Shareholders and Board of Directors Southside Bancshares, Inc. We have audited the accompanying consolidated balance sheets of Southside Bancshares, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity, and cash flow for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Southside Bancshares, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flow for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, in 1993 the Company changed its methods of accounting for income taxes and certain investments in debt and equity securities in accordance with Statement of Financial Accounting Standards Nos. 109 and 115, respectively. /s/ COOPERS & LYBRAND L.L.P. Coopers & Lybrand L.L.P. Dallas, Texas March 1, 1996 33 35 SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
December 31, December 31, 1995 1994 -------------- ------------- ASSETS Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,321 $ 25,381 Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,100 Investment securities: Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74,284 25,695 Held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,635 57,025 --------------- -------------- Total Investment securities . . . . . . . . . . . . . . . . . . . . . . 76,919 82,720 Mortgage-backed and related securities: Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,423 27,654 Held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,984 60,426 --------------- -------------- Total Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . 99,407 88,080 Marketable equity securities: Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,112 2,005 Loans: Loans, net of unearned discount . . . . . . . . . . . . . . . . . . . . . 228,778 200,990 Less: Reserve for loan losses . . . . . . . . . . . . . . . . . . . . . . (3,317) (3,137) -------------- ------------- Net Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,461 197,853 Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . 11,669 9,875 Other real estate owned, net . . . . . . . . . . . . . . . . . . . . . . . . 273 1,134 Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,095 2,581 Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 412 1,909 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,004 3,583 --------------- -------------- TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 448,673 $ 426,221 =============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 84,706 $ 88,008 Interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303,602 297,094 --------------- -------------- Total Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 388,308 385,102 Short-term obligations: Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . 4,600 Long-term obligations: Note payable - FHLB Dallas . . . . . . . . . . . . . . . . . . . . . . . . 13,686 7,997 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,727 5,598 --------------- -------------- TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 415,321 398,697 --------------- -------------- Shareholders' equity: Common stock: ($2.50 par, 6,000,000 shares authorized, 3,141,393 and 2,973,234 shares issued) . . . . . . . . . . . . . . . . . . 7,853 7,433 Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,209 14,529 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,123 7,480 Treasury stock (49,421 and 23,082 shares at cost) . . . . . . . . . . . . (486) (219) Net unrealized gains (losses) on securities available for sale . . . . . . 653 (1,699) --------------- ------------- TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . 33,352 27,524 --------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . $ 448,673 $ 426,221 =============== ==============
The accompanying notes are an integral part of the financial statements. 34 36 SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data)
Years Ended December 31, ------------------------------------- 1995 1994 1993 ------------ ----------- ----------- Interest income Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,861 $ 16,714 $ 14,500 Investment securities . . . . . . . . . . . . . . . . . . . . . . . 4,343 3,567 3,098 Mortgage-backed and related securities . . . . . . . . . . . . . . . 5,673 5,255 6,376 Marketable equity securities . . . . . . . . . . . . . . . . . . . . 121 102 16 Other interest earning assets . . . . . . . . . . . . . . . . . . . 592 534 107 ------------ ----------- ----------- Total interest income . . . . . . . . . . . . . . . . . . . . 29,590 26,172 24,097 ------------ ----------- ----------- Interest expense Time and savings deposits . . . . . . . . . . . . . . . . . . . . . 12,290 10,054 9,153 Short-term obligations . . . . . . . . . . . . . . . . . . . . . . . 94 84 86 Long-term obligations . . . . . . . . . . . . . . . . . . . . . . . 453 406 125 ------------ ----------- ----------- Total interest expense . . . . . . . . . . . . . . . . . . . . 12,837 10,544 9,364 ------------ ----------- ----------- Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . 16,753 15,628 14,733 Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . (300) 250 600 ------------ ----------- ----------- Net interest income after provision for loan losses . . . . . . . . . . 17,053 15,378 14,133 ------------ ----------- ----------- Noninterest income Deposit services . . . . . . . . . . . . . . . . . . . . . . . . . . 2,752 2,650 2,715 Gains on securities held for resale . . . . . . . . . . . . . . . . 436 Gains on securities held for investment . . . . . . . . . . . . . . 51 Gains on securities available for sale . . . . . . . . . . . . . . . 221 25 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 901 921 991 ------------ ----------- ----------- Total noninterest income . . . . . . . . . . . . . . . . . . . 3,874 3,596 4,193 ------------ ----------- ----------- Noninterest expense Salaries and employee benefits . . . . . . . . . . . . . . . . . . . 8,545 8,184 7,173 Net occupancy expense . . . . . . . . . . . . . . . . . . . . . . . 1,636 1,439 1,196 Equipment expense . . . . . . . . . . . . . . . . . . . . . . . . . 302 282 326 Advertising, travel & entertainment . . . . . . . . . . . . . . . . 888 752 745 Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 388 375 314 FDIC insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 434 791 760 Postage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303 274 253 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,186 2,156 2,188 ------------ ----------- ----------- Total noninterest expense . . . . . . . . . . . . . . . . . . 14,682 14,253 12,955 ------------ ----------- ----------- Income before federal tax expense . . . . . . . . . . . . . . . . . . . 6,245 4,721 5,371 ------------ ----------- ----------- Provision for federal tax expense Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,429 899 1,429 Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284 303 13 ------------ ----------- ----------- Total income taxes . . . . . . . . . . . . . . . . . . . . . . 1,713 1,202 1,442 ------------ ----------- ----------- Net Income before cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . . . . 4,532 3,519 3,929 Cumulative effect of change in accounting principle . . . . . . . . . . 86 ------------ ----------- ----------- Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,532 $ 3,519 $ 4,015 ============ =========== =========== Earnings Per Share Net Income before cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . . $ 1.47 $ 1.13 $ 1.27 Cumulative effect of change in accounting principle . . . . . . . . $ .03 Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.47 $ 1.13 $ 1.30
The accompanying notes are an integral part of the financial statements. 35 37 SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (in thousands)
Years Ended December 31, ----------------------------------- 1995 1994 1993 ----------- ----------- ---------- OPERATING ACTIVITIES: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,532 $ 3,519 $ 4,015 Adjustments to reconcile net cash provided by operations: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 1,563 1,792 2,330 Accretion of discount and loan fees . . . . . . . . . . . . . . . . . (846) (850) (565) Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . (300) 250 600 Deferred loan origination cost . . . . . . . . . . . . . . . . . . . (72) (44) (42) (Gain) on securities . . . . . . . . . . . . . . . . . . . . . . . . (221) (25) (487) (Gain) on premises and equipment . . . . . . . . . . . . . . . . . . (10) (10) (Gain) loss on other real estate owned . . . . . . . . . . . . . . . (20) 43 338 (Increase) decrease in interest receivable . . . . . . . . . . . . . (514) 112 89 (Increase) decrease in other receivables and prepaids . . . . . . . . 563 (805) (939) (Increase) decrease in deferred tax asset . . . . . . . . . . . . . . 284 303 (73) Increase (decrease) in interest payable . . . . . . . . . . . . . . . 217 173 (76) Increase in other payables . . . . . . . . . . . . . . . . . . . . . 2,912 1,178 1,163 Proceeds from sales of trading account securities . . . . . . . . . . 6,000 Purchases of trading account securities . . . . . . . . . . . . . . . (6,000) ----------- ----------- ----------- Net cash provided by operating activities . . . . . . . . . . . . 8,088 5,636 6,353 INVESTING ACTIVITIES: Proceeds from sales of investment securities available for sale . . . 33,457 18,593 Proceeds from sales of mortgage-backed securities available for sale 16,555 27,414 Proceeds from sales of marketable equity securities available for sale 2 Proceeds from maturities of investment securities available for sale 20,582 11,575 Proceeds from maturities of mortgage-backed securities available for sale 5,994 16,454 Proceeds from maturities of investment securities held to maturity . 17,510 11,754 Proceeds from maturities of mortgage-backed securities held to maturity 6,403 5,749 Purchases of investment securities available for sale . . . . . . . . (63,663) (27,977) Purchases of mortgage-backed securities available for sale . . . . . (38,299) (18,891) Purchases of marketable equity securities available for sale . . . . (107) (67) Purchases of investment securities held to maturity . . . . . . . . . (27,577) Purchases of mortgage-backed securities held to maturity . . . . . . (5,971) Proceeds from sales of securities held for resale . . . . . . . . . . 23,787 Proceeds from sales of investment securities held for investment . . 5,994 Proceeds from sales of mortgage-backed securities held for investment 6,992 Proceeds from maturities of securities held for resale . . . . . . . 9,332 Proceeds from maturities of investment securities held for investment 9,053 Proceeds from maturities of mortgage-backed securities held for investment 54,512 Purchases of investment securities held for investment . . . . . . . (34,460) Purchases of mortgage-backed securities held for investment . . . . . (80,878) Purchases of marketable equity securities held for investment . . . . (1,588) Net (increase) decrease in federal funds sold . . . . . . . . . . . . 11,100 (11,100) 1,825 Net (increase) in loans . . . . . . . . . . . . . . . . . . . . . . . (27,486) (18,483) (25,186) Purchases of premises and equipment . . . . . . . . . . . . . . . . . (2,822) (3,877) (2,348) Retirement of premises and equipment . . . . . . . . . . . . . . . . 7 Proceeds from sales of premises and equipment . . . . . . . . . . . . 42 31 Proceeds from sales of repossessed assets . . . . . . . . . . . . . . 1,002 991 1,124 Proceeds from sales of other real estate owned . . . . . . . . . . . 145 1,711 2,920 ----------- ----------- ----------- Net cash used in investing activities . . . . . . . . . . . . . . (19,587) (19,669) (28,914)
The accompanying notes are an integral part of the financial statements. 36 38 SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (continued) (in thousands)
Years Ended December 31, ----------------------------------- 1995 1994 1993 ---------- ---------- ---------- FINANCING ACTIVITIES: Net increase (decrease) in demand and savings accounts . . . . . . . . $ (6,388) $ 19,721 $ 12,301 Net increase (decrease) certificates of deposits . . . . . . . . . . . 9,594 13,026 (10,362) Proceeds from the issuance of common stock . . . . . . . . . . . . . . 258 195 201 Net increase (decrease) in notes payable . . . . . . . . . . . . . . . 5,689 (853) 8,850 Net increase (decrease) in securities sold under agreement to repurchase (3,923) 3,923 Net increase (decrease) in federal funds purchased . . . . . . . . . . 4,600 (7,600) 7,150 Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . (267) (219) Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,047) (725) (686) ---------- ---------- ---------- Net cash provided by financing activities . . . . . . . . . . . . 12,439 19,622 21,377 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents . . . . . . . . . 940 5,589 (1,184) Cash and cash equivalents at beginning of year . . . . . . . . . . . . 25,381 19,792 20,976 ----------- ----------- ----------- Cash and cash equivalents at end of year . . . . . . . . . . . . . . . $ 26,321 $ 25,381 $ 19,792 =========== =========== =========== SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION: Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,620 $ 10,312 $ 9,440 Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,440 $ 878 $ 1,485 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisition of OREO and repossessed assets through foreclosure . . . . $ 986 $ 1,187 $ 2,062 Transfer of securities available for sale to held to maturity . . . . . $ 54,907 Transfer of securities to available for sale . . . . . . . . . . . . . $ 57,584 $ 138,422 FAS114 reclassification . . . . . . . . . . . . . . . . . . . . . . . . $ 807
The accompanying notes are an integral part of the financial statements. 37 39 SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands)
Net Unrealized Total Common Paid in Retained Treasury Gains Shareholders' Stock Capital Earnings Stock (Losses) Equity ----------- ---------- ---------- ---------- ---------- ------------ Balance at December 31, 1992 . . . . . . $ 6,643 $ 12,339 $ 3,941 $ $ $ 22,923 Net Income . . . . . . . . . . . . . . . 4,015 4,015 Cash dividend ($.25 per share) . . . . . (686) (686) 5% Stock dividend . . . . . . . . . . . . 334 870 (1,204) Common stock issued (20,761 shares) . . . 52 149 201 Net increase in unrealized gains on securities available for sale (net of tax) 788 788 ----------- ---------- ---------- ---------- ---------- ----------- Balance at December 31, 1993 . . . . . . 7,029 13,358 6,066 788 27,241 Net Income . . . . . . . . . . . . . . . 3,519 3,519 Cash dividend ($.25 per share) . . . . . (725) (725) 5% Stock dividend . . . . . . . . . . . . 354 1,026 (1,380) Common stock issued (20,132 shares) . . . 50 145 195 Purchase of 23,082 shares of treasury stock . . . . . . . . . . . . . (219) (219) Net increase in unrealized (losses) on securities available for sale (net of tax) (2,487) (2,487) ----------- ---------- ---------- ---------- ---------- ----------- Balance at December 31, 1994 . . . . . . 7,433 14,529 7,480 (219) (1,699) 27,524 Net Income . . . . . . . . . . . . . . . 4,532 4,532 Cash dividend ($.35 per share) . . . . . (1,047) (1,047) 5% Stock dividend . . . . . . . . . . . . 368 1,474 (1,842) Common stock issued (20,800 shares) . . . 52 206 258 Purchase of 26,339 shares of treasury stock . . . . . . . . . . . . . (267) (267) Net increase in unrealized gains on securities available for sale (net of tax) 2,352 2,352 ----------- ---------- ---------- ---------- ---------- ----------- Balance at December 31, 1995 . . . . . . $ 7,853 $ 16,209 $ 9,123 $ (486) $ 653 $ 33,352 =========== ========== ========== ========== =========== ===========
The accompanying notes are an integral part of the financial statements. 38 40 NOTES TO FINANCIAL STATEMENTS Southside Bancshares, Inc. and Subsidiaries - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES The significant accounting and reporting policies of Southside Bancshares, Inc. (the "Company"), and its wholly owned subsidiaries, Southside Bank and the nonbank subsidiary, are summarized below. Organization and Basis of Presentation. The consolidated financial statements include the accounts of the Company, Southside Bank and the nonbank subsidiary, which did not conduct any business in 1995. Southside Bank offers a full range of financial services to commercial, industrial, financial and individual customers. All significant intercompany accounts and transactions are eliminated in consolidation. The preparation of these consolidated financial statements in conformity with generally accepted accounting principles requires the use of management's estimates. These estimates are subjective in nature and involve matters of judgment. Actual amounts could differ from these estimates. Cash Equivalents. Cash equivalents for purposes of reporting cash flow, include cash and amounts due from banks. Loans. All loans are stated at principal outstanding net of unearned income. Interest income on installment loans is recognized primarily on the level yield method. Interest income on other loans is credited to income based primarily on the principal outstanding at contract rates of interest. The Company adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (FAS114) and Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" (FAS118), on January 1, 1995. Under these standards, a loan is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Substantially all of the Company's impaired loans are collateral-dependent, and as such, are measured for impairment based on the fair value of the collateral. The adoption of FAS114 and FAS118 resulted in no additional provision for credit losses. Reserve for Loan Losses. A reserve for loan losses is provided through charges to income in the form of a provision for loan losses. Loans which management believes are uncollectible are charged against this account with subsequent recoveries, if any, credited to the account. The amount of the current allowance for loan losses is determined by management's evaluation of the quality and inherent risks in the loan portfolio, economic conditions and other factors which warrant current recognition. Nonaccrual Loans. A loan is placed on nonaccrual when principal or interest is past due 90 days or more unless, in the determination of management, the principal and interest on the loan are well collateralized and in the process of collection. In addition, a loan is placed on nonaccrual when, in the opinion of management, the future collectibility of interest and principal is in serious doubt. When classified as nonaccrual, accrued interest receivable on the loan is reversed and the future accrual of interest is suspended. Payments of contractual interest are recognized as income only to the extent that full recovery of the principal balance of the loan is reasonably certain. Other Real Estate Owned. Other Real Estate Owned includes real estate acquired in full or partial settlement of loan obligations. Prior to January 1, 1995, the Company classified certain loans meeting the in-substance foreclosure criteria as Other Real Estate Owned (OREO). Upon the adoption of FAS114, the Company reclassified in-substance foreclosed assets to loans. Other Real 39 41 Estate Owned is carried at the lower of (1) the recorded amount of the loan for which the foreclosed property previously served as collateral or (2) the fair market value of the property. Prior to foreclosure, the recorded amount of the loan is written down, if necessary, to the appraised fair market value of the real estate to be acquired, less selling costs, by charging the allowance for loan losses. Any subsequent reduction in fair market value is charged to results of operations through the Allowance for Losses on Other Real Estate account. Costs of maintaining and operating foreclosed properties are expensed as incurred. Expenditures to complete or improve foreclosed properties are capitalized only if expected to be recovered; otherwise, they are expensed. Mortgage Servicing Rights. In May 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" (FAS122). This statement, which the Company will be required to adopt in 1996, eliminates the accounting distinction of rights to service certain mortgage loans whether they are acquired through loan origination activities or through purchase transactions. The impact of the statement has been assessed by management and will not have a material impact on the Company's financial statements. Securities. The Company uses the specific identification method to determine the basis for computing realized gain or loss. Effective December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (FAS115) and accounts for debt and equity securities as follows: Held to Maturity (HTM). Debt securities that management has the positive intent and ability to hold until maturity are classified as held to maturity and are carried at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the level interest yield method over the estimated remaining term of the underlying security. Available for Sale (AFS). Debt and equity securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity and changes in the availability of and the yield of alternative investments are classified as available for sale. These assets are carried at market value. Market value is determined using published quotes as of the close of business. Unrealized gains and losses are excluded from earnings and reported net of tax as a separate component of shareholders' equity until realized. Trading Securities. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at market value, with unrealized gains and losses included in earnings. Prior to the adoption of FAS115, the Company accounted for debt and equity securities as follows: Held for Investment. Debt and equity securities classified as held for investment were carried at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts. Investments and mortgage-backed securities were classified as held for investment when management had the ability and the intent to hold these securities until maturity considering all foreseeable events and conditions. Held for Resale. Debt and equity securities classified as held for resale were carried at lower of cost or market value. Unrealized losses were included in the consolidated statement of operations and retained earnings. 40 42 Premises and Equipment. Bank premises and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed on a straight line basis over the estimated useful lives of the related assets. Useful lives are estimated to be 20 to 40 years for premises and 3 to 10 years for equipment. Maintenance and repairs are charged to income as incurred while major improvements and replacements are capitalized. Loan Fees. The Company treats loan fees, net of direct costs, as an adjustment to the yield of the related loan over its term. Income Taxes. The Company files a consolidated Federal income tax return. Effective January 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS109). The cumulative effect of this change in accounting principle as of January 1, 1993, increased net income by $86,000 and earnings per share by $0.03 for the year ended December 31, 1993. Under FAS109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in income in the period the change occurs. Earnings Per Share. Earnings per share have been adjusted to give retroactive recognition to stock splits and stock dividends. The weighted average number of shares during the years ended December 31, 1995, 1994 and 1993 were 3,083,921, 3,105,481, and 3,083,862, respectively. Stock Options. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS123). This statement, which the Company will be required to adopt in 1996, encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options and other equity instruments to employees based on new fair value accounting rules. Companies that choose not to adopt the new rules will continue to apply existing rules, but will be required to disclose pro forma net income and earnings per share under the new method. The Company will elect to provide the pro forma disclosures in its 1996 financial statements. General. Certain prior period amounts have been reclassified to conform to current year presentation. 2. CASH AND DUE FROM BANKS The Company is required to maintain reserve balances with the Federal Reserve Bank. The reserve balances were $4,570,000 and $3,414,000 as of December 31, 1995 and 1994, respectively. 41 43 3. INVESTMENT, MORTGAGE-BACKED AND MARKETABLE EQUITY SECURITIES The amortized cost and estimated market value of investment, mortgage-backed and marketable equity securities as of December 31, 1995 and 1994 were (in thousands):
AVAILABLE FOR SALE ----------------------------------------------------------------------- Gross Gross Estimated December 31, Amortized Unrealized Unrealized Market 1995 Cost Gains Losses Value ------------ ---------------- ----------------- ---------------- ---------------- U.S. Treasury . . . . . . . . . $ 7,029 $ 41 $ 6 $ 7,064 U.S. Government Agencies . . . 25,410 77 23 25,464 Mortgage-backed Securities: Direct Govt. Agency Issues . 61,280 726 18 61,988 Other Private Issues . . . . 3,326 109 3,435 State and Political Subdivisions . . . . . . . . 39,482 834 25 40,291 Other Stocks and Bonds . . . . 3,575 2 3,577 ---------------- ----------------- ---------------- ---------------- Total . . . . . . . . . . . . $ 140,102 $ 1,789 $ 72 $ 141,819 ================ ================= ================ ================
HELD TO MATURITY ----------------------------------------------------------------------- Gross Gross Estimated December 31, Amortized Unrealized Unrealized Market 1995 Cost Gains Losses Value ------------ ---------------- --------------- --------------- ---------------- U.S. Treasury . . . . . . . . . $ $ $ $ U.S. Government Agencies . . . 1,665 9 1,656 Mortgage-backed Securities: Direct Govt. Agency Issues . 32,675 499 136 33,038 Other Private Issues . . . . 1,309 10 1,299 State and Political Subdivisions . . . . . . . . 970 8 978 Other Stocks and Bonds . . . . ---------------- --------------- --------------- ---------------- Total . . . . . . . . . . . . $ 36,619 $ 507 $ 155 $ 36,971 ================ =============== =============== ================
42 44
AVAILABLE FOR SALE ----------------------------------------------------------------------- Gross Gross Estimated December 31, Amortized Unrealized Unrealized Market 1994 Cost Gains Losses Value ------------ ---------------- ----------------- ---------------- ---------------- U.S. Treasury . . . . . . . . . $ 9,956 $ $ 102 $ 9,854 U.S. Government Agencies . . . 14,996 18 84 14,930 Mortgage-backed Securities: Direct Govt. Agency Issues . 26,958 93 820 26,231 Other Private Issues . . . . 1,414 9 1,423 State and Political Subdivisions . . . . . . . . 912 1 2 911 Other Stocks and Bonds . . . . 2,005 2,005 ---------------- ----------------- ---------------- ---------------- Total . . . . . . . . . . . . $ 56,241 $ 121 $ 1,008 $ 55,354 ================ ================= =============== ================
HELD TO MATURITY ----------------------------------------------------------------------- Gross Gross Estimated December 31, Amortized Unrealized Unrealized Market 1994 Cost Gains Losses Value ------------ ---------------- --------------- --------------- ---------------- U.S. Treasury . . . . . . . . . $ 7,016 $ $ 175 $ 6,841 U.S. Government Agencies . . . 20,124 641 19,483 Mortgage-backed Securities: Direct Govt. Agency Issues . 58,340 2,400 55,940 Other Private Issues . . . . 2,086 109 1,977 State and Political Subdivisions . . . . . . . . 29,633 338 843 29,128 Other Stocks and Bonds . . . . 252 252 ---------------- ----------------- ---------------- ---------------- Total . . . . . . . . . . . . $ 117,451 $ 338 $ 4,168 $ 113,621 ================ ================= =============== ================
Interest income recognized on securities for the years ended December 31, 1995, 1994 and 1993 were (in thousands):
Years Ended December 31, ----------------------------------------------------- 1995 1994 1993 ----------------- ----------------- --------------- U.S. Treasury . . . . . . . . . $ 713 $ 900 $ 1,428 U.S. Government Agencies . . . 2,039 1,111 266 Mortgage-backed Securities . . 5,673 5,255 6,376 State and Political Subdivisions 1,581 1,467 1,247 Other Stocks and Bonds . . . . 131 191 173 Trading Account Securities . . 4 ---------------- ----------------- --------------- Total interest income on securities $ 10,137 $ 8,924 $ 9,494 ================ ================= ===============
Interest income from Trading Account Securities for the year ended December 31, 1993 is included in Interest income from Other interest earning assets on the Consolidated Statements of Income. 43 45 In October 1995, the Financial Accounting Standards Board issued an implementation guide to FAS115 which allowed entities to reclassify their securities among the three categories provided in FAS115. Transfers were permitted after October 1995, but no later than December 31, 1995. As a result, on November 16, 1995 the Company transferred a total of $57,584,000 from HTM to AFS at the amortized cost at date of transfer. Of this total, $37,308,000 were investment securities. The remaining $20,276,000 transferred were mortgage-backed securities. The unrealized loss on the securities transferred from HTM to AFS was $419,000, net of tax, at date of transfer. The transfer was done according to the guidelines set forth in the implementation guide to FAS115. There were no securities transferred from AFS to HTM or sales from the HTM portfolio during the year ended December 31, 1995. Of the $221,000 in net securities gains from the AFS portfolio in 1995, there were $450,000 in realized gains and $229,000 in realized losses. Of the $25,000 in net securities gains from the AFS portfolio in 1994, there were $164,000 in realized gains and $139,000 in realized losses. The scheduled maturities of AFS and HTM securities as of December 31, 1995 are presented below. Mortgage-backed securities are presented in total by category.
Amortized Aggregate Cost Fair Value -------------- -------------- (in thousands) Held to maturity securities: Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . $ 858 $ 856 Due after one year through five years . . . . . . . . . . . . . . . . . . . 1,777 1,778 Due after five years through ten years . . . . . . . . . . . . . . . . . . . Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . -------------- -------------- 2,635 2,634 Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . 33,984 34,337 -------------- -------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,619 $ 36,971 ============== ============== Available for sale securities: Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,398 $ 35,460 Due after one year through five years . . . . . . . . . . . . . . . . . . . 22,567 23,051 Due after five years through ten years . . . . . . . . . . . . . . . . . . . 10,206 10,442 Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,325 7,443 -------------- -------------- 75,496 76,396 Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . 64,606 65,423 -------------- -------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 140,102 $ 141,819 ============== ==============
Investment securities with book values of $20,042,000 and $11,663,000 were pledged as of December 31, 1995 and 1994, respectively, to secure public and trust deposits or for other purposes as required by law. 44 46 4. LOANS AND RESERVE FOR POSSIBLE LOAN LOSSES Loans in the accompanying consolidated statement of condition are classified as follows (in thousands):
December 31, December 31, 1995 1994 ----------------- ----------------- Real Estate Loans: Construction . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,558 $ 6,118 1-4 family residential . . . . . . . . . . . . . . . . . . . . . 49,909 38,563 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,436 53,881 Commercial, financial and agricultural loans . . . . . . . . . . . 44,436 39,871 Loans to individuals . . . . . . . . . . . . . . . . . . . . . . . 83,478 69,177 ----------------- ----------------- Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236,817 207,610 Less: Unearned income . . . . . . . . . . . . . . . . . . . . . 8,039 6,620 Reserve for loan losses . . . . . . . . . . . . . . . . . 3,317 3,137 ----------------- ----------------- Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 225,461 $ 197,853 ================= =================
The following is a summary of the Reserve for Loan Losses for the years ended December 31, 1995, 1994 and 1993 (in thousands):
Years Ended December 31, ----------------------------------------- 1995 1994 1993 ------------- ------------ ------------ Balance at beginning of year . . . . . . . . . . . . . . . . . . . $ 3,137 $ 2,846 $ 2,711 Provision for loan losses . . . . . . . . . . . . . . . . . . . . (300) 250 600 Loans charged off . . . . . . . . . . . . . . . . . . . . . . . (599) (530) (873) Recoveries of loans charged off . . . . . . . . . . . . . . . . 1,079 571 408 ------------- ------------ ------------ Net loan (losses) recoveries . . . . . . . . . . . . . . . . 480 41 (465) ------------- ------------ ------------ Balance at end of year . . . . . . . . . . . . . . . . . . . . . . $ 3,317 $ 3,137 $ 2,846 ============= ============ ============
Nonaccrual loans at December 31, 1995 and 1994 were $1,256,000 and $627,000, respectively. Loans with terms modified in troubled debt restructuring at December 31, 1995 and 1994 were $336,000 and $657,000, respectively. There were $807,000 in loans classified as substantively repossessed collateral, which includes nonqualifying OREO sales, at December 31, 1994. The following is a summary of the Company's recorded investment in loans (primarily nonaccrual loans) for which impairment has been recognized in accordance with FAS114 (in thousands):
Valuation Carrying Total Allowance Value ------------- ------------ ------------ Real Estate Loans . . . . . . . . . . . . . . . . . . . . . . . . . $ 486 $ 130 $ 356 Commercial Loans . . . . . . . . . . . . . . . . . . . . . . . . . 654 153 501 Loans to Individuals . . . . . . . . . . . . . . . . . . . . . . . 116 19 97 ------------- ------------ ------------ Balance at December 31, 1995 . . . . . . . . . . . . . . . . . . . $ 1,256 $ 302 $ 954 ============= ============ ============
45 47 For the year ended December 31, 1995, the average recorded investment in impaired loans was approximately $1,330,000. During the year ended December 31, 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. The amount of interest recognized on nonaccrual or restructured loans was $78,000, $260,000 and $98,000 for the years ended December 31, 1995, 1994 and 1993, respectively. If these loans had been accruing interest at their original contracted rates, related income would have been $273,000, $126,000 and $170,000 for the years ended December 31, 1995, 1994 and 1993, respectively. 5. BANK PREMISES AND EQUIPMENT
December 31, December 31, 1995 1994 ---------------- ---------------- (in thousands) Bank premises . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,912 $ 10,833 Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . 7,492 6,929 ---------------- ---------------- 20,404 17,762 Less accumulated depreciation . . . . . . . . . . . . . . . . . . . 8,735 7,887 ---------------- ---------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,669 $ 9,875 ================ ================
Depreciation expense was $997,000, $953,000 and $815,000 for the years ended December 31, 1995, 1994 and 1993, respectively. 6. OTHER REAL ESTATE OWNED The following is a summary of the Allowance for Losses on Other Real Estate Owned for the periods presented (in thousands):
Years Ended December 31, ----------------------------------------- 1995 1994 1993 ------------- ------------ ------------ Balance at beginning of year . . . . . . . . . . . . . . . . . . . $ 1,291 $ 2,594 $ 3,455 Provision for Losses . . . . . . . . . . . . . . . . . . . . . 43 338 Losses on sales . . . . . . . . . . . . . . . . . . . . . . . . (1,442) (1,379) Gains on sales . . . . . . . . . . . . . . . . . . . . . . . . 96 180 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (345) ------------- ------------ ------------ Balance at end of year . . . . . . . . . . . . . . . . . . . . . . $ 946 $ 1,291 $ 2,594 ============= ============ ============
As stated in Note 1, prior to January 1, 1995, the Company classified certain loans meeting the in-substance foreclosure criteria as OREO. Upon the adoption of FAS114, the Company reclassified in-substance foreclosed assets to loans. The "Other" category above reflects the effect of this reclassification. For the years ended December 31, 1995 and 1994, income from OREO properties exceeded the provision and other expenses by $34,000 and $32,000, respectively. For the year ended December 31, 1993, the provision and other expenses exceeded income by $288,000. 46 48 7. DOMESTIC TIME DEPOSITS
December 31, December 31, 1995 1994 ---------------- ---------------- (in thousands) Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,806 $ 15,023 Money Market demand deposits . . . . . . . . . . . . . . . . . . . 52,408 60,164 Now demand deposits . . . . . . . . . . . . . . . . . . . . . . . . 58,819 53,932 Certificates and other time deposits of $100,000 or more . . . . . . . . . . . . . . . . . . . . . . . 44,339 42,781 Certificates and other time deposits under $100,000 . . . . . . . . . . . . . . . . . . . . . 133,230 125,194 ---------------- ----------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 303,602 $ 297,094 ================ =================
For the years ended December 31, 1995, 1994 and 1993, interest expense on time certificates of deposit of $100,000 or more aggregated $2,083,000, $1,675,000 and $1,470,000, respectively. 8. SHORT TERM BORROWINGS (dollars in thousands)
Years Ended December 31, ----------------------------------------- 1995 1994 1993 ------------- ------------ ------------ Federal funds purchased Balance at end of period . . . . . . . . . . . . . . . . . . . . $ 4,600 $ $ 7,600 Average amount outstanding during the period (1) . . . . . . . . 611 959 1,216 Maximum amount outstanding during the period . . . . . . . . . . 5,350 4,750 7,800 Weighted average interest rate during the period (2) . . . . . . 6.1% 3.4% 3.1% Interest rate at end of period . . . . . . . . . . . . . . . . . 6.0% 3.1% Securities sold under agreements to repurchase Balance at end of period . . . . . . . . . . . . . . . . . . . . $ $ 3,923 Average amount outstanding during the period (1) . . . . . . . . 395 806 Maximum amount outstanding during the period . . . . . . . . . . 6,083 6,093 Weighted average interest rate during the period (2) . . . . . . 3.2% 3.3% Interest rate at end of period . . . . . . . . . . . . . . . . . 3.1% Treasury tax and loan funds Balance at end of period . . . . . . . . . . . . . . . . . . . . $ 1,352 $ 1,653 $ 1,727 Average amount outstanding during the period (1) . . . . . . . . 1,180 1,164 982 Maximum amount outstanding during the period . . . . . . . . . . 2,907 2,475 2,127 Weighted average interest rate during the period (2) . . . . . . 4.8% 3.4% 2.2% Interest rate at end of period . . . . . . . . . . . . . . . . . 5.2% 5.2% 2.9%
(1) The average amount outstanding during the period was computed by dividing the total month-end outstanding principal balances by the number of months in the period. (2) The weighted average interest rate during the period was computed by dividing the actual interest expense (annualized) by average short-term debt outstanding. 47 49 9. LONG TERM OBLIGATIONS (dollars in thousands)
Years Ended December 31, ----------------------------------------- 1995 1994 1993 ------------- ------------ ------------ FHLB - Advances Balance at end of period . . . . . . . . . . . . . . . . . . . . $ 13,686 $ 7,997 $ 8,850 Average amount outstanding during the period (1) . . . . . . . . 8,912 8,380 2,562 Maximum amount outstanding during the period . . . . . . . . . . 13,766 8,850 9,000 Weighted average interest rate during the period (2) . . . . . . 5.1% 4.8% 4.9% Interest rate at end of period . . . . . . . . . . . . . . . . . 5.5% 4.8% 4.8%
FHLB advances by remaining maturity at December 31 are:
Under Due Due Over 1995 1994 1 Year 1-5 Years 6-10 Years 10 Years Total Total ----------- ------------ ------------ ------------ ----------- ----------- Fixed rate . . . . . . . . . . $ 4,590 $ 5,314 $ 2,678 $ 1,104 $ 13,686 $ 7,997 ----------- ------------ ------------ ------------ ----------- ----------- Total Long-term Obligations . $ 4,590 $ 5,314 $ 2,678 $ 1,104 $ 13,686 $ 7,997 =========== ============ ============ ============ =========== ===========
Federal Home Loan Bank advances are collateralized by Federal Home Loan Bank stock, nonspecified real estate loans and mortgage-backed securities. (1) The average amount outstanding during the period was computed by dividing the total month-end outstanding principal balances by the number of months in the period. (2) The weighted average interest rate during the period was computed by dividing the actual interest expense (annualized) by average long-term debt outstanding. 10. RETIREMENT AND OTHER BENEFIT PLANS Southside Bank has a deferred compensation agreement with seven of its executive officers, which generally provides for payment of an aggregate amount of $2,600,000 over a maximum period of fifteen years after retirement or death. Deferred compensation expense was $97,000, $99,000 and $83,000 for the years ended December 31, 1995, 1994 and 1993, respectively. The Company provides accident and health insurance for substantially all employees through an insurance program funded by the Company. Health insurance benefits are offered to retired employees who pay a premium based on cost as determined by a third party administrator. Substantially all of the Company's employees may become eligible for those benefits if they reach normal retirement age after fifteen years of employment with the Company. The cost of health care benefits was $628,000, $736,000 and $564,000 for the years ended December 31, 1995, 1994 and 1993. There was one retiree participating in the health insurance plan as of December 31, 1995. There were two retirees participating in the health insurance plan as of December 31, 1994. 48 50 The Company has an Employee Stock Ownership Plan which covers substantially all employees. Contributions to the plan are at the sole discretion of the Board of Directors. Contributions to the plan for the years ended December 31, 1995, 1994 and 1993 were $150,000, $120,000 and $120,000, respectively. At December 31, 1995 and 1994, 80,745 and 72,504 shares of common stock were owned by the Employee Stock Ownership Plan, respectively. The number of shares have been adjusted as a result of stock dividends. These shares are treated as externally held shares for dividend and earnings per share calculations. The Company has an Officers Long Term Disability Income Plan, (the "Disability Plan"), which covers officers of the Company and Southside Bank in the event they become disabled as defined under its terms. Individuals are automatically covered under the plan if they (a) have been elected as an officer, (b) have been an employee of the Company and Southside Bank for three years and (c) receive earnings of $50,000 or more on an annual basis. The Disability Plan provides, among other things, under its terms that should a covered individual become totally disabled he would receive 66-2/3%, not to exceed $10,000 per month, of their current salary. The benefits paid out of this plan are limited by the benefits paid to the individual under the terms of other Company sponsored benefit plans. The Company and Southside Bank have a defined benefit pension plan pursuant to which participants are entitled to benefits based on final average monthly compensation and years of credited service determined in accordance with plan provisions. All employees of the Company and Southside Bank who have worked 1000 hours or more in their first twelve months of employment or during any plan year thereafter are eligible to participate. Employees are vested upon the earlier of five years credited service or the employee attaining 60 years of age. Benefits are payable monthly commencing on the later of age 65 or the participants date of retirement. Eligible participants may retire at reduced benefit levels after reaching age 55. The Company contributes amounts to the pension fund sufficient to satisfy funding requirements of the Employee Retirement Income Security Act. Plan assets included 54,414 and 56,540 shares of Southside Bancshares, Inc. stock purchased at fair market value as of December 31, 1995 and 1994, respectively. The number of shares have been adjusted as a result of stock dividends.
December 31, December 31, 1995 1994 ---------------- ---------------- (in thousands) Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of ($5,850) and ($4,659) respectively . . . . . . . . . . . . . . $ 6,642 $ 5,295 ================ ================ Projected benefit obligation for service rendered to date . . . . . $ (9,644) $ (7,452) Plan assets at fair value, primarily stocks, bonds and CD's . . . . 7,570 6,258 ---------------- ---------------- Plan assets over (under) projected benefit obligation . . . . . . . (2,074) (1,194) Unrecognized net loss . . . . . . . . . . . . . . . . . . . . . . . 1,878 1,345 Unrecognized net asset being amortized over 16.55 years . . . . . . (370) (417) ---------------- ---------------- Net pension liability included in other liabilities . . . . . . . $ (566) $ (266) ================ ================
The weighted average discount rate and rate of increase in future compensation levels used in determining actuarial present value of the projected benefit obligation was 7.25% and 4.50% and 8.5% and 5.0% for December 31, 1995 and 1994, respectively. The assumed long-term rate of return on plan assets was 9.0% for both December 31, 1995 and 1994. 49 51 Net periodic pension cost for the years ended December 31, 1995, 1994 and 1993 included the following components (in thousands):
Years Ended December 31, ------------------------------------------- 1995 1994 1993 ------------- ------------ ------------- Service cost - benefits earned during the period . . . . . . . $ 436 $ 433 $ 363 Interest cost on projected benefit obligation . . . . . . . . . 623 531 467 Actual return on plan assets . . . . . . . . . . . . . . . . . (1,212) 149 (637) Net amortization and deferral . . . . . . . . . . . . . . . . . 652 (726) 115 ------------- ------------ ------------- Net periodic pension cost . . . . . . . . . . . . . . . . . . . $ 499 $ 387 $ 308 ============= ============= =============
The Company has a nonfunded supplemental retirement plan (restoration plan) for its employees whose benefits under the principal retirement plan are reduced because of compensation deferral elections or limitations under federal tax laws. The accumulated benefit obligation for this plan was $490,000 and $294,000 as of December 31, 1995 and 1994, respectively. The expense for this plan for the years ended December 31, 1995, 1994 and 1993 was $59,000, $62,000 and $51,000, respectively. 11. SHAREHOLDERS' EQUITY Cash dividends declared and paid were $.35 per share for the year ended December 31, 1995 and $.25 per share for each of the years ended December 31, 1994 and 1993. Future dividends will depend on the Company's earnings, financial condition and other factors which the Board of Directors of the Company considers to be relevant. The Company's dividend policy requires that any dividend payments made by the Company not exceed consolidated earnings for that year. Retained earnings not available for the payment of dividends at December 31, 1995 was $9,123,000. The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies. As of December 31, 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 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, including having the highest regulatory rating. 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 December 31, 1995, the Company and Southside Bank exceeded all regulatory minimum capital ratios. 50 52 In April 1993, the Company adopted the Southside Bancshares, Inc. 1993 Incentive Stock Option Plan. A total of 231,525 options to purchase stock were approved by the shareholders for grant. During 1993, the Company granted seven executive officers options to purchase 85,382 total shares of stock at an exercise price of $6.91 per share. As of December 31, 1995, 34,153 of these options were exercisable. These options are scheduled to expire in June 2003. During 1995, the Company granted additional options to purchase 58,800 total shares at an exercise price of $11.43 per share. As of December 31, 1995, none of these option were exercisable. These options are scheduled to expire in June 2005. As of December 31, 1995, there were 87,343 options remaining available to grant. The number of shares and share prices have been adjusted as a result of stock dividends. 12. DIVIDEND REINVESTMENT AND COMMON STOCK REPURCHASE PLAN The Company has a Dividend Reinvestment Plan funded by stock authorized, but not yet issued. Proceeds from the sale of the common stock will be used for general corporate purposes and could be directed to the Company's subsidiaries. For the year ended December 31, 1995, 20,800 shares were sold under this plan at an average price of $12.41 per share, reflective of other trades at the time of each sale. The Company instituted a Common Stock Repurchase Plan in late 1994. Under the repurchase plan, the Board of Directors establishes, on a quarterly basis, total dollar limitations and price per share for stock to be repurchased. The Board reviews this plan in conjunction with the capital needs of the Company and Southside Bank and may, at it's discretion, modify or discontinue the plan. During 1995, 26,339 shares of treasury stock were purchased under this plan at a cost of $267,000. Shareholders should not anticipate a continuation of the cash dividend simply because of the implementation of a dividend reinvestment program. The payment of dividends will depend upon future earnings, the financial condition of the Company, and other related factors. 13. INCOME TAXES The provisions for federal income taxes included in the accompanying statements consist of the following (in thousands):
Years Ended December 31, ----------------------------------------- 1995 1994 1993 ------------- ------------ ------------ Current tax provision . . . . . . . . . . . . . . . . . . . . . . . $ 1,429 $ 899 $ 1,429 Deferred tax provision . . . . . . . . . . . . . . . . . . . . . . 284 303 13 ------------- ------------ ------------ Provision for tax expense charged to operations . . . . . . . . . . 1,713 1,202 1,442 Shareholders' Equity - Unrealized gains (losses) on securities available for sale . . . . . . . . . . . . . . . . . 1,212 (1,281) 406 ------------- ------------ ------------ Comprehensive provision (benefit) for income tax . . . . . . . . . $ 2,925 $ (79) $ 1,848 ============= ============ ============
51 53 Deferred income taxes result from timing differences in the recognition of revenues and expenses for tax and book purposes. These differences and the tax effect of each of the major categories are as follows (in thousands):
Years Ended December 31, ----------------------------------------- 1995 1994 1993 ------------- ------------ ------------ Provision for loan losses . . . . . . . . . . . . . . . . . . . . . $ 102 $ (85) $ (161) Provision for OREO losses . . . . . . . . . . . . . . . . . . . . . 117 443 245 Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 (9) (48) Retirement and other benefit plans . . . . . . . . . . . . . . . . (41) (78) (64) FHLB Stock dividends . . . . . . . . . . . . . . . . . . . . . . . 37 31 Loan origination costs . . . . . . . . . . . . . . . . . . . . . . 25 15 14 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (14) 27 ------------- ------------ ------------ Deferred tax provision . . . . . . . . . . . . . . . . . . . . . . $ 284 $ 303 $ 13 ============= ============ ============
The Company has a $267,000 capital loss carryforward remaining for tax purposes at December 31, 1995. If unused, $77,000 of this carryforward will expire on January 1, 1997 and the remaining $190,000 will expire on January 1, 1998. The components of the net deferred tax asset as of December 31, 1995 are summarized below (in thousands):
Assets Liabilities ------------- ----------- Allowance for Losses on OREO . . . . . . . . . . . . . . . . . . . . . . . . $ 369 $ Reserve for Loan Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . 244 Retirement and Other Benefit Plans . . . . . . . . . . . . . . . . . . . . . 454 Unrealized gains on securities available for sale . . . . . . . . . . . . . . (337) Loan Origination Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . (141) Premises and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . (124) FHLB Stock Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . (68) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ------------- ----------- Gross deferred tax assets (liabilities) . . . . . . . . . . . . . . . . . 1,082 (670) ------------- ----------- Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . $ 412 =============
52 54 A reconciliation of tax at statutory rates and total tax expense is as follows (dollars in thousands):
Years Ended December 31, -------------------------------------------------------------- 1995 1994 1993 ------------------- ------------------- ------------------- Percent Percent Percent of of of Pre-Tax Pre-Tax Pre-Tax Amount Income Amount Income Amount Income -------- -------- --------- -------- -------- --------- Calculated Tax Expense . . . . . . . . . . . . $ 2,123 34.0% $ 1,605 34.0% $ 1,826 34.0% Increase (Decrease) in Taxes from: Tax Exempt Interest . . . . . . . . . . . . . . (518) (8.3%) (492) (10.4%) (428) (8.0%) Other Net . . . . . . . . . . . . . . . . . . . 108 1.7% 89 1.8% 44 .8% -------- -------- --------- -------- -------- --------- Provision for Tax Expense Charged to Operations . . . . . . . . . . . . . . . . . 1,713 27.4% 1,202 25.4% 1,442 26.8% Shareholders' Equity - Unrealized gains (losses) on securities available for sale . 1,212 19.4% (1,281) (27.1%) 406 7.6% -------- -------- --------- -------- -------- --------- Comprehensive Provision (benefit) for Income Tax . . . . . . . . . . . . . . . . . $ 2,925 46.8% $ (79) (1.7%) $ 1,848 34.4% ======== ======== ========= ======== ======== =========
14. CONTINGENCIES Other than litigation in the normal course of business, to which the Company, or its subsidiaries, is subject, management of the Company, after consulting with its legal counsel, believes that liability resulting from any of these actions will not have a material effect on the financial position of the Company or its subsidiaries. 15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK In the normal course of business the Company is a party to certain financial instruments, with off-balance-sheet risk, to meet the financing needs of its customers. These off-balance-sheet instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount reflected in the financial statements. The contract or notional amounts of these instruments reflect the extent of involvement and exposure to credit loss the Company has in these particular classes of financial instruments. Commitments to extend credit are agreements to lend to a customer provided that the terms established in the contract are met. Commitments generally have fixed expiration dates and may require payment of fee. Since some commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers. The Company had outstanding unused commitments to extend credit of $27,203,000 and $18,787,000 at December 31, 1995 and 1994, respectively. The Company had outstanding standby letters of credit of $1,124,000 and $402,000 at December 31, 1995 and 1994, respectively. 53 55 In the normal course of business the Company buys and sells securities. At December 31, 1995 and 1994, the Company had commitments to purchase $3,616,000 and $1,328,000 in securities, respectively. The Company applies the same credit policies in making commitments and standby letters of credit as it does for on- balance-sheet instruments. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit is based on management's credit evaluation of the borrower. Collateral held varies but may include real estate, accounts receivable, inventory, property, plant, and equipment. 16. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK The economy of the Company's market area, East Texas, is directly tied to the Oil and Gas Industry. Oil prices have had an indirect effect on the Company's business. Although the Company has a diversified loan portfolio, a significant portion of its loans are secured by real estate. Repayment of these loans is in part dependent upon the economic conditions in the market area. Part of the risk associated with Real Estate Loans has been mitigated since 45.8% of this group represents loans secured by residential dwellings that are primarily owner occupied. Losses on this type of loan have historically been less than those on speculative properties. Many of the remaining Real Estate Loans are secured primarily with owner occupied commercial real estate. The Mortgage-backed Securities held by the Company consist solely of Government agency pass-through securities which are either directly or indirectly backed by the full faith and credit of the United States Government. 17. RELATED PARTY TRANSACTIONS Loan activity of executive officers, directors, and their affiliates for the years ended December 31, 1995 and 1994 were (in thousands):
Year Ended Year Ended December 31, December 31, 1995 1994 ----------------- ----------------- Beginning Balance of Loans . . . . . . . . . . . . . . . . . . . . $ 8,417 $ 8,017 Additional Loans . . . . . . . . . . . . . . . . . . . . . . . . 2,224 2,888 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,514) (2,488) ----------------- ----------------- Ending Balance of Loans . . . . . . . . . . . . . . . . . . . . . . $ 7,127 $ 8,417 ================= =================
Other indebtedness of officers and employees as of December 31, 1995 and 1994 was $2,786,000 and $3,326,000, respectively. The Company incurred legal costs of $152,000, $146,000 and $149,000 during the years ended December 31, 1995, 1994 and 1993, respectively, from a law firm of which an outside director of the Company is a partner. The Company paid approximately $57,000, $56,000 and $41,000 in insurance premiums during the years ended December 31, 1995, 1994 and 1993, respectively, to a company of which an outside director is an officer. 54 56 18. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other estimation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Such techniques and assumptions, as they apply to individual categories of the Company's financial instruments, are as follows: Cash and due from banks: The carrying amounts for cash and due from banks is a reasonable estimate of those assets' fair value. Investment, mortgage-backed and marketable equity securities: Fair values for these securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices for similar securities. Loans receivable: For adjustable rate loans that reprice frequently and with no significant change in credit risk, the carrying amounts are a reasonable estimate of those assets' fair value. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Nonperforming loans are valued based upon the underlying value of the collateral. Accrued interest receivable: The carrying amount of accrued interest approximates its fair value. Deposit liabilities: The fair value of demand deposits, savings accounts, and certain money market deposits is the amount on demand at the reporting date, that is, the carrying value. Fair values for fixed rate certificates of deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities. Federal funds purchased and securities sold under agreement to repurchase: Federal funds purchased and securities sold under agreement to repurchase generally have an original term to maturity of one day and thus are considered short-term borrowings. Consequently, their carrying value is a reasonable estimate of fair value. Commitments to extend credit: The carrying amounts of commitments to extend credit and standby letters of credit are a reasonable estimate of those assets' fair value. Notes payable FHLB - Dallas: The fair value of these notes is estimated by discounting the future cash flows using rates at which notes would be made to borrowers with similar credit ratings and for the same remaining maturities. 55 57 The following table presents the Company's assets, liabilities, and unrecognized financial instruments at both their respective carrying amounts and fair value. The Company's nonfinancial assets and liabilities are presented in both columns at their carrying amount (in thousands).
At December 31, 1995 At December 31, 1994 ------------------------------- ------------------------------- Carrying Carrying Amount Fair Value Amount Fair Value --------------- -------------- --------------- -------------- Financial assets: Cash and due from banks . . . . . . . $ 26,321 $ 26,321 $ 25,381 $ 25,381 Federal funds sold . . . . . . . . . . 11,100 11,100 Investment securities: Available for sale . . . . . . . . . 74,284 74,284 25,695 25,695 Held to maturity . . . . . . . . . . 2,635 2,634 57,025 55,704 Mortgage-backed and related securities: Available for sale . . . . . . . . . 65,423 65,423 27,654 27,654 Held to maturity . . . . . . . . . . 33,984 34,337 60,426 57,917 Marketable equity securities: Available for sale . . . . . . . . . 2,112 2,112 2,005 2,005 Loans, net . . . . . . . . . . . . . . 225,461 231,818 197,853 198,714 Interest receivable . . . . . . . . . 3,095 3,095 2,581 2,581 Nonfinancial assets: Other real estate owned . . . . . . . 273 273 1,134 1,134 Premises and equipment . . . . . . . . 11,669 11,669 9,875 9,875 Other assets . . . . . . . . . . . . . 3,416 3,416 5,492 5,492 --------------- -------------- --------------- -------------- Total Assets . . . . . . . . . . . . . . $ 448,673 $ 455,382 $ 426,221 $ 423,252 =============== ============== =============== ============== Financial liabilities: Retail deposits . . . . . . . . . . . $ 388,308 $ 389,908 $ 385,102 $ 382,720 Federal funds purchased . . . . . . . 4,600 4,600 Notes payable - FHLB Dallas . . . . . 13,686 13,024 7,997 7,221 Nonfinancial liabilities: Other liabilities . . . . . . . . . . 8,727 8,727 5,598 5,598 --------------- -------------- --------------- -------------- Total liabilities . . . . . . . . . . . . $ 415,321 $ 416,259 $ 398,697 $ 395,539 =============== ============== =============== ==============
As discussed earlier, the fair value estimate of financial instruments for which quoted market prices are unavailable is dependent upon the assumptions used. Consequently, those estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented in the above fair value table do not necessarily represent the underlying value of the Company. The Company did not own any derivative financial instruments as defined by FAS119 and adoption of the statement did not affect the Company's financial statements. 56 58 19. PARENT COMPANY FINANCIAL INFORMATION Condensed financial information for Southside Bancshares, Inc. (parent company only) was as follows (dollars in thousands): CONDENSED BALANCE SHEETS
December 31, December 31, ASSETS 1995 1994 ---------------- ---------------- Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . $ 267 $ 259 Investment in Southside Bank at equity in underlying net assets . . . . . . . . . . . . . . . . . . . . . . . 33,116 27,249 Investment in service subsidiary at equity in underlying net assets . . . . . . . . . . . . . . . . . . . . . . . 15 15 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7 ---------------- ---------------- TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $ 33,407 $ 27,530 ================ ================ LIABILITIES Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . $ 55 $ 6 ---------------- ---------------- TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . 55 6 ---------------- ---------------- SHAREHOLDERS' EQUITY Common Stock ($2.50 par, 6,000,000 shares authorized: 3,141,393 and 2,973,234 shares issued) . . . . . . . . . . . . . . 7,853 7,433 Paid-in Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,209 14,529 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 9,123 7,480 Treasury Stock (49,421 and 23,082 shares) . . . . . . . . . . . . . . (486) (219) Net unrealized gains (losses) on securities available for sale . . . 653 (1,699) ---------------- ---------------- TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . 33,352 27,524 ---------------- ---------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . $ 33,407 $ 27,530 ================ ================
57 59 CONDENSED STATEMENTS OF INCOME
Years Ended December 31, ----------------------------------------- 1995 1994 1993 ------------- ------------ ------------ INCOME Dividends from subsidiary . . . . . . . . . . . . . . . . . . . . . $ 1,197 $ 975 $ 810 ------------- ------------ ------------ TOTAL INCOME . . . . . . . . . . . . . . . . . . . . . . . . . 1,197 975 810 ------------- ------------ ------------ EXPENSE Salaries and employee benefits . . . . . . . . . . . . . . . . . . 150 120 120 Taxes other than income . . . . . . . . . . . . . . . . . . . . . . 39 38 40 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 60 11 ------------- ------------ ------------ TOTAL EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . 273 218 171 ------------- ------------ ------------ Income before federal income tax expense . . . . . . . . . . . . . 924 757 639 Benefit for federal income tax expense . . . . . . . . . . . . . . (93) (74) (58) ------------ ----------- ----------- Income before equity in undistributed earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . 1,017 831 697 Equity in undistributed earnings of subsidiaries . . . . . . . . . 3,515 2,688 3,318 ------------- ------------ ------------ NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,532 $ 3,519 $ 4,015 ============= ============ ============
CONDENSED STATEMENTS OF CASH FLOW
Years Ended December 31, ----------------------------------------- 1995 1994 1993 ------------- ----------- ----------- OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,532 $ 3,519 $ 4,015 Adjustments to reconcile net income to cash provided by operations: Equity in undistributed earnings of subsidiaries . . . . . . . (3,515) (2,688) (3,318) (Increase) decrease in taxes receivable . . . . . . . . . . . . (2) 5 2 Increase (decrease) in other liabilities . . . . . . . . . . . 49 (2) (44) ------------- ------------ ------------ Net cash provided by operating activities . . . . . . . . 1,064 834 655 INVESTING ACTIVITIES: Investments in subsidiaries . . . . . . . . . . . . . . . . . . . (15) ------------- ------------ ------------ Net cash used in investing activities . . . . . . . . . . (15) FINANCING ACTIVITIES: Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . (1,047) (725) (686) Purchase of treasury stock . . . . . . . . . . . . . . . . . . . (267) (219) Common Stock Issued . . . . . . . . . . . . . . . . . . . . . . . 258 195 201 ------------- ------------ ------------ Net cash used in financing activities . . . . . . . . . . (1,056) (749) (485) Net increase (decrease) in cash and cash equivalents . . . . . . 8 85 155 Cash and cash equivalents at beginning of year . . . . . . . . . 259 174 19 ------------- ------------ ------------ Cash and cash equivalents at end of year . . . . . . . . . . . . $ 267 $ 259 $ 174 ============= ============ ============
58 60 SOUTHSIDE BANCSHARES, INC. Exhibit Index for the Year Ended December 31, 1995
Item Description Reference for Filing - -------- ------------------------------------ ------------------------------------- 3(a)(i) Articles of Incorporation as amended This exhibit is incorporated herein and in effect on December 31, 1992, by reference to the December 31, 1992 of SoBank, Inc. (now named Southside Form 10K. Bancshares, Inc.). 3(a)(ii) Articles of Amendment effective May This exhibit is incorporated herein 9, 1994 to Articles of Incorporation by reference to the December 31, 1994 of SoBank, Inc. (now named Southside Form 10K. Bancshares, Inc.). 3(b) Bylaws as amended and in effect on This exhibit is incorporated herein March 23, 1995 of Southside by reference to the December 31, 1994 Bancshares, Inc.. Form 10K. 10(a)(i) Deferred Compensation Plan for B. G. This exhibit is incorporated herein Hartley effective February 13, 1984, by reference to the December 31, 1994 as amended June 28, 1990 and December Form 10K. 15, 1994. 10(a)(ii) Deferred Compensation Plan for Robbie Filed herewith. N. Edmonson effective February 13, 1984, as amended June 28, 1990 and March 16, 1995. 10(b) Officers Long Term Disability Income This exhibit is incorporated herein Plan effective June 25, 1990. by reference to the June 30, 1990 Form 10K. 10(c) Retirement Plan Restoration Plan for This exhibit is incorporated herein the subsidiaries of SoBank, Inc. (now by reference to the December 31, 1992 named Southside Bancshares, Inc.). Form 10K. 10(d) Incentive Stock Option Plan effective This exhibit is incorporated herein April 1, 1993 of SoBank, Inc. (now by reference to the December 31, 1994 named Southside Bancshares, Inc.). Form 10K. 10(e) Form of Deferred Compensation Filed herewith. Agreements dated June 30, 1994 with each of Sam Dawson, Lee Gibson, Titus Jones, Jeryl Story and Andy Wall as amended November 13, 1995. 22 Subsidiaries of the Registrant. This exhibit is incorporated herein by reference to the December 31, 1994 Form 10K. 27 Financial Data Schedule for the year Filed herewith. ended December 31, 1995.
EX-10.(A)(II) 2 DEFERRED COMPENSATION FOR ROBBIE N. EDMONSON 1 EXHIBIT 10(a)(ii) DEFERRED COMPENSATION AGREEMENT THE STATE OF TEXAS COUNTY OF SMITH THIS AGREEMENT is entered into by and between SOUTHSIDE STATE BANK of Tyler, Texas, a corporation organized and existing under the laws of the State of Texas, hereinafter called BANK, and ROBBIE N. EDMONSON, hereinafter called EXECUTIVE, whereby it is agreed as follows: WITNESSETH: I. The Board of Directors of BANK have determined that the EXECUTIVE services to the BANK since October, 1968, as its EXECUTIVE Vice President have been of exceptional merit and has constituted an invaluable contribution to the general welfare of BANK and in bringing BANK to its present status of operating efficiency. The Board of Directors has further determined that the continued service of EXECUTIVE on behalf of BANK is essential to the future growth and profits of BANK and it is in the best interest of BANK to arrange terms of continued employment for EXECUTIVE so as to reasonably assure his remaining in the employ of BANK for the balance of his work lifetime. II. BANK agrees to employ EXECUTIVE in such capacity as BANK may from time to time determine. EXECUTIVE will continue in the employment of BANK in such capacity and with such duties and responsibilities as may be assigned to him, and with such compensation as may be determined from time to time by the Board of Directors. EXECUTIVE agrees to well and truly perform his duties and obligations as an employee of BANK and will use his best efforts to furnish faithful and satisfactory service to BANK. III. It is specifically agreed that if EXECUTIVE remains in the employment of BANK until his permanent disability, death or retirement, whichever occurs first, BANK agrees to pay the sum and amount of THREE HUNDRED THOUSAND AND NO/100 ($300,000.00) DOLLARS to EXECUTIVE, or his surviving wife or designated beneficiaries, as hereinafter provided. Such deferred compensation shall be payable commencing on the 1st day of the month following the first of the following events to occur: (1) the permanent disability of EXECUTIVE; (2) the retirement of EXECUTIVE; or (3) the death of EXECUTIVE. For the purpose of this agreement, total disability shall be defined as a physical or mental condition as diagnosed by a medical doctor approved or selected by BANK, that so incapacitates or disables EXECUTIVE that he is no longer able to perform the duties and responsibilities assigned to EXECUTIVE and that in the opinion of such medical doctor, such condition is permanent. Such deferred compensation, when it commences, shall be payable in 120 2 equal consecutive monthly installments of TWO THOUSAND FIVE HUNDRED AND NO/100 ($2,500.00) DOLLARS. IV. EXECUTIVE shall have the right to name a beneficiary other than his wife provided such designation of beneficiary be in writing and signed by EXECUTIVE and delivered to BANK. Such designation of beneficiary may provide for alternative beneficiary if the designated beneficiary fails to survive the EXECUTIVE or fails to survive the term payout, as provided herein. Failure to designate a beneficiary in accordance with the terms hereof shall be deemed an election by EXECUTIVE that such benefits as provided herein shall go to the surviving wife or to his surviving children, should his wife die simultaneously or predecease him. V. If the EXECUTIVE should die prior to retirement, and such death is a result of a suicide, then, in such event, the death benefits provided in this Agreement shall not be payable unless such suicide occurs after the lapsing of any anti-suicide provisions contained in any insurance policy purchased by BANK upon the life of EXECUTIVE, should the BANK so elect to purchase such insurance for its own benefit. VI. If for any reason other than good cause, the employment of EXECUTIVE is terminated by BANK, such termination shall not terminate this Agreement and such involuntary termination other than for good cause shall be deemed the same as retirement for the purpose of this Agreement. For the purpose of this Agreement, "good cause" shall be defined as being action or inaction equivalent to habitual dereliction of duty, misfeasance, willful misconduct, criminal conduct, or gross negligence. VII. Neither the EXECUTIVE nor any beneficiary designated by EXECUTIVE shall have any power or right to transfer, assign, anticipate, mortgage, commute or otherwise encumber in advance any of the benefits payable hereunder, nor shall such benefits be subject to seizure for payment of any debts or judgment of any of them, or be transferred by operation of law in the event of bankruptcy, insolvency or otherwise. IX. This Agreement shall be binding upon and inure to the benefit of EXECUTIVE and his personal representatives and the BANK and its successors and assigns. However, it is specifically agreed that this is not a contract of employment between the parties hereto and nothing herein shall restrict the right of the corporation to discharge EXECUTIVE or restrict the right of EXECUTIVE to terminate his employment. 3 EXECUTED as of December, 1982. ATTEST: SOUTHSIDE STATE BANK /s/ CAYLA WASHBURN By: /s/ B.G. HARTLEY ----------------------------- ------------------------------ Assistant Vice President B.G. HARTLEY, PRESIDENT /s/ ROBBIE N. EDMONSON ------------------------------ ROBBIE N. EDMONSON, EXECUTIVE 4 FIRST AMENDMENT TO DEFERRED COMPENSATION AGREEMENT THE STATE OF TEXAS COUNTY OF SMITH THIS AGREEMENT is entered into by and between SOUTHSIDE STATE BANK of Tyler, Texas, a Texas banking corporation, hereinafter called BANK, and ROBBIE N. EDMONSON, hereinafter called EXECUTIVE, whereby it is agreed as follows: WITNESSETH: I. BANK and EXECUTIVE has heretofore entered into a Deferred Compensation Agreement in 1982, which has continued in full force and effect subsequent thereto. The parties hereto desire to amend and modify such Agreement, with such amendment to be effective immediately. II. In such Deferred Compensation Agreement, provided that EXECUTIVE met certain conditions precedent, the BANK, at his permanent disability, death or retirement, whichever occurs first, pay agreed compensation to EXECUTIVE, his surviving wife or designated beneficiaries as the case might then be. The parties hereto desire to eliminate, and do hereby eliminate, permanent disability as one of the enumerated events which cause commencement of payment of deferred compensation. All reference to disability is hereby deleted from said Agreement. Henceforth, the only occurrence that will cause the commencement of deferred compensation payments under the terms of such Agreement shall either be the death or retirement of EXECUTIVE under the terms and conditions of said Deferred Compensation Agreement. III. Except as amended or modified by this Amendment, the parties hereto do reaffirm and ratify said Agreement and when construed together, this Amendment and the original Deferred Compensation Agreement shall constitute the entire agreement of the parties. EXECUTED as of the 28th day of June, 1990. ATTEST: SOUTHSIDE STATE BANK /s/ SAM DAWSON By: /s/ B.G. HARTLEY ------------------------------ ------------------------------ Assistant Vice President B.G. HARTLEY, PRESIDENT /s/ ROBBIE N. EDMONSON ------------------------------ ROBBIE N. EDMONSON, EXECUTIVE 5 SECOND AMENDMENT TO DEFERRED COMPENSATION AGREEMENT BETWEEN SOUTHSIDE BANK AND ROBBIE N. EDMONSON DATED DECEMBER, 1982 THIS AGREEMENT is entered into by and between SOUTHSIDE BANK of Tyler, Texas (formerly Southside State BANK), a Texas banking corporation, hereinafter called BANK, and ROBBIE N. EDMONSON, hereinafter called EXECUTIVE, whereby it is agreed as follows: WITNESSETH: I. BANK and EXECUTIVE have heretofore entered into a Deferred Compensation Agreement in December of 1982, and have subsequently amended such Deferred Compensation Agreement by the First Amendment to Deferred Compensation Agreement dated June 28, 1990. The parties hereto desire to make this Second Amendment to such Agreement, with same to be effective immediately. II. The Deferred Compensation Agreement as initially prepared provided for maximum benefits to be THREE HUNDRED THOUSAND AND NO/100 ($300,000.00) DOLLARS paid in equal monthly installments over 120 months of TWO THOUSAND FIVE HUNDRED AND NO/100 ($2,500.00) DOLLARS. The parties have determined that such compensation should be increased to a maximum of THREE HUNDRED SIXTY THOUSAND AND NO/100 ($360,000.00) DOLLARS. The parties agree that such compensation shall be paid in 120 equal monthly installments of THREE THOUSAND AND NO/100 ($3,000.00) DOLLARS each. III. Except as modified by this Second Amendment, the Deferred Compensation Agreement and its First Amendment thereto shall remain in full force and effect and the original Deferred Compensation Agreement, as amended in the First and Second Amendments thereto, shall now constitute the entire agreement between the parties. EXECUTED as of the 16th day of March, 1995. ATTEST: SOUTHSIDE BANK /s/ SUSAN ASHLEY By: /s/ B.G. HARTLEY --------------------------- ------------------------------- Assistant Vice President B.G. HARTLEY, PRESIDENT /s/ ROBBIE N. EDMONSON ------------------------------- ROBBIE N. EDMONSON, EXECUTIVE EX-10.(E) 3 DEFERRED COMPENSATION WITH SAM DAWSON 1 EXHIBIT 10(e) DEFERRED COMPENSATION AGREEMENT THIS AGREEMENT is entered into, effective as of the date executed, by and between SOUTHSIDE BANK of Tyler, Texas, a corporation organized and existing under the laws of the State of Texas, hereinafter called BANK, and SAM DAWSON, hereinafter called EXECUTIVE. This Agreement amends and restates the Agreement executed as of June 30, 1994 by Sam Dawson, EXECUTIVE, and B. G. Hartley for the BANK. W I T N E S S E T H: I. The Board of Directors of BANK have determined that the service of EXECUTIVE to BANK since employment of EXECUTIVE has been of exceptional merit and has constituted an invaluable contribution to the general welfare of BANK. The Board of Directors has further determined that the continued service of EXECUTIVE on behalf of BANK is essential to the future growth and profit of BANK and it is in the best interest of BANK to arrange for financial incentives for EXECUTIVE to remain in the employment of BANK for the balance of his work lifetime. II. BANK agrees to employ EXECUTIVE in such capacity as BANK may from time to time determine. EXECUTIVE will continue in the employment of BANK in such capacity and with such duties and responsibilities as may from time to time be assigned to such EXECUTIVE. BANK shall have sole discretion over compensation to be paid to EXECUTIVE for the performance of such services. EXECUTIVE agrees to well and truly perform his duties and obligations as an employee of BANK and will use his best efforts to furnish faithful and satisfactory services to BANK. Nothing in this Agreement shall be construed as any limitation of the BANK's right and privilege to discontinue the employment of the EXECUTIVE at any time, subject to the deferred compensation provisions set forth in this Agreement. III. It is specifically agreed that if EXECUTIVE remains in the employment of BANK until his total and permanent disability, death, or retirement, whichever occurs first, BANK agrees to pay the sum of THREE HUNDRED THOUSAND AND NO/100 DOLLARS ($300,000.00) to EXECUTIVE or his surviving spouse or designated beneficiaries as hereinafter provided. Such deferred compensation shall be payable commencing on the 1st day of the month following the first of the following events to occur: A. The total and permanent disability of EXECUTIVE. (For the purposes of this Agreement, total and permanent disability shall be defined as a physical or mental impairment, non-self-induced, as diagnosed by a medical doctor selected by BANK, that so incapacitates or disables EXECUTIVE such that EXECUTIVE is no longer able to perform the essential functions of his position with reasonable accommodation and that in the opinion of such medical doctor, such condition is permanent); 2 B. The retirement of EXECUTIVE. (For the purposes of this Agreement, retirement of EXECUTIVE shall be defined as EXECUTIVE's termination of employment with the BANK at or after attainment of age sixty-five (65)); or C. The death of EXECUTIVE. Deferred compensation, when it commences, shall be payable in 120 equal consecutive monthly installments of TWO THOUSAND FIVE HUNDRED AND NO/100 DOLLARS ($2,500.00) each. IV. EXECUTIVE shall have the right to name a beneficiary other than his spouse, provided, such designation of beneficiary be in writing and signed by EXECUTIVE and EXECUTIVE's spouse, and delivered to BANK. Such designation of beneficiary may provide for alternative beneficiaries if the designated beneficiary fails to survive EXECUTIVE or fails to survive the term of payout, as provided above. Failure to designate a beneficiary in accordance with the terms hereof shall be deemed an election by EXECUTIVE that such benefit as provided herein shall go to the surviving spouse or, should the EXECUTIVE'S spouse die simultaneously or predecease him or die during the term of the payment of benefits, to his then surviving children in equal portions. V. If EXECUTIVE should die prior to retirement and such death is the result of a suicide, then, in such event, the death benefits provided in this Agreement shall not be payable unless such suicide occurs after the lapsing of any anti-suicide provisions contained in any insurance policy purchased by BANK upon the life of EXECUTIVE, should BANK so elect to purchase such insurance for its own benefit. VI. If for any reason other than good cause, EXECUTIVE'S employment is terminated by BANK, such termination shall not terminate this Agreement and such involuntary termination other than for good cause shall be deemed the same as retirement for the purposes of this Agreement. For the purposes of this Agreement, "good cause" shall be defined as action or inaction equivalent to habitual dereliction of duty, gross insubordination, willful misconduct, criminal conduct, gross negligence, or willful or malicious violation of federal or state banking statutes with the intent by the EXECUTIVE to derive personal financial benefit or to do financial harm to the Bank. VII. If, prior to a Change in Control, EXECUTIVE terminates employment (as contrasted with termination initiated by BANK) prior to attainment of age 65 for any reason other than death or disability, no amounts shall be due EXECUTIVE under this Agreement. If, after a Change in Control, the EXECUTIVE terminates employment (as contrasted with termination initiated by BANK) prior to attainment of age 65 for any reason other than death, disability, or good reason, no 3 amounts shall be due EXECUTIVE under this Agreement. After a Change in Control, a termination for good reason shall be deemed the same as retirement for the purposes of this Agreement. For purposes of this Agreement "good reason" shall mean that the EXECUTIVE resigns from his position(s) with the BANK after the occurrence of any of the following as determined by the EXECUTIVE in good faith: (i) Without his express written consent, the assignment to the EXECUTIVE of any duties that are clearly inconsistent with his positions, duties, responsibilities and status with the BANK as in effect immediately before the execution of this Agreement or a detrimental change in his titles or offices as in effect immediately before execution of this Agreement, or any removal of the EXECUTIVE from or any failures to re-elect the EXECUTIVE to any of such positions, except in connection with the termination of his employment for good cause or as a result of his disability or death; (ii) A reduction of the EXECUTIVE'S base salary or overall compensation (other than as a result of year to year variations in bonuses consistent with past practices or consistent with the similar reductions applied to the BANK's entire workforce) without the prior written consent of the EXECUTIVE; (iii) The BANK shall relocate its principal executive offices or require EXECUTIVE to have as his principal location of work any location which is in excess of thirty (30) miles from the current location of the BANK or to travel away from his office in the course of discharging his responsibilities or duties hereunder more than thirty (30) consecutive calendar days or an aggregate of more than ninety (90) calendar days in any consecutive three hundred sixty-five (365) calendar-day period without in either case his prior consent; or (v) Failure by the BANK to require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the BANK, by agreement in form and substance satisfactory to the EXECUTIVE, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the BANK would be required to perform it if no such succession had taken place. (vi) As a result of a Change in Control of the BANK or of Southside Bancshares, Inc. ("BHC") and a change in circumstances thereafter significantly affecting his position, the EXECUTIVE is rendered substantially unable to carry out, or has been substantially hindered in the performance of, any of the authorities, powers, functions, responsibilities or duties attached to his position immediately prior to the Change in Control of the BANK, which situation is not remedied within thirty (30) calendar days after receipt by the BANK of written notice from the EXECUTIVE of such determination. For purposes of this section, a "Change in Control" shall be deemed to have occurred in the event of any of the following: (1) a change in the ownership of the capital stock of the BANK where a corporation, person or group acting in concert (a "Person") as described in Section 4 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), holds or acquires, directly or indirectly, beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a number of shares of capital stock of the BANK or of BHC which constitutes 50% or more of the combined voting power of the BANK's (or BHC's) then outstanding capital stock then entitled to vote generally in the election of directors; or (2) the persons who were members of the Board of Directors of the BANK or BHC immediately prior to a tender offer, exchange offer, contested election or any combination of the foregoing, cease to constitute a majority of the Board of Directors; or (3) the adoption by the Board of Directors of the BANK or of the BHC of a merger, consolidation or reorganization plan involving the BANK in which the BANK or BHC is not the surviving entity, or a sale of all or substantially all of the assets of the BANK or BHC. For purposes of this Agreement, a sale of all or substantially all of the assets of the BANK or BHC shall be deemed to occur if any Person acquires (or during the 12-month period ending on the date of the most recent acquisition by such Person, has acquired) gross assets of the BANK or BHC that have an aggregate fair market value equal to 50% of the fair market value of all of the gross assets of the BANK or BHC immediately prior to such acquisition or acquisitions; or (4) a tender offer or exchange offer is made by any Person which, if successfully completed, would result in such Person beneficially owning (within the meaning of Rule 13d-3 promulgated under the Exchange Act) either 50% or more of the BANK's or BHC's outstanding shares of Common Stock or shares of capital stock having 50% or more of the combined voting power of the BANK's or BHC's then outstanding capital stock (other than an offer made by the BANK or BHC), and sufficient shares are acquired under the offer to cause such person to own 50% or more of the voting power; or (5) any other transactions or series of related transactions occurring which have substantially the same effect as the transactions specified in any of the preceding clauses of this subsection (vi). (vii) The BANK's failure to perform any material provision of this Agreement. (viii) Any requirement by the BANK or the Board of Directors of the BANK that the EXECUTIVE perform, assist, abet or approve any act which is or could be construed to be illegal under any federal, state or local law. VII. 5 Neither EXECUTIVE nor any beneficiary designated by EXECUTIVE shall have any power or right to transfer, assign, anticipate, mortgage, commute or otherwise encumber in advance any of the benefits payable hereunder, nor shall such benefits be subject to seizure for payment of any debts or judgments of EXECUTIVE or beneficiaries, nor shall such benefits be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. VIII. The BANK shall have no obligation to set aside, earmark or entrust any fund or money with which to pay its obligations under this Agreement. The EXECUTIVE, his Beneficiary or any successor-in-interest to him shall be and remain simply a general creditor of the BANK in the same manner as any other creditor having a general unsecured claim. For purposes of the Internal Revenue Code, the BANK intends this Agreement to be an unfunded, unsecured promise to pay on the part of the BANK. For purposes of ERISA, the BANK intends that this Agreement be an unfunded arrangement for the benefit of a select member of management, who is a highly compensated employee of the BANK for the purpose of qualifying this Agreement for the "top hat" plan exception under sections 201(2), 301(a)(3) and 401(a)(1) of ERISA. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. The BANK reserves the absolute right at its sole discretion to either "fund" the obligation undertaken by this Agreement or to refrain from funding the same and to determine the extent, nature and method of such funding. Should the BANK elect to satisfy its obligations under this Agreement, in whole or in part, through the purchase of life insurance, mutual funds, disability policies or annuities, the BANK reserves the absolute right, in its sole discretion, to terminate such "funding" at any time, in whole or in part. Any such funding shall in no event affect EXECUTIVE'S rights and it is not intended that any BANK asset be segregated or considered a plan asset. At no time shall the EXECUTIVE have or be deemed to have any lien nor right, title or interest in or to any specific investment or to any assets of the BANK; rather the EXECUTIVE shall remain a general unsecured creditor of the BANK. If the BANK elects to invest in a life insurance, disability or annuity policy upon the life of EXECUTIVE, the EXECUTIVE shall assist the BANK by freely submitting to a physical exam and supplying such additional information necessary to obtain such insurance or annuities. IX. 6 The Board of Directors of the BANK shall have the exclusive power and authority to interpret and construe the Agreement. The Board of Directors of the BANK may engage agents to assist it and may engage legal counsel, who may be counsel to the BANK. The Agreement may be amended, suspended or terminated, in whole or in part, only by a written instrument signed by a duly authorized officer of the BANK and by EXECUTIVE. X. Whenever in this Agreement words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply. Nothing contained in this Agreement shall affect the right of the EXECUTIVE to participate in or be covered by any qualified or non-qualified pension, profit sharing, group, bonus or other supplemental compensation or fringe benefit plan constituting a part of the BANK's existing or future compensation structure. The validity and interpretation of this Agreement shall be governed by the laws of the State of Texas or Federal laws, where applicable. No provision of this Agreement shall be deemed or construed to create specific employment rights to the EXECUTIVE nor limit the right of the BANK to discharge the EXECUTIVE at any time with or without cause. In a similar fashion, no provision shall limit the EXECUTIVE'S rights to voluntarily sever his employment at any time. The BANK shall deduct from the amount of any payment made pursuant to this Agreement any amounts required to be paid or withheld by the BANK with respect to federal or state taxes. By executing this Agreement, the EXECUTIVE agrees to all such deductions. In case any one or more of the provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions in this Agreement shall not in any way be affected or impaired. XI. In the event of any claim or controversy arising out of or relating to this Agreement or the breach of this Agreement, the parties agree that all such claims or controversies shall be resolved by final and binding arbitration in Smith County, Texas, in accordance with the Commercial Arbitration Rules of the American Arbitration Association in effect on the date when the claim or controversy first arises. Either party must communicate its request for arbitration under this section in writing ("Arbitration Notice") to the other party within one hundred twenty (120) days from the date the claim or controversy first arises. Failure to communicate Arbitration Notice within one hundred twenty (120) days shall constitute a waiver of any such claim or controversy. All claims or controversies subject to arbitration under this section shall be submitted to an arbitration hearing within thirty (30) days from the date Arbitration Notice is communicated by either party. All claims or controversies submitted to arbitration under this section shall be resolved 7 by a panel of three (3) arbitrators who are licensed to practice law in the State of Texas and who are experienced in the arbitration of employment disputes. These arbitrators shall be selected in accordance with the applicable Commercial Arbitration Rules or by agreement of the parties. Either party may request that the arbitration proceeding be stenographically recorded by a Certified Shorthand Reporter. The arbitrators shall issue a decision on any claim or controversy within thirty (30) days from the date the arbitration hearing is completed. The parties shall have the right to be represented by legal counsel at any arbitration hearing. The costs of any arbitration hearing, including the attorneys' fees incurred by both parties (including any costs, expenses or attorneys' fees incurred in filing any lawsuit to compel arbitration under this section, if applicable), shall be paid by the losing party or parties. The arbitration provisions in this section are subject to the Federal Arbitration Act, 9 U.S.C. Sections 1 et seq. (West 1994) (or any successor provisions) and may be specifically enforced by any party, and submission to arbitration proceedings compelled, by any Court of competent jurisdiction. The decision of the arbitrators may be specifically enforced by any party in any court of competent jurisdiction. XII. This Agreement shall be binding upon and inure to the benefit of EXECUTIVE, his heirs and personal representative, and BANK and its successors and assigns and supersedes all prior agreements between EXECUTIVE and BANK regarding deferred compensation. It is specifically agreed that this is not a contract of employment between the parties hereto and nothing herein shall restrict the right of BANK to discharge EXECUTIVE, with or without cause, or restrict the right of EXECUTIVE to terminate his employment. However, termination of employment by EXECUTIVE prior to retirement for any reason not specifically entitling EXECUTIVE to compensation under the preceding terms of this Agreement shall terminate all obligations of BANK hereunder. EXECUTED this ______ day of _______________________, 1995. -------------------------------------- SAM DAWSON, EXECUTIVE SOUTHSIDE BANK By: ----------------------------------- B. G. HARTLEY, PRESIDENT EX-27 4 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 26,321 0 0 0 141,819 36,619 36,971 228,778 3,317 448,673 388,308 4,600 8,727 13,686 7,853 0 0 25,499 448,673 18,861 10,137 592 29,590 12,290 12,837 16,753 (300) 221 14,682 6,245 6,245 0 0 4,532 1.47 1.47 4.34 1,256 652 336 462 3,137 599 1,079 3,317 3,317 0 92
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