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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
FOR THE YEAR ENDED DECEMBER 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM______ TO________
COMMISSION FILE NUMBER 0-12247
Southside Bancshares, Inc.
(Exact name of registrant as specified in its charter)
TEXAS 75-1848732
(State 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 2, 1998, 3,496,269 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 $44,922,428.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Proxy Statement to be filed for the Annual Meeting of
Shareholders to be held April 22, 1998. (Part III)
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PART I
ITEM 1. BUSINESS
GENERAL
Southside Bancshares, Inc. (the "Company") is a $571 million bank holding
company in Tyler, Texas, with a metropolitan area population of 166,000, located
90 miles east of Dallas/Fort Worth and 90 miles west of Shreveport, Louisiana,
south of Interstate 20. Southside Bank is the largest bank headquartered in
Smith County, Texas. The Company is a Texas corporation organized in 1982, which
through an intermediate holding company, owns all of the capital stock of
Southside Bank which was organized in 1960. 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 its subsidiaries. At this time the Company
conducts no business except with respect to Southside Bank and its subsidiaries.
The Company has been, and intends to remain a community-oriented
financial institution offering a variety of financial services to meet the needs
of the communities it serves. The Company attracts deposits from the general
public and uses such deposits, together with Federal Home Loan Bank ("FHLB")
Dallas borrowings and other borrowings to fund loans. See "Lending Activities."
The Company also invests in mortgage-backed securities secured by 1-4 family
residential mortgages, municipal obligations, U.S. Government and agency
obligations and other permissible investments. The Company, through its
affiliate, BSC Securities, L.C., offers a full range of retail brokerage
securities services. Southside Bank opened a finance company, Countywide Loans,
Inc. during 1997 in Tyler. The finance company provides basic financial services
such as lending, check cashing and money orders.
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 receivable financing, equipment
financing, real estate lending, other personal loans and safe deposit services.
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 made indirect automobile loans through area
auto dealers until December 31, 1997. The Company exited this line of business
effective January 2, 1998, to concentrate more on direct automobile loans. The
Company offers a variety of deposit accounts having a wide range of interest
rates and terms, which generally include savings, money market, and a variety of
checking accounts, as well as certificate accounts. The Company generally
solicits deposits in its primary market areas. Southside Bank offers automatic
teller machine facilities and services through a statewide system known as
"Moneymaker." The Company also began offering home banking during January 1998
and debit cards during 1997.
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.
At December 31, 1997, the Company had total assets of $571.1 million,
deposits of $462.7 million, borrowings of $63.1 million and shareholders' equity
of $40.0 million.
At December 31, 1997, the Company's total loan portfolio totaled $296.0
million, including $76.2 million of 1-4 family residential first mortgage loans,
$55.8 million of commercial and other real estate loans, $91.7 million of loans
to individuals and $62.0 million of commercial loans. In addition, on that date,
the Company had $141.4 million of mortgage-backed securities and $75.1 million
of other investment securities and FHLB Dallas stock.
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At December 31, 1997, the vast majority of the Company's loans were
secured by properties and/or collateral located in Smith County. The Company's
revenues are derived primarily from interest on loans, mortgage-backed
securities and investments, and income from service charges.
In February 1998, the Company made application to open a grocery store
branch in Longview, Texas. A native Longview banking veteran has joined
Southside Bank to lead the Company in its expansion into the Longview market
area. The Company anticipates it will also make application to open a free
standing full-service branch with drive-up facilities in Longview as soon as a
suitable site is found. The Company's television and radio advertising has
extended into this market area for several years, providing Southside Bank name
recognition in the Greater Longview area.
MARKET AREA
Tyler's industry base is a diverse mix that includes oil and gas,
manufacturing, distribution, conventions and tourism, as well as retirement
relocation, to name a few. All of these support a growing regional system of
medical service, retail and education centers. Tyler is home to several
nationally recognized health care systems. Five Tyler hospitals represent all
major specialties and employ over 6,500 individuals. In 1996, Target Stores
chose a location in the greater Tyler area along Interstate 20 for its $80
million distribution center that will employ approximately 900 workers. This
facility is expected to begin operations in mid 1998.
LENDING ACTIVITIES
The Company's main objective is to seek attractive lending opportunities
in Smith County, Texas and adjoining counties. Total Loans as of December 31,
1997 increased $37.9 million or 14.7% while the average balance was up $30.7
million or 12.6% when compared to 1996. Real Estate Loans as of December 31,
1997 reflected an increase of $15.0 million or 11.8% from December 31, 1996.
Loans to individuals increased $12.2 million or 15.4% from December 31, 1996 and
Commercial loans increased $10.7 million or 20.8%. The increase in Real Estate
Loans is due to a stronger real estate market, lower interest rates and
increased commitment by the Company to residential mortgage lending. Commercial
loans increased as a result of commercial growth in the Company's market area.
Loans to individuals increased due to an increase in indirect dealer loans and
additional penetration achieved through the bank's branch locations. Effective
January 2, 1998, the Company exited its indirect dealer loan line of business to
concentrate more on direct loans. 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 the local economy, the Company
believes the risk in this portion of the portfolio is spread throughout the
economic community.
The aggregate amount of loans that Southside Bank is permitted to make
under applicable bank regulations to any one borrower, including related
entities, is 25% of unimpaired capital and surplus. The Company's legal lending
limit at December 31, 1997 was $7.5 million.
The average yield on loans for the year ended December 31, 1997 decreased
slightly to 8.68% from 8.74% for the year ended December 31, 1996. This decrease
was reflective of the repricing characteristics of the loans and the decrease in
lending rates during 1997.
LOANS TO AFFILIATED PARTIES
In the normal course of business, the Company's subsidiary, Southside
Bank makes loans to certain of the Company's, as well as its own, officers,
directors, employees and their related interests. As of December 31, 1997 and
1996, these loans totaled $8.6 million and $9.9 million or 21.6% and 27.0% 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.
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LOAN PORTFOLIO COMPOSITION AND ASSOCIATED RISK
For purposes of this discussion, the Company's loans are divided into
three categories: Real Estate Loans, Commercial Loans, and Loans to Individuals.
REAL ESTATE LOANS
Real estate loans are divided into three categories: 1-4 Family
Residential Mortgage Lending, Construction Loans and Other, which are primarily
Commercial Real Estate Loans.
1-4 Family Residential Mortgage Lending
Residential loan originations are generated by the Company's in-house
originations staff, marketing efforts, present customers, walk-in customers and
referrals from real estate agents, mortgage brokers and builders. The Company
focuses its lending efforts primarily on the origination of loans secured by
first mortgages on owner-occupied, 1-4 family residences. Substantially, all of
the Company's 1-4 family residential mortgage originations are secured by
properties located in Smith County, Texas. Historically, the Company has sold a
portion of its loan originations to secondary market investors pursuant to
ongoing purchase commitments.
The Company's fixed rate 1-4 family residential mortgage loans generally
have maturities ranging from 7 to 30 years. These loans are typically fully
amortizing with monthly payments sufficient to repay the total amount of the
loan. The Company also makes 7 to 30 year amortizing loans with a balloon
feature, typically due in 7 years or less.
The Company reviews information concerning the income, financial
condition, employment and credit history when evaluating the creditworthiness of
the applicant.
Construction Loans
The Company's construction loans are secured by property located
primarily in the Company's market area. The Company's emphasis for construction
loans is directed toward properties that will be owner occupied. Occasionally,
speculative construction loans are financed, but these typically have
substantial secondary sources of repayment. The Company's construction loans to
individuals generally have fixed interest rates during the construction period.
Construction loans to individuals are typically made in connection with the
granting of the permanent loan on the property.
Commercial Real Estate Loans
In determining whether to originate commercial real estate loans, the
Company generally considers such factors as the financial condition of the
borrower and the debt service coverage of the property. Commercial real estate
loans are made at both fixed and adjustable interest rates for terms generally
up to 20 years.
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 $142.3
million in Real Estate Loans, $76.2 million or 53.6% represent loans
collateralized by residential dwellings that are primarily owner occupied.
Historically, the amount of losses suffered on this type of loan has been
significantly less than those on other properties. A significant portion of the
remaining Real Estate Loans are collateralized 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.
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The real estate market in the late 1980's in Texas, and more specifically
in East Texas, experienced a significant decline in market value. During the
1990's, new appraisals of real estate in the Company's market area appeared to
indicate improved overall real estate values for residential and commercial
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 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.
In November 1997, Texas voters approved a change to the Texas
Constitution allowing home equity loans. The Company began offering this newly
available form of real estate lending beginning January 1, 1998 when the law
became effective. The Company has established underwriting and pricing
guidelines for this new lending area.
COMMERCIAL LOANS
The Company's Commercial Loans are diversified to meet most business
needs. Loan types include, short-term working capital loans for inventory and
accounts receivable and short and medium-term loans for equipment or other
business capital expansion. 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. Commercial Loans
traditionally generated the largest volume of loan losses in the portfolio.
In its commercial business loan underwriting, the Company assesses the
creditworthiness, ability to repay and the value and liquidity of the collateral
being offered. Terms are generally granted commensurate with the useful life of
the collateral offered.
LOANS TO INDIVIDUALS
Southside Bank is a major consumer lender in its trade territory and has
been for many years. The majority of loans outstanding are those secured by
vehicles including the indirect portfolio which at December 31, 1997 was
approximately $40.0 million. Additionally, the Company makes loans for a full
range of other consumer purposes which may be secured or unsecured depending on
the credit quality and purpose of the loan. Other major categories of the
portfolio include loans secured by boats and cash or equivalently secured loans.
The largest concentration of loans to individuals, vehicle loans, were primarily
obtained through the Company's indirect dealer loan program. The Company exited
the indirect dealer loan program effective January 2, 1998 to concentrate more
on direct loans.
At this point, the economy in Southside Bank's trade territory appears
stable. One area of concern is the personal bankruptcy rate occurring nationwide
and in East Texas. Management expects this trend to have some effect on the
Company's net charge-offs. Most of the Company's Loans to Individuals are
collateralized which management believes will limit the exposure in this area
should current bankruptcy trends continue.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. The underwriting
standards employed by the Company for consumer loans include an application, a
determination of the applicant's payment history on other debts, with greatest
weight being given to payment history with the Company, and an assessment of
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the borrower's ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is a primary consideration, the
underwriting process also includes a comparison of the value of the collateral,
if any, in relation to the proposed loan amount.
LOAN PORTFOLIO COMPOSITION
The following table sets forth loan totals by category for the years
presented (in thousands):
December 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
Real Estate Loans:
Construction................................ $ 10,299 $ 7,821 $ 4,558 $ 6,118 $ 4,739
1-4 Family Residential...................... 76,243 62,356 49,909 38,563 34,982
Other....................................... 55,802 57,198 54,436 53,881 46,457
Commercial Loans............................. 61,972 51,307 44,217 39,707 40,860
Loans to Individuals......................... 91,719 79,485 75,658 62,721 56,571
----------- ----------- ----------- ----------- -----------
Total Loans................................. $ 296,035 $ 258,167 $ 228,778 $ 200,990 $ 183,609
=========== =========== =========== =========== ===========
The following table represents loan maturities and sensitivity to changes
in interest rates. The amounts of total loans outstanding at December 31, 1997,
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.
After One
Due in One but within After Five
Year or Less Five Years Years
------------ ------------ ------------
(in thousands)
Construction Loans ..................... $ 9,696 $ 603 $
Real Estate Loans-Other ................ 40,587 54,917 36,541
Commercial Loans ....................... 44,788 12,956 4,228
All Other Loans ........................ 41,372 49,924 423
------------ ------------ ------------
Total Loans ...................... $ 136,443 $ 118,400 $ 41,192
============ ============ ============
Loans with Maturities After
One Year for Which: Interest Rates are Fixed or Predetermined $ 158,248
Interest Rates are Floating or Adjustable $ 22,900
*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.
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LOAN LOSS EXPERIENCE AND RESERVE FOR LOAN LOSSES
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 FDIC and/or the State 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.
As of December 31, 1997, the Company's review of the loan portfolio
indicates that a loan loss reserve of $3.4 million is adequate.
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.
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LOAN LOSS EXPERIENCE AND RESERVE FOR LOAN LOSSES
Years Ended December 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(dollars in thousands)
Average Net Loans Outstanding ................ $ 274,577 $ 243,925 $ 209,141 $ 196,436 $ 170,409
========= ========= ========= ========= =========
Balance of Reserve for Loan Loss at
Beginning of Period ........................ $ 3,249 $ 3,317 $ 3,137 $ 2,846 $ 2,711
--------- --------- --------- --------- ---------
Loan Charge-Offs:
Real Estate-Construction
Real Estate-Other ............................ (36) (6) (494)
Commercial Loans ............................. (525) (70) (61) (129) (95)
Loans to Individuals ......................... (704) (768) (502) (395) (284)
--------- --------- --------- --------- ---------
Total Loan Charge-Offs ....................... (1,229) (838) (599) (530) (873)
--------- --------- --------- --------- ---------
Recovery on Loans Previously Charged off:
Real Estate-Construction ..................... 10
Real Estate-Other ............................ 14 7 272 93 4
Commercial Loans ............................. 133 78 546 326 287
Loans to Individuals ......................... 188 185 261 152 117
--------- --------- --------- --------- ---------
Total Recovery of Loans Previously Charged-Off 345 270 1,079 571 408
--------- --------- --------- --------- ---------
Net Loan (Charge-Offs) Recoveries ............ (884) (568) 480 41 (465)
Additions (Reductions) to Reserve
Charged (Credited) to Operating Expense .... 1,005 500 (300) 250 600
--------- --------- --------- --------- ---------
Balance at End of Period ..................... $ 3,370 $ 3,249 $ 3,317 $ 3,137 $ 2,846
========= ========= ========= ========= =========
Ratio of Net Charge-Offs (Recoveries)
to Average Loans Outstanding ............... .32% .23% (.23%) (.02%) .27%
========= ========= ========= ========= =========
Allocation of Reserve for Loan Loss (dollars in thousands):
December 31,
----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------------------------
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Real Estate-Construction .......... $ 52 1.5% $ 39 1.2% $ 23 .7% $ 31 1.0% $ 7 .2%
Real Estate-Other ................. 1,087 32.3% 1,059 32.6% 1,209 36.4% 1,127 35.9% 1,172 41.2%
Commercial Loans .................. 1,181 35.0% 1,129 34.7% 1,059 31.9% 1,059 33.8% 1,018 35.8%
Loans to Individuals .............. 1,040 30.9% 948 29.2% 934 28.2% 835 26.6% 642 22.6%
Unallocated ....................... 10 .3% 74 2.3% 92 2.8% 85 2.7% 7 .2%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Balance at End of Period .......... $3,370 100% $3,249 100% $3,317 100% $3,137 100% $2,846 100%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
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NONPERFORMING ASSETS
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
that are not delinquent may be placed on nonaccrual status 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 Statement of Financial Accounting Standard No. 114, "Accounting
by Creditors for Impairment of a Loan" (FAS114), effective January 1, 1995, 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
bank regulatory call report guidelines.
NONPERFORMING ASSETS
(dollars in thousands)
December 31,
----------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Loans 90 Days Past Due:
Real Estate ................................... $ 454 $ 214 $ 266 $ 51 $ 342
Loans to Individuals .......................... 232 170 203 52 90
Commercial .................................... 56 88 183 59 70
------ ------ ------ ------ ------
742 472 652 162 502
------ ------ ------ ------ ------
Loans on Nonaccrual:
Real Estate ................................... 108 646 486 424 711
Loans to Individuals .......................... 177 113 116 179 175
Commercial .................................... 1,059 774 654 24 213
------ ------ ------ ------ ------
1,344 1,533 1,256 627 1,099
------ ------ ------ ------ ------
Restructured Loans:
Real Estate ................................... 214 230 243 563 590
Loans to Individuals .......................... 189 108 49 51 52
Commercial .................................... 32 62 44 43 115
------ ------ ------ ------ ------
435 400 336 657 757
------ ------ ------ ------ ------
Total Nonperforming Loans ........................ 2,521 2,405 2,244 1,446 2,358
Other Real Estate Owned .......................... 364 273 273 1,134 2,745
Repossessed Assets ............................... 206 262 240 256 203
------ ------ ------ ------ ------
Total Nonperforming Assets ....................... $3,091 $2,940 $2,757 $2,836 $5,306
====== ====== ====== ====== ======
Percentage of Total Assets ....................... .5% .6% .6% .7% 1.3%
Percentage of Loans and Leases,
Net of Unearned Income ........................ 1.0% 1.1% 1.2% 1.4% 2.9%
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Total nonperforming assets increased $151,000 between December 31, 1996
and December 31, 1997. Nonperforming assets as a percentage of assets decreased
.1% from the previous year and as a percentage of loans decreased .1%.
Nonperforming assets represent a 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, 1997 in the
opinion of management, the Company had $96,000 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 ................................ $ 108 $ 27 $ 81
Commercial Loans ................................. 1,059 185 874
Loans to Individuals ............................. 177 12 165
------ --------- ------
Balance at December 31, 1997 ..................... $1,344 $ 224 $1,120
====== ========= ======
Valuation Carrying
Total Allowance Value
------ --------- ------
Real Estate Loans ................................ $ 646 $ 128 $ 518
Commercial Loans ................................. 774 199 575
Loans to Individuals ............................. 113 18 95
------ --------- ------
Balance at December 31, 1996 ..................... $1,533 $ 345 $1,188
====== ========= ======
For the years ended December 31, 1997 and 1996, the average recorded
investment in impaired loans was approximately $1,450,000 and $1,468,000,
respectively. During the year ended December 31, 1997, 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 $110,000, $97,000 and $78,000 for the years
ended December 31, 1997, 1996 and 1995. If these loans had been accruing
interest at their original contracted rates, related income would have been
$336,000, $216,000 and $273,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
The following is a summary of the Allowance for Losses on Other Real
Estate Owned for the years presented (in thousands):
Years Ended December 31,
-------------------------
1997 1996
---------- -----------
Balance at beginning of year ................ $ 946 $ 946
Provision for Losses
Losses on sales
Gains on sales
Disposition of OREO...................... (274)
----- -----
Balance at end of year ...................... $ 672 $ 946
===== =====
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SECURITIES ACTIVITY
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.
The Company 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.
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.
Average Securities increased $13.8 million or 8.1% during the year ended
December 31, 1997 compared to 1996. The mix of Average Securities between
taxable and tax-exempt securities changed to 78.4% taxable and 21.6% tax-exempt
for the year ended 1997 from 77.8% taxable and 22.2% tax-exempt for 1996.
Average Other Interest Earning Assets, consisting primarily of Federal Funds
Sold, decreased $1.0 million or 26.5% during the year ended December 31, 1997
compared to 1996. The slight decrease in Federal Funds balances is attributable
to the increase in Average Loans and Average Securities.
The mix of taxable securities reflected an increase in Mortgage-backed
Securities. Average Mortgage-backed Securities represented 66.0% of the total
securities portfolio for 1997 compared to 62.2% for 1996.
The combined Investment Securities, Mortgage-backed Securities, and
Marketable Equity Securities portfolio increased to $216.5 million on December
31, 1997, compared to $174.4 million on December 31, 1996, an increase of $42.1
million or 24.1%. Mortgage-backed Securities collateralized by agency guaranteed
mortgages increased $27.1 million or 23.7% during 1997 when compared to 1996.
State and Political Subdivisions increased $7.4 million or 18.4% during 1997.
U.S. Treasury securities increased during 1997 compared to 1996 by $14.9 million
or 294.9%, U.S. Government Agency securities decreased $8.1 million or 85.0% and
Other Stocks and Bonds increased $.9 million or 16.9% in 1997 compared to 1996.
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. During the second half of 1997 rates decreased
and the yield curve flattened as the spread between the two year treasury yield
and thirty year treasury yield narrowed. The Company continued to use the
barbell approach adopted in 1995 during most of 1996 and 1997, however some
intermediate term securities were purchased during 1997. In order to maintain
the barbell strategy, a continued change in the securities portfolio mix was
required and resulted in the changes discussed
10
12
above during 1996 and 1997. The increase in U.S. Treasury securities occurred
primarily in December 1997 as short-term treasuries were purchased to pledge as
collateral for a new public funds account obtained during 1997, which
accumulates large balances during the time period December through February each
year.
The market value of the Securities portfolio at December 31, 1997 was
$216.5 million, which represents a net unrealized gain on that date of $2.3
million. The net unrealized gain is comprised of $2.6 million in unrealized
gains and $.3 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 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, 1997 or 1996.
The following table sets forth the carrying amount of Investment
Securities, Mortgage-backed Securities and Marketable Equity Securities at
December 31, 1997 and 1996 (in thousands):
December 31,
-------------------
Available for Sale: 1997 1996
-------- --------
U. S. Treasury ............................................. $ 19,956 $ 5,054
U. S. Government Agencies .................................. 631 8,457
Mortgage-backed Securities:
Direct Govt. Agency Issues .............................. 93,981 74,442
Other Private Issues .................................... 33,770 16,132
State and Political Subdivisions ........................... 47,658 39,629
Other Stocks and Bonds ..................................... 6,044 5,171
-------- --------
Total ................................................ $202,040 $148,885
======== ========
December 31,
-------------------
Held to Maturity: 1997 1996
-------- --------
U. S. Government Agencies .................................. $ 804 $ 1,124
Mortgage-backed Securities:
Direct Govt. Agency Issues .............................. 13,662 23,782
State and Political Subdivisions ........................... 610
-------- --------
Total ................................................ $ 14,466 $ 25,516
======== ========
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The maturities classified according to the sensitivity to changes in
interest rates of the December 31,1997 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 ............................... $19,956 5.60% $ $ $
U.S. Government Agencies .................... 514 6.88% 117 9.12%
Mortgage-backed Securities .................. 37,716 6.67% 75,936 6.55% 13,205 6.27% 894 6.57%
State and Political Subdivisions ............ 2,988 7.81% 9,982 7.86% 8,771 7.67% 25,917 7.82%
Other Stocks and Bonds ...................... 3,480 5.86% 1,814 6.38% 401 6.26% 349 3.05%
------- ------- ------- -------
Total .................................. $64,654 6.35% $87,849 6.70% $22,377 6.82% $27,160 7.72%
======= ======= ======= =======
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. Government Agencies ......................... $ -- -- $ 804 5.42% $ $
Mortgage-backed Securities ....................... 5,505 5.54% 8,157 6.08%
------ ------ ------- -------
Total ............................................ $5,505 5.54% $8,961 6.02% $ $
====== ====== ======= =======
DEPOSITS AND BORROWED FUNDS
Deposits provide the Company with its primary source of funds. The
increase of $36.7 million or 8.6% in Total Deposits during 1997 provided the
Company with funds for the growth in loans and securities. Time Deposits
increased $12.3 million or 6.2% during 1997 compared to 1996. Noninterest
Bearing Demand Deposits increased during 1997 $14.6 million or 14.8%. Interest
Bearing Demand Deposits increased during 1997 $8.9 million or 7.9% and Saving
Deposits increased $.9 million or 6.2%. The latter three categories, which are
considered the lowest cost deposits, comprised 54.4% of total deposits at
December 31, 1997 compared to 53.3% at December 31, 1996. The increase in Total
Deposits is reflective of overall bank growth and branch expansion and was the
primary source of funding the increase in Loans.
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14
The following table sets forth the Company's deposits by category for the
years ended December 31, 1997 and 1996.
Years Ended December 31,
1997 1996
---------- ----------
(in thousands)
Noninterest Bearing Demand Deposits .............. $ 113,499 $ 98,901
Interest Bearing Demand Deposits ................. 121,861 112,957
Savings Deposits ................................. 16,155 15,213
Time Deposits .................................... 211,159 198,879
---------- ----------
Total Deposits ....................... $ 462,674 $ 425,950
========== ==========
Short-term Obligations, consisting primarily of FHLB Dallas advances and
Federal Funds Purchased, increased $27.7 million or 405.2% during 1997 when
compared to 1996. This increase reflects a strategically planned increase in
balance sheet leverage to achieve certain Asset/Liability Management committee
("ALCO")objectives.
Long-term Obligations consisting of FHLB Dallas advances increased in
1997 to $28.5 million or 213.8% compared to $9.1 million in 1996. The advances
were obtained from FHLB Dallas to fund long-term loans. FHLB Dallas advances are
collateralized by FHLB Dallas stock, nonspecified real estate loans and
securities.
During the year ended December 31, 1997 total certificates of deposit of
$100,000 or more increased $6.4 million or 11.5% from December 31, 1996. This
increase was due to overall bank growth and an increase in Public Funds.
The table below sets forth the maturity distribution of certificates of
deposit of $100,000 or more issued by the Company at December 31, 1997 and 1996
(in thousands).
December 31, 1997 December 31, 1996
---------------------------------------- -------------------------------------
Time Other Time Other
Certificates Time Certificates Time
of Deposit Deposit Total of Deposit Deposit Total
------------ ------------------------ ------------ ------------------------
Three months or less .............. $ 14,971 $ 6,140 $ 21,111 $ 15,767 $ 4,482 $ 20,249
Over three to six months .......... 9,810 6,000 15,810 9,170 4,000 13,170
Over six to twelve months ......... 11,038 11,038 9,270 9,270
Over twelve months ................ 14,193 14,193 13,069 13,069
--------- --------- --------- --------- --------- ---------
Total ................... $ 50,012 $ 12,140 $ 62,152 $ 47,276 $ 8,482 $ 55,758
========= ========= ========= ========= ========= =========
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15
THE BANKING INDUSTRY IN TEXAS
The banking industry is affected by general economic conditions such as
interest rates, 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 1996 and 1997 and at this time the economic activity in the State
and East Texas appears to be stable to improving with some growth areas
resulting. One area of concern continues to be the personal bankruptcy rate
occurring nationwide and in East Texas. Management expects this trend to have
some effect on the Company's net charge-offs. 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. 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 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. 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, 1997, the Company employed approximately 275 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, 1997, were as follows:
B. G. Hartley (Age 68), 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 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 65), 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 50), Executive Vice President and Secretary of the Company. He
was elected President and Chief Operations Officer of the Company's subsidiary,
Southside Bank during 1996. He became an officer of the Company in 1982 and of
Southside Bank during 1975.
James F. Deakins (Age 64), 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 41), 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 53), Executive Vice President and Director of the Company's
subsidiary, Southside Bank, since 1987. He joined Southside Bank in 1965.
Jeryl Story (Age 46), was elected Senior Executive Vice President - Loan
Administration of the Company's subsidiary, Southside Bank, during 1996. He
joined Southside Bank in 1979 as an officer in Loan Documentation.
Lonny R. Uzzell (Age 44), was elected Executive Vice President of the Company's
subsidiary, Southside Bank, during 1996. He joined Southside Bank in 1981 as an
officer in Marketing.
H. Andy Wall (Age 57), Executive Vice President and Director of the Company's
subsidiary, Southside Bank, since 1984. He 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/or Southside Bank at the pleasure of each entities Board of
Directors.
SUPERVISION AND REGULATION
Banking is a complex, highly regulated industry. The primary goals of
the bank regulatory scheme are to maintain a safe and sound banking system and
to facilitate the conduct of sound monetary policy. In furtherance of these
goals, Congress has created several largely autonomous regulatory agencies and
enacted myriad legislation that governs banks, bank holding companies and the
banking industry. The descriptions of and references to the statutes and
regulations below are brief summaries and do not purport to be complete. The
descriptions are qualified in their entirety by reference to the specific
statutes and regulations discussed.
15
17
THE COMPANY
As a bank holding company under the Bank Holding Company Act of 1956,
as amended (the "BHC Act"), the Company is registered with and subject to
regulation by the Board of Governors of the Federal Reserve System ("FRB"). The
Company is required to file annual and other reports with, and furnish
information to, the FRB, which makes periodic inspections of the Company.
The BHC Act provides that a bank holding company must obtain the prior
approval of the FRB for the acquisition of more than 5% of the voting stock or
substantially all the assets of any bank or bank holding company. In addition,
the BHC Act restricts the extension of credit to any bank holding company by its
subsidiary bank. The BHC Act also provides that, with certain exceptions, a bank
holding company may not (i) engage in any activities other than those of banking
or managing or controlling banks and other authorized subsidiaries or (ii) own
or control more than 5% of the voting shares of any company that is not a bank.
The FRB has deemed certain limited activities to be closely related to banking
and therefore permissible for a bank holding company to engage in.
In approving acquisitions by bank holding companies of banks and
companies engaged in banking-related activities, the FRB considers whether the
performance of any such activity by an affiliate of the holding company can
reasonably be expected to produce benefits to the public, such as greater
convenience, increased competition or gains in efficiency, that outweigh such
possible adverse effects as undue concentration of resources, decreased or
unfair competition, conflicts of interest or unsound banking practices. The FRB
has cease-and-desist powers over bank holding companies and their nonbanking
subsidiaries where their actions would constitute a serious threat to the
safety, soundness or stability of a subsidiary bank. Federal regulatory agencies
also have authority to regulate debt obligations (other than commercial paper)
issued by bank holding companies. This authority includes the power to impose
interest ceilings and reserve requirements on such debt obligations. A bank
holding company and its subsidiaries are also prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services.
Federal banking law generally provides that a bank holding company may
acquire or establish banks in any state of the United States, subject to certain
aging and deposit concentration limits. In addition, Texas banking laws permit a
bank holding company which owns stock of a bank located outside the State of
Texas (an "Out-of-State Bank Holding Company") to acquire a bank or bank holding
company located in Texas. Such acquisition may occur only if the Texas bank to
be directly or indirectly controlled by the Out-of-State Bank Holding Company
has existed and continuously operated as a bank for a period of at least five
years. In any event, however, a bank holding company may not own or control
banks in Texas the deposits of which would exceed 20% of the total deposits of
all federally-insured deposits in Texas.
The FRB has promulgated capital adequacy regulations to which all bank
holding companies that have assets in excess of $150 million are subject. The
FRB's capital adequacy regulations are based upon a risk based capital
determination, whereby a bank holding company's capital adequacy is determined
in light of the risk, both on- and off-balance sheet, contained in the company's
assets. Different categories of assets are assigned risk weightings and, based
thereon, are counted at a percentage (from 0% to 100%) of their book value. The
regulations divide capital between Tier 1 capital, (core capital) and Tier 2
capital. For a bank Company, Tier 1 capital consists primarily of common stock,
perpetual preferred stock, related surplus, minority interests in consolidated
subsidiaries and a limited amount of qualifying cumulative preferred securities
such as the Preferred Securities. Goodwill and certain other intangibles are
excluded from Tier 1 capital. Tier 2 capital consists of varying percentages of
the allowance for loan and lease losses, all other types of preferred stock not
included in Tier 1 capital, hybrid capital instruments and term subordinated
debt. Investments in and loans to unconsolidated banking and finance
subsidiaries that constitute capital of those subsidiaries are excluded from
capital. The sum of Tier 1 and Tier 2 capital constitutes qualifying total
capital. The Tier 1 component must comprise at least 50% of qualifying total
capital.
16
18
Every bank holding company has to achieve and maintain a minimum Tier 1
Capital Ratio of at least 4.00% and a minimum Total Capital Ratio of at least
8.00%. In addition, bank holding companies are generally required to achieve and
maintain a Leverage Capital Ratio of at least 4.00%.
Generally, under the prompt corrective action provisions of the FDIC
Improvement Act of 1991 ("FDICIA"), (described below), an institution is
considered well capitalized if it has a Leverage Capital Ratio of at least 5.0%,
a Core Capital Ratio of at least 6.0% and a Total Capital Ratio of at least
10.0%, and is deemed to be adequately capitalized if it has a Leverage Capital
Ratio of at least 4.0%, a Core Capital Ratio of at least 4.0% and a Total
Capital Ratio of at least 8.0%
As a bank holding company that does not, as an entity, currently engage
in separate business activities of a material nature, the Company's ability to
pay cash dividends depends upon the cash dividends it receives from the Bank.
The Company's only sources of income are (i) those dividends paid to it by the
Bank and (ii) the tax savings, if any, that result from the filing of
consolidated income tax returns for the Company and its subsidiaries. The
Company must pay all of its operating expenses from funds received by it from
its subsidiaries. Therefore, shareholders may receive dividends from the Company
only to the extent that funds are available after payment of the Company's
operating expenses. In addition, in November 1985 the FRB adopted a policy
statement concerning payment of cash dividends, which generally prohibits bank
holding companies from paying dividends except out of operating earnings. In
addition, the Company is subject to certain restrictions on the payment of
dividends as a result of the requirement that it maintain an adequate level of
capital as described above.
SOUTHSIDE BANK
Southside Bank (the "Bank") is subject to various requirements and
restrictions under the laws of the United States and the State of Texas, and to
regulation, supervision and regular examination by the TDB and the FDIC. The TDB
and the FDIC have the power to enforce compliance with applicable banking
statutes and regulations. Such requirements and restrictions include
requirements to maintain reserves against deposits, restrictions on the nature
and amount of loans that may be made and the interest that may be charged
thereon and restrictions relating to investments and other activities of the
Bank.
Transactions with Affiliates. Among the federal legislation applicable
to the Bank, the Federal Reserve Act, as amended by the Competitive Equality
Banking Act of 1987, prohibits the Bank from engaging in specified transactions
(including, for example, loans) with certain affiliates unless the terms and
conditions of such transactions are substantially the same or at least as
favorable to such banks as those prevailing at the time for comparable
transactions with or involving other nonaffiliated entities. In the absence of
such comparable transactions, any transaction between a bank and its affiliates
must be on terms and under circumstances, including credit standards, that in
good faith would be offered or would apply to nonaffiliated companies. In
addition, certain transactions, referred to as "covered transactions," between
the Bank and its affiliates may not exceed 10% of the Bank's capital and surplus
per affiliate and an aggregate of 20% of its capital and surplus for covered
transactions with all affiliates. Certain transactions with affiliates, such as
loans, also must be secured by collateral of specific types and amounts.
Finally, the Bank is prohibited from purchasing low quality assets from an
affiliate. Every company under common control with the Bank, including the
Company and Southside Delaware, are deemed to be affiliates of the Bank.
Loans to Insiders. Federal law also constrains the types and amounts of
loans that any bank may make to its executive officers, directors and principal
shareholders. Among other things, such loans must be approved by a bank's board
of directors in advance and must be on terms and conditions as favorable to the
bank as those available to an unrelated person.
17
19
Regulation of Lending Activities. Loans made by the Bank are also
subject to numerous federal and state laws and regulations, including the
Truth-In-Lending Act, Federal Consumer Credit Protection Act, the Texas Consumer
Credit Code, the Texas Consumer Protection Code, the Equal Credit Opportunity
Act, the Real Estate Settlement Procedures Act and adjustable rate mortgage
disclosure requirements. Remedies to the borrower and penalties to the Bank are
provided for failure of the Bank to comply with such laws and regulations. The
scope and requirements of such laws and regulations have expanded significantly
in recent years.
Branch Banking. Pursuant to the Texas Finance Code, all banks located
in Texas are authorized to branch statewide. Accordingly, a bank located
anywhere in Texas has the ability, subject to regulatory approval, to establish
branch facilities near any of the Bank's facilities and within its market areas.
If other banks were to establish branch facilities near the Bank or any of its
facilities, it is uncertain whether such branch facilities would have a
materially adverse effect on the business of the Bank.
In addition, in 1994 Congress adopted the Reigle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Reigle Act"). That statute
provides for nationwide interstate banking and branching. However, during 1995,
the Texas legislature elected to opt out of the branching provisions under the
Reigle Act until 1999, which effectively prohibits out of state banks from
opening branches in Texas. Similarly, banks located in Texas are generally
prohibited from opening branches outside of Texas. The Texas legislature will
revisit that issue during the 1999 session. Therefore, interstate branching will
continue to be prohibited in Texas until at least 1999.
Governmental Monetary Policies. The commercial banking business is
affected not only by general economic conditions but also by the monetary
policies of the FRB. Changes in the discount rate on member bank borrowings,
control of borrowings, control of borrowings at the "discount window," open
market operations, the imposition of and changes in reserve requirements against
member banks, deposits and assets of foreign branches, the imposition of and
changes in reserve requirements against certain borrowings by banks and their
affiliates and the placing of limits on interest rates which member banks may
pay on time and savings deposits are some of the instruments of monetary policy
available to the FRB. Those monetary policies influence to a significant extent
the overall growth of the bank loans, investments and deposits and the interest
rates charged on loans or paid on time and savings deposits. The nature of
future monetary policies and the effect of such policies on the future business
and earnings of the Bank, therefore, cannot be predicted accurately.
Dividends. All dividends paid by the Bank are paid to the Company, the
sole indirect shareholder of the Bank, through Southside Delaware. The general
dividend policy of the Bank is to pay dividends at levels consistent with
maintaining liquidity and preserving applicable capital ratios and servicing
obligations of the Company. The dividend policy of the Bank is subject to the
discretion of the Board of Directors of the Bank and will depend upon such
factors as future earnings, financial conditions, cash needs, capital adequacy,
compliance with applicable statutory and regulatory requirements and general
business conditions.
The ability of the Bank, as a Texas banking association, to pay
dividends is restricted under applicable law and regulations. The Bank generally
may not pay a dividend reducing its capital and surplus without the prior
approval of the Texas Banking Commissioner. All dividends must be paid out of
net profits then on hand, after deducting expenses, including losses and
provisions for loan losses. Additionally, the FDIC has the right to prohibit the
payment of dividends by a bank where such payment is deemed to be an unsafe and
unsound banking practice. The Bank is also subject to certain restrictions on
the payment of dividends as a result of the requirements that it maintain an
adequate level of capital in accordance with guidelines promulgated from time to
time by the FDIC.
The exact amount of future dividends on the stock of the Bank will be a
function of the profitability of the Bank in general and applicable tax rates in
effect from year to year. The Bank's ability to pay
18
20
dividends in the future will directly depend on the its future profitability,
which cannot be accurately estimated or assured.
Capital Adequacy. In 1983, Congress enacted the International Lending
Supervision Act, which, among other things, directed the FDIC to establish
minimum levels of capital for banks and to require banks to achieve and maintain
adequate capital. Pursuant to this authority, the FDIC has promulgated capital
adequacy regulations to which all state nonmember banks, such as the Bank, are
subject. These requirements are similar to the FRB requirements promulgated with
respect to bank holding companies. See "Regulation--The Company and Southside
Delaware."
FIRREA. The Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA") includes various provisions that affect or may affect the
Bank. Among other matters, FIRREA generally permits bank holding companies to
acquire healthy thrifts as well as failed or failing thrifts. FIRREA removed
certain cross-marketing prohibitions previously applicable to thrift and bank
subsidiaries of a common holding company. Furthermore, a multibank holding
company may now be required to indemnify the federal deposit insurance fund
against losses it incurs with respect to such company's affiliated banks, which
in effect makes a bank holding company's equity investments in healthy bank
subsidiaries available to the FDIC to assist such company's failing or failed
bank subsidiaries.
In addition, pursuant to FIRREA, any depository institution that has
been chartered less than two years, is not in compliance with the minimum
capital requirements of its primary federal banking regulator or is otherwise in
a troubled condition must notify its primary federal banking regulator of the
proposed addition of any person to the board of directors or the employment of
any person as a senior executive officer of the institution at least 30 days
before such addition or employment becomes effective. During such 30-day period,
the applicable federal banking regulatory agency may disapprove of the addition
of employment of such director or officer. The Bank is not subject to any such
requirements.
FIRREA also expanded and increased civil and criminal penalties
available for use by the appropriate regulatory agency against certain
"institution-affiliated parties" primarily including (i) management, employees
and agents of a financial institution, as well as (ii) independent contractors
such as attorneys and accountants and others who participate in the conduct of
the financial institution's affairs and who caused or are likely to cause more
than minimum financial loss to or a significant adverse affect on the
institution, who knowingly or recklessly violate a law or regulation, breach a
fiduciary duty or engage in unsafe or unsound practices. Such practices can
include the failure of an institution to timely file required reports or the
submission of inaccurate reports. Furthermore, FIRREA authorizes the appropriate
banking agency to issue cease and desist orders that may, among other things,
require affirmative action to correct any harm resulting from a violation or
practice, including restitution, reimbursement, indemnifications or guarantees
against loss. A financial institution may also be ordered to restrict its
growth, dispose of certain assets or take other action as determined by the
ordering agency to be appropriate.
FDICIA. FDICIA made a number of reforms addressing the safety and
soundness of the deposit insurance system, supervision of domestic and foreign
depository institutions, and improvement of accounting standards. This statute
also limited deposit insurance coverage, implemented changes in consumer
protection laws and provided for least-cost resolution and prompt regulatory
action with regard to troubled institutions.
FDICIA requires every bank with total assets in excess of $500 million
to have an annual independent audit made of the bank's financial statements by a
certified public accountant to verify that the financial statements of the bank
are presented in accordance with generally accepted accounting principles and
comply with such other disclosure requirements as prescribed by the FDIC.
FDICIA also places certain restrictions on activities of banks
depending on their level of capital. FDICIA divides banks into five different
categories, depending on their level of capital. Under regulations
19
21
recently adopted by the FDIC, a bank is deemed to be "well capitalized" if it
has a total Risk-Based Capital Ratio of 10% or more, a Core Capital Ratio of 6%
or more and a Leverage Ratio of 5% or more, and the bank is not subject to an
order or capital directive to meet and maintain a certain capital level. Under
such regulations, a bank is deemed to be "adequately capitalized" if it has a
total Risk-Based Capital Ratio of 8% or more, a Core Capital Ratio of 4% or more
and a Leverage Ratio of 4% or more (unless it receives the highest composite
rating at its most recent examination and is not experiencing or anticipating
significant growth, in which instance it must maintain a Leverage Ratio of 3% or
more). Under such regulations, a bank is deemed to be "undercapitalized" if it
has a total Risk-Based Capital Ratio of less than 8%, a Core Capital Ratio of
less than 4% or a Leverage Ratio of less than 4%. Under such regulations, a bank
is deemed to be "significantly undercapitalized" if it has a Risk-Based Capital
Ratio of less than 6%, a Core Capital Ratio of less than 3% and a Leverage Ratio
of less than 3%. Under such regulations, a bank is deemed to be "critically
undercapitalized" if it has a Leverage Ratio of less than or equal to 2%. In
addition, the FDIC has the ability to downgrade a bank's classification (but not
to "critically undercapitalized") based on other considerations even if the bank
meets the capital guidelines. According to these guidelines, the Bank was
classified as "well-capitalized" as of December 31, 1997.
In addition, if a state nonmember bank is classified as
undercapitalized, the bank is required to submit a capital restoration plan to
the FDIC. Pursuant to FDICIA, an undercapitalized bank is prohibited from
increasing its assets, engaging in a new line of business, acquiring any
interest in any company or insured depository institution, or opening or
acquiring a new branch office, except under certain circumstances, including the
acceptance by the FDIC of a capital restoration plan for the bank.
Furthermore, if a state nonmember bank is classified as
undercapitalized, the FDIC may take certain actions to correct the capital
position of the bank; if a bank is classified as significantly undercapitalized
or critically undercapitalized, the FDIC would be required to take one or more
prompt corrective actions. These actions would include, among other things,
requiring: sales of new securities to bolster capital, improvements in
management, limits on interest rates paid, prohibitions on transactions with
affiliates, termination of certain risky activities and restrictions on
compensation paid to executive officers. If a bank is classified as critically
undercapitalized, FDICIA requires the bank to be placed into conservatorship or
receivership within ninety days, unless the FDIC determines that other action
would better achieve the purposes of FDICIA regarding prompt corrective action
with respect to undercapitalized banks.
The capital classification of a bank affects the frequency of
examinations of the bank and impacts the ability of the bank to engage in
certain activities and affects the deposit insurance premiums paid by the bank.
Under FDICIA, the FDIC is required to conduct a full-scope, on-site examination
of every bank at least once every twelve months. An exception to this rule
provides that banks that (i) have assets of less than $100 million (ii) are
categorized as "well capitalized," (iii) were found to be well managed with a
composite rating of "outstanding" and (iv) have not been subject to a change in
control during the last twelve months, need only be examined by the FDIC once
every eighteen months.
Under FDICIA, banks may be restricted in their ability to accept
brokered deposits, depending on their capital classification. "Well capitalized"
banks are permitted to accept brokered deposits, but all banks that are not well
capitalized are not permitted to accept such deposits. The FDIC may, on a
case-by-case basis, permit banks that are adequately capitalized to accept
brokered deposits if the FDIC determines that acceptance of such deposits would
not constitute an unsafe or unsound banking practice with respect to the bank.
In addition, under FDICIA, the FDIC is authorized to assess insurance
premiums on a bank's deposits at a variable rate depending on the probability
that the deposit insurance fund will incur a loss with respect to the bank.
Under prior law, the deposit insurance assessment was a flat rate, regardless of
the likelihood of loss. In this regard, the FDIC has issued regulations for a
transitional risk-based deposit assessment that determines the deposit insurance
assessment rates on the basis of the bank's capital classification and
supervisory evaluations. Each of these categories has three subcategories,
resulting in
20
22
nine assessment risk classifications. The three subcategories with respect to
capital are "well capitalized," "adequately capitalized" and "less than
adequately capitalized (which would include "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized" banks). The three
subcategories with respect to supervisory concerns are "healthy," "supervisory
concern" and "substantial supervisory concern." A bank is deemed "healthy" if it
is financially sound with only a few minor weaknesses. A bank is deemed subject
to "supervisory concern" if it has weaknesses that, if not corrected, could
result in significant deterioration of the bank and increased risk to the Bank
Insurance Fund. A bank is deemed subject to "substantial supervisory concern" if
it poses a substantial probability of loss to the Bank Insurance Fund.
The federal banking agencies have established guidelines, effective
August 9, 1995, which prescribe standards for depository institutions relating
to internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth and
management compensation. The agencies may require an institution which fails to
meet the standards set forth in the guidelines to submit a compliance plan. The
agencies are also currently proposing standards for asset quality and earnings.
The Company cannot predict what effect such guidelines will have on the Bank.
Deposit Insurance. The Bank's deposits are insured up to $100,000 per
insured account by the Bank Insurance Fund of the FDIC (the "BIF"). As an
institution whose deposits are insured by BIF, the Bank is currently required to
pay semi-annual deposit insurance premiums to BIF. The Bank's deposit insurance
assessments may increase depending upon the risk category and subcategory, if
any, to which the Bank is assigned by the FDIC. Any increase in insurance
assessments could have an adverse effect on the Bank's earnings.
Management of the Company and the Bank cannot predict what other
legislation might be enacted or what other regulations might be adopted or the
effects thereof.
The foregoing is an attempt to summarize some of the relevant laws,
rules and regulations governing banks and bank holding companies but does not
purport to be a complete summary of all applicable laws, rules and regulations
governing banks and bank holding companies.
21
23
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, 1997, 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, 1997 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" above.
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24
ITEM 2. PROPERTIES
The Company completed expansion and remodeling of the bank headquarters
at Beckham and Lake Streets during the second half of 1997. Remodeling of the
annex building, to accommodate the Company's new centralized phone center,
immediately across the parking lot from the bank headquarters, is expected to be
completed during 1998.
Due to growth, the Company acquired the Gentry Parkway branch facility
which was previously being leased and added a second ATM. After remodeling is
complete, this branch will provide expanded facilities adequate to service this
growing market area.
Southside Bank owns the following properties:
o 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..
o 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 are located.
o Land and building located at 1010 East First Street in Tyler
where Motor Bank facilities are located.
o 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.
o Property on South Broadway near the South Broadway branch where
Motor Bank facilities are located.
o Thirteen Automatic Teller Machines (ATM) facilities located
throughout Tyler and Smith County.
o Building located in the downtown square of Tyler which houses
Southside Bank's Downtown branch, providing a full line of banking
services.
o Gentry Parkway branch and motor bank facility.
Management believes its facilities are adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
Southside Bank is party to legal proceedings arising in the normal
conduct of business. Management of the Company believes that such litigation is
not material to the financial position or results of the 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, 1997, 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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25
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 1997, 1996 and 1995, the Company
declared and paid a 5% stock dividend.
Year Ended 1st qtr. 2nd qtr. 3rd qtr. 4th qtr.
- ----------------------- ------------------- ------------------- ------------------ ---------------
December 31, 1997 $ 17.50 - 17.50 $ 17.75 - 17.50 $ 17.75 - 17.75 $ 17.75 - 17.50
December 31, 1996 $ 15.50 - 14.50 $ 15.50 - 15.50 $ 16.50 - 15.50 $ 17.50 - 15.50
See "Item 7. Capital Resources" for a discussion of the Company's common
stock repurchase program.
STOCKHOLDERS
There were approximately 1,199 holders of record of the Company's common
stock, the only class of equity securities currently issued and outstanding, as
of March 2, 1998.
DIVIDENDS
Cash dividends declared and paid were $.40 per share for the years ended
December 31, 1997 and 1996 and $.35 per share for the year ended December 31,
1995. Stock dividends of 5% were also declared and paid during each of the years
ended December 31, 1997, 1996 and 1995. The Company has paid a cash dividend at
least once every year since 1970. 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.
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26
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).
As of and For the Years Ended December 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ------------
Investment Securities............................ $ 71,835 $ 57,825 $ 76,919 $ 82,720 $ 69,220
=========== =========== =========== =========== ===========
Mortgage-backed and Related Securities........... $ 141,413 $ 114,356 $ 99,407 $ 88,080 $ 116,451
=========== =========== =========== =========== ===========
Loans, Net of Allowance for Loan Loss............ $ 292,665 $ 254,918 $ 225,461 $ 197,853 $ 180,763
=========== =========== =========== =========== ===========
Deposits......................................... $ 462,674 $ 425,950 $ 388,308 $ 385,102 $ 352,355
=========== =========== =========== =========== ===========
Total Assets..................................... $ 571,145 $ 482,694 $ 448,673 $ 426,221 $ 404,216
=========== =========== =========== =========== ===========
Long-term Obligations............................ $ 28,547 $ 9,096 $ 13,686 $ 7,997 $ 8,850
=========== =========== =========== =========== ===========
Interest & Deposit Service Income................ $ 39,168 $ 34,593 $ 32,342 $ 28,822 $ 26,812
=========== =========== =========== =========== ===========
Net Income....................................... $ 5,006 $ 4,205 $ 4,532 $ 3,519 $ 4,015
=========== =========== =========== =========== ===========
Net Income Per Common Share-Basic................ $ 1.47 $ 1.23 $ 1.33 $ 1.03 $ 1.18
=========== =========== =========== =========== ===========
Net Income Per Common Share-Diluted.............. $ 1.43 $ 1.21 $ 1.31 $ 1.02 $ 1.17
=========== =========== =========== =========== ===========
Cash Dividends Declared Per Common Share......... $ .40 $ .40 $ .35 $ .25 $ .25
=========== =========== =========== =========== ===========
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides a comparison of the
Company's results of operations for the years ended December 31, 1997, 1996 and
1995 and financial condition as of December 31, 1997 and 1996. This discussion
should be read in conjunction with the financial statements and related notes.
All share data has been adjusted to give retroactive recognition to stock
dividends.
FORWARD-LOOKING INFORMATION
Certain statements of other than historical fact that are contained in
this document and in written material, press releases and oral statements issued
by or on behalf of the Company may be considered to be "forward-looking
statements" as that term is defined in the Private Securities Litigation Reform
Act of 1995. These statements may include words such as "expect," "estimate,"
"project," "anticipate," "should," "intend," "probability," "risk," "target,"
"objective" and similar expressions. Forward-looking statements are subject to
significant risks and uncertainties and the Company's actual results may differ
materially from the results discussed in the forward-looking statements. For
example, certain market risk disclosures are dependent on choices about key
model characteristics and assumptions and are subject to various limitations.
See "Item 1 - Business" and "Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations." By their nature, certain of the
market risk disclosures are only estimates and could be materially different
from what actually occurs in the future. As a result, actual income gains and
losses could materially differ from those that have been estimated. Other
factors that could cause actual results to differ materially from
forward-looking statements include, but are not limited to general economic
conditions, either nationally or in the State of Texas, legislation or
regulatory changes which adversely affect the businesses in which the Company is
engaged, changes in the interest rate environment which reduce interest margins,
significant increases in competition in the banking and financial services
industry, changes in consumer spending, borrowing and saving habits,
technological changes, the Company's ability to increase market share and
control expenses, the effect of compliance with legislation or regulatory
changes, the effect of changes in accounting policies and practices and the
costs and effects of unanticipated litigation.
FINANCIAL CONDITION
Total assets increased $88.5 million or 18.3% to $571.1 million at
December 31, 1997 from $482.7 million at December 31, 1996. The increase was
primarily attributable to a $37.8 million increase in net loans and a $42.1
million increase in the securities portfolio. At December 31, 1997, net loans
were $292.7 million compared to $254.9 million at December 31, 1996. The
securities portfolio totaled $216.5 million at December 31, 1997 compared to
$174.4 million at December 31, 1996. The increase in loans and securities was
funded primarily by retail deposit growth and Federal Home Loan Bank ("FHLB")
Dallas advances.
Nonperforming assets at December 31, 1997 totaled $3.1 million,
representing .5% of total assets, compared to $2.9 million or .6% of total
assets at December 31, 1996. Nonaccruing loans decreased to $1.3 million and the
ratio of nonaccruing loans to total loans decreased to .5% at December 31, 1997
as compared to $1.5 million or .6% at December 31, 1996. Real estate owned
increased to $364,000 at December 31, 1997 from $273,000 at December 31, 1996.
Deposits increased $36.7 million to $462.7 million at December 31, 1997
from $426.0 million at December 31, 1996. FHLB Dallas advances were $57.6
million at December 31, 1997, a $48.5 million increase from $9.1 million at
December 31, 1996. Other borrowings at December 31, 1997 and 1996 totaled $5.5
million and $6.8 million, respectively, and consisted of short-term and
overnight borrowings.
Shareholders' equity at December 31, 1997 totaled $40.0 million compared
to $36.6 million at December 31, 1996. The increase primarily reflects the net
income recorded for the year ended December 31, 1997, partially offset by the
repurchase of 65,464 shares of the outstanding stock at an average price of
$17.62 per share and the declaration of cash dividends.
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RESULTS OF OPERATIONS
The following table presents average balance sheet amounts and average
yields for the years ended December 31, 1997, 1996 and 1995. The information
should be reviewed in conjunction with the other financial statements. 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.
AVERAGE BALANCES AND INTEREST RATES
(dollars in thousands)
Years Ended
------------------------------------------------------------------------------------------------
December 31, 1997 December 31, 1996 December 31, 1995
------------------- --------------------------- ----------------------------
AVG. AVG. AVG. AVG. AVG. AVG.
ASSETS BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ------ ------- -------- ------- ------- -------- ------- ------- -------- ------
INTEREST EARNING ASSETS:
Loans(1) ....................... $274,577 $23,847 8.68% $243,925 $21,314 8.74% $209,141 $18,861 9.02%
Securities:
Inv. Sec. (Taxable) ............ 20,242 1,238 6.12% 24,398 1,476 6.05% 45,452 2,839 6.25%
Inv. Sec. (Tax-Exempt)(2) ...... 39,819 3,049 7.66% 37,721 2,805 7.44% 29,965 2,221 7.41%
Mortgage-backed Sec ............ 121,546 7,729 6.36% 105,923 6,756 6.38% 89,151 5,673 6.36%
Marketable Equity Sec .......... 2,415 129 5.34% 2,179 119 5.46% 2,068 121 5.85%
Interest Earning Deposits ...... 602 34 5.65% 381 21 5.51% 411 25 6.08%
Federal Funds Sold ............. 2,285 129 5.65% 3,547 188 5.30% 9,576 567 5.92%
------- ------- ------- ------- --------- -------
Total Interest Earning Assets .. 461,486 36,155 7.83% 418,074 32,679 7.82% 385,764 30,307 7.86%
------- ------- -------
NONINTEREST EARNING ASSETS:
Cash and Due From Banks ........ 23,945 22,160 20,899
Bank Premises and Equipment .... 14,693 12,325 10,717
Other Assets ................... 8,950 7,257 7,574
Less: Allowance for Loan Loss (3,355) (3,282) (3,323)
------ ------ --------
Total Assets ................... $505,719 $456,534 $421,631
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST BEARING LIABILITIES:
Savings Deposits .............. $16,173 446 2.76% $ 15,105 417 2.76% $14,931 412 2.76%
Time Deposits ................. 206,776 11,000 5.32% 190,094 10,083 5.30% 172,228 8,793 5.11%
Interest Bearing
Demand Deposits .............. 117,496 3,265 2.78% 111,950 3,093 2.76% 111,063 3,085 2.78%
Short-term Interest
Bearing Liabilities .......... 14,222 773 5.44% 2,671 132 4.94% 1,790 94 5.25%
Long-term Interest Bearing
Liabilities-FHLB Dallas ...... 12,151 721 5.93% 12,010 672 5.60% 8,912 453 5.08%
------- ------- ------- ------- -------- -------
Total Interest Bearing
Liabilities.................. 366,818 16,205 4.42% 331,830 14,397 4.34% 308,924 12,837 4.16%
------- ------- -------
NONINTEREST BEARING LIABILITIES:
Demand Deposits ................ 94,102 85,453 78,338
Other Liabilities .............. 6,873 4,788 4,184
------- -------- --------
Total Liabilities .............. 467,793 422,071 391,446
SHAREHOLDERS' EQUITY ........... 37,926 34,463 30,185
------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY .......... $505,719 $456,534 $421,631
======== ======== ========
NET INTEREST INCOME ............ $19,950 $18,282 $ 17,470
======= ======= ========
NET YIELD ON AVERAGE
EARNING ASSETS ................ 4.32% 4.37% 4.53%
====== ===== ======
(1) Loans are shown net of unearned discount. Interest on loans includes
fees on loans which are not material in amount.
(2) Interest income includes taxable-equivalent adjustments of $988, $907
and $717 as of December 31, 1997, 1996 and 1995, respectively.
Note: For the years ended December 31, 1997, 1996 and 1995, loans totaling
$1,344,000, $1,533,000, and $1,256,000, respectively, were on nonaccrual
status. The 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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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,
1997 Compared to 1996
---------------------------------
Average Average Increase
Volume Rate (Decrease)
INTEREST INCOME: ------- ------- --------
Loans .......................................... $ 2,663 $ (130) $ 2,533
Investment Securities (Taxable) ................ (254) 16 (238)
Investment Securities (Tax-Exempt) (1) ......... 166 78 244
Mortgage-backed Securities ..................... 994 (21) 973
Marketable Equity Securities ................... 13 (3) 10
Federal Funds Sold ............................. (72) 13 (59)
Interest Earning Deposits ...................... 12 1 13
------- ------- -------
Total Interest Income ........................ 3,522 (46) 3,476
------- ------- -------
INTEREST EXPENSE:
Savings Deposits ............................... 29 29
Time Deposits .................................. 887 30 917
Interest Bearing Demand Deposits ............... 154 18 172
Federal Funds Purchased and Other
Interest Bearing Liabilities ................. 627 14 641
FHLB Dallas Advances ........................... 8 41 49
------- ------- -------
Total Interest Expense ....................... 1,705 103 1,808
------- ------- -------
Net Interest Earnings .......................... $ 1,817 $ (149) $ 1,668
======= ======= =======
Years Ended December 31,
1996 Compared to 1995
------------------------------
Average Average Increase
Volume Rate (Decrease)
------- ------- ----------
INTEREST INCOME:
Loans .......................................... $ 3,055 $ (602) $ 2,453
Investment Securities (Taxable) ................ (1,276) (87) (1,363)
Investment Securities (Tax-Exempt) (1) ......... 577 7 584
Mortgage-backed Securities ..................... 1,070 13 1,083
Marketable Equity Securities ................... 8 (10) (2)
Federal Funds Sold ............................. (325) (54) (379)
Interest Earning Deposits ...................... (2) (2) (4)
------- ------- -------
Total Interest Income ........................ 3,107 (735) 2,372
------- ------- -------
INTEREST EXPENSE:
Savings Deposits ............................... 5 -- 5
Time Deposits .................................. 938 352 1,290
Interest Bearing Demand Deposits ............... 25 (17) 8
Federal Funds Purchased and Other
Interest Bearing Liabilities ................. 43 (5) 38
FHLB Dallas Advances ........................... 170 49 219
------- ------- -------
Total Interest Expense ....................... 1,181 379 1,560
------- ------- -------
Net Interest Earnings .......................... $ 1,926 $(1,114) $ 812
======= ======= =======
(1) Interest rates on securities which are nontaxable for Federal Income
Tax purposes are 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.
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30
The Company's results of operations are dependent primarily on net
interest income, which is the difference between the income earned on its loan,
securities and investment portfolios and its cost of funds, consisting of the
interest paid on deposits and borrowings. Results of operations are also
affected by the Company's noninterest income, provision for loan losses and
noninterest expenses. General economic and competitive conditions, particularly
changes in interest rates, government policies and actions of regulatory
authorities, also significantly affect the Company's results of operations.
Future changes in applicable law, regulations or government policies may also
have a material impact on the Company.
Comparison of Operating Results for the years ending December 31, 1997 compared
to December 31, 1996
OVERVIEW
During the year ended December 31, 1997, the Company's net income
increased $.8 million or 19.0% to $5.0 million, from