Business Overview
Southside Bancshares, Inc. is a bank holding company headquartered in Tyler, Texas, with approximately $8.36 billion in assets as of September 30, 2024. The company's wholly-owned subsidiary, Southside Bank, currently operates 53 branches and a network of 72 ATMs/ITMs throughout East Texas, Southeast Texas, and the greater Dallas/Fort Worth, Austin, and Houston areas.
History and Growth
Southside Bancshares' history dates back to 1960, when it was founded as a community bank serving the local Tyler, Texas market. Over the decades, the company has steadily expanded its geographic footprint and diversified its product offerings, transforming into a regional banking powerhouse while maintaining its community-oriented focus. In the 1980s, Southside Bancshares faced challenges from the oil and gas industry downturn, which impacted its loan portfolio, but the bank successfully managed through this period without significant issues. The 1990s and 2000s saw continued expansion into new markets such as the Dallas/Fort Worth and Houston metro areas, which helped the company weather the 2008 financial crisis better than some of its peers. During this time, Southside Bancshares also invested in technology to enhance its banking capabilities and customer experience. In 2010, the company became publicly traded, listing its shares on the NASDAQ exchange, which provided additional capital to fund future growth initiatives. Over the past decade, Southside Bancshares has focused on strengthening its commercial banking capabilities and expanding its wealth management services.
Loan Portfolio and Risk Management
The bank's loan portfolio totaled $4.58 billion as of September 30, 2024, with a mix of 64.4% commercial real estate, 20% 1-4 family residential, and 15.6% construction loans. Southside Bancshares has demonstrated prudent risk management, as evidenced by its nonperforming assets representing just 0.09% of total assets at the end of the third quarter of 2024.
The total loan portfolio increased 1.2% from December 31, 2023 to September 30, 2024, driven by increases in commercial real estate loans (up 11.7%) and 1-4 family residential loans (up 8.4%), partially offset by decreases in construction loans (down 25.8%), municipal loans (down 8.9%), commercial loans (down 2.2%), and loans to individuals (down 13.3%).
Financials
Southside Bancshares' net interest income for the nine months ended September 30, 2024, increased by 1.2% to $162.42 million compared to the same period in 2023. The company's net interest margin (NIM) on a fully taxable-equivalent basis decreased to 2.90% from 3.13% over the same period, reflecting the challenges of operating in a rising interest rate environment. Management has been proactive in managing the balance sheet and funding mix to mitigate the impact of higher rates, including the use of interest rate swaps and adjusting deposit pricing.
The bank's noninterest income decreased by 11.6% year-over-year to $29.45 million for the nine-month period ended September 30, 2024, primarily due to a decrease in net gains on the sale of securities and equity investments, as well as a loss on the sale of a commercial real estate loan. The company's noninterest expense increased by 3.4% to $108.98 million, driven by higher salaries and employee benefits, software and data processing costs, and FDIC insurance expenses.
For the most recent fiscal year (2023), Southside Bancshares reported revenue of $250.86 million, net income of $86.69 million, operating cash flow of $79.86 million, and free cash flow of $72.96 million. In the most recent quarter (Q3 2024), the company reported revenue of $63.223 million, net income of $20.524 million, operating cash flow of -$12.32 million, and free cash flow of -$14.159 million. The decrease in operating cash flow and free cash flow in Q3 2024 compared to the prior year quarter was primarily due to increased borrowing costs and loan origination activity.
Capital Position and Liquidity
Southside Bancshares' balance sheet remains strong, with a Common Equity Tier 1 ratio of 13.07% and a total risk-based capital ratio of 16.59% as of September 30, 2024, well above the regulatory minimums for well-capitalized institutions. The company's liquidity position is also robust, with $2.23 billion in available liquidity lines as of the end of the third quarter.
The company's debt-to-equity ratio stands at 1.26, with $486.30 million in cash on hand. Southside Bank has three unsecured lines of credit totaling $80 million and $352.60 million in additional funding available from the Federal Reserve Discount Window. The current ratio and quick ratio are both 0.24.
Securities Portfolio
Southside's securities portfolio, which includes U.S. Treasury securities, state and political subdivision securities, corporate bonds, and mortgage-backed securities (MBS), increased 3.6% from December 31, 2023 to September 30, 2024. This was primarily due to purchases of MBS, partially offset by a decrease in municipal bonds. The securities portfolio comprised 32.3% of total assets as of September 30, 2024, up from 31.4% at the end of 2023.
The company utilizes interest rate swaps and fair value hedges to manage the interest rate risk associated with its securities and loan portfolios.
Deposits and Borrowings
Southside's deposit base consists of noninterest-bearing and interest-bearing accounts, including savings accounts, CDs, and interest-bearing demand accounts. Total deposits decreased 1.7% from December 31, 2023 to September 30, 2024, driven by declines in both interest-bearing and noninterest-bearing deposits.
To supplement deposits, Southside utilizes wholesale funding sources such as FHLB borrowings, brokered deposits, and borrowings from the Federal Reserve's discount window and Bank Term Funding Program. Total FHLB borrowings increased 257.4% during the first nine months of 2024, while other borrowings decreased 79.2% as the company paid down borrowings from the Federal Reserve.
Future Outlook and Challenges
Looking ahead, Southside Bancshares is navigating the challenges of a changing economic environment, including elevated inflation, rising interest rates, and concerns about a potential recession. The company has taken steps to manage its interest rate risk, such as increasing its use of interest rate swaps and adjusting deposit pricing. Additionally, the bank is focused on growing its commercial and industrial (C&I) lending business in its metropolitan markets, having added several new lenders in 2024 with the expectation of seeing results in 2025.
Despite the macroeconomic headwinds, Southside Bancshares remains well-positioned to continue serving its communities and delivering value to shareholders. The company's strong capital position, diverse revenue streams, and experienced management team provide a solid foundation for weathering the current economic uncertainty.
Guidance and Projections
Southside Bancshares has revised its loan growth guidance for 2024 from 5% down to 3% due to anticipated additional loan payoffs. The company expects noninterest expense to be $37 million for the fourth quarter of 2024. Management has reaffirmed its estimate of an annual effective tax rate of 17.6% for 2024.
Conclusion
In summary, Southside Bancshares is a resilient regional bank that has successfully navigated various economic cycles over its 64-year history. The company is proactively addressing the challenges posed by the current environment, while also pursuing strategic growth initiatives to diversify its business and enhance its long-term prospects. With a strong focus on commercial and residential real estate lending, as well as municipal and consumer lending, Southside Bancshares is well-positioned within the Texas banking market. The bank's solid liquidity position and prudent risk management practices should help it navigate the current operating environment effectively. Investors should closely monitor Southside Bancshares' progress as it continues to evolve and adapt to the changing landscape of the banking industry.