Southside Bancshares, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report; selected fourth-quarter results are included below. Southside is a Texas community bank holding company operating 59 branches. It reported audited financial statements with unqualified audit opinions.
Financial performance and position
| Metric | 2018 | 2017 | Change / context |
|---|---|---|---|
| Total assets | $6.12 billion | $6.50 billion | Down 5.8% |
| Total loans | $3.31 billion | $3.29 billion | Up 0.6%; year-end balance |
| Total deposits | $4.43 billion | $4.52 billion | Down 2.0% |
| Net interest income | $172.1 million | $144.0 million | Up 19.5% |
| Net interest margin, FTE | 3.18% | 3.07% | Up 11 basis points |
| Net income | $74.1 million | $54.3 million | Up 36.5% |
| Diluted EPS | $2.11 | $1.81 | Up 16.6% |
| Cash dividends per share | $1.20 | $1.11 | Up |
- Income drivers: Interest income rose 22.2% to $229.2 million, led by loans; interest expense rose 31.3% to $57.1 million, mainly as deposit costs increased. Net interest spread, FTE, edged down to 2.88% from 2.89%.
- Other results: Provision for loan losses was $8.4 million versus $4.7 million. Noninterest income rose to $40.8 million, including $6.8 million of trust income, but securities sales produced a $1.8 million net loss. Noninterest expense increased 12.9% to $120.1 million. Effective tax rate fell to 12.1% from 22.9%, reflecting the lower federal corporate rate and discrete tax benefits.
- Cash flow: Operating cash flow was $122.4 million; investing activities provided $261.9 million, mainly reflecting securities activity; financing activities used $462.3 million. Cash and cash equivalents fell to $120.7 million from $198.7 million.
- Funding and debt: Year-end FHLB borrowings were $719.1 million, down from $1.02 billion. Long-term debt totaled $158.7 million, comprising $98.4 million of subordinated notes and $60.2 million of trust-preferred debentures. Brokered CDs rose to $238.1 million, or 5.4% of deposits, and had maturities under one year.
- Capital and liquidity: Shareholders’ equity was $731.3 million, or 11.9% of assets. Consolidated CET1, total risk-based capital and leverage ratios were 14.77%, 19.59% and 10.64%, respectively; the Bank was above regulatory “well-capitalized” thresholds. The Bank reported approximately $1.17 billion of additional potential FHLB funding capacity, subject to collateral and other conditions.
- Asset quality: Nonperforming assets rose to $42.9 million (0.70% of assets) from $10.5 million (0.16%). Nonaccrual loans increased to $35.8 million, primarily after four commercial real estate loans were placed on nonaccrual. The allowance for loan losses was $27.0 million, or 0.82% of loans; net charge-offs were $2.2 million.
Material changes and unusual items
- The November 2017 Diboll acquisition affects comparisons: 2017 included only one month of Diboll operations, while 2018 included a full year. Diboll added deposits, loans, employees and acquisition-related intangible amortization.
- Deposits declined as public-fund balances fell $221.7 million, partly offset by $131.3 million of growth in private deposits. Average deposit costs increased amid rising rates.
- The securities portfolio declined about $295.9 million, primarily through sales of lower-yielding securities and portfolio realignment. The company recorded a $1.8 million net loss on securities sales and ended the year with $27.2 million of net unrealized losses across AFS and HTM securities.
- The company repurchased 1,459,148 shares for $47.2 million during 2018; equity also reflected $42.0 million in cash dividends and a $13.9 million increase in accumulated other comprehensive loss. The repurchase authorization was completed shortly after year-end.
- Fourth-quarter 2018 net income was $17.4 million and diluted EPS was $0.50, compared with $10.3 million and $0.33 in fourth-quarter 2017. Quarterly results included a $2.4 million loan-loss provision in Q4 2018.
- In January 2019, adoption of the callable-debt premium amortization standard reduced retained earnings by $16.5 million before tax. The company planned to adopt CECL in 2020 and was still assessing its impact.
Outlook, risks and contingencies
- Management anticipated continued growth in the Texas markets it serves during 2019 at a rate similar to 2018, but provided no specific earnings, revenue or margin guidance. It said balance-sheet and securities strategy would be reassessed as rates, funding costs, loan and deposit trends, and MBS prepayments change.
- Key exposures include interest-rate and yield-curve changes, deposit repricing and retention, MBS prepayments, real estate collateral values, borrower credit quality, Texas economic conditions and oil-price volatility. About 75.4% of loans had real estate as a primary or secondary collateral component; energy loans were 1.92% of the loan portfolio.
- Brokered funding increased materially and may carry higher costs and lower customer loyalty. The company also flagged LIBOR transition risk, cyber and third-party technology risks, competition, regulatory change and potential acquisition integration risks.
- Off-balance-sheet commitments to extend credit were $874.6 million; standby letters of credit were $27.4 million. Management said ordinary-course litigation was not expected to materially affect financial position, results or liquidity.
- The company reported effective disclosure controls and internal control over financial reporting; the independent auditor gave an unqualified opinion on both the financial statements and internal controls.
Important facts for investors to verify
- Whether the elevated nonaccrual balance—especially the four commercial real estate credits—leads to further charge-offs, provisions or recoveries, and whether the $27.0 million allowance remains adequate.
- Trends in deposit balances, public-fund funding, brokered CDs and funding costs, alongside liquidity capacity and FHLB collateral availability.
- How rising or falling rates affect net interest margin, securities fair values, AOCI and MBS prepayments; review the filing’s modeled interest-rate scenarios and their assumptions.
- The full-year contribution and remaining integration costs or benefits from Diboll, including the effect of intangible amortization on expenses.
- The eventual CECL impact on credit-loss reserves and regulatory capital, and the effects of the 2019 accounting changes noted in the filing.
- Dividend sustainability and capital allocation after the 2018 share repurchases, given regulatory limits on subsidiary-bank dividends and the company’s dependence on those dividends.