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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)
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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
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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.
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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.
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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.
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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.
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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.
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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
========= ========= ========= ========= ========= =========
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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.
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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
================ =============== ===============
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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.
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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.
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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.
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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
=========== =========== =========== =========== =========== ===========
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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 Av