Southside Bancshares, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual filing, not a standalone fourth-quarter report. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context
Southside Bancshares is a Texas-based community bank holding company operating through Southside Bank. At year-end, it reported 50 banking centers, $3.45 billion in assets, $1.35 billion in loans and $2.53 billion in deposits. It opened a second Austin branch in 2013 and completed the closure of its broker-dealer subsidiary in the second quarter.
Financial performance and condition
| Metric | 2013 | 2012 | Change / context |
|---|---|---|---|
| Net income attributable to Southside | $41.2 million | $34.7 million | Up 18.7% |
| Diluted earnings per share | $2.30 | $1.91 | Up 20.4% |
| Net interest income (GAAP) | $101.6 million | $89.1 million | Up 14.0% |
| Net interest margin | 3.69% | 3.26% | Improved; filing’s margin calculation uses taxable-equivalent figures |
| Provision for loan losses | $8.9 million | $10.7 million | Lower provision, despite higher net charge-offs |
| Noninterest income | $35.2 million | $40.0 million | Down 11.9%, chiefly from lower securities gains |
| Noninterest expense | $81.7 million | $76.1 million | Up 7.4%, mainly salaries and benefits |
| Effective tax rate | 11.0% | 18.0% | Lower primarily due to tax-exempt income |
| Total assets | $3.45 billion | $3.24 billion | Up 6.4% |
| Deposits | $2.53 billion | $2.35 billion | Up 7.5%; public-fund deposits were a major source of growth |
| Shareholders’ equity | $259.5 million | $257.8 million | Up slightly; year-end equity was 7.5% of assets |
Return on average assets was 1.22% (1.05% in 2012); return on average equity was 16.50% (12.83%). Cash dividends paid were $0.91 per share, versus $1.11 in 2012; both years also included a 5% stock dividend.
Net cash provided by operating activities was $59.5 million, investing activities used $367.8 million, and financing activities provided $212.1 million. Cash and cash equivalents fell to $54.4 million from $150.6 million. The investing outflow principally reflected securities purchases and loan growth.
Year-end FHLB advances totaled $572.8 million, comprising $73.4 million short-term and $499.3 million long-term; long-term debt, consisting of junior subordinated debentures, was $60.3 million. The Bank reported $405.4 million of potential additional FHLB funding against unpledged securities, net of required FHLB stock purchases. Regulatory capital remained well above applicable 2013 “well-capitalized” thresholds: Bank total risk-based capital was 21.46%, Tier 1 risk-based capital 20.22%, and Tier 1 leverage 8.97%.
Changes, credit quality and portfolio
- Loans grew 7.0% to $1.35 billion. Growth included residential, commercial real estate and municipal lending; public-fund deposits rose $149.4 million.
- Nonperforming assets declined to $13.6 million, or 0.39% of assets, from $14.7 million, or 0.45%. Nonaccrual loans fell to $8.1 million from $10.3 million.
- Net charge-offs increased to $10.6 million from $8.7 million; loans to individuals, including SFG’s purchased subprime auto portfolio, accounted for most charge-offs. The allowance declined to $18.9 million, or 1.40% of loans, from $20.6 million, or 1.63%.
- Real estate collateral was a primary or secondary component for approximately 57.6% of loans. Management also identified concentration exposure to the medical community and to local Texas markets.
- Securities grew to approximately $1.84 billion. The company transferred $452.9 million of securities from available-for-sale to held-to-maturity during 2013. Combined AFS and HTM securities had a $31.2 million net unrealized loss at year-end; the HTM portfolio’s estimated fair value was $649.2 million versus $667.1 million carrying value.
- Wholesale funding increased: FHLB advances rose $52.7 million and brokered CDs rose to $54.4 million from $19.5 million. The company prepaid $94.3 million of higher-cost FHLB advances and recorded $1.0 million in associated fees.
Outlook, risks and unusual items
- Management described local economic conditions as generally improving and cited expectations for slow-to-moderate growth in 2014, while cautioning that growth could be uneven. No specific earnings or revenue guidance was provided.
- Interest-rate sensitivity shifted materially: the year-end model projected that immediate rate increases of 100 and 200 basis points would reduce next-12-month net interest income by 5.86% and 8.42%, respectively, relative to the base case. Management warned that interest rates, securities values and mortgage prepayments could affect earnings and equity.
- Net securities gains fell to $8.5 million from $18.0 million; management cautioned that gains may not continue. The fourth-quarter sale of trust preferred securities, prompted by Volcker Rule guidance, resulted in an approximately $959,000 loss.
- Fourth-quarter results included an immaterial cumulative correction of prior-period municipal-bond premium amortization: interest income increased about $1.4 million and net income about $1.1 million for 2013. The accounting error also led to restatement of quarterly financial information for the first three quarters of 2013.
- A material weakness in internal control over financial reporting concerned interest-income recognition on callable municipal securities purchased at a premium. Management said it enhanced controls after year-end, but remediation was not yet complete at filing. The independent auditor issued an adverse opinion on internal control; its opinion on the 2013 consolidated financial statements was unqualified.
- Other significant risks include real-estate and medical-sector credit exposure, SFG subprime auto-loan losses, deposit and wholesale-funding availability, changing regulation and capital rules, securities prepayment and valuation risk, and dependence of parent-company liquidity on regulated bank dividends. Ordinary-course litigation was assessed by management as not material.
Important facts for investors to verify
- Review the restated quarterly figures and the size and timing of the municipal-security accounting correction; confirm whether the control weakness has been fully remediated.
- Assess whether the allowance for loan losses remains adequate given higher net charge-offs, the SFG auto portfolio, and real-estate and medical concentrations.
- Evaluate securities exposure, unrealized losses, AFS-to-HTM transfers, and sensitivity of net interest income and equity to rate changes and prepayments.
- Track deposit composition, public-fund concentration, brokered CDs, FHLB borrowing levels, and available liquidity.
- Consider earnings quality, including lower securities gains, BOLI death-benefit income, the tax benefit from tax-exempt income, and the prior-period correction.