Southside Bancshares(SBSI) - 2024 Q2 - Quarterly Report

Glossary of Acronyms, Abbreviations and Terms The report provides a comprehensive glossary of acronyms, abbreviations, and terms to ensure clarity and understanding of financial and banking-specific terminology - The report provides a comprehensive glossary of acronyms, abbreviations, and terms used throughout the Form 10-Q to ensure clarity and understanding of financial and banking-specific terminology[6][7][31][32][34] Part I. Financial Information Item 1. Financial Statements This section presents the unaudited consolidated financial statements of Southside Bancshares, Inc. and its subsidiaries for the quarter ended June 30, 2024, including balance sheets, income statements, statements of comprehensive income, changes in shareholders' equity, and cash flows, along with detailed notes on significant accounting policies, earnings per share, securities, loans, borrowings, derivatives, fair value measurements, and income taxes Consolidated Balance Sheets This section provides a snapshot of the company's financial position at specific points in time, detailing assets, liabilities, and shareholders' equity Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2024 | December 31, 2023 | |:------------------------|:--------------|:------------------| | Total Assets | $8,357,702 | $8,284,914 | | Total Liabilities | $7,556,732 | $7,511,626 | | Total Shareholders' Equity| $800,970 | $773,288 | - Total assets increased by $72.8 million (0.9%) from December 31, 2023, to June 30, 2024, driven by increases in securities and FHLB stock, partially offset by decreases in cash and cash equivalents[11][36][294] Consolidated Statements of Income This section outlines the company's financial performance over specific periods, detailing revenues, expenses, and net income Consolidated Statements of Income Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | |:------------------------|:---------------------------------|:---------------------------------| | Total Interest Income | $104,186 | $86,876 | | Total Interest Expense | $50,578 | $32,960 | | Net Interest Income | $53,608 | $53,916 | | Net Income | $24,673 | $24,893 | | Basic EPS | $0.81 | $0.81 | | Diluted EPS | $0.81 | $0.81 | | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:------------------------|:-------------------------------|:-------------------------------| | Total Interest Income | $206,944 | $167,724 | | Total Interest Expense | $99,988 | $60,455 | | Net Interest Income | $106,956 | $107,269 | | Net Income | $46,184 | $50,927 | | Basic EPS | $1.52 | $1.64 | | Diluted EPS | $1.52 | $1.64 | - Net income for the three months ended June 30, 2024, slightly decreased by $0.22 million (0.9%) to $24.7 million, while for the six months ended June 30, 2024, it decreased by $4.7 million (9.3%) to $46.2 million, primarily due to increased interest expense and noninterest expense[38][293] Consolidated Statements of Comprehensive Income This section presents the total comprehensive income, which includes net income and other comprehensive income (loss) items not recognized in the income statement Consolidated Statements of Comprehensive Income Highlights (in thousands) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | |:----------------------------------------|:---------------------------------|:---------------------------------| | Net Income | $24,673 | $24,893 | | Other Comprehensive Income (Loss), net of tax | ($95) | $17,619 | | Comprehensive Income (Loss) | $24,578 | $42,512 | | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:----------------------------------------|:-------------------------------|:-------------------------------| | Net Income | $46,184 | $50,927 | | Other Comprehensive Income (Loss), net of tax | $2,508 | $21,763 | | Comprehensive Income (Loss) | $48,692 | $72,690 | - Other comprehensive income (loss) significantly decreased for both the three and six months ended June 30, 2024, compared to the prior year, primarily due to changes in unrealized gains/losses on AFS securities and derivatives[14][39] Consolidated Statements of Changes in Shareholders' Equity This section details the changes in the company's shareholders' equity over time, reflecting net income, dividends, and other equity transactions Shareholders' Equity Changes (in thousands) | Metric | December 31, 2023 | June 30, 2024 | |:----------------------------------------|:------------------|:--------------| | Total Shareholders' Equity (Beginning) | $773,288 | $773,288 | | Net Income | $46,184 | $46,184 | | Other Comprehensive Income (Loss) | $2,508 | $2,508 | | Cash Dividends Paid | ($21,797) | ($21,797) | | Purchase of Common Stock | ($1,510) | ($1,510) | | Total Shareholders' Equity (Ending) | $773,288 | $800,970 | - Total shareholders' equity increased by $27.7 million (3.6%) to $801.0 million at June 30, 2024, from $773.3 million at December 31, 2023, driven by net income and other comprehensive income, partially offset by cash dividends and stock repurchases[41][42][68][294] Consolidated Statements of Cash Flows This section summarizes the cash inflows and outflows from operating, investing, and financing activities, providing insight into the company's liquidity Consolidated Statements of Cash Flows Highlights (in thousands) | Activity | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:----------------------------------------|:-------------------------------|:-------------------------------| | Net Cash Provided by Operating Activities | $44,312 | ($82,917) | | Net Cash Used in Investing Activities | ($146,431) | ($219,068) | | Net Cash Provided by (Used in) Financing Activities | ($36,860) | $168,896 | | Net Increase (Decrease) in Cash and Cash Equivalents | ($108,514) | $7,861 | | Cash and Cash Equivalents at End of Period | $451,996 | $207,113 | - Net cash provided by operating activities significantly improved to $44.3 million for the six months ended June 30, 2024, compared to a net cash used of $82.9 million in the prior year, primarily due to changes in other liabilities and other assets[53] - Net cash used in financing activities was $36.9 million for the six months ended June 30, 2024, a substantial shift from $168.9 million provided in the prior year, mainly due to a decrease in other borrowings and net change in deposits, partially offset by FHLB borrowings[45] Notes to Consolidated Financial Statements (Unaudited) This section provides detailed explanations and additional information supporting the consolidated financial statements 1. Summary of Significant Accounting and Reporting Policies This section outlines the key accounting principles and methods used in preparing the financial statements - The unaudited consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information, with adjustments consisting only of normal recurring items and interim results not necessarily indicative of full-year results[48] 2. Earnings Per Share This section details the calculation of basic and diluted earnings per share, a key profitability metric Earnings Per Share (in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | |:----------------------------------------|:---------------------------------|:---------------------------------| | Net Income Available to Common Shareholders | $24,658 | $24,883 | | Basic Weighted-Average Shares Outstanding | 30,280 | 30,721 | | Diluted Weighted-Average Shares Outstanding | 30,312 | 30,754 | | Basic Earnings Per Share | $0.81 | $0.81 | | Diluted Earnings Per Share | $0.81 | $0.81 | | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:----------------------------------------|:-------------------------------|:-------------------------------| | Net Income Available to Common Shareholders | $46,157 | $50,908 | | Basic Weighted-Average Shares Outstanding | 30,271 | 31,045 | | Diluted Weighted-Average Shares Outstanding | 30,310 | 31,099 | | Basic Earnings Per Share | $1.52 | $1.64 | | Diluted Earnings Per Share | $1.52 | $1.64 | - Anti-dilutive shares were approximately 649 thousand for the three months ended June 30, 2024, compared to 686 thousand in the prior year, indicating a slight reduction in potential dilution[25] 3. Accumulated Other Comprehensive Income (Loss) This section provides a breakdown of accumulated other comprehensive income (loss), including unrealized gains and losses on securities and derivatives Accumulated Other Comprehensive Income (Loss) (AOCI) (in thousands) | Component | June 30, 2024 (Net of Tax) | December 31, 2023 (Net of Tax) | |:----------------------------------------|:---------------------------|:-------------------------------| | Unrealized Gains (Losses) on Securities | ($109,881) | ($107,499) | | Unrealized Gains (Losses) on Derivatives| $17,444 | $12,803 | | Retirement Plans | ($18,517) | ($18,766) | | Total AOCI | ($110,954) | ($113,462) | - Total AOCI improved to a loss of $110.95 million at June 30, 2024, from a loss of $113.46 million at December 31, 2023, primarily due to an increase in unrealized gains on derivatives, partially offset by increased unrealized losses on securities[26][60] Reclassification Adjustments out of AOCI (Net of Tax) (in thousands) | Item | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2024 | |:----------------------------------------|:---------------------------------|:-------------------------------| | Amortization of unrealized gains/losses | ($1,634) | ($3,232) | | Realized net gain (loss) on sale of AFS securities | ($445) | ($459) | | Realized net gain (loss) on interest rate swap derivatives | $4,568 | $9,815 | | Amortization of pension plan net actuarial loss | ($116) | ($249) | | Total Reclassifications | $2,373 | $5,875 | 4. Securities This section provides a detailed breakdown of the company's investment securities portfolio, including available-for-sale (AFS) and held-to-maturity (HTM) categories Securities Portfolio (in thousands) | Security Type (AFS) | Amortized Cost (June 30, 2024) | Fair Value (June 30, 2024) | |:------------------------|:-------------------------------|:---------------------------| | U.S. Treasury | $172,732 | $172,746 | | State & Political Subdivisions | $499,234 | $456,381 | | Corporate Bonds & Other | $14,607 | $13,563 | | MBS Residential | $762,472 | $758,534 | | MBS Commercial | $5,221 | $4,720 | | Total AFS | $1,454,266 | $1,405,944 | | Security Type (HTM) | Amortized Cost (June 30, 2024) | Fair Value (June 30, 2024) | |:------------------------|:-------------------------------|:---------------------------| | State & Political Subdivisions | $1,040,476 | $899,246 | | Corporate Bonds & Other | $147,061 | $133,835 | | MBS Residential | $88,510 | $79,676 | | MBS Commercial | $29,928 | $27,690 | | Total HTM | $1,305,975 | $1,140,447 | - The total securities portfolio increased by $108.6 million (4.2%) to $2.71 billion at June 30, 2024, from $2.60 billion at December 31, 2023, primarily due to purchases of MBS and U.S. Treasury Bills, partially offset by sales of municipal bonds[294][295] Interest Income on Securities (in thousands) | Security Type | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:------------------------|:-------------------------------|:-------------------------------| | U.S. Treasury | $4,089 | $4,523 | | State & Political Subdivisions | $28,157 | $34,000 | | Corporate Bonds & Other | $3,528 | $3,598 | | MBS | $21,203 | $8,159 | | Total | $56,977 | $50,280 | - Net realized loss from AFS securities sales was $0.581 million for the six months ended June 30, 2024, which included a net gain of $4.0 million from unwinding fair value hedges on municipal securities[126] 5. Loans and Allowance for Loan Losses This section details the composition of the loan portfolio and the allowance for loan losses, reflecting credit quality and risk management Loan Portfolio Composition (in thousands) | Loan Type | June 30, 2024 | December 31, 2023 | |:--------------------------|:--------------|:------------------| | Construction Real Estate | $546,040 | $789,744 | | 1-4 Family Residential | $738,037 | $696,738 | | Commercial Real Estate | $2,472,771 | $2,168,451 | | Commercial Loans | $359,807 | $366,893 | | Municipal Loans | $416,986 | $441,168 | | Loans to Individuals | $55,724 | $61,516 | | Total Loans | $4,589,365 | $4,524,510 | | Less: Allowance for Loan Losses | $42,407 | $42,674 | | Net Loans | $4,546,958 | $4,481,836 | - Total loans increased by $64.9 million (1.4%) to $4.59 billion at June 30, 2024, compared to December 31, 2023, driven by commercial real estate and 1-4 family residential loans, partially offset by decreases in construction, municipal, commercial, and individual loans[88][294] Nonperforming Assets (in thousands) | Metric | June 30, 2024 | December 31, 2023 | Change (%) YoY | |:--------------------------|:--------------|:------------------|:---------------| | Nonaccrual Loans | $6,110 | $3,889 | 57.1% | | Restructured Loans | $145 | $13 | 1015.4% | | OREO | $648 | $99 | 554.5% | | Repossessed Assets | $15 | $0 | 100.0% | | Total Nonperforming Assets| $6,918 | $4,001 | 72.9% | | Ratio of Nonperforming Assets to Total Assets | 0.08% | 0.05% | | - The allowance for loan losses decreased by $0.267 million (0.6%) to $42.4 million at June 30, 2024, representing 0.92% of total loans, compared to 0.94% at December 31, 2023[83] 6. Borrowing Arrangements This section details the company's various borrowing arrangements, including FHLB advances and other short-term and long-term debt Borrowing Arrangements (in thousands) | Metric | June 30, 2024 | December 31, 2023 | |:----------------------------------------|:--------------|:------------------| | Other Borrowings (End of Period) | $201,418 | $509,820 | | FHLB Borrowings (End of Period) | $562,282 | $212,648 | | Weighted Average Interest Rate (Other Borrowings) | 5.8% | 4.9% | | Weighted Average Interest Rate (FHLB Borrowings) | 4.1% | 2.5% | - FHLB borrowings significantly increased by $349.6 million (164.4%) to $562.3 million at June 30, 2024, from $212.6 million at December 31, 2023, while other borrowings decreased by $308.4 million (60.5%) primarily due to a $300.0 million decrease in FRDW borrowings[294] - The Bank had approximately $1.78 billion in additional funding available from FHLB and $377.4 million from the FRDW at June 30, 2024[76][176][295] 7. Long-term Debt This section outlines the company's long-term debt obligations, including subordinated notes and trust preferred subordinated debentures Long-term Debt (in thousands) | Debt Type | June 30, 2024 | December 31, 2023 | |:----------------------------------------|:--------------|:------------------| | Subordinated Notes, net | $91,970 | $93,877 | | Trust Preferred Subordinated Debentures, net | $60,272 | $60,270 | | Total Long-term Debt | $152,242 | $154,147 | - The Company repurchased $2.0 million of its $100 million fixed-to-floating rate subordinated notes during the six months ended June 30, 2024[178] 8. Employee Benefit Plans This section provides information on the company's employee retirement and restoration plans, including net periodic benefit costs Net Periodic Benefit Cost (Income) (in thousands) | Plan Type | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:------------------------|:-------------------------------|:-------------------------------| | Retirement Plan | ($330) | ($38) | | Acquired Retirement Plan| ($38) | ($30) | | Restoration Plan | $455 | $430 | | Total | $87 | $362 | - The net periodic benefit cost (income) for the Retirement Plan improved significantly, moving from a cost of $38 thousand in 2023 to an income of $330 thousand in 2024 for the six-month period[208] 9. Derivative Financial Instruments and Hedging Activities This section describes the company's use of derivative instruments, primarily interest rate swaps, to manage interest rate risk and their classification as hedges or non-hedging instruments - The Company uses interest rate derivative instruments, including interest rate swaps, to manage exposure to interest rate risk, designating them as cash flow hedges, fair value hedges, or non-hedging instruments[183][184][185] Derivative Positions Outstanding (Notional Amounts in thousands) | Derivative Type | Notional Amount (June 30, 2024) | Notional Amount (December 31, 2023) | |:------------------------|:--------------------------------|:------------------------------------| | Swaps-Cash Flow Hedge | $940,000 | $1,010,000 | | Swaps-Fair Value Hedge | $722,090 | $453,440 | | Swaps-Non-hedging (Financial Institution) | $243,673 | $248,073 | | Swaps-Non-hedging (Customer) | $243,673 | $248,073 | - During the six months ended June 30, 2024, the Company entered into an additional $50 million cash flow hedge swap while $120 million of cash flow hedge swaps matured[295] Amounts Included in Consolidated Statements of Income Related to Interest Rate Swap Agreements (in thousands) | Item | Six Months Ended June 30, 2024 | |:----------------------------------------|:-------------------------------| | Gain (loss) in interest expense on deposits | $7,849 | | Gain (loss) in interest expense on FHLB borrowings | $4,575 | | Gain (loss) in interest income on tax-exempt investment securities | $5,103 | | Gain (loss) in interest income on MBS | $266 | | Gain (loss) in interest income on loans | $87 | | Other noninterest income (non-hedging) | $53 | 10. Fair Value Measurement This section explains how fair value is measured for various financial instruments, categorizing them into a three-level hierarchy based on input observability - Fair value measurements are categorized into a three-level hierarchy based on the observability of inputs, with Level 1 for unadjusted quoted prices in active markets, Level 2 for observable inputs other than Level 1, and Level 3 for unobservable inputs[191] Recurring Fair Value Measurements (June 30, 2024, in thousands) | Asset Type | Carrying Amount | Level 1 | Level 2 | Level 3 | |:------------------------|:----------------|:----------|:------------|:--------| | U.S. Treasury | $172,746 | $172,746 | — | — | | State & Political Subdivisions | $456,381 | — | $456,381 | — | | MBS Residential | $758,534 | — | $758,534 | — | | Equity Investments | $5,229 | $5,229 | — | — | | Interest Rate Swaps (Assets) | $66,044 | — | $66,044 | — | | Interest Rate Swaps (Liabilities) | $23,973 | — | $23,973 | — | Nonrecurring Fair Value Measurements (June 30, 2024, in thousands) | Asset Type | Carrying Amount | Level 1 | Level 2 | Level 3 | |:------------------------|:----------------|:--------|:--------|:--------| | Foreclosed Assets | $663 | — | — | $663 | | Collateral-Dependent Loans | $9,213 | — | — | $9,213 | 11. Income Taxes This section provides details on the company's income tax expense, including current and deferred components, and the effective tax rate Income Tax Expense (in thousands) | Metric | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2024 | |:------------------------|:---------------------------------|:-------------------------------| | Current Income Tax Expense | $5,055 | $9,819 | | Deferred Income Tax Expense (Benefit) | $157 | $15 | | Total Income Tax Expense| $5,212 | $9,834 | - The effective tax rate (ETR) increased to 17.4% for the three months and 17.6% for the six months ended June 30, 2024, compared to 15.5% and 15.2% for the same periods in 2023, primarily due to a decrease in net tax-exempt income as a percentage of pre-tax income[254][333] 12. Off-Balance-Sheet Arrangements, Commitments and Contingencies This section outlines the company's off-balance-sheet financial instruments, including commitments to extend credit and standby letters of credit Financial Instruments with Off-Balance-Sheet Risk (in thousands) | Instrument | June 30, 2024 | December 31, 2023 | |:--------------------------|:--------------|:------------------| | Commitments to Extend Credit | $943,360 | $1,082,327 | | Standby Letters of Credit | $12,428 | $10,823 | | Total | $955,788 | $1,093,150 | Allowance for Off-Balance-Sheet Credit Exposures (in thousands) | Metric | June 30, 2024 | December 31, 2023 | |:--------------------------|:--------------|:------------------| | Balance at End of Period | $3,208 | $3,932 | - Total off-balance-sheet financial instruments decreased by $137.4 million (12.6%) to $955.8 million at June 30, 2024, from $1.09 billion at December 31, 2023, primarily due to a decrease in commitments to extend credit[230] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition, changes in financial condition, and results of operations for the quarter ended June 30, 2024, covering economic conditions, deposits, capital resources, liquidity, balance sheet strategy, and detailed analysis of net interest income, noninterest income, noninterest expense, income taxes, loan composition, and asset quality Forward-Looking Statements This section highlights that the report contains forward-looking statements subject to various risks and uncertainties that could cause actual results to differ materially - The report contains forward-looking statements subject to significant known and unknown risks and uncertainties, including impacts from higher inflation, elevated interest rates, general economic conditions, and regulatory changes, which could cause actual results to differ materially[258][259] Critical Accounting Estimates This section discusses the critical accounting estimates that involve significant judgment and assumptions about uncertain matters, such as the allowance for credit losses - Critical accounting estimates, including the allowance for credit losses on loans and off-balance-sheet credit exposure, involve significant judgment and assumptions about uncertain matters, with no significant changes noted as of June 30, 2024[260] Non-GAAP Financial Measures This section explains the use of non-GAAP financial measures by management to supplement performance evaluation and enhance comparability - Management uses non-GAAP measures like Net Interest Income (FTE), Net Interest Margin (FTE), and Net Interest Spread (FTE) to supplement performance evaluation, adjusting for the tax-favored status of certain income to enhance comparability[288] Non-GAAP Financial Measures (in thousands) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | |:------------------------|:---------------------------------|:---------------------------------| | Net Interest Income (GAAP)| $53,608 | $53,916 | | Net Interest Income (FTE) | $56,292 | $57,051 | | Net Interest Margin (FTE) | 2.87% | 3.17% | | Net Interest Spread (FTE) | 2.13% | 2.55% | | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:------------------------|:-------------------------------|:-------------------------------| | Net Interest Income (GAAP)| $106,956 | $107,269 | | Net Interest Income (FTE) | $112,376 | $113,651 | | Net Interest Margin (FTE) | 2.87% | 3.19% | | Net Interest Spread (FTE) | 2.15% | 2.58% | Overview This section provides a high-level summary of the company's financial performance and key factors influencing its condition Economic Conditions This section discusses the prevailing economic environment and its impact on the company's operations and outlook - Despite elevated inflation and higher interest rates, the economic outlook for the Company's Texas markets remains solid and positive, supported by job and population growth[290] Deposits This section analyzes the company's deposit base, including changes in total deposits, composition, and cost - Total deposits decreased by $53.7 million (0.8%) to $6.50 billion at June 30, 2024, with noninterest-bearing deposits representing approximately 21.0% of the total[291] Cost of Deposits | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | |:----------------------------|:---------------------------------|:---------------------------------| | Cost of Interest Bearing Deposits | 3.01% | 2.03% | | Cost of Total Deposits | 2.39% | 1.50% | | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:----------------------------|:-------------------------------|:-------------------------------| | Cost of Interest Bearing Deposits | 2.99% | 1.92% | | Cost of Total Deposits | 2.37% | 1.42% | - Estimated uninsured deposits were 36.4% of total deposits, and 19.4% when excluding affiliate and public fund deposits, as of June 30, 2024[291] Capital Resources and Liquidity This section evaluates the company's capital adequacy and available liquidity sources to meet financial obligations - The Company's capital ratios and contingent liquidity sources remain solid, with $377.4 million available from the FRDW and $1.78 billion from FHLB at June 30, 2024[292][293][295] Liquidity Lines (June 30, 2024, in thousands) | Source | Line of Credit | Borrowings | Available for Future Liquidity | |:----------------------------------------|:---------------|:-----------|:-------------------------------| | FHLB Advances | $2,344,153 | $562,282 | $1,781,871 | | Federal Reserve Discount Window | $377,381 | — | $377,381 | | Correspondent Bank Lines of Credit | $80,000 | — | $80,000 | | Federal Reserve Bank Term Funding Program | $113,415 | $113,415 | — | | Total Liquidity Lines | $2,914,949 | $675,697 | $2,239,252 | - BTFP borrowings totaled $113.4 million at June 30, 2024, at a cost of 5.40%, compared to $117.7 million at 4.37% at December 31, 2023[292] Financial Condition This section provides an overview of the company's overall financial health, including changes in assets, liabilities, and equity - Total assets increased by $72.8 million (0.9%) to $8.36 billion at June 30, 2024, from $8.28 billion at December 31, 2023, driven by growth in the securities portfolio and FHLB stock[294] - Loans increased by $64.9 million (1.4%) to $4.59 billion, primarily due to commercial real estate and 1-4 family residential loans, while nonperforming assets increased by $2.9 million (72.9%) to $6.9 million[294] - Total shareholders' equity increased by $27.7 million (3.6%) to $801.0 million, representing 9.6% of total assets, compared to 9.3% at December 31, 2023[294] Balance Sheet Strategy This section describes the company's approach to managing its balance sheet, including interest rate sensitivity and funding sources - The Company's balance sheet strategy involves managing interest rate sensitivity, utilizing wholesale funding (brokered deposits, FHLB, FRDW, BTFP) for investments primarily in U.S. agency MBS and long-term municipal securities[295] - The securities portfolio increased to $2.71 billion at June 30, 2024, from $2.60 billion at December 31, 2023, with purchases of $408.9 million in U.S. Treasury Bills and $249.5 million in MBS[295] - Wholesale funding as a percentage of deposits (excluding brokered deposits) decreased to 23.3% at June 30, 2024, from 25.5% at December 31, 2023[269] Operating Results This section analyzes the company's financial performance from its core operations, including net interest income, noninterest income, and expenses Net Interest Income This section examines the primary source of a bank's earnings, calculated as the difference between interest earned on assets and interest paid on liabilities Net Interest Income (in thousands) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | |:------------------------|:---------------------------------|:---------------------------------| | Total Interest Income | $104,186 | $86,876 | | Total Interest Expense | $50,578 | $32,960 | | Net Interest Income | $53,608 | $53,916 | | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:------------------------|:-------------------------------|:-------------------------------| | Total Interest Income | $206,944 | $167,724 | | Total Interest Expense | $99,988 | $60,455 | | Net Interest Income | $106,956 | $107,269 | - Net interest income for the three months ended June 30, 2024, declined slightly by $0.308 million (0.6%) to $53.6 million, and for the six months, it decreased by $0.313 million (0.3%) to $107.0 million, primarily due to a significant increase in interest expense on liabilities[273][299] Net Interest Margin and Spread (FTE) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | |:------------------------|:---------------------------------|:---------------------------------| | Net Interest Margin (FTE) | 2.87% | 3.17% | | Net Interest Spread (FTE) | 2.13% | 2.55% | | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:------------------------|:-------------------------------|:-------------------------------| | Net Interest Margin (FTE) | 2.87% | 3.19% | | Net Interest Spread (FTE) | 2.15% | 2.58% | Noninterest Income This section analyzes income generated from sources other than interest, such as deposit service charges, gains on securities, and brokerage services Noninterest Income (in thousands) | Category | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Change (%) | |:------------------------|:---------------------------------|:---------------------------------|:-----------| | Deposit Services | $6,157 | $6,291 | (2.1)% | | Net gain (loss) on sale of securities AFS | ($563) | ($3,455) | 83.7% | | Net gain on sale of equity securities | — | $2,642 | (100.0)% | | BOLI | $1,767 | $756 | 133.7% | | Brokerage Services | $1,081 | $904 | 19.6% | | Total Noninterest Income| $11,557 | $10,464 | 10.4% | | Category | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | Change (%) | |:------------------------|:-------------------------------|:-------------------------------|:-----------| | Deposit Services | $12,142 | $12,713 | (4.5)% | | Net gain (loss) on sale of securities AFS | ($581) | ($5,601) | 89.6% | | Net gain on sale of equity securities | — | $5,058 | (100.0)% | | BOLI | $2,551 | $2,431 | 4.9% | | Brokerage Services | $2,095 | $1,601 | 30.9% | | Total Noninterest Income| $21,281 | $22,497 | (5.4)% | - Noninterest income increased by 10.4% for the three months ended June 30, 2024, primarily due to a decrease in net loss on AFS securities sales and higher BOLI income, despite the absence of equity securities gains seen in the prior year[309] - For the six months, noninterest income decreased by 5.4%, mainly due to the absence of significant equity securities gains and lower deposit services income, partially offset by reduced AFS securities losses[309] Noninterest Expense This section details the company's operating expenses not directly related to interest, such as salaries, software, and occupancy costs Noninterest Expense (in thousands) | Category | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Change (%) | |:------------------------|:---------------------------------|:---------------------------------|:-----------| | Salaries and Employee Benefits | $21,984 | $21,376 | 2.8% | | Software and Data Processing | $2,860 | $2,264 | 26.3% | | FDIC Insurance | $977 | $1,220 | (19.9)% | | Amortization of Intangibles | $307 | $442 | (30.5)% | | Total Noninterest Expense | $35,765 | $34,993 | 2.2% | | Category | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | Change (%) | |:------------------------|:-------------------------------|:-------------------------------|:-----------| | Salaries and Employee Benefits | $45,097 | $43,232 | 4.3% | | Software and Data Processing | $5,716 | $4,319 | 32.3% | | Net Occupancy | $7,112 | $7,424 | (4.2)% | | Professional Fees | $2,229 | $2,564 | (13.1)% | | Total Noninterest Expense | $72,646 | $69,842 | 4.0% | - Total noninterest expense increased by 2.2% for the three months and 4.0% for the six months ended June 30, 2024, primarily due to higher salaries and employee benefits and software and data processing costs[312][330] - Salaries and employee benefits increased due to normal salary increases and approximately $0.618 million associated with future cost reductions[312] Income Taxes This section analyzes the company's income tax expense and effective tax rate, explaining factors influencing tax liabilities - Pre-tax income for the three months ended June 30, 2024, increased by 1.4% to $29.9 million, while for the six months, it decreased by 6.7% to $56.0 million[333] Effective Tax Rate (ETR) | Period | ETR (June 30, 2024) | ETR (June 30, 2023) | |:------------------------|:--------------------|:--------------------| | Three Months Ended | 17.4% | 15.5% | | Six Months Ended | 17.6% | 15.2% | - The increase in ETR was primarily due to a decrease in net tax-exempt income as a percentage of pre-tax income[333] Composition of Loans This section provides a detailed breakdown of the loan portfolio by type, illustrating the company's lending activities and concentrations Loan Totals by Class (in thousands) | Loan Type | June 30, 2024 | December 31, 2023 | June 30, 2023 | |:--------------------------|:--------------|:------------------|:--------------| | Construction Real Estate | $546,040 | $789,744 | $657,354 | | 1-4 Family Residential | $738,037 | $696,738 | $684,878 | | Commercial Real Estate | $2,472,771 | $2,168,451 | $2,100,338 | | Commercial Loans | $359,807 | $366,893 | $383,724 | | Municipal Loans | $416,986 | $441,168 | $435,211 | | Loans to Individuals | $55,724 | $61,516 | $67,538 | | Total Loans | $4,589,365 | $4,524,510 | $4,329,043 | - Total loans increased by $64.9 million (1.4%) compared to December 31, 2023, with significant increases in commercial real estate and 1-4 family residential loans, partially offset by decreases in construction and municipal loans[88] Nonperforming Assets This section analyzes assets that are not generating income or are at risk of default, providing insight into asset quality and credit risk Nonperforming Assets (in thousands) | Metric | June 30, 2024 | December 31, 2023 | June 30, 2023 | Change (%) vs. Dec 31, 2023 | Change (%) vs. June 30, 2023 | |:--------------------------|:--------------|:------------------|:--------------|:----------------------------|:-----------------------------| | Nonaccrual Loans | $6,110 | $3,889 | $3,017 | 57.1% | 102.5% | | Restructured Loans | $145 | $13 | — | 1,015.4% | 100.0% | | OREO | $648 | $99 | — | 554.5% | 100.0% | | Repossessed Assets | $15 | — | $42 | 100.0% | (64.3)% | | Total Nonperforming Assets| $6,918 | $4,001 | $3,059 | 72.9% | 126.2% | | Ratio of Nonperforming Assets to Total Assets | 0.08% | 0.05% | 0.04% | | | - Total nonperforming assets increased by 72.9% to $6.9 million at June 30, 2024, compared to $4.0 million at December 31, 2023, primarily due to a significant rise in nonaccrual loans and OREO[81][294] Allowance for Credit Losses – Loans This section discusses the allowance for credit losses specifically related to the loan portfolio, reflecting management's estimate of future loan losses - The allowance for loan losses decreased by $0.267 million (0.6%) to $42.4 million at June 30, 2024, representing 0.92% of total loans, compared to 0.94% at December 31, 2023[83] Loan Charge-offs and Recoveries (in thousands) | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:------------------------|:-------------------------------|:-------------------------------| | Loan Charge-offs | $1,355 | $1,370 | | Recoveries | $791 | $792 | | Net Charge-offs | $564 | $578 | - The Company recorded a provision for credit losses for loans of $0.297 million for the six months ended June 30, 2024, compared to $0.366 million in the prior year[83] Allowance for Credit Losses – Off-Balance-Sheet Credit Exposures This section details the allowance for credit losses associated with off-balance-sheet items, such as loan commitments and letters of credit Allowance for Off-Balance-Sheet Credit Exposures (in thousands) | Metric | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2024 | |:------------------------|:---------------------------------|:-------------------------------| | Balance at Beginning of Period | $2,820 | $3,932 | | Provision for (reversal of) off-balance-sheet credit exposures | $388 | ($724) | | Balance at End of Period| $3,208 | $3,208 | - The allowance for off-balance-sheet credit exposures decreased by $0.724 million for the six months ended June 30, 2024, to $3.2 million, compared to a reversal of $0.480 million in the prior year[85] Capital Resources and Liquidity (MD&A) This section, within the MD&A, further discusses the company's capital adequacy and liquidity management strategies - Total shareholders' equity increased by $27.7 million (3.6%) to $801.0 million at June 30, 2024, representing 9.6% of total assets[68] Key Equity Ratios | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | |:----------------------------------------|:---------------------------------|:---------------------------------| | Return on Average Assets | 1.19% | 1.29% | | Return on Average Shareholders' Equity | 12.46% | 13.32% | | Dividend Payout Ratio – Basic | 44.44% | 43.21% | | Average Shareholders' Equity to Average Total Assets | 9.52% | 9.72% | | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:----------------------------------------|:-------------------------------|:-------------------------------| | Return on Average Assets | 1.11% | 1.34% | | Return on Average Shareholders' Equity | 11.74% | 13.62% | | Dividend Payout Ratio – Basic | 47.37% | 42.68% | | Average Shareholders' Equity to Average Total Assets | 9.43% | 9.83% | - The Company and Southside Bank met all capital adequacy requirements under Basel III Capital Rules as of June 30, 2024[74] Branch Closures This section reports on the company's decisions regarding the closure of certain branch locations - The Company announced plans to close a retail grocery store branch in Kingwood on November 2, 2024, and closed a traditional branch in Jasper on May 3, 2024, due to proximity to another branch[78] Recent Accounting Pronouncements This section refers to Note 1 for information on recently issued accounting standards and their potential impact - Refer to Note 1 – Summary of Significant Accounting and Reporting Policies for information on recent accounting pronouncements[91] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the Company's exposure to market risks, primarily interest rate risk, and the strategies employed to manage it, highlighting the use of net income simulation analysis and Market Value of Portfolio Equity (MVPE) modeling to assess the impact of various interest rate scenarios on net interest income - The Company uses net income simulation and MVPE modeling to manage interest rate risk, quantifying the effects of various interest rate scenarios on projected net interest income over the next 12 months[92] Anticipated Impact on Net Interest Income (Next 12 Months) | Rate Projection | June 30, 2024 | June 30, 2023 | |:----------------|:--------------|:--------------| | Increase 100 bps| 3.78% | 4.38% | | Increase 200 bps| 7.13% | 9.11% | | Decrease 50 bps | (3.00)% | (3.04)% | | Decrease 100 bps| (4.85)% | (6.29)% | | Decrease 200 bps| (6.95)% | (12.81)% | - Economic conditions, including record inflation and higher interest rates, continue to impact growth prospects and could negatively affect consumer and commercial borrowers[96] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of June 30, 2024, with no material changes to internal control over financial reporting occurring during the quarter - The CEO and CFO evaluated and concluded that disclosure controls and procedures were effective as of June 30, 2024[97] - No material changes were made to internal control over financial reporting during the quarter ended June 30, 2024[98] Part II. Other Information Item 1. Legal Proceedings The Company is involved in various litigation in the normal course of business, but management believes any resulting liability will not materially affect its financial position, results of operations, or liquidity - Management believes that any liability from ongoing litigation will not have a material effect on the Company's financial position, results of operations, or liquidity[99] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the 2023 Form 10-K - No material changes in risk factors were reported compared to the 2023 Form 10-K[99] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company's board of directors approved a Stock Repurchase Plan in July 2023, authorizing the repurchase of up to 1.0 million shares, and during the three months ended June 30, 2024, the Company repurchased 57,966 shares at an average price of $26.22 per share - The Stock Repurchase Plan, approved on July 20, 2023, authorizes the repurchase of up to 1.0 million shares[64] Issuer Purchases of Equity Securities (Three Months Ended June 30, 2024) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | |:----------------------------|:---------------------------------|:-----------------------------| | April 1, 2024 - April 30, 2024 | — | — | | May 1, 2024 - May 31, 2024 | 9,290 | $26.33 | | June 1, 2024 - June 30, 2024| 48,676 | $26.20 | | Total | 57,966 | $26.22 | - As of June 30, 2024, 583,066 shares remained available for repurchase under the plan[64] Item 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities for the period - There were no defaults upon senior securities[65][317] Item 4. Mine Safety Disclosures The Company has no mine safety disclosures to report - No mine safety disclosures were reported[66] Item 5. Other Information No directors or executive officers adopted, terminated, or modified a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the three months ended June 30, 2024 - No directors or executive officers adopted, terminated, or modified Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the three months ended June 30, 2024[318] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications, articles of incorporation, bylaws, and XBRL interactive data files - The report includes certifications from the Chief Executive Officer and Chief Financial Officer (Exhibits 31.1, 31.2, and 32)[339] - Interactive Data Files (XBRL) are provided, including schema, calculation, label, presentation, and definition linkbases, along with the cover page interactive data file[339] Signatures This section includes the required signatures from the company's principal executive and financial officers, certifying the accuracy of the report - The report is signed by Lee R. Gibson, President and Chief Executive Officer, and Julie N. Shamburger, Chief Financial Officer, on July 26, 2024[338][342]