10q10k10q10k.net

What changed in SOUTHSIDE BANCSHARES INC's 10-K — 2022 vs 2023

vs

Paragraph-level year-over-year comparison of SOUTHSIDE BANCSHARES INC's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+429 added−462 removedSource: 10-K (2024-02-27) vs 10-K (2023-02-24)

Top changes in SOUTHSIDE BANCSHARES INC's 2023 10-K

429 paragraphs added · 462 removed · 352 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

95 edited+18 added−35 removed106 unchanged
Biggest changeHowever, on March 27, 2020 the federal bank agencies announced a final rule that permits banks that have adopted the CECL standard to defer recognition of the estimated impact of credit losses on regulatory capital by permitting a three-year “phase-in” approach commencing in 2022. We elected to adopt the transition option.
Biggest changeSouthside Bank Common equity tier 1 risk-based capital ratio 4.50 % 6.50 % 12.28 % 14.88 % Tier 1 risk-based capital ratio 6.00 % 8.00 % 13.32 % 14.88 % Total risk-based capital ratio 8.00 % 10.00 % 15.73 % 15.62 % Leverage ratio 4.00 % 5.00 % 9.39 % 10.49 % On March 27, 2020 the federal bank agencies announced a final rule that permits banks that have adopted the CECL standard to defer recognition of the estimated impact of credit losses on regulatory capital by permitting a three-year “phase-in” approach commencing in 2022.
The Tyler metropolitan area has an estimated population of 240,000 and is located approximately 90 miles east of Dallas, Texas and 90 miles west of Shreveport, Louisiana. We consider our primary market areas to be East Texas, Southeast Texas, as well as the greater Fort Worth, Austin and Houston, Texas areas.
The Tyler metropolitan area has an estimated population of 240,000 and is located approximately 90 miles east of Dallas, Texas and 90 miles west of Shreveport, Louisiana. We consider our primary market areas to be East Texas, Southeast Texas, as well as the greater Dallas-Fort Worth, Austin and Houston, Texas areas.
Under the BHCA, a bank holding company is generally permitted to engage in, or acquire direct or indirect control of more than five percent of the voting shares of any company engaged in, the following activities: • banking or managing or controlling banks; • furnishing services to or performing services for its subsidiaries; and • any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking, including: ◦ factoring accounts receivable; ◦ making, acquiring, brokering or servicing loans and usual related activities; ◦ leasing personal or real property; ◦ operating a nonbank depository institution, such as a savings association; ◦ performing trust company functions; 7 Table of Contents ◦ conducting financial and investment advisory activities; ◦ conducting discount securities brokerage activities; ◦ underwriting and dealing in government obligations and money market instruments; ◦ providing specified management consulting and counseling activities; ◦ performing selected data processing services and support services; ◦ acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; ◦ performing selected insurance underwriting activities; ◦ providing certain community development activities (such as making investments in projects designed primarily to promote community welfare); and ◦ issuing and selling money orders and similar consumer-type payment instruments.
Under the BHCA, a bank holding company is generally permitted to engage in, or acquire direct or indirect control of more than five percent of the voting shares of any company engaged in, the following activities: • banking or managing or controlling banks; • furnishing services to or performing services for its subsidiaries; and • any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking, including: ◦ factoring accounts receivable; ◦ making, acquiring, brokering or servicing loans and usual related activities; ◦ leasing personal or real property; ◦ operating a nonbank depository institution, such as a savings association; ◦ performing trust company functions; ◦ conducting financial and investment advisory activities; ◦ conducting discount securities brokerage activities; 7 Table of Contents ◦ underwriting and dealing in government obligations and money market instruments; ◦ providing specified management consulting and counseling activities; ◦ performing selected data processing services and support services; ◦ acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; ◦ performing selected insurance underwriting activities; ◦ providing certain community development activities (such as making investments in projects designed primarily to promote community welfare); and ◦ issuing and selling money orders and similar consumer-type payment instruments.
Under the BHCA, a bank holding company meeting certain eligibility requirements may elect to become a “financial holding company,” which is a form of bank holding company with authority to engage in additional activities.
Under the BHCA, a bank holding company meeting certain eligibility requirements may elect to become a “financial holding company,” which is a form of bank holding company with authority to engage in certain additional activities.
Subject to certain exceptions, under the BHCA and the CBCA, and the regulations promulgated thereunder, persons who intend to acquire direct or indirect control of a depository institution or a bank holding company are required to obtain the prior approval of the Federal Reserve.
Subject to certain exceptions, under the BHCA, the CBCA and the regulations promulgated thereunder, persons who intend to acquire direct or indirect control of a depository institution or a bank holding company are required to obtain the prior approval of the Federal Reserve.
The Bank Secrecy Act, USA PATRIOT Act, and Anti-Money Laundering Act of 2020, along with the related FinCEN regulations, impose numerous requirements with respect to financial institution operations, including the following: • establishment of AML programs, including adoption of written procedures and an ongoing employee training program, designation of a compliance officer and auditing of the program; 16 Table of Contents • establishment of a program specifying procedures for obtaining information from customers seeking to open new accounts, including verifying the identity of customers within a reasonable period of time; • establishment of enhanced due diligence policies, procedures and controls designed to detect and report money laundering, for financial institutions that administer, maintain or manage private bank accounts or correspondent accounts for non-U.S. persons; • prohibitions on correspondent accounts for foreign shell banks and compliance with recordkeeping obligations with respect to correspondent accounts of foreign banks; • filing of suspicious activities reports if a bank believes a customer may be violating U.S. laws and regulations; and • requirements that bank regulators consider bank holding and bank compliance with federal anti-money laundering laws in connection with proposed merger or acquisition transactions.
The Bank Secrecy Act, USA PATRIOT Act, and Anti-Money Laundering Act of 2020, along with the related FinCEN regulations, impose numerous requirements with respect to financial institution operations, including the following: • establishment of AML programs, including adoption of written procedures and an ongoing employee training program, designation of a compliance officer and auditing of the program; • establishment of a program specifying procedures for obtaining information from customers seeking to open new accounts, including verifying the identity of customers within a reasonable period of time; 15 Table of Contents • establishment of enhanced due diligence policies, procedures and controls designed to detect and report money laundering, for financial institutions that administer, maintain or manage private bank accounts or correspondent accounts for non-U.S. persons; • prohibitions on correspondent accounts for foreign shell banks and compliance with recordkeeping obligations with respect to correspondent accounts of foreign banks; • filing of suspicious activities reports if a bank believes a customer may be violating U.S. laws and regulations; and • requirements that bank regulators consider bank holding and bank compliance with federal anti-money laundering laws in connection with proposed merger or acquisition transactions.
Our public filings with the SEC may be obtained free of charge on either our website, https://investors.southside.com/ under the topic Filings and Financials, or the SEC’s website, www.sec.gov, as soon as reasonably practicable after filing with the SEC. 4 Table of Contents MARKET AREA We are headquartered in Tyler, Texas.
Our public filings with the SEC may be obtained free of charge on either our website, https://investors.southside.com/ under the topic Financials, or the SEC’s website, www.sec.gov, as soon as reasonably practicable after filing with the SEC. 4 Table of Contents MARKET AREA We are headquartered in Tyler, Texas.
Under Texas law, without the approval of the TDB and subject to certain limited exceptions for loans secured by livestock, stored agricultural products, or readily marketable collateral, the maximum aggregate amount of loans that Southside Bank is permitted to make to any one borrower is 25% of Tier 1 capital. Insider Loans .
Under Texas law, without the approval of the TDB and subject to certain limited exceptions for loans secured by livestock, stored agricultural products, or readily marketable collateral, the maximum aggregate amount of loans that Southside Bank is permitted to make to any one borrower is 25% of Tier 1 capital.
Furthermore, the FDIC provides that any insured depository institution generally will be liable for any loss incurred by the FDIC in connection with the default of, or any assistance provided by the FDIC to, a commonly controlled insured depository institution. Southside Bank is an FDIC-insured depository institution and thus subject to these requirements.
Furthermore, the FDIA provides that any insured depository institution generally will be liable for any loss incurred by the FDIC in connection with the default of, or any assistance provided by the FDIC to, a commonly controlled insured depository institution. Southside Bank is an FDIC-insured depository institution and thus subject to these requirements.
The new guidance encourages banks to consider (i) the qualification of the bank’s reviewing personnel; (ii) the frequency, scope and depth of credit reviews; and (iii) appropriate internal distribution of credit review results. Dividends . All dividends paid by Southside Bank are paid to the Company, as the sole shareholder of Southside Bank.
The guidance encourages banks to consider (i) the qualification of the bank’s reviewing personnel; (ii) the frequency, scope and depth of credit reviews; and (iii) appropriate internal distribution of credit review results. Dividends . All dividends paid by Southside Bank are paid to the Company, as the sole shareholder of Southside Bank.
Financial activities specifically include insurance brokerage and underwriting, securities underwriting and dealing, merchant banking, investment advisory and lending activities. Financial holding companies and their subsidiaries also may engage in additional activities that are determined by the Federal Reserve, in consultation with the U.S.
Financial activities include insurance brokerage and underwriting, securities underwriting and dealing, merchant banking, investment advisory and lending activities. Financial holding companies and their subsidiaries also may engage in additional activities that are determined by the Federal Reserve, in consultation with the U.S.
The federal and state laws applicable to banks regulate, among other things, the scope of their business and investments, lending and deposit-taking activities, borrowings, maintenance of retained earnings and reserve accounts, distribution of earnings and payment of dividends. Permitted Activities and Investments .
The federal and state laws applicable to banks regulate, among other things, the scope of their activities and investments, lending and deposit-taking activities, borrowings, maintenance of retained earnings and reserve accounts, distribution of earnings and payment of dividends. Permitted Activities and Investments .
Undercapitalized depository institutions are also subject to restrictions on borrowing from the Federal Reserve System, may not accept brokered deposits, are subject to growth limitations and are required to submit capital restoration plans for regulatory approval.
Undercapitalized depository institutions are also subject to restrictions on borrowing from the Federal Reserve, may not accept brokered deposits, are subject to growth limitations and are required to submit capital restoration plans for regulatory approval.
However, the Bureau may participate in examinations of these smaller institutions on a “sampling basis” and may refer potential enforcement actions against such institutions to their primary regulators. Accordingly, the Bureau may participate in examinations of Southside Bank, and could supervise and examine other direct or indirect subsidiaries of the Company that offer consumer financial products or services.
However, the CFPB may participate in examinations of these smaller institutions on a “sampling basis” and may refer potential enforcement actions against such institutions to their primary regulators. Accordingly, the CFPB may participate in examinations of Southside Bank, and could supervise and examine other direct or indirect subsidiaries of the Company that offer consumer financial products or services.
The ability of Southside Bank, as a Texas state bank, to pay dividends is restricted under federal and state law and regulations. As an initial matter, the FDICIA and the regulations of the FDIC generally prohibit an insured depository institution from making a capital distribution (including payment of dividend) if, thereafter, the institution would not be at least adequately capitalized.
The ability of Southside Bank, as a Texas state bank, to pay dividends is restricted under federal and state law and regulations. The FDICIA and the regulations of the FDIC generally prohibit an insured depository institution from making a capital distribution (including payment of dividend) if, thereafter, the institution would not be at least adequately capitalized.
Tyler, Fort Worth, Austin and Houston are home to several nationally recognized health care systems that represent all major specialties.
Tyler, Dallas-Fort Worth, Austin and Houston are home to several nationally recognized health care systems that represent all major specialties.
Specifically, section 23A places limits on the amount of “covered transactions,” between a bank and its affiliates, including loans or extensions of credit to, investments in or certain other transactions with, affiliates. It also limits the amount of any advances to third parties that are collateralized by the securities or obligations of affiliates.
Specifically, section 23A places limits on the amount of “covered transactions” between a bank and its affiliates, including loans or extensions of credit to, investments in or certain other transactions with, affiliates. It also limits the amount of any advances to third parties that are collateralized by the securities or obligations of affiliates.
Under federal law, financial institutions are generally prohibited from disclosing consumer information to non-affiliated third parties unless the consumer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required, subject to certain exceptions, to disclose their privacy policies to customers annually.
Under federal law, financial institutions are generally prohibited from disclosing consumer nonpublic personal information to non-affiliated third parties unless the consumer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required, subject to certain exceptions, to disclose their privacy policies to customers annually.
These descriptions do not purport to be complete and are qualified in their entirety by reference to the particular statutory or regulatory provision. Holding Company Regulation As a bank holding company regulated under the BHCA, as amended, the Company is registered with and subject to regulation, supervision and examination by the Federal Reserve.
These descriptions do not purport to be complete and are qualified in their entirety by reference to the particular statutory or regulatory provisions. Holding Company Regulation As a bank holding company regulated under the BHCA, as amended, the Company is registered with and subject to regulation, supervision and examination by the Federal Reserve.
If the FDIC determines that Southside Bank fails to meet any standards prescribed by the Guidelines, it may require Southside Bank 13 Table of Contents to submit an acceptable plan to achieve compliance, consistent with deadlines for the submission and review of such safety and soundness compliance plans.
If the FDIC determines that Southside Bank fails to meet any standards prescribed by the Guidelines, it may require Southside Bank to submit an acceptable plan to achieve compliance, consistent with deadlines for the submission and review of such safety and 12 Table of Contents soundness compliance plans.
Interest and other charges collected or contracted for by the banks are subject to state usury laws and federal laws concerning interest rates.
Interest and other charges collected or contracted for by banks are subject to state usury laws and federal laws concerning interest rates.
The Federal Reserve has broad enforcement powers over bank holding companies and their nonbank subsidiaries, as well as “institution-affiliated parties,” including management, employees, agents, independent contractors and consultants, such as attorneys and accountants and others who participate in the conduct of the institution’s 10 Table of Contents affairs, and has authority to prohibit activities that represent unsafe or unsound banking practices or constitute knowing or reckless violations of laws or regulations.
The Federal Reserve has broad enforcement powers over bank holding companies and their nonbank subsidiaries, as well as “institution-affiliated parties,” including management, employees, agents, independent contractors and consultants, such as attorneys and accountants and others who participate in the conduct of the institution’s affairs, and has authority to prohibit activities that represent unsafe or unsound banking practices or constitute knowing or reckless violations of laws or regulations.
Deposit and other operations also are subject to: • the Truth in Savings Act and Regulation DD, governing disclosure of deposit account terms to consumers; • the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and 15 Table of Contents • the Electronic Fund Transfer Act and Regulation E, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of ATMs and other electronic banking services, which the Bureau has expanded to include a new compliance regime that governs consumer-initiated cross border electronic transfers.
Deposit and other operations also are subject to: • the Truth in Savings Act and Regulation DD, governing disclosure of deposit account terms to consumers; • the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and • the Electronic Fund Transfer Act and Regulation E, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of ATMs and other electronic banking 14 Table of Contents services, which the CFPB has expanded to include a new compliance regime that governs consumer-initiated cross border electronic transfers.
The FDIC has developed a method for insured depository institutions to provide supplemental disclosure of the estimated fair value of assets and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report of condition or any other report.
The FDIC has developed a method for insured depository institutions to provide supplemental disclosure of the estimated fair value of assets and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report of condition or any other report. Enforcement Authority .
Under the 2015 Capital Rules, a well-capitalized insured depository institution is one (1) having a total risk-based capital ratio of 10 percent or greater, (2) having a Tier 1 risk-based capital ratio of 8 percent or greater, (3) having a CET1 capital ratio of 6.5 percent or greater, (4) having a leverage capital ratio of 5 percent or greater and (5) that is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure. • Adequately Capitalized - The insured depository institution meets the required minimum level for each relevant capital measure.
A well-capitalized insured depository institution is one (1) having a total risk-based capital ratio of 10 percent or greater, (2) having a Tier 1 risk-based capital ratio of 8 percent or greater, (3) having a CET1 capital ratio of 6.5 percent or greater, (4) having a leverage capital ratio of 5 percent or greater and (5) that is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure. • Adequately Capitalized - The insured depository institution meets the required minimum level for each relevant capital measure.
A joint proposed rule was published in the Federal Register on April 14, 2011, and a second joint proposed rule was published on June 10, 2016; however, as of December 31, 2022, regulators have yet to issue a final rule (or further guidance) on the topic.
A joint proposed rule was published in the Federal Register on April 14, 2011, and a second joint proposed rule was published on June 10, 2016; however, as of December 31, 2023, regulators have yet to issue a final rule (or further guidance) on the topic.
In general, a bank may not extend credit, lease, sell property, or furnish any services or fix or vary the consideration for these products or services on the condition that either: (i) the customer obtain or provide some additional credit, property, or services from or to the bank, the bank holding company or subsidiaries thereof or (ii) the customer not obtain credit, property, or service from a competitor, except to the extent reasonable conditions 14 Table of Contents are imposed to assure the soundness of the credit extended.
In general, a bank may not extend credit, lease, sell property, or furnish any services or fix or vary the consideration for these products or services on the condition that either: (i) the customer obtain or provide some additional credit, property, or services from or to the bank, the bank holding company or subsidiaries thereof or (ii) the customer not obtain credit, property, or service from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of the credit extended.
The foregoing laws and regulations are amended periodically. Notably, several were changed as a direct result of the COVID-19 pandemic. For example, during the pandemic, the Bureau was particularly active and adopted several amendments to Regulation Z.
The foregoing laws and regulations are amended periodically. Notably, several were changed as a direct result of the COVID-19 pandemic. For example, during the pandemic, the CFPB was particularly active and adopted several amendments to Regulation Z.
The rule also imposes requirements on bank service providers to notify their affected banking organization customers of certain 17 Table of Contents computer-security incidents. This rule became effective on April 1, 2022. At the state level, as of January 2, 2020, Texas state banks are required to notify the TDB of “cybersecurity incidents” within specified timeframes. Regulatory Examination .
The rule also imposes requirements on bank service providers to notify their affected banking organization customers of certain computer-security incidents. This rule became effective on April 1, 2022. At the state level, as of January 2, 2020, Texas state banks are required to notify the TDB of “cybersecurity incidents” within specified timeframes. Regulatory Examination .
Under the 2015 Capital Rules, an adequately-capitalized depository institution is one having (1) a total risk based capital ratio of 8 percent or more, (2) a Tier 1 capital ratio of 6 percent or more, (3) a CET1 capital ratio of 4.5 percent or more and (4) a leverage ratio of 4 percent or more. • Undercapitalized - The insured depository institution fails to meet the required minimum level for any relevant capital measure.
An adequately-capitalized depository institution is one having (1) a total risk based capital ratio of 8 percent or more, (2) a Tier 1 capital ratio of 6 percent or more, (3) a CET1 capital ratio of 4.5 percent or more and (4) a leverage ratio of 4 percent or more. • Undercapitalized - The insured depository institution fails to meet the required minimum level for any relevant capital measure.
The Bureau also issued a “COVID-19 Mortgage Servicing Rule” on June 28, 2021, affording borrowers greater procedural safeguards designed to limit situations in which a servicer can initiate foreclosures.
The CFPB also issued a “COVID-19 Mortgage Servicing Rule” on June 28, 2021, affording borrowers greater procedural safeguards designed to limit situations in which a servicer can initiate foreclosures.
The aggregate of all covered transactions is limited to 10 percent of the bank’s capital and surplus for any one affiliate and 20 percent for all affiliates. Additionally, within the foregoing limitations, each covered transaction must meet specified collateral requirements ranging from 100 to 130 percent of the loan amount, depending on the type of collateral.
The aggregate of all covered transactions is limited to 10 percent of the bank’s capital and surplus for any one affiliate and 20 percent for all affiliates. Additionally, within the foregoing limitations, each credit transaction with an affiliate must meet specified collateral requirements ranging from 100 to 130 percent of the loan amount, depending on the type of collateral.
In addition, under state law, as the parent company of a Texas-chartered state bank that is not a member of the Federal Reserve, the Company is subject to supervision and examination by the TDB.
As a bank holding company under federal law, the Company is subject to regulation, supervision and examination by the Federal Reserve. In addition, under state law, as the parent company of a Texas-chartered state bank that is not a member of the Federal Reserve, the Company is subject to supervision and examination by the TDB.
We cannot predict the extent to which new or modified regulations focused on consumer financial protection, whether adopted by the TDB, the Bureau, or the federal banking agencies will have on our businesses.
We cannot predict the extent to which new or modified regulations focused on consumer financial protection, whether adopted by the TDB, the CFPB, or the federal banking agencies will have on our businesses.
More broadly, on November 18, 2021, the federal banking regulators imposed a new cybersecurity-related notification rule that would require banking organizations, including the Company and Southside Bank, to notify their primary federal regulator as soon as possible (but within 36 hours) of incidents that have materially disrupted or degraded, or are reasonably likely to materially disrupt or degrade, the banking organization’s ability to deliver services to a material portion of its customer base, jeopardize the viability of key operations of the banking organization, or impact the stability of the financial sector.
More broadly, on November 23, 2021, the federal banking regulators imposed a new cybersecurity-related notification rule that would require banking organizations, including the Company and Southside Bank, to notify their primary federal regulator as soon as possible (but within 36 hours) of incidents that have materially disrupted or degraded, or are reasonably likely to materially disrupt or degrade, the banking organization’s ability to deliver services to a material portion of its customer 16 Table of Contents base, jeopardize the viability of key operations of the banking organization, or impact the stability of the financial sector.
Under the 2015 Capital Rules, a significantly undercapitalized institution is one having (1) a total risk-based capital ratio of less than 6 percent (2) a Tier 1 capital ratio of less than 4 percent, (3) a CET1 ratio of less than 3 percent or (4) a leverage capital ratio of less than 3 percent. • Critically Undercapitalized - The insured depository institution fails to meet a critical capital level set by the appropriate federal banking agency.
A significantly undercapitalized institution is one having (1) a total risk-based capital ratio of less than 6 percent (2) a Tier 1 capital ratio of less than 4 percent, (3) a CET1 ratio of less than 3 percent or (4) a leverage capital ratio of less than 3 percent. • Critically Undercapitalized - The insured depository institution fails to meet a critical capital level set by the appropriate federal banking agency.
Under the Federal Reserve’s CBCA regulations, a rebuttable presumption of control would arise with respect to an acquisition where, after the transaction, the acquiring party owns, controls or has the power to vote at least 10% (but less than 25%) of our voting securities.
Under the Federal Reserve’s CBCA regulations, a rebuttable presumption of control would arise with respect to an acquisition where, after the transaction, the acquiring party owns, controls or has the power to vote at least 10% (but less than 9 Table of Contents 25%) of our voting securities.
Under the 2015 Capital Rules, an undercapitalized depository institution is one having (1) a total capital ratio of less than 8 percent, (2) a Tier 1 capital ratio of less than 6 percent, (3) a CET1 capital ratio of less than 4.5 percent or (4) a leverage ratio of less than 4 percent. • Significantly Undercapitalized - The insured depository institution is significantly below the required minimum level for any relevant capital measure.
An undercapitalized depository institution is one having (1) a total capital ratio of less than 8 percent, (2) a Tier 1 capital ratio of less than 6 percent, (3) a CET1 capital ratio of less than 4.5 percent or (4) a leverage ratio of less than 4 percent. • Significantly Undercapitalized - The insured depository institution is significantly below the required minimum level for any relevant capital measure.
Some institutions we compete with offer interest rate levels on loan and deposit products that we are unwilling to offer due to interest rate risk and overall profitability concerns. We expect the level of competition to continue to increase. 5 Table of Contents HUMAN CAPITAL RESOURCES At December 31, 2022, we employed approximately 813 full time equivalent persons.
Some institutions we compete with offer interest rate levels on loan and deposit products that we are unwilling to offer due to interest rate risk and overall profitability concerns. We expect the level of competition to continue to increase. 5 Table of Contents HUMAN CAPITAL RESOURCES At December 31, 2023, we employed approximately 815 full time equivalent persons.
Additional guidance was released by the FDIC on July 15, 2022, regarding how banks should treat the placement of deposits by third-parties under “sweep arrangements” with broker-dealers. 11 Table of Contents Loans to One Borrower .
Additional guidance was released by the FDIC on July 15, 2022, regarding how banks should treat the placement of deposits by third-parties under “sweep arrangements” with broker-dealers. Loans to One Borrower .
Consistent with its “source of strength” policy, the Federal Reserve discourages bank holding companies from paying dividends except out of operating earnings and prefers that dividends be paid only if, after the payment, the prospective rate of earnings retention appears consistent with the bank holding company’s capital needs, asset quality and overall financial condition.
Consistent with its source of strength policy, the Federal Reserve discourages bank holding companies from paying dividends except out of operating earnings and prefers that dividends be paid only if, after the payment, the prospective rate of earnings retention appears consistent with the bank holding company’s capital needs, asset quality and overall financial condition.
This approval was based in part upon a finding by the Federal Reserve that all of our depository institution subsidiaries satisfy the Federal Reserve’s “well capitalized” and “well managed” standards and have at least a satisfactory rating under the CRA (discussed below). We do not currently engage in financial activities beyond those permissible for a bank holding company.
Our election was declared effective based in part upon a finding by the Federal Reserve that all of our depository institution subsidiaries satisfy the Federal Reserve’s “well capitalized” and “well managed” standards and have at least a satisfactory rating under the CRA (discussed below). We do not currently engage in financial activities beyond those permissible for a bank holding company.
As of December 31, 2022, the Federal Reserve and other federal banking regulators have not issued rules implementing this requirement.
As of December 31, 2023, the Federal Reserve and other federal banking regulators have not issued rules implementing this requirement.
The likelihood, timing and scope of any such change of law, and the impact that any such change may have on us, are impossible to determine with any certainty. Set forth below is a brief description of the significant federal and state laws and regulations to which we are currently subject.
The likelihood, timing and scope of any such change of law, and the impact that any such change may have on us, are impossible to determine with any certainty. Set forth below are brief descriptions of the significant federal and state laws and regulations to which we are currently subject.
At December 31, 2022, our wealth management and trust assets under management were approximately $1.58 billion. Our business strategy includes evaluating expansion opportunities through acquisitions of financial institutions in market areas that could complement our existing franchise.
At December 31, 2023, our wealth management and trust assets under management were approximately $1.48 billion. Our business strategy includes evaluating expansion opportunities through acquisitions of financial institutions in market areas that could complement our existing franchise.
A bank may, however, offer combined-balance products and may otherwise offer more favorable terms if a customer obtains two or more traditional bank products. Also, certain foreign transactions are exempt from the general rule. Community Reinvestment Act .
A bank may, however, offer combined-balance products and may 13 Table of Contents otherwise offer more favorable terms if a customer obtains two or more traditional bank products. Also, certain foreign transactions are exempt from the general rule. Community Reinvestment Act .
For the years ended December 31, 2022 and 2021, diluted earnings per common share was $3.26 and $3.47, respectively. We have paid a cash dividend to shareholders every year since 1970 (including dividends paid by Southside Bank prior to the incorporation of Southside Bancshares).
For the years ended December 31, 2023 and 2022, diluted earnings per common share was $2.82 and $3.26, respectively. We have paid a cash dividend to shareholders every year since 1970 (including dividends paid by Southside Bank prior to the incorporation of Southside Bancshares).
While most of these protections expired in 2022, on January 18, 2023, in its revised Mortgage Servicing Examination Procedures , the Bureau stated it expected services to continue to utilize these safeguards, regardless of their expiration.
While most of these protections expired in 2022, on January 18, 2023, in its revised Mortgage Servicing Examination Procedures , the CFPB stated it expected servicers to continue to utilize these safeguards, regardless of their expiration.
If other banks were to establish branch facilities near our facilities, it is uncertain whether these branch facilities would have a material adverse effect on our business. Notably, de novo interstate branching by Southside Bank is also subject to the Dodd-Frank Act interstate branching rules.
If other banks were to establish branch facilities near our facilities, it is uncertain whether these branch facilities would have a material adverse effect on our business. De novo interstate branching by Southside Bank is also subject to the Federal interstate branching rules.
Such requests are considered incidental to the normal conduct of business. 18 Table of Contents
Such requests are considered incidental to the normal conduct of business. 17 Table of Contents
Only “well-capitalized” banks are permitted to accept, renew or roll over brokered deposits. The FDIC may, on a case-by-case basis, permit banks that are adequately capitalized to accept brokered deposits if the FDIC determines that acceptance of such deposits would not constitute an unsafe or unsound banking practice with respect to the bank.
The FDIC may, on a case-by-case basis, permit banks that are adequately capitalized to accept brokered deposits if the FDIC determines that acceptance of such deposits would not constitute an unsafe or unsound banking practice with respect to the bank. Undercapitalized banks generally may not accept, renew or roll over brokered deposits.
Under its new “Tiered Presumptions” framework, the Federal Reserve will consider the nature and extent of “controlling influences” that exist between a party and a banking organization at different levels of voting security ownership (i.e., between 0% and 4.99%, or between 5% and 9.99%).
Under the Federal Reserve’s “Tiered Presumptions” framework, promulgated in 2010, the Federal Reserve will consider the nature and extent of “controlling influences” that exist between a party and a banking organization at different levels of voting security ownership (i.e., between 0% and 4.99%, or between 5% and 9.99%).
Generally, Southside Bank must disclose its privacy policy for collecting and protecting confidential customer information to consumers, permit consumers to “opt out” of having nonpublic customer information disclosed to non-affiliated third parties, with some exceptions, and allow customers to opt out of receiving marketing solicitations based on information about the customer received from another subsidiary.
Generally, Southside Bank must disclose its privacy policy for collecting and protecting NPI to consumers, permit consumers to “opt out” of having NPI disclosed to non-affiliated third parties, with some exceptions, and allow consumers to opt out of receiving marketing solicitations based on information about the consumer received from another affiliate.
Further, banks are prohibited from purchasing low quality assets from an affiliate. Section 608 of the Dodd-Frank Act broadened the definition of “covered transactions” to include derivative transactions and the borrowing or lending of securities if the transaction will cause a bank to have credit exposure to an affiliate.
Further, banks are prohibited from purchasing low quality assets from an affiliate. The definition of “covered transactions” has been broadened to include derivative transactions and the borrowing or lending of securities if the transaction will cause a bank to have credit exposure to an affiliate.
Under the final rule, effective January 1, 2020, a “qualifying community banking organization” is one that has (i) less than $10 billion in total consolidated assets; (ii) a leverage ratio greater than 9%; (iii) off-balance sheet exposures of 25% or less of total consolidated assets; and (iv) trading assets and liabilities of 5% or less of total consolidated assets.
A “qualifying community banking organization” is one that has (i) less than $10 billion in total consolidated assets; (ii) a leverage ratio greater than 9%; (iii) off-balance sheet exposures of 25% or less of total consolidated assets; and (iv) trading assets and liabilities of 5% or less of total consolidated assets.
To that end, on October 24, 2022, the FDIC adopted a final rule raising the DIF assessment rate on all insured depository institutions, including Southside Bank, by two basis points. The new assessment rates became effective January 1, 2023, with the first quarterly assessment due June 30, 2023. Capital Adequacy . See Holding Company Regulation - Capital Adequacy .
To that end, on October 24, 2022, the FDIC adopted a final rule raising the DIF assessment rate on all insured depository institutions, including Southside Bank, by two basis points. This assessment rate became effective January 1, 2023, with the first quarterly assessment due June 30, 2023.
RECENT DEVELOPMENTS In January 2023, we closed one traditional branch location in Lufkin, due to close proximity to another Southside branch and a shift in customer preferences and their transition from in-branch banking to digital banking.
RECENT DEVELOPMENTS During the year ended December 31, 2023, we closed one traditional branch location in Lufkin, due to close proximity to another Southside branch and a shift in customer preferences and their transition from in-branch banking to digital banking.
In addition to the foregoing requirements, the Dodd-Frank Act’s provisions authorize the Federal Reserve and other federal banking regulators to require a company that directly or indirectly controls a bank to submit reports that are designed both to assess the ability of such company to comply with its “source of strength” obligations and to enforce the company’s compliance with these obligations.
In addition to the foregoing requirements, the Federal Reserve and other federal banking regulators are authorized to require a company that directly or indirectly controls a bank to submit reports that are designed both to assess the ability of such company to comply with its source of strength obligations and to enforce the company’s compliance with these obligations.
The 2015 Capital Rules provide for a number of deductions from and adjustments to CET1, which include the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.
The capital rules provide for a number of deductions from and adjustments to CET1, which include the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. 8 Table of Contents Certain regulatory capital ratios of the Company and Southside Bank, as of December 31, 2023, are shown in the following table.
On July 22, 2019, the federal banking agencies amended the Volcker Rule to exempt from coverage those banks with (i) total consolidated assets equal to $10 billion or less; and (ii) total trading assets and liabilities equal to 5 percent or less of total consolidated assets.
Subsequent amendments to the Volcker Rule exempt from coverage those banks with (i) total consolidated assets equal to $10 billion or less; and (ii) total trading assets and liabilities equal to 5 percent or less of total consolidated assets.
As a result, a bank holding company may be required to contribute additional capital to its subsidiaries in the form of capital notes or other instruments which qualify as capital under regulatory rules.
A bank holding company, such as us, is required to act as a source of financial and managerial strength to its subsidiary banks. As a result, a bank holding company may be required to contribute additional capital to its subsidiaries in the form of capital notes or other instruments which qualify as capital under regulatory rules.
Accordingly, a bank located anywhere in Texas has the ability, subject to regulatory approval, to establish branch facilities near any of our facilities and within our market area. Similarly, under the interstate branching legal framework of the Dodd-Frank Act, out-of-state banks are more easily able to establish branches in Texas.
Accordingly, a bank located anywhere in Texas has the ability, subject to regulatory approval, to establish branch facilities near any of our facilities and within our market area. Similarly, under applicable Federal law, out-of-state banks are permitted to establish branches in Texas.
Southside Bank also may be restricted in its ability to accept, renew or roll over brokered deposits, depending on its capital classification. Subject to certain exceptions, deposits are “brokered” if they are placed at a bank through the intervention of a third party in the business of facilitating the placement of deposits with FDIC-insured banks.
Subject to certain exceptions, deposits are “brokered” if they are placed at a bank through the intervention of a third party in the business of facilitating the placement of deposits with FDIC-insured banks. Only “well-capitalized” banks are permitted to accept, renew or roll over brokered deposits.
Generally, subject to a narrow exception, the FDICIA requires the banking regulator to appoint a receiver or conservator for an insured depository institution that is critically undercapitalized. The federal banking agencies have specified by regulation the relevant capital level for each category.
Generally, subject to a narrow exception, the FDICIA requires the banking regulator to appoint a receiver or conservator for an insured depository institution that is critically undercapitalized.
Department of the Treasury, to be “financial in nature or incidental to” a financial activity or are determined by the Federal Reserve unilaterally to be “complementary” to financial activities. On March 22, 2011, the Company was granted financial holding company status by the Federal Reserve Bank of Dallas.
Department of the Treasury, to be “financial in nature or incidental to” a financial activity or are determined by the Federal Reserve unilaterally to be “complementary” to financial activities. The Company has elected to become a financial holding company.
The health, safety and wellness of our employees is a top priority. In 2022, we focused on the health and wellness of our employees through several company-wide efforts including: a virtual health and wellness fair, a wellness program that allows employees to earn cash rewards, on-site biometric screenings, as well as wellness communications and webinars throughout the year.
In 2023, we continued to focus on the health and wellness of our employees through several company-wide efforts including: a wellness program that allows employees to earn cash rewards; a three-week wellness challenge to encourage healthy habits; on-site biometric screenings, as well as wellness communications and webinars throughout the year.
At December 31, 2022, our total assets were $7.56 billion, total loans were $4.15 billion, total deposits were $6.20 billion and total equity was $746.0 million. For the years ended December 31, 2022 and 2021, our net income was $105.0 million and $113.4 million, respectively.
At December 31, 2023, our total assets were $8.28 billion, total loans were $4.52 billion, total deposits were $6.55 billion and total equity was $773.3 million. For the years ended December 31, 2023 and 2022, our net income was $86.7 million and $105.0 million, respectively.
Most recently, on June 30, 2021, FinCEN published the first set of “national AML priorities,” as required by the Bank Secrecy Act, which include, but are not limited to, cybercrime, terrorist financing, fraud, and drug/human trafficking.
On June 30, 2021, FinCEN published the first set of “national AML priorities,” as required by the Bank Secrecy Act, which include, but are not limited to, cybercrime, terrorist financing, fraud, and drug/human trafficking. FinCEN is required to implement regulations to specify how covered financial institutions, such as Southside Bank, should incorporate these national priorities into their AML programs.
The 2015 Capital Rules also require a minimum “capital conservation buffer” equal to 2.5% of an organization’s total risk-weighted assets, which measure exists in addition to the required minimum CET1, Tier 1 and total capital ratios. The “capital conservation buffer,” which must consist entirely of CET1, is designed to absorb losses during periods of economic stress.
The Bank must also maintain a minimum “capital conservation buffer” equal to 2.5% of its total risk-weighted assets. The “capital conservation buffer,” which must consist entirely of CET1, is designed to absorb losses during periods of economic stress.
For additional information regarding our employee benefit plans, see “Note 10 - Employee Benefits” to our consolidated financial statements included in this report. 6 Table of Contents SUPERVISION AND REGULATION General Banking is a complex, highly regulated industry. As a bank holding company under federal law, the Company is subject to regulation, supervision and examination by the Federal Reserve.
We believe our compensation package and benefits are competitive with others in our industry. For additional information regarding our employee benefit plans, see “Note 10 - Employee Benefits” to our consolidated financial statements included in this report. 6 Table of Contents SUPERVISION AND REGULATION General Banking is a complex, highly regulated industry.
Furthermore, on May 5, 2022, the federal banking agencies issued a joint proposal to strengthen and modernize the CRA, key elements of which include (i) expanding access to credit, investment, and basic banking services in low- and moderate-income communities; (ii) updating CRA assessment areas by including activities associated with online and mobile banking, branchless banking, and hybrid models; and (iii) better tailoring CRA evaluations and data collection requirements by bank size and type.
Key elements of the final rule include (i) encouragement of expanded access to credit, investment, and basic banking services in low- and moderate-income communities; (ii) updated CRA assessment areas by including activities associated with online and mobile banking, branchless banking, and hybrid models; (iii) greater clarity and consistency in the application of CRA regulations; and (iv) better tailoring CRA evaluations and data collection requirements by bank size and type.
Qualifying banks that meet these thresholds, and elect the CBLR framework, would be exempt from the agencies’ current capital framework, including the risk-based capital requirements and capital conservation buffer imposed under Basel III, and would be deemed well-capitalized under the agencies’ prompt corrective action regulations.
Qualifying banks that meet these thresholds and elect the CBLR framework, are exempt from the agencies’ current capital framework, including the risk-based capital requirements and capital conservation buffer, and are deemed well-capitalized under the agencies’ prompt corrective action regulations. Southside Bank has not elected to use the CBLR framework at this time. Source of Strength .
A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions determined to be appropriate by the ordering agency. The federal banking agencies also may remove a director or officer from an insured depository institution (or bar them from the industry) if a violation is willful or reckless.
A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, refrain from declaring or paying dividends, or take other actions determined to be appropriate by the ordering agency.
Department of the Treasury, which implements the Bank Secrecy Act, as amended by the USA PATRIOT Act and the Anti-Money Laundering Act of 2020. The USA PATRIOT Act gives the federal government the power to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements.
The USA PATRIOT Act gives the federal government the power to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. Title III of the USA PATRIOT Act includes measures intended to encourage information sharing among banks, regulatory agencies and law enforcement bodies.
The Dodd-Frank Act gives the Bureau authority to supervise and examine depository institutions with more than $10 billion in assets for compliance with these federal consumer laws. The authority to supervise and examine depository institutions with $10 billion or less in assets (such as Southside Bank) for compliance with federal consumer laws remains largely with those institutions’ primary regulators.
The CFPB also has rulemaking authority for a range of consumer financial protection laws (such as TILA, the Electronic Fund Transfer Act and RESPA, among others). The authority to supervise and examine depository institutions with $10 billion or less in assets (such as Southside Bank) for compliance with federal consumer laws remains largely with those institutions’ primary regulators.
Title III of the USA PATRIOT Act includes measures intended to encourage information sharing among banks, regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including state-chartered banks like Southside Bank.
Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including state-chartered banks like Southside Bank.
In addition, FinCEN issued a final rule, which became effective on May 11, 2018, that requires covered financial institutions subject to certain exclusions and exemptions to identify and verify the identity of beneficial owners of legal entity customers.
In addition, under applicable FinCEN regulations, covered financial institutions, subject to certain exclusions and exemptions, are required to identify and verify the identity of beneficial owners of legal entity customers.
On December 22, 2022, the agencies extended this relief to January 1, 2024. Deposit Insurance and Assessments . The deposits of Southside Bank are insured by the DIF of the FDIC, up to the applicable limits established by law and are subject to the deposit insurance premium assessments of the DIF.
The deposits of Southside Bank are insured by the FDIC, up to the applicable limits established by law and are subject to the deposit insurance premium assessments of the DIF. By statute, the DRR must be at least 1.35 percent of estimated insured deposits.
In addition, federal and state banking agencies have prescribed standards for maintaining the security and confidentiality of consumer information. Southside Bank is subject to such standards, as well as standards for notifying consumers in the event of a security breach.
In addition, federal and state banking agencies have prescribed standards for maintaining the security and confidentiality of consumer information, to which Southside Bank is subject. Pursuant to these standards, Southside Bank is required to have an information security program to safeguard the confidentiality and security of customer information and to ensure proper disposal.
The Bank is subject to extensive regulation, examination and supervision by the TDB, as its chartering authority, and by the FDIC, as its primary federal regulator and deposit insurer. In addition, the Bureau could participate in examinations of the Bank (as described above) regarding the Bank’s offering of consumer financial products and services.
Southside Bank is not a member of the Federal Reserve. The Bank is subject to extensive regulation, examination and supervision by the TDB, as its chartering authority, and by the FDIC, as its primary federal regulator and deposit insurer.

… 68 more changes not shown on this page.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

77 edited+18 added−26 removed106 unchanged
Biggest changeEnvironmental remediation may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability.
Biggest changeIf hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental remediation may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property.
Our success depends primarily on the general economic conditions of the State of Texas and the specific local markets within Texas in which we operate.
Our success depends primarily on the general economic conditions in the State of Texas and the specific local markets within Texas in which we operate.
RISKS ASSOCIATED WITH THE BANKING INDUSTRY We are subject or may become subject to extensive government regulation and supervision. Southside Bancshares, Inc., primarily through Southside Bank, and certain of its nonbank subsidiaries, is subject to extensive federal and state regulation and supervision.
RISKS ASSOCIATED WITH THE BANKING INDUSTRY We are subject or may become subject to extensive government regulation and supervision. Southside Bancshares, Inc., primarily through the Bank, and certain of its nonbank subsidiaries, is subject to extensive federal and state regulation and supervision.
Changes in monetary policy, interest rates, the yield curve, or market risk spreads, or a prolonged, flat or inverted yield curve could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect: • our ability to originate loans and obtain deposits; • our ability to retain deposits in a rising rate environment; • net interest rate spreads and net interest rate margins; • our ability to enter into instruments to hedge against interest rate risk; • the fair value of our financial assets and liabilities; and • the average duration of our loan and MBS portfolio.
Changes in monetary policy, interest rates, the yield curve, or market risk spreads, or a prolonged, flat or inverted yield curve could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect: • our ability to originate loans and obtain deposits; • our ability to retain deposits in a rising rate environment; • net interest rate spreads and net interest rate margins; • our ability to enter into instruments to hedge against interest rate risk; • the fair value of our financial assets and liabilities; and • the average duration of our loan and securities portfolio.
The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny and disclosure obligations or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny and disclosure obligations or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our business strategy, financial condition and results of operations.
Funding to provide liquidity may not be available to us on favorable terms or at all. Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost. The liquidity of Southside Bank is necessary to make loans and leases and to repay deposit liabilities as they become due or are demanded by customers.
Funding to provide liquidity may not be available to us on favorable terms or at all. Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost. The liquidity of the Bank is necessary to make loans and leases and to repay deposit liabilities as they become due or are demanded by customers.
While we have policies and procedures designed to prevent or limit the effect of a failure, interruption or security breach of our information systems, there can be no assurance that we can prevent any such failures, interruptions, cybersecurity breaches or other security breaches or, if they do occur, that they will be adequately addressed.
While we have policies and procedures designed to prevent or limit the effect of a failure, interruption or security breach of our information systems, there can be no assurance that we will adhere to such policies or procedures or that they can prevent any such failures, interruptions, cybersecurity breaches or other security breaches or, if they do occur, that they will be adequately addressed.
The occurrence of any such breaches or failures could damage our reputation, result in a loss of customer business and expose us to additional regulatory scrutiny, disclosure obligations, civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
The occurrence of any such breaches or failures could damage our reputation, result in a loss of customer business and expose us to additional regulatory scrutiny, disclosure obligations, civil litigation and possible financial liability, any of which could have a material adverse effect on our business strategy, financial condition and results of operations.
Southside Bank is also a member of the FHLB System, which provides funding through advance agreements to members that are collateralized with U.S. Treasury securities, MBS, commercial MBS and loans. We maintain a portfolio of securities that can be used as a secondary source of liquidity.
The Bank is also a member of the FHLB System, which provides funding through advance agreements to members that are collateralized with U.S. Treasury securities, MBS, commercial MBS and loans. We maintain a portfolio of securities that can be used as a secondary source of liquidity.
We employ an in-depth, layered, defense approach that leverages people, processes and technology to manage and maintain cybersecurity controls. Notwithstanding the strength of our defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated, and attackers respond rapidly to changes in defensive measures.
We employ an in-depth, layered, defense approach that leverages people, processes and technology to manage and maintain cybersecurity controls. Notwithstanding the strength of our defensive measures, the threat from cyber-attacks is severe as attacks are sophisticated, and attackers respond rapidly to changes in defensive measures.
Business and consumer customers of Southside Bank may be currently experiencing varying degrees of financial distress, which may continue over the coming months and may adversely affect their ability to timely pay interest and principal on their loans and the value of the collateral securing their obligations.
Business and consumer customers of the Bank may be currently experiencing varying degrees of financial distress, which may continue over the coming months and may adversely affect their ability to timely pay interest and principal on their loans and the value of the collateral securing their obligations.
These dividends are the principal source of funds to pay dividends on our common stock to our shareholders and interest and principal on our debt. Various federal and/or state laws and regulations limit the amount of dividends that Southside Bank and certain of our nonbank subsidiaries may pay to us.
These dividends are the principal source of funds to pay dividends on our common stock to our shareholders and interest and principal on our debt. Various federal and/or state laws and regulations limit the amount of dividends that the Bank and certain of our nonbank subsidiaries may pay to us.
Our stock price can fluctuate significantly in response to a variety of factors including, among other things: • actual or anticipated variations in our results of operations, financial conditions or asset quality; • changes in recommendations by securities analysts; • operating and stock price performance of other companies that investors deem comparable to us; • news reports relating to trends, concerns and other issues in the financial services industry, including regulatory actions against other financial institutions; • perceptions in the marketplace regarding us and/or our competitors; • perceptions in the marketplace regarding the impact of changes in price per barrel of crude oil, real estate values and interest rates on the Texas economy; • new technology used or services offered by competitors; • significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors; • failure to integrate acquisitions or realize anticipated benefits from acquisitions; • future issuances of our common stock or other securities; • additions or departures of key personnel; • changes in government regulations; and • geopolitical conditions such as acts or threats of terrorism or military conflicts, health emergencies, epidemics or pandemics.
Our stock price can fluctuate significantly in response to a variety of factors including, among other things: • actual or anticipated variations in our results of operations, financial condition or asset quality; • changes in recommendations by securities analysts; • operating and stock price performance of other companies that investors deem comparable to us; • news reports relating to trends, concerns and other issues in the financial services industry, including regulatory actions against other financial institutions; • perceptions in the marketplace regarding us and/or our competitors; • perceptions in the marketplace regarding the impact of changes in price per barrel of crude oil, real estate values and interest rates on the Texas economy; 27 Table of Contents • new technology used or services offered by competitors; • significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors; • failure to integrate acquisitions or realize anticipated benefits from acquisitions; • future issuances of our common stock or other securities; • additions or departures of key personnel; • changes in government regulations; and • geopolitical conditions such as acts or threats of terrorism or military conflicts, health emergencies, epidemics or pandemics.
We rely on dividends from our bank subsidiary for most of our revenue. Southside Bancshares, Inc. is a separate and distinct legal entity from its subsidiaries. We receive substantially all of our revenue from dividends from our subsidiary, Southside Bank.
We rely on dividends from our bank subsidiary for most of our revenue. Southside Bancshares, Inc. is a separate and distinct legal entity from its subsidiaries. We receive substantially all of our revenue from dividends from the Bank.
Government and non-U.S. agency investment securities, corporate and municipal securities; • an adverse or unfavorable resolution of the Fannie Mae or Freddie Mac receivership; and • decreases in the real estate values subject to ad-valorem taxes by municipalities that impact such municipalities’ ability to repay their debt, which could adversely affect our municipal loans or debt securities.
Government and non-U.S. agency investment securities, corporate and municipal securities; • an adverse or unfavorable resolution of the Fannie Mae or Freddie Mac conservatorship; and • decreases in the real estate values subject to ad-valorem taxes by municipalities that impact such municipalities’ ability to repay their debt, which could adversely affect our municipal loans or debt securities.
The Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of the financial services industry, addressing, among other things, systemic risk, capital adequacy, deposit insurance assessments, consumer financial protection (as implemented through the Bureau) interchange fees, derivatives, lending limits, mortgage lending practices, registration of investment advisors and changes among bank regulatory authorities.
The Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of the financial services industry, addressing, among other things, systemic risk, capital adequacy, deposit insurance assessments, consumer financial protection (as implemented through the CFPB), interchange fees, derivatives, lending limits, mortgage lending practices, registration of investment advisors and changes among bank regulatory authorities.
However, as with any risk management processes, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. The ongoing developments in the financial institutions industry continue to highlight both the importance and some of the limitations of managing unanticipated risks.
However, as with any risk management process, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. The ongoing developments in the financial institutions industry continue to highlight both the importance and some of the limitations of managing unanticipated risks.
We may also rely on representations of those customers, counterparties or other third parties, such as independent auditors or property appraisers, as to the accuracy and completeness of that information. Such information could turn out to be inaccurate, including as a result of fraud on behalf of our customers, counterparties or other third parties.
We may also rely on representations of those customers, counterparties or other third parties, such as independent auditors or property appraisers, as to the accuracy and completeness of that information. Such information could be inaccurate, including as a result of fraud on behalf of our customers, counterparties or other third parties.
This in turn may influence the recognition of credit losses in our loan portfolios and may increase our allowance for credit losses, particularly should businesses remain closed and should more customers draw on their lines of credit or seek additional loans to help finance their businesses.
This in turn may influence the recognition of credit losses in our loan portfolios and may increase our allowance for credit losses, particularly should more customers draw on their lines of credit or seek additional loans to help finance their businesses.
Southside Bank’s ability to pay dividends to us is subject to, among other things, its earnings, financial condition and need for funds, as well as federal and state governmental policies and regulations applicable to us and Southside Bank, including the statutory requirement that we serve as a source of financial strength for Southside Bank, which limit the amount that may be paid as dividends without prior regulatory approval.
The Bank’s ability to pay dividends to us is subject to, among other things, its earnings, financial condition and need for funds, as well as federal and state governmental policies and regulations applicable to us and the Bank, including the statutory requirement that we serve as a source of financial strength for the Bank, which limits the amount that may be paid as dividends without prior regulatory approval.
Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business, financial condition and results of operations. We are subject to the risk that our U.S. agency MBS could prepay faster than we have projected. We have and may continue to purchase MBS at premiums.
Failure to successfully keep pace with technological changes affecting the financial services industry could have a material adverse impact on our business, financial condition and results of operations. We are subject to the risk that our U.S. agency MBS could prepay faster than we have projected. We have purchased and may continue to purchase MBS at premiums.
On August 8 and 10, 2007, we issued $23.2 million and $12.9 million, respectively, of fixed-to-floating rate junior subordinated debentures in connection with $22.5 million and $12.5 29 Table of Contents million, respectively, trust preferred securities issuances by our subsidiaries Southside Statutory Trust IV and V, respectively. Trust IV matures October 2037 and Trust V matures September 2037.
On August 8 and 10, 2007, we issued $23.2 million and $12.9 million, respectively, of fixed-to-floating rate junior subordinated debentures in connection with $22.5 million and $12.5 million, respectively, trust preferred securities issuances by our subsidiaries Southside Statutory Trust IV and V, respectively. Trust IV matures October 2037 and Trust V matures September 2037.
The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on our financial condition and results of operations. 28 Table of Contents The soundness of other financial institutions could adversely affect us. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships.
The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on our financial condition and results of operations. The soundness of other financial institutions could adversely affect us. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships.
Increased risk of unauthorized dissemination of confidential information, greater risk of privacy breach due to screen/voice/video conversation outside private office space, limited ability to restore the systems in the event of a system failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of our ability to perform critical functions, including wiring funds, all of which could expose us to risks of data or financial loss, litigation and liability and could seriously disrupt our operations and the operations of any impacted customers. 20 Table of Contents While to date we have not experienced a significant compromise, significant data loss or material financial losses related to cyber-attacks, our systems and those of our customers and third-party service providers are under constant threat, and it is possible that we could experience a significant event in the future.
Increased risk of unauthorized dissemination of confidential information, greater risk of privacy breach due to screen/voice/video conversation outside private office space, limited ability to restore the systems in the event of a system failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of our ability to perform critical functions, including wiring funds, all of which could expose us to risks of data or financial loss, litigation and liability and could seriously disrupt our operations and the operations of any impacted customers. 19 Table of Contents Our systems and those of our customers and third-party service providers are under constant threat, and it is possible that we could experience a significant compromise, significant data loss or material financial losses related to cyber-attacks in the future.
External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or 24 Table of Contents new product or service could have a significant impact on the effectiveness of our system of internal controls.
External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls.
A prolonged period of low oil prices could also have a negative impact on the U.S. economy and, in particular, the economies of energy-dominant states such as Texas, which in turn could have a material adverse effect on our business, financial condition and results of operations.
A prolonged period of low oil prices could also have a negative impact on the 25 Table of Contents U.S. economy and, in particular, the economies of energy-dominant states such as Texas, which in turn could have a material adverse effect on our business, financial condition and results of operations.
If one or more of these analysts cease to cover us or fail to publish regular reports on us, we could lose visibility in the financial markets, which could cause the price or trading volume of our common stock to decline.
If one or more of these analysts cease to cover us or fail to publish regular reports 28 Table of Contents on us, we could lose visibility in the financial markets, which could cause the price or trading volume of our common stock to decline.
If the models we use to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon sale or settlement of such financial 23 Table of Contents instruments.
If the models we use to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon sale or settlement of such financial instruments.
The state of the economy and various economic, social and political factors, including inflation, recession, pandemics, unemployment, social unrest/civil disorder, interest rates, declining oil prices and the level of U.S. debt, as well as governmental action and uncertainty resulting from U.S. and global political trends, including weakness in foreign sovereign debt and currencies, the United Kingdom’s exit from the European Union, hostile actions of foreign governments (including the Russian-Ukranian War), may directly and indirectly have a destabilizing effect on our financial condition and results of operations.
The state of the economy and various economic, social and political factors, including inflation, recession, pandemics, unemployment, social unrest/civil disorder, interest rates, declining oil prices and the level of U.S. debt, as well as governmental action and uncertainty resulting from U.S. and global political trends, including weakness in foreign sovereign debt and currencies, hostile actions of foreign governments (including the Russian-Ukranian War and the Israel/Hamas conflict), may directly and indirectly have a destabilizing effect on our financial condition and results of operations.
Our success depends, in large part, on our ability to attract and retain key personnel. Competition for the best personnel in most activities we engage in can be intense, and we may not be able to hire personnel or to retain them.
Our success depends, in large part, on our ability to attract and retain key personnel. Competition for the best personnel in most of our activities can be intense, and we may not be able to hire or retain acceptable personnel.
In addition, Southside Bancshares, Inc.’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. In the event Southside Bank is unable to pay dividends to Southside Bancshares, Inc., we may not be able to service debt, pay obligations or pay dividends to our shareholders.
In addition, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. In the event the Bank is unable to pay dividends to us, we may not be able to service debt, pay obligations or pay dividends to our shareholders.
The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present and forecasted economic, political and regulatory conditions, including the ongoing impact of COVID-19, inflation and recessionary concerns; the Federal Reserve’s aggressive raising of the federal funds rate throughout 2022; and unidentified losses expected in the current loan portfolio.
The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present and forecasted economic, political and regulatory conditions, including inflation and recessionary concerns; the Federal Reserve’s aggressive raising of the federal funds rate throughout 2022 and most of 2023; and unidentified losses expected in the current loan portfolio.
These increasing interest rates could negatively impact our cost of borrowing and reduce the amount of money our customers borrow or adversely affect their ability to repay outstanding loan balances that may increase due to adjustments in their variable rates.
These increased interest rates and uncertainty regarding future rates could negatively impact our cost of borrowing and reduce the amount of money our customers borrow or adversely affect their ability to repay outstanding loan balances that may increase due to adjustments in their variable rates.
In addition, one or more of our third-party service providers may become 21 Table of Contents subject to cyber-attacks or information security breaches, including as a result of increased remote working, that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our customers’ confidential, proprietary and other information, or otherwise disrupt our or our customers’ or other third parties’ business operations.
In addition, one or more of our third-party service providers may become subject to cyber-attacks or information security breaches, including as a result of increased remote working, that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our customers’ confidential, proprietary and other information, or otherwise disrupt our or our customers’ or other third parties’ business strategies, financial condition or results of operations.
Additionally, if Southside Bank’s earnings are not sufficient to pay dividends to us while maintaining adequate capital levels, we may not be able to pay dividends to our shareholders. See “Supervision and Regulation — Holding Company Regulation — Dividends” included in this report. 22 Table of Contents We may not be able to attract and retain skilled personnel.
Additionally, if the Bank’s earnings are not sufficient to pay dividends to us while maintaining adequate capital levels, we may not be able to pay dividends to our shareholders. See “Supervision and Regulation — Holding Company Regulation — Dividends” included in this report. We may not be able to attract and retain skilled personnel.
Management and our asset liability committee also establish policies and monitor guidelines to diversify Southside Bank’s funding sources to avoid concentrations in excess of board-approved policies from any one market source. Funding sources include federal funds purchased, repurchase agreements, noncore deposits and short- and long-term debt.
Management and our ALCO also establish policies and monitor guidelines to diversify the Bank’s funding sources to avoid concentrations in excess of board-approved policies from any one market source. Funding sources include federal funds purchased, repurchase agreements, noncore deposits and short- and long-term debt.
Further, ineffective internal controls could cause our investors to lose confidence in our financial information, which could affect the trading price of our common stock. The value of our goodwill and other intangible assets may decline in the future. As of December 31, 2022, we had $205.7 million of goodwill and other intangible assets.
Further, ineffective internal controls could cause our investors to lose confidence in our financial information, which could affect the trading price of our common stock. The value of our goodwill and other intangible assets may decline in the future. As of December 31, 2023, we had $204.0 million of goodwill and other intangible assets.
We rely heavily on communications and information systems to conduct our business. Our communications and information systems remain vulnerable to unexpected disruptions and failures. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems.
We rely heavily on communications and information systems to conduct our business. Our communications and information systems remain vulnerable to unexpected disruptions and failures. Any failure, interruption or breach in security of these systems could result in a material adverse effect on our customer relationships, general ledger, deposit, loan and other systems.
Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report for further discussion related to our balance sheet strategy. Our process for managing risk may not be effective in mitigating risk or losses to us. The objectives of our risk management processes are to mitigate risk and loss to our organization.
Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report for further discussion related to our balance sheet strategy. 23 Table of Contents Our process for managing risk may not be effective in mitigating risk or losses to us. The objective of our risk management process is to mitigate risk and loss to our organization.
The statutory and regulatory framework under which we operate has changed substantially as the result of the enactment of the Dodd-Frank Act and the Regulatory Relief Act, and the adoption of the Basel III Capital Rules and the European Union’s General Data Protection Regulations.
The statutory and regulatory framework under which we operate has changed substantially as the result of the enactment of the Dodd-Frank Act and the Regulatory Relief Act, and the adoption of the Basel III Capital Rules, the European Union’s General Data Protection Regulations and data protection laws enacted by several U.S states.
If we were to conclude that a future write-down of goodwill and other intangible assets is necessary, we would record the appropriate charge, which could have a material adverse effect on our business, financial condition and results of operations.
If we were to conclude that a future write-down of goodwill and other intangible assets is necessary, we would record the appropriate charge, which could have a material adverse effect on our business, financial condition and results of operations. We are subject to environmental liability as a result of certain lending activities.
The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations. We may be adversely affected by declining crude oil prices. Since 2015, the market price of a barrel of crude oil has been extremely volatile.
The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations. We may be adversely affected by declining crude oil prices.
Other sources of liquidity include sales or securitizations of loans, our ability to acquire additional national market, noncore deposits, additional collateralized borrowings such as FHLB advance agreements, the issuance and sale of debt securities and the issuance and sale of preferred or common securities in public or private transactions. Southside Bank also can borrow from the FRDW.
Other sources of liquidity include sales or securitizations of loans, our ability to acquire additional national market, noncore deposits, additional collateralized borrowings such as FHLB advance agreements, the issuance and sale of debt securities and the issuance and sale 24 Table of Contents of preferred or common securities in public or private transactions.
We rely on other companies to provide key components of our business infrastructure. Third parties provide key components of our business infrastructure, such as banking services, core processing and internet connections and network access.
Third parties provide key components of our business infrastructure, such as banking services, core processing and internet connections and network access.
The inability to receive dividends from Southside Bank could have a material adverse effect on Southside Bancshares, Inc.’s business, financial condition and results of operations. See the section captioned “Supervision and Regulation” in “Item 1. Business” and “Note 13 – Shareholders’ Equity” to our consolidated financial statements included in this report. You may not receive dividends on our common stock.
The inability to receive dividends from the Bank could have a material adverse effect on our 21 Table of Contents business, financial condition and results of operations. See the section captioned “Supervision and Regulation” in “Item 1. Business” and “Note 13 – Shareholders’ Equity” to our consolidated financial statements included in this report.
Financial services companies depend on the accuracy and completeness of information about customers and counterparties and inaccuracies in such information, including as a result of fraud, could adversely impact our business, financial condition and results of operations.
Business - Supervision and Regulation - Regulatory Examination” in this report. 26 Table of Contents Financial services companies depend on the accuracy and completeness of information about customers and counterparties and inaccuracies in such information, including as a result of fraud, could adversely impact our business, financial condition and results of operations.
Cybersecurity risks may also occur with our third-party service providers, and may interfere with their ability to fulfill their contractual obligations to us, with potential for financial loss or liability that could adversely affect our financial condition or results of operations.
Cybersecurity risks may also occur with our third-party service providers and may interfere with their ability to fulfill their contractual obligations to us, with potential for financial loss or liability that could have a material adverse effect on our business strategy, financial condition or results of operations.
Liquidity policies and limits are established by our board of directors. Management and our asset liability committee regularly monitor the overall liquidity position of Southside Bank and the Company to ensure that various alternative strategies exist to cover unanticipated events that could affect liquidity.
Our board of directors establishes liquidity policies and limits. Management and our ALCO regularly monitor the overall liquidity position of the Bank and the Company to ensure that various alternative strategies exist to cover unanticipated events that could affect liquidity.
Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers, and even if we implement such products and services, we may incur substantial costs in doing so.
We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers, and even if we implement such products and services, we may incur substantial costs in doing so.
Our ability to compete successfully depends on a number of factors, including: • the ability to develop, maintain and build upon long-term customer relationships based on top quality service, high ethical standards and safe, sound assets; • the ability to expand our market position; • the scope, relevance and pricing of products and services offered to meet customer needs and demands; • the rate at which we introduce new products and services relative to our competitors; • our ability to invest in or partner with technology providers offering banking solutions and delivery channels at a level equal to our competitors; • customer satisfaction with our level of service; and • industry and general economic trends.
Our ability to compete successfully depends on a number of factors, including: • the ability to develop, maintain and build upon long-term customer relationships based on top quality service, high ethical standards and safe, sound assets; • the ability to expand our market position; • the scope, relevance and pricing of products and services offered to meet customer needs and demands; • the rate at which we introduce new products and services relative to our competitors; • our ability to invest in or partner with technology providers offering banking solutions and delivery channels at a level equal to our competitors; • customer satisfaction with our level of service; and • industry and general economic trends. 22 Table of Contents Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations.
While we have processes in place to monitor our third-party service providers’ data and information security safeguards, we do not control such service providers’ day-to-day operations, and preventing a successful attack or security breach at one or more of such third-party service providers is not within our control.
We also do not control such service providers’ day-to-day operations, and preventing a successful attack or security breach at one or more of such third-party service providers is not within our control.
To the extent that our activities or the activities of our customers or third-party service providers involve the storage and transmission of confidential information, security breaches and malicious software could expose us to claims, regulatory scrutiny, litigation and other possible liabilities.
To the extent that our activities or the activities of our customers or third-party service providers involve the storage and transmission of confidential information, security breaches and malicious software could expose us to claims, regulatory scrutiny, litigation and other possible liabilities. In addition, we permit a portion of our employees to work remotely from their homes.
A significant portion of our loan portfolio is dependent on real estate. In addition to the importance of the financial strength and cash flow characteristics of the borrower, loans are also often secured with real estate collateral. As of December 31, 2022, approximately 77.4% of our loans have real estate as a primary or secondary component of collateral.
In addition to the importance of the financial strength and cash flow characteristics of the borrower, loans are also often secured with real estate collateral. As of December 31, 2023, approximately 80.8% of our loans have real estate as a primary or secondary component of collateral.
Although we have historically declared quarterly cash dividends on our common stock, we are not required to do so and may reduce or cease to pay common stock dividends in the future. If we reduce or cease to pay common stock dividends, the market price of our common stock could be adversely affected.
You may not receive dividends on our common stock. Although we have historically declared quarterly cash dividends on our common stock, we are not required to do so and may reduce or cease to pay common stock dividends to our shareholders in the future.
Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company.
Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you may lose some or all of your investment. ITEM 1B.
If borrowers fail to repay their loans, our financial condition and results of operations would be adversely affected. We have a high concentration of loans secured by real estate and a decline in the real estate market, for any reason, could result in losses and materially and adversely affect our business, financial condition, results of operations and future prospects.
We have a high concentration of loans secured by real estate and a decline in the real estate market, for any reason, could result in losses and materially and adversely affect our business, financial condition, results of operations and future prospects. A significant portion of our loan portfolio is dependent on real estate.
Although we have policies and procedures that require us to perform an environmental review before initiating any foreclosure action on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards.
In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures that require us to perform an environmental review before initiating any foreclosure action on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards.
Further, in the event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent us from making our business decisions or may result in a delay in our taking certain remediation 19 Table of Contents actions, such as foreclosure.
Further, in the event of delinquencies, regulatory changes and policies designed to protect 18 Table of Contents borrowers may slow or prevent us from making business decisions or delay us from taking certain remediation actions, such as foreclosure. If borrowers fail to repay their loans, our financial condition and results of operations would be adversely affected.
Failures in our business structure or in the structure of one or more of our third-party service providers could interrupt the operations or increase the cost of doing business. We continually encounter technological change. The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services.
Failures in our business structure or in the structure of one or more of our third-party service providers could interrupt our operations or increase the cost of doing business. We continually encounter technological change.
Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money 27 Table of Contents penalties and/or reputational damage, which could have a material adverse effect on our business, financial condition and results of operations.
Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputational damage, which could have a material adverse effect on our business, financial condition and results of operations. While our policies and procedures are designed to prevent any such violations, there can be no assurance that such violations will not occur.
Any such losses or liabilities could adversely affect our financial condition or results of operations and could expose us to reputation risk, the loss of customer business, increased operational costs, as well as additional regulatory scrutiny, possible litigation and related financial liability. These risks also include possible business interruption, including the inability to access critical information and systems.
Any such losses or liabilities could have a material adverse effect on our business strategy, financial condition or results of operations and could expose us to reputation risk, the loss of customer business, increased operational costs, as well as additional regulatory scrutiny, possible litigation and related financial liability.
During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. There is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. There is a risk that hazardous or toxic substances could be found on these properties.
The effective use of technology increases efficiency and enables financial institutions to better serve customers and reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations.
Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements.
If we were unable to access any of these funding sources when needed, we might be unable to meet customers’ needs, which could adversely impact our financial condition, results of operations, cash flows and liquidity and level of regulatory-qualifying capital. 25 Table of Contents If we fail to maintain an effective system of disclosure controls and procedures, including internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud, which could have a material adverse effect on our business, results of operation and financial condition.
If we fail to maintain an effective system of disclosure controls and procedures, including internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud, which could have a material adverse effect on our business, results of operations and financial condition.
As noted above, our ability to pay dividends depends primarily upon the receipt of dividends or other capital distributions from Southside Bank.
If we reduce or cease to pay common stock dividends, the market price of our common stock could be adversely affected. As noted above, our ability to pay dividends depends primarily upon the receipt of dividends or other capital distributions from the Bank.
The federal banking agencies have also issued comprehensive guidance on incentive compensation limitations, and jointly proposed additional restrictions in the future, which may impact our retention of qualified personnel.
The increase of “remote work” opportunities in the financial services industry means that community banks must compete more directly against larger financial institutions for qualified workers. The federal banking agencies have also issued comprehensive guidance on incentive compensation limitations, and jointly proposed additional restrictions in the future, which may impact our retention of qualified personnel.
General political or economic conditions in the United States could adversely affect our financial condition and results of operations.
These risks also include possible business interruption, including the inability to access critical information and systems. General political or economic conditions in the United States could adversely affect our financial condition and results of operations.
This, along with reliance on employees’ residential internet, could cause network, system, application, and communication limitations or instability, affecting customer experience for some departments. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk. These cyber risks include greater phishing, malware, and other social engineering attacks targeted at employees working from home.
However, consumer technology in employees’ homes may not provide similar performance or security as commercial-grade technology in our offices. This, along with reliance on employees’ residential internet, could cause network, system, application, and communication limitations or instability, affecting customer experience for some departments. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk.
The Company believes it will continue to meet the capital guidelines, however complying with any higher 2015 Capital Rules mandated by the Dodd-Frank Act or Basel III, and/or the 2018 Capital Rules mandated by the federal banking agencies, may affect our operations, including our asset portfolios and financial performance.
The Company believes it will continue to meet the capital guidelines, however complying with new capital rules mandated by the federal banking agencies may affect our operations, including our asset portfolios and financial performance. Changes in accounting and tax rules applicable to banks could adversely affect our financial condition and results of operations.
Changes in accounting and tax rules applicable to banks could adversely affect our financial condition and results of operations. From time to time, the FASB and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements.
From time to time, the FASB and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations.
While our policies and procedures are designed to prevent any such violations, there can be no assurance that such violations will not occur. See the section captioned “Supervision and Regulation” in “Item 1. Business” and “Note 13 – Shareholders’ Equity” to our consolidated financial statements included in this report. We may become subject to increased regulatory capital requirements .
See the section captioned “Supervision and Regulation” in “Item 1. Business” and “Note 13 – Shareholders’ Equity” to our consolidated financial statements included in this report. We may become subject to increased regulatory capital requirements . The capital requirements applicable to Southside Bancshares, Inc. and the Bank are subject to change as a result of future government actions.
Decreased market oil prices compressed margins for many U.S. and Texas-based oil producers, as well as oilfield service providers, energy equipment manufacturers and transportation suppliers, among others. However, during 2021, the market rebounded significantly, and as of December 31, 2022, the price per barrel of crude oil was approximately $85.
Decreased market oil prices compressed margins for many U.S. and Texas-based oil producers, as well as oilfield service providers, energy equipment manufacturers and transportation suppliers, among others. As of December 31, 2023, energy loans comprised approximately 2.09% of our loan portfolio. Energy production and related industries represent a significant part of the economies in our primary markets.
For a discussion of the reporting and accounting implications to the Company and Southside Bank resulting from recent changes to the tax laws, refer to “Item 1. Business - Supervision and Regulation - Regulatory Examination” in this report.
In some cases, we could be required to apply a new or revised standard retroactively, resulting in us restating prior period financial statements. For a discussion of the reporting and accounting implications to the Company and Southside Bank resulting from recent changes to the tax laws, refer to “Item 1.
For additional discussion relating to capital adequacy refer to “Item 1. Business - Supervision and Regulation - Capital Adequacy” in this report.
Each of the federal banking agencies, including the Federal Reserve and the FDIC, has issued substantially similar risk-based and leverage capital guidelines applicable to the banking organizations they supervise. For additional discussion relating to capital adequacy refer to “Item 1. Business - Supervision and Regulation - Capital Adequacy” in this report.
As of December 31, 2022, energy loans comprised approximately 2.68% of our loan portfolio. Energy production and related industries represent a significant part of the economies in our primary markets. If oil prices decline for an extended period, we could experience weaker loan demand from the energy industry and increased losses within our energy portfolio.
Although crude oil prices are not presently depressed, if oil prices were to decline significantly for an extended period, we could experience weaker loan demand from the energy industry and increased losses within our energy portfolio.
In 2022, the Federal Reserve raised interest rates seven times, to a federal funds rate of 4.25-4.5% as of December 31, 2022 and further raised the interest rate to 4.75% effective February 2, 2023, with further increases signaled for 2023.
Since the beginning of 2022, the Federal Reserve has raised interest rates 11 times, to a federal funds rate of 5.25% – 5.50% as of July 31, 2023. In December 2023, the Federal Reserve held the federal funds rate steady for the third consecutive meeting and indicated it may likely decrease the rate in 2024 and beyond.
Any of the foregoing could adversely affect our financial condition and results of operation. The economic impact of COVID-19 has adversely affected our business, financial condition, results of operations and our liquidity and such economic impact will likely continue for the foreseeable future.
Any of the foregoing could adversely affect our financial condition and results of operations. Negative developments in the banking industry could adversely affect our current and projected business operations and our financial condition and results of operations.
Removed
In addition, in response to COVID-19 and ongoing employee preferences, we have modified our business practices to permit a portion of our employees to work remotely from their homes. However, consumer technology in employees’ homes may not provide similar performance or security as commercial-grade technology in our offices.
Added
These cyber risks include greater phishing, malware, and other social engineering attacks targeted at employees working from home.
Removed
COVID-19 significantly disrupted supply chains and the labor markets, impacted interest rates and adversely affected business activity and the overall economic and financial markets. As of December 31, 2022, economic conditions in Texas have returned to pre-pandemic levels.

… 41 more changes not shown on this page.

Item 2. Properties

Properties — owned and leased real estate

2 edited+1 added−0 removed2 unchanged
Biggest changeIn addition to our branches, Southside also operates drive-thrus, wealth management and trust services or other financial services offices which Southside owns. Southside also owns 74 ATMs/ITMs located throughout our market areas. For additional information concerning our properties, refer to “Note 6 – Premises and Equipment” and “Note 16 – Leases” to our consolidated financial statements included in this report.
Biggest changeIn addition to our branches, Southside also operates drive-thrus, wealth management and trust services or other financial services offices which Southside owns. Southside also owns 73 ATMs/ITMs located throughout our market areas.
As of December 31, 2022, Southside operated 55 branches which includes traditional full service branches and full service branches within grocery stores. These branches are located in the state of Texas in the Dallas/Fort Worth, East Texas, Southeast Texas, Austin and Houston regions. Of the 55 branches, 36 are owned and 19 are leased.
As of December 31, 2023, Southside operated 55 branches which includes traditional full service branches and full service branches within grocery stores. These branches are located in the state of Texas in the Dallas/Fort Worth, East Texas, Southeast Texas, Austin and Houston regions. Of the 55 branches, 36 are owned and 19 are leased.
Added
For additional information concerning our properties, refer to “Note 6 – Premises and Equipment” and “Note 16 – Leases” to our consolidated financial statements included in this report. 30

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

8 edited+0 added−0 removed4 unchanged
Biggest changeThe following table provides information with respect to purchases made by or on behalf of any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act), of our common stock during the three months ended December 31, 2022: Period Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plan Maximum Number of Shares That May Yet Be Purchased Under the Stock Repurchase Plan at the End of the Period October 1, 2022 - October 31, 2022 63,341 $ 34.02 63,341 621,860 November 1, 2022 - November 30, 2022 261,196 35.39 261,196 360,664 December 1, 2022 - December 31, 2022 284,439 34.92 284,439 1,076,225 Total 608,976 $ 35.03 608,976 Subsequent to December 31, 2022, and through February 22, 2023, we purchased 173,670 shares of common stock at an average price of $35.73 pursuant to the Stock Repurchase Plan.
Biggest changeThe following table provides information with respect to purchases made by or on behalf of any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act), of our common stock during the three months ended December 31, 2023: Period Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plan Maximum Number of Shares That May Yet Be Purchased Under the Stock Repurchase Plan at the End of the Period October 1, 2023 - October 31, 2023 146,580 $ 28.54 146,580 641,032 November 1, 2023 - November 30, 2023 — — — 641,032 December 1, 2023 - December 31, 2023 — — — 641,032 Total 146,580 $ 28.54 146,580 We have not purchased any common stock pursuant to the Stock Repurchase Plan subsequent to December 31, 2023.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES MARKET INFORMATION Our common stock trades on the NASDAQ Global Select Market under the symbol “SBSI.” SHAREHOLDERS There were approximat e ly 1,400 holders of record of our common stock, the only class of equity securities currently issued and outstanding, as of February 22, 2023.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES MARKET INFORMATION Our common stock trades on the NASDAQ Global Select Market under the symbol “SBSI.” SHAREHOLDERS There were approximat e ly 1,400 holders of record of our common stock, the only class of equity securities currently issued and outstanding, as of February 23, 2024.
RECENT SALES OF UNREGISTERED SECURITIES There were no equity securities sold by us during the years ended December 31, 2022, 2021 or 2020 that were not registered under the Securities Act of 1933. 32 Table of Contents FINANCIAL PERFORMANCE The following performance graph compares the returns for the indexes indicated assuming that $100 was invested on December 31, 2017 and that all dividends are reinvested.
RECENT SALES OF UNREGISTERED SECURITIES There were no equity securities sold by us during the years ended December 31, 2023, 2022 or 2021 that were not registered under the Securities Act of 1933. 31 Table of Contents FINANCIAL PERFORMANCE The following performance graph compares the returns for the indexes indicated assuming that $100 was invested on December 31, 2018 and that all dividends are reinvested.
(PB), Texas Capital Bancshares, Inc. (TCBI) and Veritex Holdings, Inc. (VBTX). Source: S&P Global Market Intelligence © 2023 33 Table of Contents ITEM 6. [ RESERVED]
(PB), Texas Capital Bancshares, Inc. (TCBI) and Veritex Holdings, Inc. (VBTX). Source: S&P Global Market Intelligence © 2024 32 Table of Contents ITEM 6. [ RESERVED]
During 2022, we repurchased a total of 923,775 shares at an average price per share of $36.63. 31 Table of Contents Repurchases may be carried out in open market purchases, privately negotiated transactions or pursuant to any trading plan that might be adopted in accordance with Rule 10b5-1 of the Exchange Act, as amended.
During 2023, we repurchased a total of 1,435,193 shares at an average price per share of $31.44. Repurchases may be carried out in open market purchases, privately negotiated transactions or pursuant to any trading plan that might be adopted in accordance with Rule 10b5-1 of the Exchange Act, as amended.
On December 13, 2022, the board of directors increased its authorization under the Company’s Stock Repurchase Plan by an additional 1.0 million shares for a total authorization to repurchase up to 2.0 million shares.
ISSUER SECURITY REPURCHASES On December 13, 2022, our board of directors increased its authorization under the Company’s Stock Repurchase Plan, previously authorized in March 2022, by an additional 1.0 million shares, for a total authorization to repurchase up to 2.0 million shares of Southside common stock.
ISSUER SECURITY REPURCHASES On March 1, 2022, our board of directors approved a Stock Repurchase Plan, authorizing the repurchase, from time to time, of up to 1.0 million shares of the Company’s outstanding common stock.
During the first six months of 2023, all remaining authorized shares under the Stock Repurchase Plan were repurchased. On July 20, 2023, our board of directors approved a Stock Repurchase Plan authorizing the repurchase of up to 1.0 million shares of the Company’s outstanding common stock.
Period Ending Index 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21 12/31/22 Southside Bancshares, Inc. 100.00 97.60 118.41 103.32 144.19 128.55 Russell 2000 100.00 88.99 111.70 134.00 153.85 122.41 SBSI Peer Group Index* 100.00 86.30 103.73 105.51 134.39 123.45 *Peer group index includes Cullen/Frost Bankers, Inc.(CFR), First Financial Bankshares, Inc.(FFIN), Hilltop Holdings (HTH), Independent Bank Group, Inc. (IBTX), Prosperity Bancshares, Inc.
Period Ending Index 12/31/18 12/31/19 12/31/20 12/31/21 12/31/22 12/31/23 Southside Bancshares, Inc. 100.00 121.32 105.86 147.74 131.71 120.00 Russell 2000 Index 100.00 125.53 150.58 172.90 137.56 160.85 SBSI Peer Group* 100.00 120.20 122.26 155.72 143.05 133.25 *Peer group includes Cullen/Frost Bankers, Inc.(CFR), First Financial Bankshares, Inc.(FFIN), Hilltop Holdings (HTH), Independent Bank Group, Inc. (IBTX), Prosperity Bancshares, Inc.

Item 6. [Reserved]

Selected Financial Data — reserved (removed by SEC in 2021)

1 edited+0 added−0 removed0 unchanged
Biggest changeItem 6. [Reserved] 34 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 34 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 65 Item 8. Financial Statements and Supplementary Data 67 Report of Independent Registered Public Accounting Firm 68 Consolidated Financial Statements 70 Notes to Consolidated Financial Statements 76
Biggest changeItem 6. [Reserved] 33 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 33 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 63 Item 8. Financial Statements and Supplementary Data 64 Report of Independent Registered Public Accounting Firm 65 Consolidated Financial Statements 67 Notes to Consolidated Financial Statements 73

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

162 edited+40 added−47 removed79 unchanged
Biggest changeThe information should be reviewed in conjunction with the consolidated financial statements for the same years then ended (dollars in thousands): Average Balances with Average Yields and Rates Year Ended December 31, 2022 December 31, 2021 December 31, 2020 Average Balance Interest Avg Yield/Rate Average Balance Interest Avg Yield/Rate Average Balance Interest Avg Yield/Rate ASSETS Loans (1) $ 3,918,249 $ 173,355 4.42 % $ 3,668,149 $ 147,667 4.03 % $ 3,750,657 $ 161,098 4.30 % Loans held for sale 1,098 48 4.37 % 2,063 56 2.71 % 3,254 104 3.20 % Securities: Taxable investment securities (2) 627,546 18,940 3.02 % 454,836 13,312 2.93 % 133,785 4,172 3.12 % Tax-exempt investment securities (2) 1,675,227 56,389 3.37 % 1,407,231 47,775 3.39 % 1,201,385 42,228 3.51 % Mortgage-backed and related securities (2) 496,940 16,639 3.35 % 793,300 19,534 2.46 % 1,311,722 34,319 2.62 % Total securities 2,799,713 91,968 3.28 % 2,655,367 80,621 3.04 % 2,646,892 80,719 3.05 % FHLB stock, at cost, and equity investments 21,255 503 2.37 % 37,549 530 1.41 % 59,439 1,233 2.07 % Interest earning deposits 37,898 362 0.96 % 39,426 78 0.20 % 26,202 238 0.91 % Federal funds sold 44,454 1,126 2.53 % — — — — — — Total earning assets 6,822,667 267,362 3.92 % 6,402,554 228,952 3.58 % 6,486,444 243,392 3.75 % Cash and due from banks 104,602 94,959 79,677 Accrued interest and other assets 457,782 670,062 664,511 Less: Allowance for loan losses (35,962) (43,064) (50,807) Total assets $ 7,349,089 $ 7,124,511 $ 7,179,825 LIABILITIES AND SHAREHOLDERS’ EQUITY Savings accounts $ 671,402 1,838 0.27 % $ 578,245 953 0.16 % $ 440,346 817 0.19 % CDs 579,223 5,659 0.98 % 663,789 3,635 0.55 % 1,182,938 17,051 1.44 % Interest bearing demand accounts 3,139,628 21,578 0.69 % 2,464,670 4,816 0.20 % 2,061,805 6,780 0.33 % Total interest bearing deposits 4,390,253 29,075 0.66 % 3,706,704 9,404 0.25 % 3,685,089 24,648 0.67 % FHLB borrowings 135,926 3,291 2.42 % 665,384 7,348 1.10 % 1,032,269 11,397 1.10 % Subordinated notes, net of unamortized debt issuance costs 98,604 4,015 4.07 % 171,857 8,246 4.80 % 113,736 6,301 5.54 % Trust preferred subordinated debentures, net of unamortized debt issuance costs 60,262 2,397 3.98 % 60,258 1,390 2.31 % 60,252 1,829 3.04 % Repurchase agreements 29,919 199 0.67 % 22,257 42 0.19 % 32,890 226 0.69 % Other borrowings 47,926 1,663 3.47 % — — — 59,050 162 0.27 % Total interest bearing liabilities 4,762,890 40,640 0.85 % 4,626,460 26,430 0.57 % 4,983,286 44,563 0.89 % Noninterest bearing deposits 1,712,849 1,516,682 1,277,011 Accrued expenses and other liabilities 90,988 93,136 90,548 Total liabilities 6,566,727 6,236,278 6,350,845 Shareholders’ equity 782,362 888,233 828,980 Total liabilities and shareholders’ equity $ 7,349,089 $ 7,124,511 $ 7,179,825 Net interest income (FTE) $ 226,722 $ 202,522 $ 198,829 Net interest margin (FTE) 3.32 % 3.16 % 3.07 % Net interest spread (FTE) 3.07 % 3.01 % 2.86 % (1) Interest on loans includes net fees on loans that are not material in amount.
Biggest changeThe information should be reviewed in conjunction with the consolidated financial statements for the same years then ended (dollars in thousands): Average Balances with Average Yields and Rates Year Ended December 31, 2023 December 31, 2022 December 31, 2021 Average Balance Interest Avg Yield/Rate Average Balance Interest Avg Yield/Rate Average Balance Interest Avg Yield/Rate ASSETS Loans (1) $ 4,300,138 $ 247,431 5.75 % $ 3,918,249 $ 173,355 4.42 % $ 3,668,149 $ 147,667 4.03 % Loans held for sale 1,681 96 5.71 % 1,098 48 4.37 % 2,063 56 2.71 % Securities: Taxable investment securities (2) 845,907 31,186 3.69 % 627,546 18,940 3.02 % 454,836 13,312 2.93 % Tax-exempt investment securities (2) 1,554,519 64,568 4.15 % 1,675,227 56,389 3.37 % 1,407,231 47,775 3.39 % Mortgage-backed and related securities (2) 470,692 19,450 4.13 % 496,940 16,639 3.35 % 793,300 19,534 2.46 % Total securities 2,871,118 115,204 4.01 % 2,799,713 91,968 3.28 % 2,655,367 80,621 3.04 % FHLB stock, at cost, and equity investments 24,971 1,185 4.75 % 21,255 503 2.37 % 37,549 530 1.41 % Interest earning deposits 83,343 4,364 5.24 % 37,898 362 0.96 % 39,426 78 0.20 % Federal funds sold 79,948 4,124 5.16 % 44,454 1,126 2.53 % — — — Total earning assets 7,361,199 372,404 5.06 % 6,822,667 267,362 3.92 % 6,402,554 228,952 3.58 % Cash and due from banks 107,018 104,602 94,959 Accrued interest and other assets 397,860 457,782 670,062 Less: Allowance for loan losses (37,890) (35,962) (43,064) Total assets $ 7,828,187 $ 7,349,089 $ 7,124,511 LIABILITIES AND SHAREHOLDERS’ EQUITY Savings accounts $ 636,603 5,633 0.88 % $ 671,402 1,838 0.27 % $ 578,245 953 0.16 % CDs 862,211 30,906 3.58 % 579,223 5,659 0.98 % 663,789 3,635 0.55 % Interest bearing demand accounts 3,122,319 71,618 2.29 % 3,139,628 21,578 0.69 % 2,464,670 4,816 0.20 % Total interest bearing deposits 4,621,133 108,157 2.34 % 4,390,253 29,075 0.66 % 3,706,704 9,404 0.25 % FHLB borrowings 276,584 6,777 2.45 % 135,926 3,291 2.42 % 665,384 7,348 1.10 % Subordinated notes, net of unamortized debt issuance costs 96,024 3,920 4.08 % 98,604 4,015 4.07 % 171,857 8,246 4.80 % Trust preferred subordinated debentures, net of unamortized debt issuance costs 60,267 4,504 7.47 % 60,262 2,397 3.98 % 60,258 1,390 2.31 % Repurchase agreements 91,132 3,431 3.76 % 29,919 199 0.67 % 22,257 42 0.19 % Other borrowings 345,544 17,925 5.19 % 47,926 1,663 3.47 % — — — Total interest bearing liabilities 5,490,684 144,714 2.64 % 4,762,890 40,640 0.85 % 4,626,460 26,430 0.57 % Noninterest bearing deposits 1,485,896 1,712,849 1,516,682 Accrued expenses and other liabilities 97,509 90,988 93,136 Total liabilities 7,074,089 6,566,727 6,236,278 Shareholders’ equity 754,098 782,362 888,233 Total liabilities and shareholders’ equity $ 7,828,187 $ 7,349,089 $ 7,124,511 Net interest income (FTE) $ 227,690 $ 226,722 $ 202,522 Net interest margin (FTE) 3.09 % 3.32 % 3.16 % Net interest spread (FTE) 2.42 % 3.07 % 3.01 % (1) Interest on loans includes net fees on loans that are not material in amount.
Our 1-4 family residential loans are made at both fixed and adjustable interest rates. Underwriting for 1-4 family residential loans includes debt-to-income analysis, credit history analysis, appraised value and down payment considerations. Changes in the market value of real estate can affect the potential losses in the portfolio.
Our 1-4 family residential loans are made at both fixed and adjustable interest rates. Underwriting for 1-4 family residential loans includes debt-to-income analysis, credit history analysis, appraised value and down payment considerations. Changes in the market value of real estate can affect the potential losses in the residential portfolio.
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.
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, municipal and corporate securities, the unpredictable nature of MBS prepayments and credit risks associated with the municipal and corporate securities.
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. Actual results could differ from those estimates. We consider our critical accounting policies to include the following: Allowance for Credit Losses .
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. Actual results could differ from those estimates. We consider our critical accounting estimates to include the following: Allowance for Credit Losses .
Owner occupied 1-4 family residential construction loans are subject to the underwriting standards of the permanent loan. 1-4 Family Residential Real Estate Loans Residential loan originations are generated by our loan officers, in-house origination staff, marketing efforts, present customers, walk-in customers and referrals from real estate agents and builders.
Owner occupied 1-4 family residential construction loans are subject to the underwriting standards of the permanent loan. 1-4 Family Residential Real Estate Loans Residential loan originations are generated by our mortgage loan officers, in-house origination staff, marketing efforts, present customers, walk-in customers and referrals from real estate agents and builders.
These include payments related to (i) borrowings presented in “Note 8 - Borrowing Arrangements” and “Note 9 – Long-Term Debt,” (ii) operating leases presented in “Note 16 - Leases,” (iii) time deposits with stated maturity dates presented in “Note 7 – Deposits” and (iv) commitments to extend credit and standby letters of credit as presented in “Note 17 - Off-Balance-Sheet Arrangements, Commitments and Contingencies.” Management continually evaluates our liquidity position and currently believes the Company has adequate funding to meet our financial needs. 64 Table of Contents
These include payments related to (i) borrowings presented in “Note 8 - Borrowing Arrangements” and “Note 9 – Long-Term Debt,” (ii) operating leases presented in “Note 16 - Leases,” (iii) time deposits with stated maturity dates presented in “Note 7 – Deposits” and (iv) commitments to extend credit and standby letters of credit as presented in “Note 17 - Off-Balance-Sheet Arrangements, Commitments and Contingencies.” Management continually evaluates our liquidity position and currently believes the Company has adequate funding to meet our financial needs. 62 Table of Contents
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” to our consolidated financial statements included in this report for a detailed description of our estimation process and methodology related to the allowance for loan losses. 36 Table of Contents NON-GAAP FINANCIAL MEASURES Certain non-GAAP measures are used by management to supplement the evaluation of our performance.
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” to our consolidated financial statements included in this report for a detailed description of our estimation process and methodology related to the allowance for loan losses. 35 Table of Contents NON-GAAP FINANCIAL MEASURES Certain non-GAAP measures are used by management to supplement the evaluation of our performance.
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. 42 Table of Contents RESULTS OF OPERATIONS 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.
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. 41 Table of Contents RESULTS OF OPERATIONS 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.
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. 40 Table of Contents BALANCE SHEET STRATEGY Determining the appropriate size of the balance sheet is one of the critical decisions any bank makes.
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. 39 Table of Contents BALANCE SHEET STRATEGY Determining the appropriate size of the balance sheet is one of the critical decisions any bank makes.
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. 35 Table of Contents CRITICAL ACCOUNTING ESTIMATES Our accounting and reporting estimates conform with U.S. GAAP and general practices within the financial services industry.
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. 34 Table of Contents CRITICAL ACCOUNTING ESTIMATES Our accounting and reporting estimates conform with U.S. GAAP and general practices within the financial services industry.
Commercial Real Estate Loans 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. Management does not consider there to be a risk in any one industry type.
Commercial Real Estate Loans 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. Management does not consider there to be a concentration of risk in any one industry type.
Southside Bank has three unsecured lines of credit for the purchase of overnight federal funds at prevailing rates with Frost Bank, TIB – The Independent Bankers Bank and Comerica Bank for $40.0 million, $15.0 million and $7.5 million, respectively. There were no federal funds purchased at December 31, 2022 or 2021.
Southside Bank has three unsecured lines of credit for the purchase of overnight federal funds at prevailing rates with Frost Bank, TIB – The Independent Bankers Bank and Comerica Bank for $40.0 million, $15.0 million and $7.5 million, respectively. There were no federal funds purchased at December 31, 2023 or December 31, 2022.
The Bank has a $5.0 million line of credit with Frost Bank to be used to issue letters of credit, and at December 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.
The Bank has a $5.0 million line of credit with Frost Bank to be used to issue letters of credit, and at December 31, 2023, 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.
This discussion should be read in conjunction with the financial statements and related notes included elsewhere in this report. Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2021 Form 10-K for a discussion and analysis of the more significant factors that affected periods prior to 2021.
This discussion should be read in conjunction with the financial statements and related notes included elsewhere in this report. Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2022 Form 10-K for a discussion and analysis of the more significant factors that affected periods prior to 2022.
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 Bank and Comerica Bank for $40.0 million, $15.0 million and $7.5 million, respectively. There were no federal funds purchased at December 31, 2022 or 2021.
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 Bank and Comerica Bank for $40.0 million, $15.0 million and $7.5 million, respectively. There were no federal funds purchased at December 31, 2023 or 2022.
Future changes in applicable law, regulations or government policies may also have a material impact on us. Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2021 Form 10-K for a discussion and analysis of the periods prior to 2021.
Future changes in applicable law, regulations or government policies may also have a material impact on us. Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2022 Form 10-K for a discussion and analysis of the periods prior to 2022.
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 December 31, 2022 included $58.5 million of trust preferred securities.
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 December 31, 2023 included $58.5 million of trust preferred securities.
The Bank did not have any additional Tier 1 capital beyond Common Equity Tier 1 at December 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.
The Bank did not have any additional Tier 1 capital beyond Common Equity Tier 1 at December 31, 2023. 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.
We attempt to mitigate the amount of risk associated with this group of loans through the type of loans originated and geographic distribution. At December 31, 2022, the majority of our real estate loans were collateralized by properties located in our market areas.
We attempt to mitigate the amount of risk associated with this group of loans through the type of loans originated and geographic distribution. At December 31, 2023, the majority of our real estate loans were collateralized by properties located in our market areas.
The amounts of these loans outstanding at December 31, 2022, which, based on maturity, are due in (1) one year or less, (2) after one but within five years, (3) after five years but within 15 years, and (4) after 15 years, are shown in the following table.
The amounts of these loans outstanding at December 31, 2023, which, based on maturity, are due in (1) one year or less, (2) after one but within five years, (3) after five years but within 15 years, and (4) after 15 years, are shown in the following table.
For additional information regarding our methodology used to estimate the allowance for credit losses on off-balance-sheet credit exposures, see “Note 17 - Off-Balance-Sheet Arrangements, Commitments and Contingencies” to our consolidated financial statements included in this report. 57 Table of Contents SECURITIES ACTIVITY Our securities portfolio plays a primary role in the management of our interest rate sensitivity and, therefore, is managed in the context of the overall balance sheet.
For additional information regarding our methodology used to estimate the allowance for credit losses on off-balance-sheet credit exposures, see “Note 17 – Off-Balance-Sheet Arrangements, Commitments and Contingencies” to our consolidated financial statements included in this report. 55 Table of Contents SECURITIES ACTIVITY Our securities portfolio plays a primary role in the management of our interest rate sensitivity and liquidity and, therefore, is managed in the context of the overall balance sheet.
As of December 31, 2022, Southside Bancshares and Southside Bank met all capital adequacy requirements under the Basel III Capital Rules that became fully phased-in as of January 1, 2019. See the section captioned “Supervision and Regulation” in “Item 1.
As of December 31, 2023, Southside Bancshares and Southside Bank met all capital adequacy requirements under the Basel III Capital Rules that became fully phased-in as of January 1, 2019. See the section captioned “Supervision and Regulation” in “Item 1.
Salaries and employee benefits expense increased during the year ended December 31, 2022, compared to the same period in 2021, due to an increase in direct salary expense, partially offset by decreases in retirement expense and health insurance expense.
Salaries and employee benefits expense increased during the year ended December 31, 2023, compared to the same period in 2022, due to an increase in direct salary expense, partially offset by decreases in retirement expense and health insurance expense.
Regardless of the underwriting criteria utilized, losses may occur as a result of various factors beyond our control, including, among other things, changes in market conditions affecting the value of properties used as collateral for loans and problems affecting the credit worthiness of the borrower and the ability of the borrower to make 55 Table of Contents payments on the loan.
Regardless of the underwriting criteria utilized, losses may occur as a result of various factors beyond our control, including, among other things, changes in market conditions affecting the value of properties used as collateral for loans and problems affecting the credit worthiness of the borrower and the ability of the borrower to make payments on the loan.
We focus our lending efforts primarily on the origination of loans secured by first mortgages on owner occupied 1-4 family residences. Substantially all of our 1-4 family 50 Table of Contents residential originations are secured by properties located in or near our market areas. Historically, we have originated a portion of our residential loans for sale into the secondary market.
We focus our lending efforts primarily on the origination of loans secured by first mortgages on owner occupied 1-4 family residences. Substantially all of our 1-4 family residential originations are secured by properties located in or near our market areas. Historically, we have originated a portion of our residential loans for sale into the secondary market.
Construction loans to individuals are typically priced and made with the intention of granting the permanent loan on the completed property. Commercial construction loans are subject to underwriting standards similar to that of the commercial portfolio.
Construction loans to individuals are typically priced and made with the intention of granting the permanent loan on the completed property. Commercial construction loans are subject to underwriting standards similar to that of the commercial real estate loan portfolio.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides a comparison of our results of operations for the years ended December 31, 2022 and 2021 and financial condition as of December 31, 2022 and 2021.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides a comparison of our results of operations for the years ended December 31, 2023 and 2022 and financial condition as of December 31, 2023 and 2022.
Potential higher interest expense and lack of customer loyalty are risks associated with the use of brokered deposits. 44 Table of Contents AVERAGE BALANCES WITH AVERAGE YIELDS AND RATES The following table presents 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 for the years ended December 31, 2022, 2021 and 2020.
Potential higher interest expense and lack of customer loyalty are risks associated with the use of brokered deposits. 43 Table of Contents AVERAGE BALANCES WITH AVERAGE YIELDS AND RATES The following table presents 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 for the years ended December 31, 2023, 2022 and 2021.
No valuation allowance was recorded at December 31, 2022 or 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. 49 Table of Contents LENDING ACTIVITIES One of our main objectives is to seek attractive lending opportunities in Texas, primarily in the market areas in which we operate.
No valuation allowance was recorded at December 31, 2023 or December 31, 2022, as management believes it is more likely than not that all of the deferred tax asset items will be realized in future years. LENDING ACTIVITIES One of our main objectives is to seek attractive lending opportunities in Texas, primarily in the market areas in which we operate.
Please refer to the accompanying notes to these consolidated financial statements for the expected timing of such cash payments as of December 31, 2022.
Please refer to the accompanying notes to these consolidated financial statements for the expected timing of such cash payments as of December 31, 2023.
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: • 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, as well as the risk of an economic slowdown or recession; • 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’s actions to increase interest rates, the capital requirements promulgated by the Basel Committee, the CARES Act, the Economic Aid Act, the discontinuation of interest rates based on LIBOR and other regulatory responses to economic conditions; • economic or other disruptions caused by acts of terrorism, war or other conflicts, including the Russia-Ukraine conflict, 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; • 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; • 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; 34 Table of Contents • the potential of the ongoing impact of the COVID-19 pandemic and related variants on our future consolidated financial condition and results of operations and the financial condition of our customers; • 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; • the effect of compliance with legislation or regulatory changes; • credit risks of borrowers, including any increase in those risks due to changing economic conditions; • increases in our nonperforming assets; • risks related to environmental liability as a result of certain lending activity; • our ability to maintain adequate liquidity to fund operations and growth; • our ability to monitor interest rate risk; • any applicable regulatory limits or other restrictions on the Bank and its ability to pay dividends to us; • the failure of our assumptions underlying our allowance for credit losses and other estimates; • the failure to maintain an effective system of controls and procedures, including internal control over financial reporting; • the effectiveness of our derivative financial instruments and hedging activities to manage risk; • unexpected outcomes of, and the costs associated with, existing or new litigation involving us; • potential claims, damages, penalties, fines and reputational damage resulting from pending or future litigation, regulatory proceedings and enforcement actions; • changes impacting our balance sheet and leverage strategy; • risks related to actual mortgage prepayments diverging from projections; • risks related to fluctuations in the price per barrel of crude oil; • significant increases in competition in the banking and financial services industry; • changes in consumer spending, borrowing and saving habits, including as a result of 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 market share and control expenses; • our ability to develop competitive new products and services in a timely manner and the acceptance of such products and services by our customers; • the effect of changes in federal or state tax laws; • the effect of changes in accounting policies and practices; • adverse changes in the status or financial condition of the GSEs which impact the GSEs’ guarantees or ability to pay or issue debt; • adverse changes in the credit portfolios of other U.S. financial institutions relative to the performance of certain of our investment securities; • risks related to actual U.S. agency MBS prepayments exceeding projected prepayment levels; • 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; • risks related to loans secured by real estate, including the risk that the value and marketability of collateral could decline; • risks associated with our common stock and our other securities, including fluctuations in our stock price and general volatility in the stock market; and • the risks identified in “Part I - Item 1A.
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: • 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, as well as the risk of an economic slowdown or recession; • 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’s actions to increase interest rates, the capital requirements promulgated by the Basel Committee, the CARES Act, the Economic Aid Act and other regulatory responses to economic conditions; • economic or other disruptions caused by acts of terrorism, war or other conflicts, including the Russia-Ukraine and Israeli-Hamas conflicts, natural disasters, such as hurricanes, freezes, flooding and other man-made disasters, such as oil spills or power outages, health emergencies, epidemics or pandemics, climate change or other catastrophic events; • potential impacts of the adverse developments in the banking industry highlighted by high-profile bank failures, including impacts on customer confidence, deposit outflows, liquidity and the regulatory response thereto; • 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; • our ability to identify and address cyber-security risks such as data security breaches, malware, “denial of service” attacks, “hacking” and identity theft, which may be exacerbated by recent developments in generative artificial intelligence and 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; 33 Table of Contents • 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; • 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; • the effect of compliance with legislation or regulatory changes; • credit risks of borrowers, including any increase in those risks due to changing economic conditions; • increases in our nonperforming assets; • risks related to environmental liability as a result of certain lending activity; • our ability to maintain adequate liquidity to fund operations and growth; • our ability to control interest rate risk; • any applicable regulatory limits or other restrictions on the Bank and its ability to pay dividends to us; • the failure of our assumptions underlying our allowance for credit losses and other estimates; • the failure to maintain an effective system of controls and procedures, including internal control over financial reporting; • the effectiveness of our derivative financial instruments and hedging activities to manage risk; • unexpected outcomes of, and the costs associated with, existing or new litigation involving us; • potential claims, damages, penalties, fines and reputational damage resulting from pending or future litigation, regulatory proceedings and enforcement actions; • changes impacting our balance sheet strategy; • risks related to actual mortgage prepayments diverging from projections; • risks related to fluctuations in the price per barrel of crude oil; • significant increases in competition in the banking and financial services industry; • changes in consumer spending, borrowing and saving habits, including as a result of rising inflation and recessionary concerns; • 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 market share and control expenses; • our ability to develop competitive new products and services in a timely manner and the acceptance of such products and services by our customers; • the effect of changes in federal or state tax laws; • the effect of changes in accounting policies and practices; • adverse changes in the status or financial condition of the GSEs which impact the GSEs’ guarantees or ability to pay or issue debt; • adverse changes in the credit portfolios of other U.S. financial institutions relative to the performance of certain of our investment securities; • risks related to actual U.S. agency MBS prepayments exceeding projected prepayment levels; • 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; • risks related to loans secured by real estate, including the risk that the value and marketability of collateral could decline; • risks associated with our common stock and our other securities, including fluctuations in our stock price and general volatility in the stock market; and • the risks identified in “Part I - Item 1A.
Business” included in this report. 63 Table of Contents The table below summarizes our key equity ratios: Years Ended December 31, 2022 2021 2020 Return on average assets 1.43 % 1.59 % 1.14 % Return on average shareholders’ equity 13.42 % 12.77 % 9.91 % Dividend payout ratio – Basic 42.81 % 39.37 % 52.63 % Dividend payout ratio – Diluted 42.94 % 39.48 % 52.63 % Average shareholders’ equity to average total assets 10.65 % 12.47 % 11.55 % EFFECTS OF INFLATION Our consolidated financial statements and their related notes have been prepared in accordance with GAAP which requires the measurement of financial position and operating results in terms of historical dollars, without considering the change in the relative purchasing power of money over time and due to inflation.
Business” included in this report. 61 Table of Contents The table below summarizes our key equity ratios: Years Ended December 31, 2023 2022 2021 Return on average assets 1.11 % 1.43 % 1.59 % Return on average shareholders’ equity 11.50 % 13.42 % 12.77 % Dividend payout ratio – Basic 50.35 % 42.81 % 39.37 % Dividend payout ratio – Diluted 50.35 % 42.94 % 39.48 % Average shareholders’ equity to average total assets 9.63 % 10.65 % 12.47 % EFFECTS OF INFLATION Our consolidated financial statements and their related notes have been prepared in accordance with GAAP which requires the measurement of financial position and operating results in terms of historical dollars, without considering the change in the relative purchasing power of money over time and due to inflation.
Business – Market Area.” The aggregate amount of loans that we are permitted to make under applicable bank regulations to any one borrower, including non-affiliate related entities is 25% of Tier 1 capital. Our legal lending limit at December 31, 2022, was approximately $205.8 million. Our largest loan relationship at December 31, 2022 was approximately $133.3 million.
Business – Market Area.” The aggregate amount of loans that we are permitted to make under applicable bank regulations to any one borrower, including non-affiliate related entities is 25% of Tier 1 capital. Our legal lending limit at December 31, 2023, was approximately $209.1 million. Our largest loan relationship at December 31, 2023 was approximately $133.3 million.
The decrease in the ETR for the year ended December 31, 2022, compared to the same period in 2021, was mainly due to an increase in tax-exempt income as a percentage of pre-tax income.
The increase in the ETR for the year ended December 31, 2023, compared to the same period in 2022, was mainly due to a decrease in tax-exempt income as a percentage of pre-tax income.
The internal loan review department maintains a list of all loans or loan relationships that are graded as having more than the normal degree of risk associated with them.
The internal loan review department maintains a list of all loans or loan relationships that are graded as having more than the normal degree of risk 53 Table of Contents associated with them.
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, FHLB and FRDW borrowings.
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, FHLB and borrowings from the Federal Reserve through the FRDW and BTFP.
(2) The maximum amount outstanding at any month-end during the period. (3) The weighted average interest rate during the period was computed by dividing the actual interest expense by the average balance outstanding during the period. The weighted average interest rate on the FHLB borrowings include the effect of interest rate swaps. (4) Stated rate.
(2) The maximum amount outstanding at any month-end during the period. (3) The weighted average interest rate during the period was computed by dividing the actual interest expense by the average balance outstanding during the period. The weighted average interest rate on other borrowings and FHLB borrowings includes the effect of interest rate swaps. (4) Stated rate.
The instruments are designated as fair value hedges as the changes in the fair value of the 41 Table of Contents interest rate swap are expected to offset changes in the fair value of the hedged item attributable to changes in the SOFR swap rate, the designated benchmark interest rate.
The instruments are designated as fair value hedges as the changes in the fair value of the interest rate swap are expected to offset changes in the fair value of the hedged item attributable to changes in the SOFR swap rate, the designated benchmark interest rate.
(5) The interest rate on FHLB borrowings includes the effect of interest rate swaps. Other borrowings may include federal funds purchased, repurchase agreements and borrowings from the FRDW.
(5) The interest rate on FHLB borrowings includes the effect of interest rate swaps. Other borrowings may include federal funds purchased, repurchase agreements and borrowings from the Federal Reserve through the FRDW and BTFP.
The balance of the allowance for off-balance-sheet credit exposures at December 31, 2022 and 2021, was $3.7 million and $2.4 million, respectively, and is included in other liabilities. See the section captioned “Allowance for Credit Losses - Off-Balance-Sheet Credit Exposures” elsewhere in this discussion for further analysis of the provision for credit losses for off-balance-sheet credit exposures.
The balance of the allowance for off-balance-sheet credit exposures at December 31, 2023 and 2022, was $3.9 million and $3.7 million, respectively, and is included in other liabilities. See the section captioned “Allowance for Credit Losses - Off-Balance-Sheet Credit Exposures” elsewhere in this discussion for further analysis of the provision for credit losses for off-balance-sheet credit exposures.
At December 31, 2022, the combined investment securities, MBS, FHLB stock and other investments as a percentage of total assets was 35.0% compared to loans, which were 54.9% of total assets. For a discussion of our strategy in relation to the securities portfolio, see “Item 7.
At December 31, 2023, the combined investment securities, MBS, FHLB stock and other investments as a percentage of total assets was 31.7% compared to loans, which were 54.7% of total assets. For a discussion of our strategy in relation to the securities portfolio, see “Item 7.
MUNICIPAL LOANS We make loans to municipalities and school districts primarily throughout the state of Texas, with a small percentage originating outside of the state. The majority of the loans to municipalities and school districts have tax or revenue pledges and in some cases are additionally supported by collateral.
MUNICIPAL LOANS We have made loans to municipalities and school districts primarily throughout the state of Texas, with a small percentage originating outside of the state. The majority of the loans to municipalities and school districts have tax or revenue 49 Table of Contents pledges and in some cases are additionally supported by collateral.
As of December 31, 2022, and 2021, our reviews of the loan portfolio indicated that loan loss allowances of $36.5 million and $35.3 million, respectively, were appropriate to cover expected credit losses in the portfolio. See the section captioned “Allowance for Credit Losses - Loans” elsewhere in this discussion for further analysis of the provision for credit losses for loans.
As of December 31, 2023, and 2022, our reviews of the loan portfolio indicated that loan loss allowances of $42.7 million and $36.5 million, respectively, were appropriate to cover expected credit losses in the portfolio. See the section captioned “Allowance for Credit Losses - Loans” elsewhere in this discussion for further analysis of the provision for credit losses for loans.
We also make home equity loans, which are included as part of the 1-4 family residential loans, and at December 31, 2022, these loans totaled $104.8 million. Under Texas law, these loans, when combined with all other mortgage indebtedness for the property, are capped at 80% of appraised value.
We also make home equity loans, which are included as part of the 1-4 family residential loans, and at December 31, 2023, these loans totaled $98.5 million. Under Texas law, these loans, when combined with all other mortgage indebtedness for the property, are capped at 80% of appraised value.
The increase in net interest income for the year ended December 31, 2022 was due to the increase in the average yield as well as the average balance of interest earning assets and the change in the mix of our interest bearing liabilities, partially offset by the increase in interest expense on our interest bearing liabilities due to the increase in interest rates.
The increase in net interest income for the year ended December 31, 2023 was due to the increase in the average yield as well as the average balance of interest earning assets, partially offset by the increase in interest expense on our interest bearing liabilities due to the increase in interest rates and an increase in the average balance of our interest bearing liabilities.
(2) For the purpose of calculating the average yield, the average balance of securities is presented at historical cost. Note: As of December 31, 2022, 2021 and 2020, loans totaling $2.8 million, $2.5 million and $7.7 million, respectively, were on nonaccrual status.
(2) For the purpose of calculating the average yield, the average balance of securities is presented at historical cost. Note: As of December 31, 2023, 2022 and 2021, loans totaling $3.9 million, $2.8 million and $2.5 million, respectively, were on nonaccrual status.
Municipal loans made without a direct pledge of taxes or revenues are usually made based on some type of collateral that represents an essential service. Lending money directly to these municipalities allows us to earn a higher yield than we could if we purchased municipal securities for similar durations.
Municipal loans made without a direct pledge of taxes or revenues are usually made based on some type of collateral that represents an essential service. These loans allow us to earn a higher yield than we could if we purchased municipal securities for similar durations.
In connection with $575.0 million and $605.0 million of the agreements outstanding at December 31, 2022 and 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.
In connection with $1.01 billion and $575.0 million of the agreements outstanding at December 31, 2023 and December 31, 2022, 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 SOFR interest rate.
We elected to adopt the five-year transition option. In accordance with CECL guidance, a CECL transitional amount totaling $6.1 million has been added back to CET1 as of December 31, 2022, representing 75% of the $8.2 million transitional amount at December 31, 2021.
We elected to adopt the five-year transition option. In accordance with CECL guidance, a CECL transitional amount totaling $4.1 million has been added back to CET1 as of December 31, 2023, representing 50% of the $8.2 million transitional amount at December 31, 2022.
Direct salary expense increased $3.7 million, or 5.5%, for the year ended December 31, 2022, compared to the same period in 2021, primarily due to normal salary increases effective in the first quarter of 2022, market increases in the second quarter of 2022 and new employees hired during the year.
Direct salary expense increased $3.9 million, or 5.5%, for the year ended December 31, 2023, compared to the same period in 2022, primarily due to normal salary increases effective in the first quarter of 2023 and new employees hired during the year.
There were $1.33 billion and $90.8 million of securities classified as HTM at December 31, 2022 and 2021, respectively. 58 Table of Contents The maturities classified according to the sensitivity to changes in interest rates of the December 31, 2022 AFS and HTM investment securities and MBS portfolio and the weighted yields are presented below (dollars in thousands).
There were $1.31 billion and $1.33 billion of securities classified as HTM at December 31, 2023 and 2022, respectively. 56 Table of Contents The maturities classified according to the sensitivity to changes in interest rates of the December 31, 2023 AFS and HTM investment securities and MBS portfolio and the weighted yields are presented below (dollars in thousands).
Government, (ii) are more liquid than individual loans and (iii) may be used to collateralize our borrowings or other obligations.
Government, and the guarantees of the municipalities, (ii) are more liquid than individual loans and (iii) may be used to collateralize our borrowings or other obligations.
Our policy is to reverse previously accrued but unpaid interest on nonaccrual loans; thereafter, interest income is recorded to the extent received when appropriate. 45 Table of Contents PROVISION FOR CREDIT LOSSES For the year ended December 31, 2022, there was a provision for credit losses of $3.2 million, compared to a reversal of provision for credit losses of $17.0 million for the year ended December 31, 2021.
Our policy is to reverse previously accrued but unpaid interest on nonaccrual loans; thereafter, interest income is recorded to the extent received when appropriate. 44 Table of Contents PROVISION FOR CREDIT LOSSES For the year ended December 31, 2023, there was a provision for credit losses of $9.2 million, compared to $3.2 million for the year ended December 31, 2022.
The average yield on loans for the year ended December 31, 2022 increased to 4.42%, compared to 4.03% for the year ended December 31, 2021. This increase was due to the higher interest rate environment during 2022.
The average yield on loans for the year ended December 31, 2023 increased to 5.75%, compared to 4.42% for the year ended December 31, 2022. This increase was due to the higher interest rate environment during 2023.
See “Note 5 – Loans and Allowance for Loan Losses” in our consolidated financial statements included in this report. 56 Table of Contents ALLOWANCE FOR CREDIT LOSSES - OFF-BALANCE-SHEET CREDIT EXPOSURES Allowance for off-balance-sheet credit exposures were as follows (in thousands): Years Ended December 31, 2022 2021 2020 Balance at beginning of period $ 2,384 $ 6,386 $ 1,455 Impact of CECL adoption — — 4,840 Provision for (reversal of) off-balance-sheet credit exposures 1,303 (4,002) 91 Balance at end of period $ 3,687 $ 2,384 $ 6,386 Our off-balance-sheet credit exposures include contractual commitments to extend credit and standby letters of credit.
See “Note 5 – Loans and Allowance for Loan Losses” in our consolidated financial statements included in this report. 54 Table of Contents ALLOWANCE FOR CREDIT LOSSES – OFF-BALANCE-SHEET CREDIT EXPOSURES Allowance for off-balance-sheet credit exposures were as follows (in thousands): Years Ended December 31, 2023 2022 2021 Balance at beginning of period $ 3,687 $ 2,384 $ 6,386 Provision for (reversal of) off-balance-sheet credit exposures 245 1,303 (4,002) Balance at end of period $ 3,932 $ 3,687 $ 2,384 Our off-balance-sheet credit exposures include contractual commitments to extend credit and standby letters of credit.
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.
These funds are invested primarily in U.S. agency MBS and long-term municipal securities and to a lesser extent, U.S. Treasury Bills and corporate securities. Although the securities purchased 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.
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. Total nonperforming assets at December 31, 2022 were $10.9 million, representing a decrease of $747,000, or 6.4%, from $11.6 million at December 31, 2021.
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. Total nonperforming assets at December 31, 2023 were $4.0 million, representing a decrease of $6.9 million, or 63.2%, from $10.9 million at December 31, 2022.
Tier 2 capital for the Company also includes $98.7 million of qualified subordinated debt as of December 31, 2022. The permissible portion of qualified subordinated notes decreases 20% per year during the final five years of the term of the notes.
Tier 2 capital for the Company also includes $93.9 million of qualified subordinated debt as of December 31, 2023. The permissible portion of qualified subordinated notes decreases 20% per year during the final five years of the term of the notes.
Of the $3.21 billion in real estate loans, $663.5 million, or 20.7%, represent loans collateralized by residential dwellings that are primarily owner occupied. Historically, the amount of losses suffered on this type of loan has been significantly less than those on other properties.
Of the $3.65 billion in real estate loans, $696.7 million, or 19.1%, represent loans collateralized by residential dwellings that are primarily owner occupied. Historically, the amount of losses suffered on this type of loan has been significantly less than those on other properties.
The increase in average earning assets was primarily the result of the increase in loans and investment securities, partially offset by the decrease in MBS.
The increase in average earning assets was primarily the result of the increase in loans and taxable investment securities, partially offset by the decrease in tax-exempt investment securities.
Health and life insurance expense, included in salaries and employee benefits, decreased $243,000, or 2.7%, for the year ended December 31, 2022 compared to the same period in 2021 due to a decrease in health claims expense. We have a self-insured health plan which is supplemented with a stop loss policy.
Health and life insurance expense, included in salaries and employee benefits, decreased $373,000, or 4.3%, for the year ended December 31, 2023, compared to the same period in 2022, primarily due to a decrease in health claims expense. We have a self-insured health plan which is supplemented with a stop loss policy.
At December 31, 2022, loans collateralized by titled equipment, which are primarily automobiles, accounted for approximately $45.5 million, or 61.0%, of total loans to individuals. Home equity loans, which are included in 1-4 family residential loans, have replaced some of the traditional loans to individuals.
At December 31, 2023, loans collateralized by titled equipment, which are primarily automobiles, accounted for approximately $35.0 million, or 56.8%, of total loans to individuals. Home equity loans, which are included in 1-4 family residential loans, have replaced some of the traditional loans to individuals.
During the year ended December 31, 2022, the composition of the securities portfolio continued to change as corporate bonds increased while the remaining categories in the portfolio decreased. The decrease in MBS was attributable to sales of U.S. Agency MBS and principal payments, partially offset by MBS purchases.
During the year ended December 31, 2023, the composition of the securities portfolio continued to change as U.S. Treasury Bills and MBS increased while the remaining categories in the portfolio decreased. The increase in MBS was attributable to purchases of U.S. Agency MBS, partially offset by MBS sales and principal payments.
The interest rate swap contracts had an average interest rate of 1.02% with a remaining average weighted maturity of 2.3 years at December 31, 2022.
The interest rate swap contracts had an average interest rate of 2.75% with a remaining average weighted maturity of 2.3 years at December 31, 2023.
Securities transferred with losses included in AOCI continue to be included in management’s assessment for impairment for each individual security. During the year ended December 31, 2022, there were $1.25 billion securities transferred from AFS to HTM. There were no securities transferred from AFS to HTM during the year ended December 31, 2021.
Securities transferred with losses included in AOCI continue to be included in management’s assessment for impairment for each individual security. During the year ended December 31, 2023, we did not transfer any securities from AFS to HTM. There were $1.25 billion securities transferred from AFS to HTM during the year ended December 31, 2022.
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, FHLB and FRDW.
We utilize wholesale funding and securities to enhance overall profitability to determine the appropriate leverage 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 market, FHLB and the Federal Reserve through the FRDW and BTFP.
The fair value of the AFS securities portfolio at December 31, 2022 was $1.30 billion, which included a net unrealized loss of $88.9 million. The net unrealized loss was comprised of $90.2 million of unrealized losses and $1.3 million of unrealized gains. The majority of the $90.2 million of unrealized losses is reflected in our state and political subdivisions.
The fair value of the AFS securities portfolio at December 31, 2023 was $1.30 billion, which included a net unrealized loss of $36.2 million. The net unrealized loss was comprised of $39.8 million of unrealized losses and $3.7 million of unrealized gains. The majority of the $39.8 million of unrealized losses is reflected in our state and political subdivisions.
Income tax expense was $14.6 million for the year ended December 31, 2022 and represented a decrease of $2.8 million, or 16.2%, from $17.4 million for the year ended December 31, 2021. The ETR as a percentage of pre-tax income was 12.2% in 2022 and 13.3% in 2021.
Income tax expense was $14.4 million for the year ended December 31, 2023 and represented a decrease of $0.2 million, or 1.2%, from $14.6 million for the year ended December 31, 2022. The ETR as a percentage of pre-tax income was 14.3% in 2023 and 12.2% in 2022.
Our brokered non-maturity deposits increased to $438.4 million at December 31, 2022, of which $425.0 million are related to our cash flow hedges, from $270.1 million at December 31, 2021, with a weighted average cost of 126 basis points and 91 basis points, respectively.
Our brokered non-maturity deposits increased to $828.0 million at December 31, 2023, of which $800.0 million are related to our cash flow hedges, from $438.4 million at December 31, 2022, with a weighted average cost of 323 basis points and 126 basis points, respectively.
The majority of our loan originations are made to borrowers who live in and/or conduct business in the market areas of Texas in which we operate or adjoin. Total loans as of December 31, 2022 increased $502.5 million, or 13.8%, and the average loan balance outstanding for the year increased $250.1 million, or 6.8%, compared to 2021.
The majority of our loan originations are made to borrowers who live in and/or conduct business in the market areas of Texas in which we operate or adjoin. Total loans as of December 31, 2023 increased $376.8 million, or 9.1%, and the average loan balance outstanding for the year increased $381.9 million, or 9.7%, compared to 2022.
ANALYSIS OF CHANGES IN 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.
See “Non-GAAP Financial Measures” for more information and for a reconciliation to GAAP. 42 Table of Contents ANALYSIS OF CHANGES IN 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.
Our securities portfolio decreased from $2.86 billion at December 31, 2021 to $2.63 billion at December 31, 2022. The decrease in the securities portfolio was due to an unrealized loss position in the portfolio, sales of securities, and principal payments, which more than offset the securities purchased during the year ended December 31, 2022.
Our securities portfolio decreased slightly from $2.63 billion at December 31, 2022 to $2.60 billion at December 31, 2023. The decrease in the securities portfolio was due to sales of securities and principal payments during the year ended December 31, 2023, which more than offset securities purchased.
Professional fees increased for the year ended December 31, 2022, when compared to the same period in 2021, due to an increase in consulting fees. Software and data processing expense increased for the year ended December 31, 2022, compared to the same period in 2021, due to new software contracts and increases in existing contract renewal costs.
Software and data processing expense increased for the year ended December 31, 2023, compared to the same period in 2022, due to new software contracts and increases in existing contract renewal costs.
The combined investment securities, MBS, FHLB stock and other investments decreased to $2.65 billion at December 31, 2022, compared to $2.88 billion at December 31, 2021, a decrease of $235.2 million, or 8.2%.
The combined investment securities, MBS, FHLB stock and other investments decreased to $2.62 billion at December 31, 2023, compared to $2.65 billion at December 31, 2022, a decrease of $21.1 million, or 0.8%.
As of December 31, 2022, our review of the loan portfolio indicated that an allowance for loan losses of $36.5 million was appropriate to cover expected losses in the portfolio. Changes in economic and other conditions, including the application of the CECL model, rising interest rates and heightened inflation, may require future adjustments to the allowance for loan losses.
As of December 31, 2023, our review of the loan portfolio indicated that an allowance for loan losses of $42.7 million was appropriate to cover expected losses in the portfolio. Changes in economic and other conditions, including the application of the CECL model, may require future adjustments to the allowance for loan losses.
From December 31, 2021 to December 31, 2022, nonaccrual loans increased $310,000, or 12.2%, to $2.8 million with increases in nonaccrual construction loans, commercial real estate loans and loans to individuals, partially offset by decreases in nonaccrual 1-4 family residential loans and commercial loans during the year. Restructured loans decreased $1.2 million, or 13.5%, to $7.8 million.
From December 31, 2022 to December 31, 2023, nonaccrual loans increased $1.0 million, or 36.6%, to $3.9 million with increases in nonaccrual 1-4 family residential loans and commercial loans, partially offset by decreases in nonaccrual construction loans, commercial real estate loans and loans to individuals during the year. Restructured loans decreased $7.8 million, or 99.8%, to $13,000.
The following table presents net interest income for the periods presented (in thousands): Years Ended December 31, 2022 2021 2020 Interest income: Loans $ 170,410 $ 144,803 $ 158,450 Taxable investment securities 18,940 13,312 4,172 Tax-exempt investment securities 45,001 37,730 33,416 MBS 16,639 19,534 34,319 FHLB stock and equity investments 503 530 1,233 Other interest earning assets 1,488 78 238 Total interest income 252,981 215,987 231,828 Interest expense: Deposits 29,075 9,404 24,648 FHLB borrowings 3,291 7,348 11,397 Subordinated notes 4,015 8,246 6,301 Trust preferred subordinated debentures 2,397 1,390 1,829 Repurchase agreements 199 42 226 Other borrowings 1,663 — 162 Total interest expense 40,640 26,430 44,563 Net interest income $ 212,341 $ 189,557 $ 187,265 NET 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.
The following table presents net interest income for the periods presented (in thousands): Years Ended December 31, 2023 2022 2021 Interest income: Loans $ 244,803 $ 170,410 $ 144,803 Taxable investment securities 31,186 18,940 13,312 Tax-exempt investment securities 54,629 45,001 37,730 MBS 19,450 16,639 19,534 FHLB stock and equity investments 1,185 503 530 Other interest earning assets 8,488 1,488 78 Total interest income 359,741 252,981 215,987 Interest expense: Deposits 108,157 29,075 9,404 FHLB borrowings 6,777 3,291 7,348 Subordinated notes 3,920 4,015 8,246 Trust preferred subordinated debentures 4,504 2,397 1,390 Repurchase agreements 3,431 199 42 Other borrowings 17,925 1,663 — Total interest expense 144,714 40,640 26,430 Net interest income $ 215,027 $ 212,341 $ 189,557 NET 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.
Most of our fixed rate commercial real estate loans adjust at least every five years. At December 31, 2022, commercial real estate loans consisted of $1.60 billion of owner and non-owner occupied real estate loans, $363.3 million of loans secured by multi-family properties and $26.3 million of loans secured by farmland.
Most of our fixed rate commercial real estate loans adjust at least every five years. At December 31, 2023, commercial real estate loans consisted of $1.79 billion of owner and non-owner occupied real estate loans, $347.5 million of loans secured by multi-family properties and $28.6 million of loans secured by farmland.
At December 31, 2022, these investments were 2.4% of total assets, as compared with 5.9% for December 31, 2021. The decrease to 2.4% at December 31, 2022 as compared to December 31, 2021, is reflective of the increase in total assets combined with decreases in the short-term investment portfolio and interest earning deposits.
At December 31, 2023, these investments were 8.9% of total assets, as compared with 2.4% for December 31, 2022. The increase to 8.9% at December 31, 2023 as compared to December 31, 2022, is reflective of increases in interest earning deposits and the short-term investment portfolio, partially offset by the increase in total assets.
Earnings per diluted common share decreased $0.21, or 6.1%, to $3.26 for the year ended December 31, 2022, from $3.47 for the same period in 2021. 38 Table of Contents The following table sets forth selected financial data regarding our results of operations and financial position for, and as of the end of, each of the fiscal years in the three-year period ended December 31, 2022.
Earnings per diluted common share decreased $0.44, or 13.5%, to $2.82 for the year ended December 31, 2023, compared to $3.26 for the same period in 2022. 37 Table of Contents The following table sets forth selected financial data regarding our results of operations and financial position for, and as of the end of, each of the fiscal years in the three-year period ended December 31, 2023.

… 169 more changes not shown on this page.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

7 edited+0 added−2 removed9 unchanged
Biggest changeFurthermore, worker shortages, supply chain disruptions and inflationary conditions, have had some impact on the level of economic growth in our market areas. Ongoing higher inflation levels and higher interest rates could have a negative impact on the financial condition of both our consumer and commercial borrowers.
Biggest changeOngoing elevated inflation levels and higher interest rates could have a negative impact on the financial condition of both our consumer and commercial borrowers. The ALCO monitors various liquidity ratios to ensure a satisfactory liquidity position for us.
By utilizing this model, we can determine changes that need to be made to the asset and liability mixes to mitigate the change in net interest income under these various interest rate scenarios. 66 Table of Contents
By utilizing this model, we can determine changes that need to be made to the asset and liability mixes to mitigate the change in net interest income under these various interest rate scenarios. 63 Table of Contents
In addition, as described 65 Table of Contents above, we utilize a simulation model to determine the impact of net interest income under several different interest rate scenarios.
In addition, as described above, we utilize a simulation model to determine the impact of net interest income under several different interest rate scenarios.
The following table reflects the noted increases and decreases in interest rates under the model simulations and the anticipated impact on net interest income relative to the base case over the next 12 months for the periods presented.
We continue to monitor interest rates and anticipate additional rate changes during 2024. The following table reflects the noted increases and decreases in interest rates under the model simulations and the anticipated impact on net interest income relative to the base case over the next 12 months for the periods presented.
Anticipated impact over the next 12 months December 31, Rate projections: 2022 2021 Increase: 100 basis points 7.92 % 2.40 % 200 basis points 12.90 % 4.78 % Decrease: 50 basis points (2.96) % (1.68) % 100 basis points (6.16) % N/A 200 basis points (12.34) % N/A As part of the overall assumptions, certain assets and liabilities are given reasonable floors.
Anticipated impact over the next 12 months December 31, Rate projections: 2023 2022 Increase: 100 basis points 2.49 % 7.92 % 200 basis points 5.49 % 12.90 % Decrease: 50 basis points (0.80) % (2.96) % 100 basis points (1.82) % (6.16) % 200 basis points (3.85) % (12.34) % As part of the overall assumptions, certain assets and liabilities are given reasonable floors.
The ALCO monitors various liquidity ratios to ensure a satisfactory liquidity position for us. Management continually evaluates the condition of the economy, the pattern of market interest rates and other economic data to determine the types of investments that should be made and at what maturities.
Management continually evaluates the condition of the economy, the pattern of market interest rates and other economic data to determine the types of investments that should be made and at what maturities.
Assumptions are based on management’s best estimates but may not accurately reflect actual results under certain changes in interest rates. Economic conditions and growth prospects are currently impacted by record inflation and recessionary concerns. Increasing interest rates and high building costs have caused a slowdown in the single family housing market.
Assumptions are based on management’s best estimates but may not accurately reflect actual results under certain changes in interest rates. Economic conditions and growth prospects are currently impacted by record inflation and potential recessionary concerns. Furthermore, worker shortages, supply chain disruptions and inflationary conditions, have had some impact on the level of economic growth in our market areas.
Removed
The interest rate environment in 2020 and much of 2021 was at a point where most treasury terms were under 100 basis points; therefore, we did not believe an analysis of an assumed decrease in interest rates beyond 50 basis points would provide meaningful results.
Removed
We have resumed the simulation of rates decreasing 100 and 200 basis points as a result of the Federal Reserve’s ongoing interest rate increases. We are continuing to monitor interest rates and anticipate additional rate increases during 2023.

Other SBSI 10-K year-over-year comparisons