Southside Bancshares, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; quarterly figures below are for the fourth quarter. Southside is a Texas-based community bank holding company operating Southside Bank, with 57 branches and wealth-management and trust services. The filing was dated February 26, 2021.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Total assets at year-end | $7.01 billion | $6.75 billion |
| Loans at year-end | $3.66 billion | $3.57 billion |
| Deposits at year-end | $4.93 billion | $4.70 billion |
| Net interest income | $187.3 million | $169.8 million |
| Provision for credit losses | $20.2 million | $5.1 million |
| Noninterest income | $49.7 million | $42.4 million |
| Noninterest expense | $123.3 million | $119.3 million |
| Net income | $82.2 million | $74.6 million |
| Diluted EPS | $2.47 | $2.20 |
| Cash dividends per share | $1.30 | $1.26 |
Net interest margin was 2.89% on a GAAP basis (2.93% in 2019); fully taxable-equivalent margin, a non-GAAP measure, was 3.07% (3.06%). Return on average assets was 1.14%, and return on average equity was 9.91%. Operating cash flow was $90.5 million; investing cash flow was negative $223.7 million and financing cash flow was positive $130.9 million.
At year-end, shareholders’ equity was $875.3 million, or 12.5% of assets. Consolidated CET1, total risk-based capital and leverage ratios were 14.68%, 21.78% and 9.81%, respectively. FHLB borrowings were $832.5 million; subordinated notes were $197.3 million and trust-preferred subordinated debentures were $60.3 million. Cash and cash equivalents totaled $108.4 million. Management reported additional borrowing capacity of approximately $1.15 billion from the FHLB and $722.3 million from the Federal Reserve discount window, subject to collateral requirements.
Material changes and quarterly results
- Full-year net income rose 10.2% and diluted EPS rose 12.3%. Net interest income increased 10.3%, as lower funding costs more than offset lower asset yields. Total interest expense fell 37.2%, while total interest income declined 3.7%.
- Loan growth was 2.5%; commercial loans grew largely from $214.8 million in PPP loans outstanding at year-end. Deposits increased 4.9%, including a $314.7 million rise in noninterest-bearing deposits. FHLB borrowings declined 14.4%.
- The allowance for loan losses rose to $49.0 million, or 1.34% of loans, from $24.8 million, or 0.69%. The increase reflects CECL adoption and COVID-19-related economic assumptions. Net charge-offs fell to $1.2 million from $7.3 million.
- Nonperforming assets were nearly unchanged at $17.5 million, or 0.25% of assets. Nonaccrual loans increased to $7.7 million from $5.0 million; restructured loans declined to $9.6 million from $12.0 million.
- AFS securities sales generated an $8.3 million net gain, versus $0.8 million in 2019. Noninterest income also reflected higher mortgage-loan sale gains, partly offset by lower deposit-service income and trust fees. Trust assets under management declined 8.4% to approximately $1.58 billion.
- Fourth-quarter net income was $29.6 million, or $0.89 per diluted share, compared with $17.3 million, or $0.51, in fourth-quarter 2019. The quarter included a $5.5 million provision release, compared with a $2.5 million provision in fourth-quarter 2019; the filing reports quarterly provisions of $(5.5) million and $(4.7) million in Q4 and Q3 2020, respectively.
Outlook, commentary, risks and unusual items
Management gave no formal quantitative earnings or financial guidance. It noted that economic conditions in Texas and the markets served remained affected by COVID-19, while expressing the view that vaccine distribution could support stronger economic growth in the second half of 2021. The company continued PPP lending: it reported $55 million of additional PPP loans funded through February 23, 2021. Outstanding loans with COVID-related payment deferrals declined from $47.2 million at year-end to $2.5 million by February 23, 2021.
- Key risks: pandemic-related borrower stress and credit losses; real-estate concentration (about 71% of loans have real estate as a primary or secondary collateral component); low interest rates and interest-rate sensitivity; MBS prepayment risk; Texas and energy-sector exposure; liquidity and funding access; cybersecurity and third-party systems; and the transition away from LIBOR.
- Energy loans were $104.5 million, or 2.86% of loans, at year-end; classified energy loans increased to $6.4 million from $1.1 million. Management highlighted retail, hotels, food services, and arts/entertainment/recreation as pandemic-sensitive sectors; combined exposure was $540.1 million, or 14.77% of loans.
- CECL adoption on January 1, 2020 reduced retained earnings by $7.8 million after tax. The company elected regulatory-capital relief for CECL, which management said added 30 basis points to the year-end CET1 ratio.
- Other notable items included $64.8 million of other comprehensive income, primarily associated with securities valuation changes; a $100 million subordinated-note issuance in November 2020; and the freeze of future defined-benefit pension accruals effective December 31, 2020.
- The company repurchased 1.04 million shares for $31.0 million during 2020 and paid $43.2 million in dividends. Litigation arising in the ordinary course was described as not material. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification points
- Assess the assumptions behind the CECL allowance and the significance of the Q4 provision release; compare future credit costs with pandemic-sensitive exposures and subsequent loan performance.
- Separate underlying loan growth from PPP balances and determine how PPP forgiveness and repayment affect interest income, fee income, and reported loan growth.
- Review securities portfolio composition, unrealized gains, duration and sensitivity to rising rates and faster MBS prepayments; note that the unrealized AFS gain affects GAAP equity.
- Evaluate funding and liquidity using deposit mix, brokered-CD levels, FHLB borrowings, collateral availability and the maturity profile of debt.
- Confirm dividend and repurchase capacity against bank-level earnings, regulatory restrictions, capital needs and the terms of subordinated debt.