Southside Bancshares, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022, compared primarily with fiscal 2021. This is an annual filing; it does not provide a standalone fourth-quarter financial summary.
Business context
Southside is a Texas bank holding company operating Southside Bank, with 55 branches and consumer, commercial, municipal, wealth management and trust services. At year-end, assets under wealth management and trust were approximately $1.58 billion.
Financial performance and condition
| Metric | 2022 | 2021 |
|---|---|---|
| Total assets | $7.56 billion | $7.26 billion |
| Total loans | $4.15 billion | $3.65 billion |
| Total deposits | $6.20 billion | $5.72 billion |
| Net interest income | $212.3 million | $189.6 million |
| Net interest margin | 3.11% | 2.96% |
| Net income | $105.0 million | $113.4 million |
| Diluted earnings per share | $3.26 | $3.47 |
| Cash dividends per share | $1.40 | $1.37 |
Net interest income increased 12.0%, reflecting higher asset yields and average earning assets, while interest expense rose 53.8% to $40.6 million as rates increased. Noninterest income fell 17.2% to $40.9 million, including a $3.8 million net loss on AFS securities sales. Noninterest expense rose 4.2% to $130.3 million. The provision for credit losses was $3.2 million, versus a $17.0 million reversal in 2021. Net income declined 7.4%; return on average assets was 1.43% and return on average equity was 13.42%.
Cash flow: Operating activities provided $226.5 million; investing activities used $634.8 million, principally reflecting securities activity and loan growth; financing activities provided $405.8 million. Cash and cash equivalents ended the year at $199.3 million.
Credit quality: The allowance for loan losses was $36.5 million, or 0.88% of loans, versus $35.3 million, or 0.97%, in 2021. Net loan charge-offs were $0.7 million (0.02% of average loans). Nonperforming assets declined to $10.9 million, or 0.14% of assets.
Capital, debt and liquidity: Shareholders’ equity declined 18.2% to $746.0 million, mainly due to a $197.2 million after-tax other comprehensive loss associated primarily with rising rates and securities values, plus dividends and buybacks. Year-end consolidated CET1, total risk-based capital and leverage ratios were 12.63%, 16.11% and 9.96%, respectively; the Bank’s ratios were 15.12%, 15.71% and 11.00%. Deposits were the primary funding source. FHLB borrowings were $153.4 million; other borrowings were $221.2 million, including $188.0 million borrowed from the Federal Reserve discount window. The company also had $98.7 million of subordinated notes and $60.3 million of trust preferred subordinated debentures. Management said liquidity was adequate and reported additional borrowing capacity of approximately $527.6 million at the discount window and $1.61 billion from the FHLB, subject to collateral and terms.
Material changes and unusual items
- Loans grew 13.8%; excluding PPP loans, growth was 14.8%, led by commercial real estate and construction lending.
- Deposits grew 8.3%. Brokered deposits increased substantially, to approximately $659 million, while FHLB borrowings declined. The company cited funding cash-flow hedges and choosing lower-cost wholesale funding as drivers.
- The company transferred approximately $1.25 billion of securities from AFS to HTM, stating it intended and was able to hold them to maturity. At year-end, HTM securities had estimated fair value of $1.15 billion versus $1.33 billion carrying value. Combined AFS and HTM securities had a $266.4 million net unrealized loss at fair value.
- The board authorized repurchases of up to 2.0 million shares; 923,775 shares were repurchased during 2022 for $33.8 million. The quarterly cash dividend was $1.40 per share for the year.
- The company closed one Lufkin branch in January 2023. It originated more than $420 million of PPP loans since 2020; only $113,000 remained outstanding at year-end 2022.
Outlook, commentary and risks
The filing gives no formal earnings or financial guidance. Management described Texas markets as generally positive, with activity near pre-pandemic levels, but cited inflation, higher rates, recession concerns, labor shortages and supply-chain disruption. It noted that further rate increases and an inverted yield curve could make net interest income less favorable. Interest-rate sensitivity modeling estimated that an immediate 100- and 200-basis-point increase would raise next-12-month net interest income by 7.92% and 12.90%, respectively; corresponding decreases of 100 and 200 basis points would reduce it by 6.16% and 12.34%. These are model estimates, not forecasts, and depend on assumptions.
Key risks include real-estate concentration (approximately 77.4% of loans had real estate as a primary or secondary collateral component), borrower credit deterioration, deposit repricing and retention, reliance on brokered and wholesale funding, securities valuation and liquidity, MBS prepayments, cybersecurity and third-party service disruptions, and the Texas-focused economy. The company also noted LIBOR transition exposure. Ordinary-course litigation was not considered material by management. The auditor issued an unqualified opinion on the financial statements and internal controls; the allowance for loan losses was identified as a critical audit matter because of the judgment involved in economic forecasts and scenario weighting.
Investor verification priorities
- Review deposit composition, uninsured deposits (estimated at $2.59 billion), brokered-deposit costs and maturities, and the pace of deposit repricing.
- Assess securities unrealized losses, pledged collateral, AFS/HTM classification and the effect of any future sales or liquidity needs.
- Track commercial real estate and construction exposure, criticized loan trends, nonperforming assets, charge-offs and allowance assumptions.
- Compare actual net interest income and margin with the filing’s rate-sensitivity model as rates and the yield curve change.
- Monitor capital ratios, discount-window and FHLB funding use, dividend capacity, and the effect of continued share repurchases.