Southside Bancshares, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing. Amounts are in U.S. dollars unless stated otherwise.
Business context
Southside Bancshares is a Texas bank holding company operating Southside Bank. It provides consumer and commercial banking, municipal lending, and wealth management and trust services across East and Southeast Texas and the greater Fort Worth and Austin areas. At year-end, it operated 60 branches and reported approximately $1.72 billion in wealth and trust assets under management.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Net income | $74.6 million | $74.1 million |
| Diluted earnings per share | $2.20 | $2.11 |
| Interest income | $240.8 million | $229.2 million |
| Interest expense | $71.0 million | $57.1 million |
| Net interest income | $169.8 million | $172.1 million |
| Net interest margin, FTE | 3.06% | 3.18% |
| Provision for loan losses | $5.1 million | $8.4 million |
| Noninterest income | $42.4 million | $40.8 million |
| Noninterest expense | $119.3 million | $120.1 million |
| Cash dividends per share | $1.26 | $1.20 |
Total assets rose 10.2% to $6.75 billion; loans increased 7.7% to $3.57 billion; deposits grew 6.3% to $4.70 billion. Shareholders’ equity increased 10.0% to $804.6 million, or 11.9% of assets.
Cash and cash equivalents were $110.7 million, down from $120.7 million. Operating cash flow was $80.6 million (2018: $122.4 million); investing activities used $566.8 million, largely reflecting securities purchases and loan growth; financing activities provided $476.2 million. The Bank reported approximately $1.37 billion of additional potential FHLB funding, subject to collateral and required stock purchases.
Year-end funding included $972.7 million of FHLB borrowings, $28.4 million of other borrowings, $98.6 million of subordinated notes and $60.3 million of trust preferred debentures. Brokered CDs were $365.7 million, or 7.8% of deposits, with maturities under one year. The $100 million subordinated notes mature in 2026; trust preferred debentures mature between 2033 and 2037.
Credit indicators improved overall: nonperforming assets fell to $17.4 million, or 0.26% of assets, from $42.9 million, or 0.70%; nonaccrual loans declined to $5.0 million from $35.8 million. Net charge-offs nevertheless rose to $7.3 million from $2.2 million, and the allowance declined to $24.8 million, or 0.69% of loans, from $27.0 million, or 0.82%.
Regulatory capital remained strong. Consolidated CET1, Tier 1 risk-based, total risk-based and leverage ratios were 14.07%, 15.46%, 18.43% and 10.18%, respectively. The Bank was categorized as well capitalized.
Material changes versus 2018
- Net income edged up 0.6%, while diluted EPS increased 4.3%. Growth in interest income and lower loan-loss provision were more than offset at the net-interest-income level by funding costs: interest expense rose 24.3%, and net interest income declined 1.3%.
- Falling nonperforming assets reflected the sale of three large commercial real estate loans in the first quarter and the payoff of another previously nonaccrual loan. Restructured loans increased to $12.0 million from $5.9 million.
- The securities portfolio expanded; total securities increased to approximately $2.49 billion from $2.15 billion. The Company purchased about $1.26 billion of agency MBS and sold about $750 million of lower-yielding fixed-rate securities during 2019.
- FHLB borrowings increased 35.3% to $972.7 million, and brokered CDs grew from $238.1 million to $365.7 million. Deposits increased, including private and public-fund balances.
- Other comprehensive income was $54.5 million, versus a $14.0 million loss in 2018, primarily reflecting the securities portfolio’s unrealized gains; year-end AOCI moved from a $50.2 million loss to $4.2 million of income.
Outlook, risks and unusual items
- Management provided no specific earnings or financial guidance. It said Texas markets served were expected to grow in 2020 at a rate similar to 2019. The Company announced plans to apply for a Houston-area loan production office, subject to regulatory approval, and opened a Kingwood branch in the fourth quarter of 2019.
- CECL took effect for the Company on January 1, 2020. Management estimated the combined allowance for loan losses and unfunded-commitment reserve at adoption would be $34 million to $42 million; the final impact could differ as implementation and modeling were completed. Management did not expect a significant regulatory-capital impact.
- Adoption of the callable-debt-security premium-amortization standard reduced beginning retained earnings by $16.5 million pre-tax. Adoption of the new lease standard also added $10.1 million of operating lease liabilities and $9.8 million of right-of-use assets to the balance sheet.
- Key disclosed risks include the concentration of real-estate-secured lending (about 75.2% of loans), interest-rate and MBS prepayment risk, rising funding costs, reliance on wholesale funding and bank-subsidiary dividends, Texas economic and oil-and-gas exposure, cybersecurity and third-party service-provider risks, and the transition from LIBOR after 2021.
- Commitments to extend credit were $925.7 million and standby letters of credit were $17.2 million at year-end. Management said ordinary-course litigation was not expected to materially affect financial position, results or liquidity.
- The auditor gave unqualified opinions on the financial statements and internal control over financial reporting. The allowance for loan losses was identified as a critical audit matter because of judgment involved in qualitative reserve adjustments. The Company also disclosed that it did not timely file an 8-K concerning a named executive’s retirement announcement; management and the auditor concluded controls over financial reporting were effective.
Important facts for investors to verify
- Whether loan growth, especially construction and commercial real estate, remains consistent with underwriting standards; monitor real-estate collateral, criticized loans and the increase in restructurings.
- How CECL adoption compared with the stated $34 million–$42 million estimate, including effects on earnings, reserves and regulatory capital.
- Whether net interest margin stabilizes as deposit costs, FHLB funding and brokered-CD balances evolve; assess brokered-CD maturities and refinancing needs.
- Whether securities growth, MBS prepayments and interest-rate movements affect earnings, AOCI and capital; review the balance-sheet strategy and associated hedges.
- Whether the Company executes its Houston-area expansion plans and sustains deposit and loan growth without weakening liquidity or capital.