The following is a discussion of our consolidated financial condition, changes in our financial condition and results of our operations, and should be read and reviewed in conjunction with the financial statements, and the notes thereto, in this Quarterly Report on Form 10-Q and in our 2021 Form 10-
K. Certainrisks, uncertainties and other factors, including those set forth under "Risk Factors" in Part I, Item 1A. of the 2021 Form 10-K and elsewhere in this Quarterly Report on Form 10-Q, may cause actual results to differ materially from the results discussed in the forward-looking statements appearing in this discussion and analysis. Forward-Looking Statements Certain statements of other than historical fact that are contained in this report may be considered to be "forward-looking statements" within the meaning of and subject to the safe harbor protections of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management's views as of any subsequent date. These statements may include words such as "expect," "estimate," "project," "anticipate," "appear," "believe," "could," "should," "may," "might," "will," "would," "seek," "intend," "probability," "risk," "goal," "target," "objective," "plans," "potential," and similar expressions. Forward-looking statements are statements with respect to our beliefs, plans, expectations, objectives, goals, anticipations, assumptions, estimates, intentions and future performance and are subject to significant known and unknown risks and uncertainties, which could cause our actual results to differ materially from the results discussed in the forward-looking statements. For example, discussions of the effect of our expansion, benefits of the Share Repurchase Plan, trends in asset quality, capital, liquidity, our ability to sell nonperforming assets, expense reductions, planned operational efficiencies and earnings from growth and certain market risk disclosures, including the impact of interest rates, tax reform, inflation, the impacts related to or resulting from other economic factors are based upon information presently available to management and are dependent on choices about key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future. Accordingly, our results could materially differ from those that have been estimated. The most recent factor that could cause future results to differ materially from those anticipated by our forward-looking statements include the ongoing impact of the COVID-19 pandemic and related variants on our business, financial position, operations and prospects, including our ability to continue our business activities in certain communities we serve, the duration of the pandemic and its continued effects on financial markets, a reduction in financial transactions and business activities resulting in decreased deposits and reduced loan originations, our ability to manage liquidity in a rapidly changing and unpredictable market, supply chain disruptions, labor shortages and interest rate changes by the Federal Reserveand other government actions in response to the pandemic including regulations or laws enacted to counter the effects of the COVID-19 pandemic on the economy. Other factors that could cause actual results to differ materially from those indicated by forward-looking statements include, but are not limited to, the following:
•the continued impact of the COVID-19 pandemic and related developments on our future consolidated financial condition and results of operations;
•general (i) political conditions, including, without limitation, governmental action and uncertainty resulting from
U.S.and global political trends and (ii) economic conditions, either globally, nationally, in the State of Texas, or in the specific markets in which we operate, including, without limitation, the deterioration of the commercial real estate, residential real estate, construction and development, energy, oil and gas, credit or liquidity markets, which could cause an adverse change in our net interest margin, or a decline in the value of our assets, which could result in realized losses; •current or future legislation, regulatory changes or changes in monetary or fiscal policy that adversely affect the businesses in which we or our customers or our borrowers are engaged, including the impact of the Dodd-Frank Act, the Federal Reserve'sactions with respect to interest rates, the capital requirements promulgated by the Basel Committee, the CARES Act, the Economic Aid Act, uncertainty relating to calculation of LIBOR and other regulatory responses to economic conditions;
•adverse changes in the status or financial situation of the GSEs having an impact on the guarantees or the ability of the GSEs to pay or issue debt;
• unfavorable evolution of the credit portfolios of other
•economic or other disruptions caused by acts of terrorism, war or other conflicts, including the
Russia- Ukraineconflict, natural disasters, such as hurricanes, freezes, flooding and other man-made disasters, such as oil spills or power outages, health emergencies, epidemics or pandemics or other catastrophic events; •technological changes, including potential cyber-security incidents and other disruptions, or innovations to the financial services industry, including as a result of the increased telework environment; Southside Bancshares, Inc.|39 --------------------------------------------------------------------------------
•our ability to identify and address cyber-security risks such as data security breaches, malware, "denial of service" attacks, "hacking" and identity theft, which could disrupt our business and result in the disclosure of and/or misuse or misappropriation of confidential or proprietary information, disruption or damage of our systems, increased costs, significant losses, or adverse effects to our reputation; •the risk that our enterprise risk management framework, compliance program or our corporate governance and supervisory oversight functions may not identify or address risks adequately, which may result in unexpected losses; •changes in the interest rate yield curve such as flat, inverted or steep yield curves, or changes in the interest rate environment that impact net interest margins and may impact prepayments on our MBS portfolio;
•increase in our non-performing assets;
•our ability to maintain adequate liquidity to fund operations and growth;
•any regulatory limits or other restrictions applicable to the Bank and its ability to pay dividends to us;
•failure of our assumptions underlying our allowance for credit losses and other estimates;
•failure to maintain an effective system of controls and procedures, including internal control over financial reporting;
•the effectiveness of our financial derivative instruments and our hedging activities in managing risk;
•unexpected results and costs associated with existing or new litigation involving us;
•changes affecting our balance sheet and debt strategy;
•the risks associated with actual prepayments of mortgage loans that deviate from forecasts;
• reality risks
•risks related to
U.S.agency MBS prepayments increasing due to U.S.government programs designed to assist homeowners to refinance their mortgage that might not otherwise have qualified;
•our ability to monitor interest rate risk;
•risks related to fluctuations in the price of a barrel of crude oil;
•a significant increase in competition in the banking and financial services sector;
•changes in consumption, borrowing and saving habits, notably due to rising inflation and the economic impact of COVID-19;
•execution of future acquisitions, reorganization or disposition transactions, including the risk that the anticipated benefits of such transactions are not realized;
•our ability to increase our market share and control our expenses;
• our ability to develop new competitive products and services in a timely manner and the acceptance of these products and services by our customers;
•the effect of changes in federal or state tax laws;
•the effect of compliance with legislation or regulatory changes;
•the effect of changes in accounting policies and practices;
• the credit risks of borrowers, including any increase in these risks due to changes in economic conditions;
•risks associated with loans secured by real estate, including the risk of decline in the value and negotiability of collateral;
•risks related to environmental liability resulting from certain lending activities;
• the risks associated with our common stock and other securities, including fluctuations in our stock price and general stock market volatility; and
• other risks and uncertainties discussed in “Part I – Item 1A. Risk Factors” of the 2021 Form 10-K.
All written or oral forward-looking statements made by us or attributable to us are expressly qualified by this cautionary notice. We disclaim any obligation to update any factors or to announce publicly the result of revisions to any of the forward-looking statements included herein to reflect future events or developments, unless otherwise required by law.
Southside Bancshares, Inc.|40 --------------------------------------------------------------------------------
Critical accounting estimates
Our accounting and reporting estimates conform with
U.S.GAAP and general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We consider accounting estimates that can (1) be replaced by other reasonable estimates and/or (2) changes to an estimate from period to period that have a material impact on the presentation of our financial condition, changes in financial condition or results of operations as well as (3) those estimates that require significant and complex assumptions about matters that are highly uncertain to be critical accounting estimates. We consider our critical accounting policies to include allowance for credit losses on loans and off-balance-sheet credit exposure. Critical accounting estimates include a high degree of uncertainty in the underlying assumptions. Management bases its estimates on historical experience, current information and other factors deemed relevant. The development, selection and disclosure of our critical accounting estimates are reviewed with the Audit Committee of the Company's Board of Directors. Actual results could differ from these estimates. For additional information regarding critical accounting policies, refer to "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates,," "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Allowance for Credit Losses - Loans and Allowance for Credit Losses - Off-Balance-Sheet Credit Exposures," "Note 1 - Summary of Significant Accounting and Reporting Policies," "Note 5 - Loans and Allowance for Loan Losses" and "Note 17 - Off-Balance-Sheet Arrangements, Commitments and Contingencies" in the 2021 Form 10-K. As of March 31, 2022, there have been no significant changes to our critical accounting estimates. Southside Bancshares, Inc.|41
Non-GAAP Financial Measures
Certain non-GAAP measures are used by management to supplement the evaluation of our performance. These include the following fully taxable-equivalent measures: Net interest income (FTE), net interest margin (FTE) and net interest spread (FTE), which include the effects of taxable-equivalent adjustments using a federal income tax rate of 21% to increase tax-exempt interest income to a tax-equivalent basis. Interest income earned on certain assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. Net interest income (FTE), net interest margin (FTE) and net interest spread (FTE). Net interest income (FTE) is a non-GAAP measure that adjusts for the tax-favored status of net interest income from certain loans and investments and is not permitted under GAAP in the consolidated statements of income. We believe this measure to be the preferred industry measurement of net interest income, and that it enhances comparability of net interest income arising from taxable and tax-exempt sources. The most directly comparable financial measure calculated in accordance with GAAP is our net interest income. Net interest margin (FTE) is the ratio of net interest income (FTE) to average earning assets. The most directly comparable financial measure calculated in accordance with GAAP is our net interest margin. Net interest spread (FTE) is the difference in the average yield on average earning assets on a tax-equivalent basis and the average rate paid on average interest bearing liabilities. The most directly comparable financial measure calculated in accordance with GAAP is our net interest spread. These non-GAAP financial measures should not be considered alternatives to GAAP-basis financial statements and other bank holding companies may define or calculate these non-GAAP measures or similar measures differently. Whenever we present a non-GAAP financial measure in an
SECfiling, we are also required to present the most directly comparable financial measure calculated and presented in accordance with GAAP and reconcile the differences between the non-GAAP financial measure and such comparable GAAP measure. In the following table we present the reconciliation of net interest income to net interest income adjusted to a fully taxable-equivalent basis assuming a 21% marginal tax rate for interest earned on tax-exempt assets such as municipal loans and investment securities (dollars in thousands), along with the calculation of net interest margin (FTE) and net interest spread (FTE). Non-GAAP Reconciliations Three Months Ended March 31, 2022 2021 Net interest income (GAAP) $ 48,906 $ 46,303Tax equivalent adjustments: Loans 745 736 Tax-exempt investment securities 2,464 2,211 Net interest income (FTE) (1) $ 52,115 $ 49,250Average earning assets $ 6,553,710$
Net interest margin 3.03 % 3.01 % Net interest margin (FTE) (1) 3.22 % 3.20 % Net interest spread 2.89 % 2.84 % Net interest spread (FTE) (1) 3.09 % 3.03 %
(1) These amounts are presented on a full tax equivalent basis and are non-GAAP measures.
Management believes adjusting net interest income, net interest margin and net interest spread to a fully taxable-equivalent basis is a standard practice in the banking industry as these measures provide useful information to make peer comparisons. Tax-equivalent adjustments are reported in the respective earning asset categories as listed in the "Average Balances with Average Yields and Rates" tables under Results of Operations.
Southside Bancshares, Inc.|42 --------------------------------------------------------------------------------
Table of Contents OVERVIEW COVID-19 During
March 2020, the World Health Organizationdeclared COVID-19 a global pandemic in response to the rapidly growing outbreak of the virus. COVID-19 significantly impacted local, national and global economies due to stay-at-home orders and social distancing guidelines. In compliance with social distancing guidelines issued by federal, state and local governments, we initially closed all of our grocery store branches. As stay-at-home orders were issued by local governments in our market areas to combat the spread of the virus, we closed all traditional lobbies and wealth management and trust offices to walk-in customers, however, most of these traditional locations were offering certain services by appointment only. All other banking services were available to customers through our drive-thrus, ATMs/ITMs and automated telephone, internet and mobile banking products. After careful consideration and implementation of additional safety precautions, all locations were reopened on June 1, 2020. Approximately 45% of our workforce has remote working capabilities, however most of our workforce have returned to our office and branch locations. COVID-19 significantly disrupted supply chains, business activity and the overall economic and financial markets globally and in our footprint. As of March 31, 2022, economic conditions in Texashave returned close to pre-pandemic levels. Commercial activity has resumed to levels close to those existing prior to the outbreak of the pandemic. While the overall outlook has improved based on the availability of the vaccine, the risk of further resurgence and possible reimplementation of restrictions remains. The ongoing pandemic could continue to adversely impact the markets in which we operate and our business, operations and financial condition. In response to the COVID-19 pandemic, the CARES Act was signed into law on March 27, 2020. The CARES Act provided an estimated $2.2 trillionto address the economic impact of the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of financial relief. The CARES Act also included provisions to encourage financial institutions to work prudently with borrowers. As an SBA lender, we were well positioned to assist business customers in accessing funds available through the PPP implemented in April of 2020. On December 27, 2020, the Economic Aid Act was signed into law. This second coronavirus relief package granted additional funds for a new round of PPP loans. Additionally, it expanded the eligibility for loans and allowed certain businesses to request a second loan. The SBA began accepting applications for the second round of PPP loans on January 13, 2021, and we accepted new applications through April 6, 2021. In total, we originated over $420 millionof PPP loans, of which $13.9 millionwere still outstanding as of March 31, 2022. On March 11, 2021, the American Rescue Plan was signed into law granting additional funds for unemployment benefits, individuals and other types of financial relief. Additionally, we assisted both our consumer and commercial borrowers that experienced financial hardship due to COVID-19 related challenges. As of March 31, 2022and December 31, 2021, there were no remaining loans with payment deferrals. As of March 31, 2021, we had outstanding loans with payment deferrals, generally for up to three months, totaling $1.7 million. The decrease in the COVID-19 modified loans are the result of the loans coming out of the deferral periods and resuming performance.
Net income decreased
$9.1 million, or 26.7%, for the three months ended March 31, 2022, to $25.0 millioncompared to the same period in 2021. The decrease in net income was primarily a result of a provision for credit losses of $294,000for the three months ended March 31, 2022, compared to a reversal of provision for credit losses of $10.1 millionfor the same period in 2021 due to the improved economic forecast during the first quarter of 2021, and to a lesser extent, a $2.9 milliondecrease in noninterest income, partially offset by the $2.6 millionincrease in net interest income and the $1.6 milliondecrease in income tax expense. Earnings per diluted common share decreased $0.27, or 26.0%, to $0.77for the three months ended March 31, 2022, compared to $1.04for the three months ended March 31, 2021. Southside Bancshares, Inc.|43 --------------------------------------------------------------------------------
Our total assets decreased
$140.5 million, or 1.9%, to $7.12 billionat March 31, 2022from $7.26 billionat December 31, 2021. Our securities portfolio decreased by $314.8 million, or 11.0%, to $2.54 billion, compared to $2.86 billionat December 31, 2021. The decrease in the securities portfolio was due to the increase in the unrealized loss in the portfolio, sales of securities, and principal payments, which more than offset the securities purchased during the quarter. Our FHLB stock decreased $10.6 million, or 73.9%, to $3.8 millionfrom $14.4 millionat December 31, 2021, due to the decline in our FHLB borrowings during the first quarter of 2022, reducing the amount of FHLB stock we are required to hold. Loans at March 31, 2022were $3.80 billion, an increase of $155.8 million, or 4.3%, compared to $3.65 billionat December 31, 2021. Our PPP loans, a component of the commercial loan category, decreased $17.1 millionduring the quarter due to forgiveness payments received for loans funded under the CARES Act. Excluding PPP loans, total loans increased $172.9 million, or 4.8%, due to increases of $124.4 millionin commercial real estate loans, $42.3 millionin construction loans and $12.1 millionin municipal loans. The increases were partially offset by decreases of $3.3 millionin 1-4 family residential loans, $1.9 millionin loans to individuals and $706,000in commercial loans (excluding PPP loans). Loans held for sale decreased $108,000, or 6.4%, to $1.6 millionat March 31, 2022from $1.7 millionat December 31, 2021. Our nonperforming assets at March 31, 2022decreased $154,000, or 1.3%, to $11.5 millionand represented 0.16% of total assets, compared to $11.6 million, or 0.16% of total assets at December 31, 2021. Nonaccruing loans decreased $179,000, or 7.1%, to $2.4 million, and the ratio of nonaccruing loans to total loans decreased to 0.06% at March 31, 2022compared to 0.07% at December 31, 2021. Restructured loans were $9.1 millionat March 31, 2022and December 31, 2021. There was no OREO at March 31, 2022or December 31, 2021. Our deposits increased $348.1 million, or 6.1%, to $6.07 billionat March 31, 2022from $5.72 billionat December 31, 2021. The increase was primarily due to the increase in our brokered deposits of $380.8 million, or 129.2%, associated with funding our cash flow hedge swaps in place of the FHLB advances to obtain lower cost funding.
Total FHLB borrowings decreased
Our total shareholders' equity at
March 31, 2022decreased 14.0%, or $127.9 million, to $784.2 million, or 11.0% of total assets, compared to $912.2 million, or 12.6% of total assets, at December 31, 2021. The decrease in shareholders' equity was the result of other comprehensive loss of $140.0 million, cash dividends paid of $11.0 million, and the repurchase of $3.4 millionof our common stock. These decreases were partially offset by net income of $25.0 million, stock compensation expense of $819,000, common stock issued under our dividend reinvestment plan of $322,000and net issuance of common stock under employee stock plans of $269,000. Economic conditions in our market areas are relatively strong with economic activity having quickly returned close to pre-pandemic levels. Worker shortages especially in the restaurant, hospitality and retail industries combined with supply chain disruptions impacting numerous industries has had some impact on the level of economic growth. Overall, Texascontinues to experience economic growth due to company relocations and expansions combined with overall population growth. Key financial indicators management follows include, but are not limited to, numerous interest rate sensitivity and interest rate risk indicators, credit risk, operations risk, liquidity risk, capital risk, regulatory risk, inflation risk, competition risk, yield curve risk, U.S.agency MBS prepayment risk and economic risk indicators. Southside Bancshares, Inc.|44
Table of Contents Balance Sheet Strategy Determining the appropriate size of the balance sheet is one of the critical decisions any bank makes. Our balance sheet is not merely the result of a series of micro-decisions, but rather the size is controlled based on the economics of assets compared to the economics of funding and funding sources. Changing interest rate environments and economic conditions require that we monitor the interest rate sensitivity of the assets, the funding driving our growth and closely align ALCO objectives accordingly. During the first quarter of 2022, we replaced
$310 millionof FHLB advances with brokered deposits as the funding source of our cash flow hedge swaps to lower our funding cost. Over the past two years, management has used the significant increase in non-maturity deposits, net of brokered deposits, to reduce dependence on more interest rate sensitive wholesale funding. At March 31, 2022, of the remaining wholesale funding, 85% is swapped at a fixed rate, providing protection from rising interest rates. The securities portfolio is currently funded primarily by non-maturity deposits with wholesale funding accounting for approximately 27% of the funding source. We utilize wholesale funding and securities to enhance overall profitability by maximizing the use of our capital, determining acceptable levels of credit, interest rate and liquidity risk consistent with prudent capital management. This balance sheet strategy currently consists of borrowing funds from the brokered funds market and the FHLB. These funds are invested primarily in U.S.agency MBS and long-term municipal securities. Although U.S.agency MBS often carry lower yields than loans we make, these securities generally (i) increase the overall quality of our assets because of either the implicit or explicit guarantees of the U.S. Government, (ii) are more liquid than individual loans and (iii) may be used to collateralize our borrowings or other obligations. Risks associated with this asset structure include a potentially lower net interest rate spread and margin when compared to our peers, changes in the slope of the yield curve, increased interest rate risk, the length of interest rate cycles, changes in volatility or spreads associated with the MBS and municipal securities, the unpredictable nature of MBS prepayments and credit risks associated with the municipal securities. See "Part I - Item 1A. Risk Factors - Risks Related to Our Business" in the 2021 Form 10-K for a discussion of risks related to interest rates. An additional risk is significant increases in interest rates, especially long-term interest rates, which could adversely impact the fair value of the AFS securities portfolio and could also impact our equity capital. Due to the unpredictable nature of MBS prepayments, the length of interest rate cycles and the slope of the interest rate yield curve, net interest income could fluctuate more than simulated under the scenarios modeled by our ALCO and described under "Item 3. Quantitative and Qualitative Disclosures about Market Risk" in this Quarterly Report on Form 10-Q. Our securities portfolio decreased from $2.86 billionat December 31, 2021to $2.54 billionat March 31, 2022. The decrease in the securities portfolio was due to the increase in the unrealized loss in the portfolio, sales of securities, and principal payments, which more than offset the securities purchased during the quarter. During the first quarter of 2022, the composition of the securities portfolio continued to change as municipal and corporate bonds increased while MBS and US. Treasury Notes decreased. The decrease in MBS was attributable to the sale of $99 millionin U.S.Agency MBS and regular principal payments, with no additional MBS purchases during the first quarter. During the three months ended March 31, 2022, we purchased $107.3 millionin highly rated primarily Texasmunicipal securities, $41.2 millionof which were taxable, and $11 millionin investment grade subordinated debt and $10 millionin U.S.Treasury Notes. In March of 2022, we sold approximately $68.1 millionof U.S.Treasury Notes due to the rising rate environment. Sales of AFS securities for the three months ended March 31, 2022, resulted in a net realized loss of $1.5 million. In March of 2022, management transferred to HTM, long duration AFS taxable municipal securities with fair values of approximately $385.8 million. These transfers were made due to management's intent and ability to hold these securities to maturity. Long duration securities experience greater fair value volatility when interest rates either rise or fall. These transfers reduce any future volatility resulting from unrealized gains or losses, reflected in AOCI. These transfers were made to align the investment portfolio with the current balance sheet strategy. At March 31, 2022, securities as a percentage of assets totaled 35.7%, compared to 39.3% at December 31, 2021, due to the $314.8 million, or 11.0%, decrease in the securities portfolio, partially offset by a decrease in total assets of $140.5 million. Our balance sheet management strategy is dynamic and is continually evaluated as market conditions warrant. With respect to funding sources, we primarily utilize deposits and to a lesser extent wholesale funding to achieve our strategy of minimizing cost while achieving overall interest rate risk objectives as well as the liability management objectives of the ALCO. Our primary wholesale funding sources are brokered deposits and FHLB borrowings. Our FHLB borrowings decreased 98.9%, or $340.2 million, to $3.9 millionat March 31, 2022from $344.0 millionat December 31, 2021. Southside Bancshares, Inc.|45 --------------------------------------------------------------------------------
For the three months ended
March 31, 2022, our total wholesale funding as a percentage of deposits, not including brokered deposits, increased slightly to 12.6%, from 11.8% at December 31, 2021, and decreased from 14.9% at March 31, 2021. Our brokered deposits consist of CDs and non-maturity deposits. Our brokered CDs increased $68.4 million, or 277.0%, from $24.7 millionat December 31, 2021to $93.1 millionat March 31, 2022. At March 31, 2022, our brokered CDs had a weighted average cost of 25 basis points and remaining maturities of less than 11 months. Our brokered non-maturity deposits increased to $582.5 millionat March 31, 2022from $270.1 millionat December 31, 2021, with a weighted average cost of 83 basis points and 91 basis points, respectively. Our wholesale funding policy currently allows for maximum brokered deposits of $800 million, with an additional $50 millionof flexibility for deposits maturing within 30 days. Potential higher interest expense and lack of customer loyalty are risks associated with the use of brokered deposits. In connection with most of our wholesale funds, the Bank has entered into various variable rate agreements and fixed or variable rate short-term pay agreements with an interest rate tied to three-month LIBOR or to one-month LIBOR. In connection with $575.0 millionand $605.0 millionof the agreements outstanding at March 31, 2022and December 31, 2021, respectively, the Bank also entered into various interest rate swap contracts that are treated as cash flow hedges under ASC Topic 815, "Derivatives and Hedging" that are expected to be effective in hedging the variability in future cash flows attributable to fluctuations in the underlying LIBOR interest rate. The interest rate swap contracts had an average interest rate of 0.83% with a remaining average weighted maturity of 3.1 years at March 31, 2022. Refer to "Note 11 - Derivative Financial Instruments and Hedging Activities" in our consolidated financial statements included in this report for a detailed description of our hedging policy and methodology related to derivative instruments. Southside Bancshares, Inc.|46 --------------------------------------------------------------------------------
Our results of operations are dependent primarily on net interest income, which is the difference between the interest income earned on assets (loans and investments) and interest expense due on our funding sources (deposits and borrowings) during a particular period. Results of operations are also affected by our noninterest income, provision for credit losses, noninterest expenses and income tax expense. General economic and competitive conditions, particularly changes in interest rates, changes in interest rate yield curves, prepayment rates of MBS and loans, repricing of loan relationships, government policies and actions of regulatory authorities also significantly affect our results of operations. Future changes in applicable law, regulations or government policies may also have a material impact on us. The following table presents net interest income for the periods presented (in thousands): Three Months Ended March 31, 2022 2021 Interest income: Loans
$ 34,888 $ 36,038Taxable investment securities 4,608 2,323 Tax-exempt investment securities 10,219 8,965 MBS 4,017 6,088 FHLB stock and equity investments 113 136 Other interest earning assets 28 15 Total interest income 53,873 53,565 Interest expense: Deposits 3,237 2,597 FHLB borrowings 366 1,908 Subordinated notes 998 2,395 Trust preferred subordinated debentures 356 351 Other borrowings 10 11 Total interest expense 4,967 7,262 Net interest income $ 48,906 $ 46,303Net Interest Income Net interest income is one of the principal sources of a financial institution's earnings stream and represents the difference or spread between interest and fee income generated from interest earning assets and the interest expense paid on interest bearing liabilities. Fluctuations in interest rates or interest rate yield curves, as well as repricing characteristics and volume and changes in the mix of interest earning assets and interest bearing liabilities, materially impact net interest income. During the first quarter of 2022, the Federal Reserveincreased the target federal funds rate by 25 basis points to 50 basis points and has indicated it anticipates multiple additional rate increases during 2022. Net interest income for the three months ended March 31, 2022increased $2.6 million, or 5.6%, compared to the same period in 2021. The increase in net interest income for the three months ended March 31, 2022was due to the decrease in interest expense on our interest bearing liabilities due to the change in the mix of our interest bearing liabilities, and to a lesser extent, an increase in interest income, a result of an increase in the average balance of investment securities, partially offset by a decrease in the interest income on PPP loans. Total interest income increased $308,000, or 0.6%, to $53.9 millionfor the three months ended March 31, 2022, compared to $53.6 millionduring the same period in 2021. Total interest expense decreased $2.3 million, or 31.6%, to $5.0 millionfor the three months ended March 31, 2022, compared to $7.3 millionfor the same period in 2021. Our net interest margin (FTE), a non-GAAP measure, increased to 3.22% for the three months ended March 31, 2022, compared to 3.20% for the same period in 2021, and our net interest spread (FTE), also a non-GAAP measure, increased to 3.09%, compared to 3.03% for the same period in 2021. Southside Bancshares, Inc. |47
Quarterly analysis of the evolution of interest income and interest expense
The following table presents on a fully taxable-equivalent basis, a non-GAAP measure, the net change in net interest income and sets forth the dollar amount of increase (decrease) in the average volume of interest earning assets and interest bearing liabilities and from changes in yields/rates. Volume/Yield/Rate variances (change in volume times change in yield/rate) have been allocated to amounts attributable to changes in volumes and to changes in yields/rates in proportion to the amounts directly attributable to those changes (in thousands): Three
Change Attributable to Total Fully Taxable-Equivalent Basis: Average Volume Average Yield/Rate Change Interest income on: Loans (1) $ 697 $ (1,826)
$ (1,129)Loans held for sale (16) 4 (12) Taxable investment securities 2,510 (225) 2,285 Tax-exempt investment securities (1) 2,154 (647) 1,507 Mortgage-backed and related securities (2,605) 534 (2,071) FHLB stock, at cost, and equity investments (69) 46 (23) Interest earning deposits 7 2 9 Federal funds sold 4 - 4 Total earning assets 2,682 (2,112) 570 Interest expense on: Savings accounts 56 8 64 CDs (247) (388) (635) Interest bearing demand accounts 450 761 1,211 FHLB borrowings (1,772) 230 (1,542)
Subordinated notes, net of unamortized debt issue costs
(1,049) (348) (1,397) Trust preferred subordinated debentures, net of unamortized debt issuance costs - 5 5 Repurchase agreements (1) - (1) Other borrowings - - - Total interest bearing liabilities (2,563) 268 (2,295) Net change $ 5,245 $ (2,380)
(1) Interest yields on loans and securities that are not taxable for federal income tax purposes are presented on a fully equivalent to tax basis. See “Non-GAAP Financial Measures” for more information and for a reconciliation to GAAP.
The increase in total interest income was primarily attributable to the increase in the average interest earning assets for the three months ended
March 31, 2022compared to the same period in 2021, offset by a decrease in the average yield on interest earning assets. The decrease in total interest expense for the three months ended March 31, 2022was attributable to the change in the mix of our interest bearing liabilities when compared to the same period in 2021. Southside Bancshares, Inc.|48 --------------------------------------------------------------------------------
The "Average Balances with Average Yields and Rates" table that follows shows average earning assets and interest bearing liabilities together with the average yield on the earning assets and the average rate of the interest bearing liabilities (dollars in thousands) for the three months ended
March 31, 2022and 2021. The interest and related yields presented are on a fully taxable-equivalent basis and are therefore non-GAAP measures. See "Non-GAAP Financial Measures" for more information, and for a reconciliation to GAAP.
Average balances with average yields and rates (annualised)
(unaudited) Three Months Ended March 31, 2022 March 31, 2021 Average Average Average Balance Interest Yield/Rate Average Balance Interest Yield/Rate
$ 3,703,980 $ 35,6253.90 % $ 3,634,053 $ 36,7544.10 % Loans held for sale 928 8 3.50 % 2,803 20 2.89 % Securities: Taxable investment securities (2) 644,706 4,608 2.90 % 295,968 2,323 3.18 % Tax-exempt investment securities (2) 1,563,185 12,683 3.29 % 1,300,991 11,176 3.48 % Mortgage-backed and related securities (2) 566,941 4,017 2.87 % 940,815 6,088 2.62 % Total securities 2,774,832 21,308 3.11 % 2,537,774 19,587 3.13 % FHLB stock, at cost, and equity investments 20,677 113 2.22 % 35,635 136 1.55 % Interest earning deposits 44,642 24 0.22 % 31,169 15 0.20 % Federal funds sold 8,651 4 0.19 % - - - Total earning assets 6,553,710 57,082 3.53 % 6,241,434 56,512 3.67 % Cash and due from banks 107,144 86,634 Accrued interest and other assets 607,235 677,230 Less: Allowance for loan losses (35,636) (49,240) Total assets $ 7,232,453 $ 6,956,058LIABILITIES AND SHAREHOLDERS' EQUITY Savings accounts $ 652,394 273 0.17 % $ 517,182209 0.16 % CDs 563,599 594 0.43 % 736,099 1,229 0.68 % Interest bearing demand accounts 3,097,966 2,370 0.31 % 2,342,299 1,159 0.20 % Total interest bearing deposits 4,313,959 3,237 0.30 % 3,595,580 2,597 0.29 % FHLB borrowings 122,783 366 1.21 % 727,513 1,908 1.06 % Subordinated notes, net of unamortized debt issuance costs 98,552 998 4.11 % 197,252 2,395 4.92 % Trust preferred subordinated debentures, net of unamortized debt issuance costs 60,261 356 2.40 % 60,256 351 2.36 % Repurchase agreements 21,494 10 0.19 % 23,522 11 0.19 % Other borrowings 467 - - - - - Total interest bearing liabilities 4,617,516 4,967 0.44 % 4,604,123 7,262 0.64 % Noninterest bearing deposits 1,642,973 1,389,020 Accrued expenses and other liabilities 84,009 89,222 Total liabilities 6,344,498 6,082,365 Shareholders' equity 887,955 873,693 Total liabilities and shareholders' equity $ 7,232,453 $ 6,956,058Net interest income (FTE) $ 52,115 $ 49,250Net interest margin (FTE) 3.22 % 3.20 % Net interest spread (FTE) 3.09 % 3.03 %
(1) Interest on borrowings includes net commissions on borrowings, the amount of which is not significant. (2) For the purposes of calculating the average return, the average balance of securities is presented at historical cost.
Note: As of
Southside Bancshares, Inc.|49 --------------------------------------------------------------------------------
Noninterest income consists of revenue generated from a broad range of financial services and activities and other fee generating services that we either provide or in which we participate. The following table details the categories included in noninterest income (dollars in thousands): Three Months Ended 2022 March 31, Change From 2022 2021 2021 Deposit services
$ 6,628 $ 6,125 $ 5038.2 % Net gain (loss) on sale of securities AFS (1,543) 2,003 (3,546) (177.0) % Gain on sale of loans 178 593 (415) (70.0) % Trust fees 1,494 1,383 111 8.0 % BOLI 691 626 65 10.4 % Brokerage services 809 780 29 3.7 % Other noninterest income 2,468 2,113 355 16.8 % Total noninterest income $ 10,725 $ 13,623 $ (2,898)(21.3) % The 21.3% decrease in noninterest income for the three months ended March 31, 2022, when compared to the same period in 2021, was due to decreases in net gain on sale of securities AFS and gain on sale of loans, partially offset by increases in deposit services income, other noninterest income and trust fees.
The increase in depository services revenue for the quarter ended
In the three months ended
Gain on sale of loans decreased for the three months ended
March 31, 2022, when compared to the same period in 2021, due to a decrease in the volume of loans sold. Trust fees increased for the three months ended March 31, 2022, when compared to the same period in 2021, primarily due to an increase in assets under management. The market value of our wealth management and trust assets under management, which are not reflected in our consolidated balance sheets, increased 2.7%, and were approximately $1.63 billionat March 31, 2022, compared to $1.59 billionat March 31, 2021.
BOLI’s revenue increase for the three months ended
Other non-interest income increased for the quarter ended
Southside Bancshares, Inc.|50 --------------------------------------------------------------------------------
We incur certain types of non-interest expenses associated with the operation of our various business activities. The following table details the categories included in non-interest expenses (in thousands of dollars):
Three Months Ended 2022 March 31, Change From 2022 2021 2021 Salaries and employee benefits
$ 19,969 $ 20,044 $ (75)(0.4) % Net occupancy 3,656 3,560 96 2.7 % Advertising, travel & entertainment 737 437 300 68.6 % ATM expense 281 238 43 18.1 % Professional fees 927 991 (64) (6.5) % Software and data processing 1,631 1,312 319 24.3 % Communications 503 525 (22) (4.2) % FDIC insurance 472 454 18 4.0 % Amortization of intangibles 622 766 (144) (18.8) % Other noninterest expense 2,397 2,907 (510) (17.5) % Total noninterest expense $ 31,195 $ 31,234 $ (39)(0.1) %
The slight decrease in non-interest expenses for the three months ended
Advertising, travel and entertainment expense increased for the three months ended
March 31, 2022, when compared to the same period in 2021, primarily due to an increase in donations and travel related expenses. Media advertising, included in advertising, travel and entertainment, also increased for the three months ended March 31, 2022, when compared to the same period in 2021.
ATM fees increased for the three months ended
Software and data processing costs increased for the quarter ended
Amortization of intangibles decreased for the three months ended
March 31, 2022, when compared to the same period in 2021, due primarily to a decrease in core deposit intangible amortization which is recognized on an accelerated method resulting in a decline in expense over the amortization period. Other noninterest expense decreased for the three months ended March 31, 2022, when compared to the same period in 2021, primarily due to decreases in retirement expense related to the Retirement Plan and the Restoration Plan and decreases in computer supplies expense and losses on retired assets.
Pre-tax income for the three months ended
March 31, 2022was $28.1 million, a decrease of 27.5%, compared to $38.8 millionfor the same period in 2021. We recorded income tax expense of $3.1 million, for the three months ended March 31, 2022, compared to income tax expense of $4.8 millionfor the same period in 2021. The ETR as a percentage of pre-tax income was 11.2% for the three months ended March 31, 2022, compared to an ETR as a percentage of pre-tax income of 12.2% for the same period in 2021. The lower ETR for the three months ended March 31, 2022was primarily due to an increase in tax-exempt income as a percentage of pre-tax income as compared to the same period in 2021. The decrease in the income tax expense for the three months ended March 31, 2022as compared to the same period in 2021 is primarily due to the decrease in pre-tax income in 2022 and the decrease in the ETR. The ETR differs from the statutory rate of 21% primarily due to the effect of tax-exempt income from municipal loans and securities, as well as BOLI. The net deferred tax asset totaled $19.1 millionat March 31, 2022as compared to a net deferred tax liability of $17.8 millionat December 31, 2021. The increase in the net deferred tax asset is primarily the result of an increase in unrealized losses in the AFS securities portfolio. Southside Bancshares, Inc.|51 --------------------------------------------------------------------------------
See "Note 11 - Income Taxes" to our consolidated financial statements included in this report. No valuation allowance was recorded at
March 31, 2022or December 31, 2021, as management believes it is more likely than not that all of the deferred tax asset items will be realized in future years.
Composition of loans
One of our main objectives is to seek attractive lending opportunities in
Texas, primarily in the market areas in which we operate. Refer to "Part I - Item 1. Business - Market Area" in the 2021 Form 10-K for a discussion of our primary market area and the geographic concentration of our loan portfolio as of December 31, 2021. There were no substantial changes in these concentrations during the three months ended March 31, 2022. The majority of our loan originations are made to borrowers wholive in and/or conduct business in the market areas of Texasin which we operate or adjoin, with the exception of municipal loans, which are made primarily throughout the state of Texas. Municipal loans are made to municipalities, counties, school districts and colleges. The following table sets forth loan totals by class as of the dates presented (dollars in thousands): Compared to December 31, 2021 March 31, 2021 December 31, March 31, 2022 2021 March 31, 2021 Change (%) Change (%) Real estate loans: Construction $ 490,166 $ 447,860 $ 605,6779.4 % (19.1) % 1-4 family residential 647,837 651,140 700,430 (0.5) % (7.5) % Commercial 1,722,577 1,598,172 1,348,551 7.8 % 27.7 % Commercial loans 401,144 418,998 564,745 (4.3) % (29.0) % Municipal loans 455,155 443,078 406,377 2.7 % 12.0 % Loans to individuals 84,037 85,914 90,818 (2.2) % (7.5) % Total loans $ 3,800,916 $ 3,645,162 $ 3,716,5984.3 % 2.3 % Our total loan portfolio increased $155.8 million, or 4.3%, at March 31, 2022compared to December 31, 2021. For the three months ended March 31, 2022, our PPP loans experienced a decrease of $17.1 million, or 55.3%, from $31.0 millionat December 31, 2021, primarily due to forgiveness payments received from loans funded under the CARES Act. Excluding PPP loans, total loans increased $172.9 million, or 4.8%, with increases in commercial real estate loans, construction loans, and municipal loans, partially offset by decreases in 1-4 family residential loans, loans to individuals and commercial loans. Excluding a $207.0 millionyear-over-year decrease in PPP loans, total loans increased $291.3 million, or 8.3%, compared to March 31, 2021, with increases in commercial real estate loans, municipal loans and commercial loans, partially offset by decreases in construction loans, 1-4 family residential loans and loans to individuals. At March 31, 2022, our real estate loans represented 75.3% of our loan portfolio and were comprised of commercial real estate loans of 60.2%, 1-4 family residential loans of 22.7% and construction loans of 17.1%. Commercial real estate loans primarily include loans collateralized by retail, commercial office buildings, multi-family residential buildings, medical facilities and offices, senior living, assisted living and skilled nursing facilities, warehouse facilities, hotels and churches. Our 1-4 family residential loans consist primarily of loans secured by first mortgages on owner occupied 1-4 family residences. Our construction loans are collateralized by property located primarily in or near the market areas we serve. A number of our construction loans will be owner occupied upon completion. Construction loans for non-owner occupied projects are financed, but these typically have cash flows from leases with tenants, secondary sources of repayment, and in some cases, additional collateral.
Loan portfolios are most at risk due to economic strains resulting from the impact of COVID-19
The banking industry is affected by general economic conditions such as interest rates, inflation, recession, unemployment and other factors beyond our control, including the ongoing impact of the COVID-19 pandemic. During the last 30 years the
Texaseconomy has continued to diversify, decreasing the overall impact of fluctuations in oil and gas prices; however, the oil and gas industry is still a significant component of the Texaseconomy. Oil prices have increased significantly during 2022 as a result of strong demand, global supply disruptions and the Ukraine/ Russiaconflict. We cannot predict whether current economic conditions or oil prices will improve, remain the same or decline. Southside Bancshares, Inc.|52 --------------------------------------------------------------------------------
March 31, 2022, the Company's exposure to the oil and gas industry totaled $85.9 million, or 2.26% of gross loans, an increase of $16.2 million, or 23.2%, from December 31, 2021, and consisted primarily of (i) support/service loans of 1.52%, (ii) upstream of 0.48%, (iii) downstream of 0.14% and (iv) midstream of 0.12%. Expanded monitoring and analysis of these loans has been implemented to address the uncertainty in oil and gas prices as needed.
The following table sets forth our oil and gas information for the periods presented (in thousands of dollars):
March 31, 2022 2021 March 31, 2021 Oil and gas related loans
$ 85,877 $ 69,688 $ 104,777Oil and gas related loans as a % of loans 2.26 % 1.91 % 2.82 % Classified oil and gas related loans $ 3,755
Ranking of oil and gas related loans as % of oil and gas related loans
4.37 % 5.89 % 5.00 % Nonaccrual oil and gas related loans $ 294
$ 334$ 728 Net (recoveries) charge-offs for oil and gas related loans $ - $ (7)$ - Allowance for oil and gas related loans as a % of oil and gas loans 1.16 % 1.19 % 1.35 % As of March 31, 2022, economic conditions in Texashave returned close to pre-pandemic levels. Commercial activity has resumed to levels close to those existing prior to the outbreak of the pandemic. When the pandemic occurred, in addition to the oil and gas industry, we considered the sectors set forth in the table below to be most vulnerable to financial risks from business disruptions caused by the pandemic mitigation efforts based on North American Industry Classification System categories as of March 31, 2022(dollars in thousands). As of March 31, 2022, our customers in these industries have not experienced long-term business disruptions initially thought possible. We are however continuing to monitor these customers closely. March 31, 2022 Percent of Percent Loans Total Loans Classified (1) Retail commercial real estate (2) $ 457,34712.03 % - Retail goods and services 57,076 1.50 % 0.24 % Hotels 30,274 0.80 % 29.34 % Food services 47,378 1.25 % 4.02 % Arts, entertainment and recreation 5,947 0.15 % 2.43 % Total $ 598,02215.73 % 1.85 % December 31, 2021 Percent of Percent Loans Total
Classified loans (1)
Retail commercial real estate (2)
$ 384,38110.54 % - Retail goods and services 72,650 1.99 % 0.20 % Hotels 61,992 1.70 % 14.33 % Food services 45,019 1.24 % 4.33 % Arts, entertainment and recreation 6,039 0.17 % 2.95 % Total $ 570,08115.64 % 1.96 % Southside Bancshares, Inc. |53
-------------------------------------------------------------------------------- Table of Contents March 31, 2021 Percent of Percent Loans Total Loans Classified (1) Retail commercial real estate (2)
$ 323,7298.71 % 0.02 % Retail goods and services 74,662 2.01 % 9.47 % Hotels 69,063 1.86 % - Food services 49,729 1.34 % - Arts, entertainment and recreation 8,580 0.23 % 2.73 % Total $ 525,76314.15 % 1.40 %
(1) Loans classified by sector as a percentage of total sector loans. (2) Commercial real estate sector loans are included in our commercial real estate portfolio.
We have purchased certain loans that as of the date of purchase have experienced more-than-insignificant deterioration in credit quality since origination. Management evaluates these loans against a probability threshold to determine if substantially all of the contractually required payments will be received. PCD loans are recorded at the purchase price plus an allowance for credit losses which becomes the PCD loan's initial amortized cost. The non-credit related discount or premium, the difference between the initial amortized cost and the par value, will be amortized into interest income over the life of the loan. Any further changes to the allowance for credit losses are recorded through provision expense. In accordance with the adoption of ASU 2016-13, management did not reassess whether PCI assets met the criteria of PCD assets and elected to not maintain pools of loans as of the date of adoption. All PCD loans are evaluated based upon product type within the underlying segment.
Nonperforming assets consist of delinquent loans 90 days or more past due, nonaccrual loans, OREO, repossessed assets and TDR loans. Nonaccrual loans are loans 90 days or more delinquent and collection in full of both the principal and interest is not expected. Additionally, some loans that are not delinquent or that are delinquent less than 90 days may be placed on nonaccrual status if it is probable that we will not receive contractual principal and interest payments in accordance with the terms of the respective loan agreements. When a loan is categorized as nonaccrual, the accrual of interest is discontinued and any accrued balance is reversed for financial statement purposes. OREO represents real estate taken in full or partial satisfaction of debts previously contracted. The dollar amount of OREO is based on a current evaluation of the OREO at the time it is recorded on our books, net of estimated selling costs. Updated valuations are obtained as needed and any additional impairments are recognized. Restructured loans represent loans that have been renegotiated to provide a below market interest rate or deferral of interest or principal because of deterioration in the financial position of the borrowers. The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, restructuring amortization schedules and other actions intended to minimize potential losses. Categorization of a loan as nonperforming is not in itself a reliable indicator of potential loan loss. Other factors, such as the value of collateral securing the loan and the financial condition of the borrower are considered in judgments as to potential loan loss.
Southside Bancshares, Inc.|54 --------------------------------------------------------------------------------
The following table sets forth nonperforming assets for the periods presented (dollars in thousands): Compared to March 31, December 31, 2021 2021 March 31, December 31, March 31, 2022 2021 2021 Change (%) Change (%) Nonaccrual loans
$ 2,357 $ 2,536 $ 5,314(7.1) % (55.6) % Accruing loans past due more than 90 days - - - - - TDR loans 9,098 9,073 9,641 0.3 % (5.6) % OREO - - 412 - (100.0) % Repossessed assets - - - - - Total nonperforming assets $ 11,455 $ 11,609 $ 15,367(1.3) % (25.5) % Total loans $ 3,800,916 $ 3,645,162 $ 3,716,598Allowance for loan losses at end of period 35,524 35,273 41,454 Ratio of nonaccruing loans to: Total loans 0.06 % 0.07 % 0.14 % Ratio of nonperforming assets to: Total assets 0.16 % 0.16 % 0.22 % Total loans 0.30 % 0.32 % 0.41 % Total loans and OREO 0.30 % 0.32 % 0.41 % Total loans, excluding PPP loans, and OREO 0.30 % 0.32 % 0.44 % Ratio of allowance for loan losses to: Nonaccruing loans 1,507.17 % 1,390.89 % 780.09 % Nonperforming assets 310.12 % 303.84 % 269.76 % Total loans 0.93 % 0.97 % 1.12 % Total loans, excluding PPP loans 0.94 % 0.98 % 1.19 % Net charge-offs to average loans outstanding - 0.02
We actively market all OREO properties and do not hold them for investment purposes.
Allowance for Credit Losses – Loans
In accordance with ASC 326, the allowance for credit losses on loans is estimated and recognized upon origination of the loan based on expected credit losses. The CECL model uses historical experience and current conditions for homogeneous pools of loans, and reasonable and supportable forecasts about future events. The impact of varying economic conditions and portfolio stress factors are a component of the credit loss models applied to each portfolio. Reserve factors are specific to the loan segments that share similar risk characteristics based on the probability of default assumptions and loss given default assumptions, over the contractual term. The forecasted periods gradually mean-revert the economic inputs to their long-run historical trends. Management evaluates the economic data points used in the Moody's forecasting scenarios on a quarterly basis to determine the most appropriate impact to the various portfolio characteristics based on management's view and applies weighting to various forecasting scenarios as deemed appropriate based on known and expected economic activities. Management also considers and may apply relevant qualitative factors, not previously considered, to determine the appropriate allowance level. The use of the CECL model includes significant judgment by management and may differ from those of our peers due to different historical loss patterns, economic forecasts, and the length of time of the reasonable and supportable forecast period and reversion period.
We use Moody’s Analytics economic forecast scenarios and assign a probability weight to the scenarios that best reflect management’s views on the economic forecast. The probabilistic weighting and scenarios used for the allocation estimate generally reflected an improvement in economic forecasts based on known and actionable information at the time.
When determining the appropriate allowance for credit losses on our loan portfolio, our real estate and commercial construction loans, our commercial loans and our municipal loans use the probability of default/loss given default approach. discounted cash.
Southside Bancshares, Inc.|55 --------------------------------------------------------------------------------
Reserves on these loans are based upon risk factors including the loan type and structure, collateral type, leverage ratio, refinancing risk and origination quality, among others. Our consumer construction real estate loans, 1-4 family residential loans and our loans to individuals use a loss rate based upon risk factors including loan types, origination year and credit scores. Loans covered by the PPP may be eligible for loan forgiveness. The remaining loan balance after forgiveness of any amount is still fully guaranteed by the SBA and therefore does not have an associated allowance. Loans evaluated collectively in a pool are monitored to ensure they continue to exhibit similar risk characteristics with other loans in the pool. If a loan does not share similar risk characteristics with other loans, expected credit losses for that loan are evaluated individually. As of
March 31, 2022, our review of the loan portfolio indicated that an allowance for loan losses of $35.5 millionwas appropriate to cover expected losses in the portfolio. Changes in economic and other conditions, including the application of the CECL model and the economic uncertainty related to COVID-19, may require future adjustments to the allowance for loan losses.
In the three months ended
For the three months ended
March 31, 2022, loan charge-offs were $555,000, and recoveries were $540,000. For the three months ended March 31, 2021, loan charge-offs were $795,000, and recoveries were $622,000. For the three months ended March 31, 2022we recorded a provision for credit losses for loans of $266,000. For the three months ended March 31, 2021, we recorded a reversal of provision of $7.4 million.
Provision for credit losses – Off-balance sheet credit risks
Allowance for off-balance-sheet credit exposures were as follows (in thousands): Three Months Ended March 31, 2022 2021 Balance at beginning of period
$ 2,384 $ 6,386Provision for (reversal of) off-balance-sheet credit exposures 28 (2,770) Balance at end of period $ 2,412 $ 3,616Our off-balance-sheet credit exposures include contractual commitments to extend credit and standby letters of credit. For these credit exposures we evaluate the expected credit losses using usage given defaults and credit conversion factors depending on the type of commitment and based upon historical usage rates. These assumptions are reevaluated on an annual basis and adjusted if necessary. For the three months ended March 31, 2022there was a provision for credit losses for off-balance-sheet exposures of $28,000, compared to a reversal of provision of $2.8 millionfor the three months ended March 31, 2021. For additional information regarding our methodology used to estimate the allowance for credit losses on off-balance-sheet credit exposures, see "Note 12 - Off-Balance-Sheet Arrangements, Commitments and Contingencies" to our consolidated financial statements included in this report. Southside Bancshares, Inc. |56 --------------------------------------------------------------------------------
Capital resources and liquidity
Our total shareholders' equity at
March 31, 2022decreased 14.0%, or $127.9 million, to $784.2 million, or 11.0% of total assets, compared to $912.2 million, or 12.6% of total assets, at December 31, 2021. The decrease in shareholders' equity was the result of other comprehensive loss of $140.0 million, cash dividends paid of $11.0 million, and the repurchase of $3.4 millionof our common stock. These decreases were partially offset by net income of $25.0 million, stock compensation expense of $819,000, common stock issued under our dividend reinvestment plan of $322,000and net issuance of common stock under employee stock plans of $269,000. The Company's Common Equity Tier 1 capital includes common stock and related paid-in capital, net of treasury stock, and retained earnings. The Bank's Common Equity Tier 1 capital includes common stock and related paid-in capital, and retained earnings. In connection with the adoption of the Basel III CapitalRules, we elected to opt-out of the requirement to include accumulated other comprehensive income in Common Equity Tier 1. We also elected, for a five-year transitional period, the effects of credit loss accounting under CECL from Common Equity Tier 1, as further discussed below. Common Equity Tier 1 for both the Company and the Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities. Tier 1 capital includes Common Equity Tier 1 capital and additional Tier 1 capital. For the Company, additional Tier 1 capital at March 31, 2022included $58.4 millionof trust preferred securities. For bank holding companies that had assets of less than $15 billionas of December 31, 2009, trust preferred securities issued prior to May 19, 2010can be treated as Tier 1 capital to the extent that they do not exceed 25% of Tier 1 capital after the application of capital deductions and adjustments. The Bank did not have any additional Tier 1 capital beyond Common Equity Tier 1 at March 31, 2022. Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital for both the Company and the Bank includes a permissible portion of the allowance for credit losses on loans and off-balance sheet exposures. Tier 2 capital for the Company also includes $98.6 millionof qualified subordinated debt as of March 31, 2022. The permissible portion of qualified subordinated notes decreases 20% per year during the final five years of the term of the notes. In April 2020, the FDIC, Federal Reserve, and the Office of the Comptroller of the Currencyissued supplemental instructions allowing banking organizations that implement CECL before the end of 2020, the option to delay for two years an estimate of the CECL methodologies' effect on regulatory capital, relative to the incurred loss methodologies effect on capital, followed by a three-year transition period. We elected to adopt the five-year transition option. In accordance with CECL guidance, a CECL transitional amount totaling $6.1 millionhas been added back to CET1 as of March 31, 2022, representing 75% of the $8.2 milliontransitional amount at December 31, 2021. Also in April 2020, we began originating loans to qualified small businesses under the PPP administered by the SBA. Federal bank regulatory agencies have issued an interim final rule that permits banks to neutralize the regulatory capital effects of participating in the Paycheck Protection Program Lending Facility and clarify that PPP loans have a zero percent risk weight under applicable risk-based capital rules. Specifically, a bank may exclude all PPP loans pledged as collateral to the PPP Facility from its average total consolidated assets for the purposes of calculating its leverage ratio, while PPP loans that are not pledged as collateral to the PPP Facility will be included. Our PPP loans are included in the calculation of our leverage ratio as of March 31, 2022, as we did not utilize the PPP Facility for funding purposes. Management believes that, as of March 31, 2022, we met all capital adequacy requirements to which we were subject. It is management's intention to maintain our capital at a level acceptable to all regulatory authorities and future dividend payments will be determined accordingly. Regulatory authorities require that any dividend payments made by either us or the Bank not exceed earnings for that year. Accordingly, shareholders should not anticipate a continuation of the cash dividend payments simply because of the existence of a dividend reinvestment program. The payment of dividends will depend upon future earnings, our financial condition and other related factors including the discretion of the board of directors. Southside Bancshares, Inc.|57
To be classified as well capitalized, we must maintain minimum Tier 1 risk-based, Tier 1 risk-based, risk-based Tier 1 total capital and Tier 1 leverage ratios as noted in the following table (in thousands of dollars):
To Be Well Capitalized Under Prompt For Capital Corrective Actions Actual Adequacy Purposes Provisions
March 31, 2022 Amount Ratio Amount Ratio Amount Amount Common Equity Tier 1 (to Risk-Weighted Assets) Consolidated
$ 667,31513.67 % $ 219,7514.50 % N/A N/A Bank Only $ 798,98316.36 % $ 219,7304.50 % $ 317,3876.50 % Tier 1 Capital (to Risk-Weighted Assets) Consolidated $ 725,76514.86 % $ 293,0016.00 % N/A N/A Bank Only $ 798,98316.36 % $ 292,9736.00 % $ 390,6318.00 % Total Capital (to Risk-Weighted Assets) Consolidated $ 854,46117.50 % $ 390,6688.00 % N/A N/A Bank Only $ 829,11016.98 % $ 390,6318.00 % $ 488,28810.00 % Tier 1 Capital (to Average Assets) (1) Consolidated $ 725,76510.39 % $ 279,3214.00 % N/A N/A Bank Only $ 798,98311.45 % $ 279,2214.00 % $ 349,0265.00 % To Be Well Capitalized Under Prompt For Capital Corrective Actions Actual Adequacy Purposes Provisions December 31, 2021 Amount Ratio Amount Ratio Amount Ratio Common Equity Tier 1 (to Risk-Weighted Assets) Consolidated $ 657,04314.17 % $ 208,6164.50 % N/A N/A Bank Only $ 793,27117.11 % $ 208,5764.50 % $ 301,2776.50 % Tier 1 Capital (to Risk-Weighted Assets) Consolidated $ 715,49215.43 % $ 278,1556.00 % N/A N/A Bank Only $ 793,27117.11 % $ 278,1026.00 % $ 370,8038.00 % Total Capital (to Risk-Weighted Assets) Consolidated $ 841,30018.15 % $ 370,8748.00 % N/A N/A Bank Only $ 820,54517.70 % $ 370,8038.00 % $ 463,50310.00 % Tier 1 Capital (to Average Assets) (1) Consolidated $ 715,49210.33 % $ 277,0654.00 % N/A N/A Bank Only $ 793,27111.46 % $ 276,9324.00 % $ 346,1655.00 %
(1) Refers to quarterly average assets calculated in accordance with policies established by banking regulatory bodies.
March 31, 2022, Southside Bancsharesand Southside Bankmet all capital adequacy requirements under the Basel III Capital Rules that became fully phased-in as of January 1, 2019. Refer to the Supervision and Regulation section in the 2021 Form 10-K for further discussion of our capital requirements. Southside Bancshares, Inc.|58 --------------------------------------------------------------------------------
The table below summarizes our main capital ratios for the periods presented:
Three Months Ended March 31, 2022 2021 Return on average assets 1.40 % 1.99 % Return on average shareholders' equity 11.42 % 15.82 % Dividend payout ratio - Basic 44.16 % 30.77 % Dividend payout ratio - Diluted 44.16 % 30.77 % Average shareholders' equity to average total assets 12.28 % 12.56 % Management of Liquidity Liquidity management involves our ability to convert assets to cash with minimum risk of loss while enabling us to meet our current and future obligations to our customers at any time. This means addressing (1) the immediate cash withdrawal requirements of depositors and other fund providers; (2) the funding requirements of lines and letters of credit; and (3) the short-term credit needs of customers. Liquidity is provided by cash, interest earning deposits and short-term investments that can be readily liquidated with a minimum risk of loss. At
March 31, 2022, these investments were 4.4% of total assets, as compared with 5.9% for December 31, 2021and 6.6% for March 31, 2021. The decrease to 4.4% at March 31, 2022as compared to December 31, 2021, is reflective of decreases in the short-term investment portfolio and interest earning deposits, partially offset by the decrease in total assets while the decrease as compared to March 31, 2021, is reflective of the decrease in the short-term investment portfolio combined with the increase in total assets. Liquidity is further provided through the matching, by time period, of rate sensitive interest earning assets with rate sensitive interest bearing liabilities. The Bank has three unsecured lines of credit for the purchase of overnight federal funds at prevailing rates with Frost Bank, TIB - The Independent Bankers Bankand Comerica Bankfor $40.0 million, $15.0 millionand $7.5 million, respectively. There were no federal funds purchased at March 31, 2022or December 31, 2021. To provide more liquidity in response to the economic impact of the COVID-19 pandemic, the Federal Reservetook steps to encourage broader use of the discount window. At March 31, 2022, the amount of additional funding the Bank could obtain from the FRDW, collateralized by securities, was approximately $435.9 million. There were no borrowings from the FRDW at March 31, 2022or December 31, 2021. At March 31, 2022, the amount of additional funding Southside Bankcould obtain from FHLB, collateralized by securities, FHLB stock and nonspecified loans and securities, was approximately $1.72 billion, net of FHLB stock purchases required. The Bank has a $5.0 millionline of credit with Frost Bankto be used to issue letters of credit, and at March 31, 2022, the line had one outstanding letter of credit for $155,000. The Bank currently has no outstanding letters of credit from FHLB held as collateral for its public fund deposits. Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates. The ALCO closely monitors various liquidity ratios and interest rate spreads and margins. The ALCO utilizes a simulation model to perform interest rate simulation tests that apply various interest rate scenarios including immediate shocks and MVPE to assist in determining our overall interest rate risk and the adequacy of our liquidity position. In addition, the ALCO utilizes this simulation model to determine the impact on net interest income of various interest rate scenarios. By utilizing this technology, we can determine changes that need to be made to the asset and liability mix to minimize the change in net interest income under these various interest rate scenarios.
Management continually assesses our liquidity position and currently believes that the Company has sufficient funding to meet our financial needs.
Recent accounting pronouncements
See “Note 1 – Summary of Significant Accounting and Reporting Policies” in our consolidated financial statements included with this Quarterly Report on Form 10-Q.
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