Business context and reporting period
Southside Bancshares, Inc. is a Texas-based bank holding company operating Southside Bank, a community-focused lender serving East Texas, Fort Worth and Austin. This Form 10-K covers the fiscal year ended December 31, 2016; comparisons are primarily with 2015. At year-end, the company had 60 banking centers, $5.56 billion in assets, $2.56 billion in loans and $3.53 billion in deposits.
Key financial metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Net income | $49.3 million | $44.0 million |
| Diluted EPS | $1.86 | $1.65 |
| Net interest income (GAAP) | $139.6 million | $134.7 million |
| Net interest margin | 3.26% | 3.40% |
| Provision for loan losses | $9.8 million | $8.3 million |
| Net charge-offs | $11.6 million | $1.9 million |
| Total assets | $5.56 billion | $5.16 billion |
| Total loans | $2.56 billion | $2.43 billion |
| Total deposits | $3.53 billion | $3.46 billion |
| Shareholders’ equity | $518.3 million | $444.1 million |
| Cash and cash equivalents | $169.7 million | $81.0 million |
Net interest income on a tax-equivalent basis was $157.6 million; tax-equivalent net interest margin was 3.26%. Return on average assets was 0.94% and return on average equity was 10.54%. Operating cash flow was $86.7 million; investing activities used $384.4 million and financing activities provided $386.4 million.
Year-end borrowings included $1.31 billion in FHLB advances, $98.1 million in subordinated notes (net of issuance costs) and $60.2 million in junior subordinated debt. Deposits were $3.53 billion. Regulatory capital ratios were strong: consolidated CET1 14.64%, Tier 1 16.37%, total capital 20.10% and leverage 9.46%; management reported the company and bank met applicable capital requirements.
Material changes versus the prior comparable period
- Net income rose 12.2%, reflecting higher interest income, lower noninterest expense and modestly higher noninterest income, partly offset by increased funding costs, taxes and loan-loss provision.
- Net interest margin fell to 3.26% from 3.40%; interest expense increased 47.8% to $29.3 million as deposit and borrowing costs rose and funding balances expanded.
- Loans increased 5.1%. Commercial real estate loans grew $310.8 million, while commercial, construction, consumer and 1–4 family residential balances declined.
- Nonperforming assets fell to $15.1 million, or 0.27% of assets, from $32.5 million, or 0.63%. However, net charge-offs increased to $11.6 million, mainly reflecting $10.9 million charged off on two commercial relationships.
- Shareholders’ equity increased 16.7%, supported by a December common-stock offering that generated $76.0 million net proceeds. Accumulated other comprehensive loss increased $19.8 million, primarily due to unrealized securities losses.
Outlook, management commentary, risks and unusual items
- Management said its markets were generally performing better than many other areas, despite oil-price-related headwinds, and cited expectations for slow-to-modest economic growth in 2017. The filing provides no specific earnings or revenue guidance.
- The company issued $100 million of fixed-to-floating subordinated notes in September 2016, bearing 5.50% through September 2021 and then three-month LIBOR plus 429.7 basis points. Proceeds supported general corporate purposes, including advances to the bank.
- In December, the company issued 2.185 million shares at $36.50 per share for $76.0 million net proceeds. It repurchased 443,426 shares for $10.2 million during the year; the repurchase plan was discontinued in December.
- Fourth-quarter results included a $2.676 million net loss on securities sales, primarily from selling approximately $45 million of lower-yielding U.S. Treasury securities. Full-year securities gains were $2.836 million.
- Management described a balance-sheet strategy using wholesale funding and securities, including agency mortgage-backed securities and municipal bonds, to manage credit, interest-rate and liquidity risks. It cautioned that funding costs, yield-curve changes, securities fair values and unpredictable mortgage prepayments could pressure earnings and equity.
- Key risks include Texas economic and real-estate conditions, interest-rate and funding-cost movements, commercial real-estate concentration, credit losses, competition, regulation and cybersecurity. Energy loans were 1.09% of loans, but management noted indirect exposure to the Texas economy from low oil prices. Approximately 76.8% of loans had real estate as a primary or secondary collateral component.
- Unused credit commitments and standby letters of credit totaled $674.7 million. Management considered ordinary-course litigation immaterial. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth and the sharp increase in commercial loan charge-offs represent isolated events or a continuing credit-quality trend; review the $42.6 million in potential problem loans and the $17.9 million allowance.
- Whether deposit and wholesale funding costs continue to rise, and how the lower net interest margin responds to rate changes. The filing’s rate simulations show differing results across scenarios and depend on management assumptions.
- The sensitivity of securities values and equity to interest rates: the AFS portfolio had a $17.8 million net unrealized loss at year-end, and total AFS and HTM securities had a $29.7 million net unrealized loss on a fair-value basis.
- The sustainability of earnings and capital after the stock issuance, subordinated debt issuance, dividends and share repurchases, including the effect of regulatory restrictions on bank dividends.
- Execution of the company’s 2017 outlook and balance-sheet strategy, particularly loan growth, CRE concentration, liquidity availability and exposure to Texas economic conditions.