Southside Bancshares, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are primarily with 2022. Southside is a Texas-based community banking holding company operating 55 branches. It reported $8.28 billion in assets, $4.52 billion in loans and $6.55 billion in deposits at year-end.
Financial performance and position
| Metric | 2023 | 2022 |
|---|---|---|
| Net interest income | $215.0 million | $212.3 million |
| Net interest margin (GAAP) | 2.92% | 3.11% |
| Net income | $86.7 million | $105.0 million |
| Diluted EPS | $2.82 | $3.26 |
| Loans at year-end | $4.52 billion | $4.15 billion |
| Deposits at year-end | $6.55 billion | $6.20 billion |
| Shareholders’ equity | $773.3 million | $746.0 million |
| Operating cash flow | $79.9 million | $226.5 million |
- Interest income rose 42.2% to $359.7 million, while interest expense climbed 256.1% to $144.7 million. Deposit interest expense more than tripled to $108.2 million. The average cost of interest-bearing deposits increased to 2.34% from 0.66%.
- Net interest margin contracted despite slightly higher net interest income. Noninterest income declined 12.3% to $35.8 million; noninterest expense increased 7.9% to $140.6 million. Provision for credit losses increased to $9.2 million from $3.2 million.
- Net income fell 17.5%. Management attributed the decline principally to higher expenses and credit-loss provision, lower noninterest income, and sharply higher funding costs.
- Loans grew 9.1%, led by construction and commercial real estate lending. Deposits rose 5.7%, reflecting growth in interest-bearing balances that more than offset a decline in noninterest-bearing deposits.
- Allowance for loan losses was $42.7 million, or 0.94% of loans, versus $36.5 million, or 0.88%, in 2022. Net charge-offs rose to $2.75 million from $0.70 million. Nonperforming assets declined to $4.0 million, or 0.05% of assets, from $10.9 million, or 0.14%; the comparison is affected by adoption of new loan-modification disclosure rules.
- Year-end cash and cash equivalents were $560.5 million, up from $199.3 million. Management reported $2.22 billion of available liquidity across listed borrowing lines, including approximately $1.95 billion of FHLB capacity. Borrowings included $300.0 million from the Federal Reserve discount window and $117.7 million under the Bank Term Funding Program (BTFP).
- Regulatory capital ratios remained above “well-capitalized” thresholds. At year-end, Bank CET1 was 14.88%, total risk-based capital 15.62%, and Tier 1 leverage 10.49%. Consolidated ratios were 12.28%, 15.73%, and 9.39%, respectively.
- Cash dividends were $1.42 per share; the company repurchased 1.44 million shares for $45.1 million. The dividend payout ratio was 50.35%.
Material changes and unusual items
- Sales of available-for-sale securities produced a $16.0 million net loss, compared with a $3.8 million loss in 2022. Management said fourth-quarter sales reflected strategic reinvestment opportunities; proceeds went mainly into higher-yielding securities and, to a lesser extent, loans.
- The securities portfolio had a $177.1 million net unrealized loss at fair value at year-end: $36.2 million on AFS securities and approximately $140.9 million on HTM securities. Management attributed unrealized losses principally to interest rates and market spreads; it reported no credit-loss allowance on either portfolio.
- Interest-rate swaps designated as cash-flow hedges covered $1.01 billion of liabilities. A pre-tax unrealized hedge gain of $17.3 million was reported in other comprehensive income; management reported no hedge ineffectiveness.
- BOLI income increased to $5.8 million, including $3.0 million of death benefits. The company also recorded a $5.1 million gain on sales of equity securities.
- Southside adopted ASU 2022-02 prospectively in 2023; management said it had no material impact on the financial statements, but it changed the presentation and disclosure of modified loans.
Outlook, risks and contingencies
- No company earnings or financial guidance is provided in the filing. Management described its Texas markets as healthy, supported by job and population growth, while warning that persistent inflation, higher interest rates and recession concerns could affect borrowers and loan demand. The filing notes the Federal Reserve held rates steady in December 2023 and indicated potential cuts in 2024; this is not company guidance.
- Management expects municipal loan balances to decline as scheduled payments occur because it is not currently originating these loans amid tight spreads and low yields.
- Key risks include deposit competition and rising funding costs, deposit outflows, interest-rate and securities valuation risk, real-estate concentration, CRE refinancing and collateral risk, and the possibility that securities sales to meet liquidity needs would crystallize losses. Approximately 80.8% of loans had real estate as a primary or secondary collateral component.
- Estimated uninsured deposits were 37.5% of deposits; excluding affiliate deposits and collateralized public funds, estimated deposits without insurance or collateral were 19.0%. Brokered non-maturity deposits were $828.0 million, including $800.0 million funding cash-flow hedges.
- The BTFP had only about $8,000 of remaining capacity at year-end; borrowings had a remaining maturity under three months, and new advances could be requested only through March 11, 2024. Management stated it believed funding was adequate.
- Legal proceedings arise in the ordinary course; management said they were not expected to materially affect financial position, results or cash flows. The auditor issued unqualified opinions on the financial statements and internal controls. The critical audit matter was the judgment involved in estimating the loan-loss allowance.
Important facts for investors to verify
- How deposit costs, deposit mix and reliance on brokered/wholesale funding evolve, including replacement of BTFP borrowings.
- Whether net interest margin stabilizes and whether loan and deposit repricing match management’s assumptions.
- Trends in CRE and construction loan performance, criticized/classified credits, charge-offs and the adequacy of the $42.7 million allowance.
- How the $177.1 million unrealized securities loss, securities pledging and potential liquidity needs affect capital and earnings.
- Whether the reduced nonperforming-asset figure is comparable after the accounting disclosure change, and whether the company’s planned municipal loan runoff continues.