UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20212022
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ____________
Commission file number: 000-12247
SOUTHSIDE BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
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Texas | | | 75-1848732 |
(State or Other Jurisdiction of Incorporation or Organization) | | | (I.R.S. Employer Identification No.) |
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1201 S. Beckham Avenue, | Tyler, | Texas | | | 75701 |
(Address of Principal Executive Offices) | | | (Zip Code) |
903-531-7111
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common Stock, $1.25 par value | | SBSI | | NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the issuer’s common stock, par value $1.25, outstanding as of October 26, 2021July 27, 2022 was 32,276,05732,103,712 shares.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION | |
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PART II. OTHER INFORMATION | |
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SOUTHSIDE BANCSHARES, INC.
Glossary of Acronyms, Abbreviations and Terms
The acronyms, abbreviations and terms listed below are used in various sections of this Form 10-Q, including "Item 1. Financial Statements" and "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations."
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Entities: | | |
Southside Bancshares, Inc. | | Bank holding company for Southside Bank |
Southside Bank | | Texas state bank and wholly owned subsidiary of Southside Bancshares, Inc. |
Company | | Combined entities of Southside Bancshares, Inc. and its subsidiaries, including Southside Bank |
Bank | | Southside Bank |
Southside | | Southside Bancshares, Inc. |
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Other Acronyms, Abbreviations and Terms: | | |
20202021 Form 10-K | | Company’s Annual Report on Form 10-K for the year ended December 31, 20202021 |
401(k) Plan | | 401(k) Defined Contribution Plan |
Acquired Retirement Plan | | OmniAmerican Bank defined benefit pension plan |
AFS | | Available for sale |
ALCO | | Asset/Liability Committee |
AOCI | | Accumulated other comprehensive income or loss |
ASC | | Accounting Standards Codification |
ASU | | Accounting Standards Update issued by the FASB |
ATM | | Automated teller machines |
Basel Committee | | Basel Committee on Banking Supervision |
BOLI | | Bank owned life insurance |
CARES Act | | Coronavirus Aid, Relief, and Economic Security Act |
CDs | | Certificates of deposit |
CECL | | ASU No. 2016-13, Financial Instruments- Credit Losses, also known as Current Expected Credit Losses |
CET1 | | Common Equity Tier 1 |
CMOs | | Collateralized mortgage obligations |
COVID-19 | | Novel strain of coronavirus |
Dodd-Frank Act | | Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 |
Economic Aid Act | | Economic Aid to Hard-Hit Small Business, Nonprofits and Venues Act |
ESOP | | Employee Stock Ownership Plan |
ETR | | Effective tax rate |
Exchange Act | | Securities Exchange Act of 1934 |
FASB | | Financial Accounting Standards Board |
FDIC | | Federal Deposit Insurance Corporation |
Federal Reserve | | The Board of Governors of the Federal Reserve System |
FHLB | | Federal Home Loan Bank |
FRBNY | | Federal Reserve Bank of New York |
FRDW | | Federal Reserve Discount Window |
FTE | | Fully-taxable equivalents measurements |
GAAP | | United States generally accepted accounting principles |
GSEs | | U.S. government-sponsored enterprises |
Guidelines | | Interagency Guidelines Prescribing Standards for Safety and Soundness adopted by federal banking agencies |
Southside Bancshares, Inc. |1
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Guidelines | | Interagency Guidelines Prescribing Standards for Safety and Soundness adopted by federal banking agencies |
HTM | | Held to maturity |
ITM | | Interactive teller machines |
LIBOR | | London Interbank Offered Rate |
MBS | | Mortgage-backed securities |
MVPE | | Market value of portfolio equity |
OREO | | Other real estate owned |
PCD | | Purchased financial assets with credit deterioration under CECL |
PCI | | Financial assets purchased credit impaired under ASC 310-30 prior to CECL |
PPP | | Paycheck Protection Program |
PPP Facility | | Paycheck Protection Program Lending Facility |
Repurchase agreements | | Securities sold under agreements to repurchase |
Restoration Plan | | Nonfunded supplemental retirement plan |
Retirement Plan | | Defined benefit pension plan |
ROU | | Right-of-use |
SBA | | Small Business Administration |
SEC | | Securities and Exchange Commission |
SOFR | | Secured Overnight Financing Rate provided by the Federal Reserve Bank of New York |
TDR | | Troubled debt restructurings |
U.S. | | United States |
Southside Bancshares, Inc. |2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share amounts)
| | | September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
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ASSETS | ASSETS | | | | | ASSETS | | | | |
Cash and due from banks | Cash and due from banks | | $ | 83,346 | | | $ | 87,357 | | Cash and due from banks | | $ | 111,099 | | | $ | 91,120 | |
Interest earning deposits | Interest earning deposits | | 3,787 | | | 21,051 | | Interest earning deposits | | 12,910 | | | 110,633 | |
Federal funds sold | | Federal funds sold | | 48,280 | | | — | |
Total cash and cash equivalents | Total cash and cash equivalents | | 87,133 | | | 108,408 | | Total cash and cash equivalents | | 172,289 | | | 201,753 | |
Securities: | Securities: | | Securities: | |
Securities AFS, at estimated fair value (amortized cost of $2,650,237 and $2,437,513, respectively) | | 2,753,104 | | | 2,587,305 | | |
Securities HTM (estimated fair value of $98,035 and $118,198, respectively) | | 92,479 | | | 108,998 | | |
Securities AFS, at estimated fair value (amortized cost of $1,816,349 and $2,655,594, respectively) | | Securities AFS, at estimated fair value (amortized cost of $1,816,349 and $2,655,594, respectively) | | 1,733,354 | | | 2,764,325 | |
Securities HTM (estimated fair value of $969,807 and $95,235, respectively) | | Securities HTM (estimated fair value of $969,807 and $95,235, respectively) | | 1,083,672 | | | 90,780 | |
FHLB stock, at cost | FHLB stock, at cost | | 27,248 | | | 25,259 | | FHLB stock, at cost | | 13,726 | | | 14,375 | |
Equity investments | Equity investments | | 11,794 | | | 11,905 | | Equity investments | | 11,282 | | | 11,841 | |
Loans held for sale | Loans held for sale | | 1,131 | | | 3,695 | | Loans held for sale | | 815 | | | 1,684 | |
Loans: | Loans: | | | | | Loans: | | | | |
Loans | Loans | | 3,647,585 | | | 3,657,779 | | Loans | | 3,963,041 | | | 3,645,162 | |
Less: Allowance for loan losses | Less: Allowance for loan losses | | (38,022) | | | (49,006) | | Less: Allowance for loan losses | | (35,449) | | | (35,273) | |
Net loans | Net loans | | 3,609,563 | | | 3,608,773 | | Net loans | | 3,927,592 | | | 3,609,889 | |
Premises and equipment, net | Premises and equipment, net | | 142,736 | | | 144,576 | | Premises and equipment, net | | 142,772 | | | 142,509 | |
Operating lease ROU assets | Operating lease ROU assets | | 15,394 | | | 15,063 | | Operating lease ROU assets | | 14,427 | | | 15,073 | |
Goodwill | Goodwill | | 201,116 | | | 201,116 | | Goodwill | | 201,116 | | | 201,116 | |
Other intangible assets, net | Other intangible assets, net | | 7,553 | | | 9,744 | | Other intangible assets, net | | 5,687 | | | 6,895 | |
Interest receivable | Interest receivable | | 29,097 | | | 38,708 | | Interest receivable | | 41,539 | | | 39,145 | |
| Deferred tax asset, net | | Deferred tax asset, net | | 34,458 | | | — | |
Unsettled trades to sell securities | | Unsettled trades to sell securities | | 72,001 | | | — | |
| BOLI | BOLI | | 130,522 | | | 115,583 | | BOLI | | 132,675 | | | 131,232 | |
Other assets | Other assets | | 26,821 | | | 29,094 | | Other assets | | 18,656 | | | 28,985 | |
Total assets | Total assets | | $ | 7,135,691 | | | $ | 7,008,227 | | Total assets | | $ | 7,606,061 | | | $ | 7,259,602 | |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | |
Deposits: | Deposits: | | | | | Deposits: | | | | |
Noninterest bearing | Noninterest bearing | | $ | 1,596,781 | | | $ | 1,354,815 | | Noninterest bearing | | $ | 1,735,488 | | | $ | 1,644,775 | |
Interest bearing | Interest bearing | | 3,734,874 | | | 3,577,507 | | Interest bearing | | 4,512,921 | | | 4,077,552 | |
Total deposits | Total deposits | | 5,331,655 | | | 4,932,322 | | Total deposits | | 6,248,409 | | | 5,722,327 | |
Other borrowings | Other borrowings | | 20,724 | | | 23,172 | | Other borrowings | | 58,478 | | | 23,219 | |
FHLB borrowings | FHLB borrowings | | 659,204 | | | 832,527 | | FHLB borrowings | | 153,701 | | | 344,038 | |
Subordinated notes, net of unamortized debt issuance costs | Subordinated notes, net of unamortized debt issuance costs | | 98,500 | | | 197,251 | | Subordinated notes, net of unamortized debt issuance costs | | 98,604 | | | 98,534 | |
Trust preferred subordinated debentures, net of unamortized debt issuance costs | Trust preferred subordinated debentures, net of unamortized debt issuance costs | | 60,259 | | | 60,255 | | Trust preferred subordinated debentures, net of unamortized debt issuance costs | | 60,262 | | | 60,260 | |
Deferred tax liability, net | Deferred tax liability, net | | 12,486 | | | 15,549 | | Deferred tax liability, net | | — | | | 17,808 | |
Unsettled trades to purchase securities | Unsettled trades to purchase securities | | 4,433 | | | — | | Unsettled trades to purchase securities | | 174,038 | | | 18,995 | |
Operating lease liabilities | Operating lease liabilities | | 16,967 | | | 16,734 | | Operating lease liabilities | | 16,096 | | | 16,676 | |
Other liabilities | Other liabilities | | 53,597 | | | 55,120 | | Other liabilities | | 64,691 | | | 45,573 | |
Total liabilities | Total liabilities | | 6,257,825 | | | 6,132,930 | | Total liabilities | | 6,874,279 | | | 6,347,430 | |
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Off-balance-sheet arrangements, commitments and contingencies (Note 12) | Off-balance-sheet arrangements, commitments and contingencies (Note 12) | | 0 | | 0 | Off-balance-sheet arrangements, commitments and contingencies (Note 12) | | 0 | | 0 |
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Shareholders’ equity: | Shareholders’ equity: | | | | | Shareholders’ equity: | | | | |
Common stock: ($1.25 par value, 80,000,000 shares authorized, 37,960,148 shares issued at September 30, 2021 and 37,934,819 shares issued at December 31, 2020) | | 47,450 | | | 47,419 | | |
Common stock: ($1.25 par value, 80,000,000 shares authorized, 37,984,357 shares issued at June 30, 2022 and 37,968,969 shares issued at December 31, 2021) | | Common stock: ($1.25 par value, 80,000,000 shares authorized, 37,984,357 shares issued at June 30, 2022 and 37,968,969 shares issued at December 31, 2021) | | 47,481 | | | 47,461 | |
Paid-in capital | Paid-in capital | | 778,600 | | | 771,511 | | Paid-in capital | | 782,511 | | | 780,501 | |
Retained earnings | Retained earnings | | 163,809 | | | 111,208 | | Retained earnings | | 208,171 | | | 179,813 | |
Treasury stock: (shares at cost, 5,687,226 at September 30, 2021 and 4,983,645 at December 31, 2020) | | (155,967) | | | (123,921) | | |
Treasury stock: (shares at cost, 5,876,390 at June 30, 2022 and 5,616,917 at December 31, 2021) | | Treasury stock: (shares at cost, 5,876,390 at June 30, 2022 and 5,616,917 at December 31, 2021) | | (167,046) | | | (155,308) | |
AOCI | AOCI | | 43,974 | | | 69,080 | | AOCI | | (139,335) | | | 59,705 | |
Total shareholders’ equity | Total shareholders’ equity | | 877,866 | | | 875,297 | | Total shareholders’ equity | | 731,782 | | | 912,172 | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | | $ | 7,135,691 | | | $ | 7,008,227 | | Total liabilities and shareholders’ equity | | $ | 7,606,061 | | | $ | 7,259,602 | |
The accompanying notes are an integral part of these consolidated financial statements.
Southside Bancshares, Inc. |3
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
| | September 30, | | September 30, | | June 30, | | June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
Interest income: | Interest income: | | | | | | | | Interest income: | | | | | | | |
Loans | Loans | $ | 37,034 | | | $ | 38,185 | | | $ | 108,792 | | | $ | 119,195 | | Loans | $ | 38,344 | | | $ | 35,720 | | | $ | 73,232 | | | $ | 71,758 | |
Taxable investment securities | Taxable investment securities | 3,853 | | | 1,175 | | | 9,097 | | | 2,419 | | Taxable investment securities | 4,632 | | | 2,921 | | | 9,240 | | | 5,244 | |
Tax-exempt investment securities | Tax-exempt investment securities | 9,649 | | | 9,003 | | | 27,787 | | | 24,430 | | Tax-exempt investment securities | 10,605 | | | 9,173 | | | 20,824 | | | 18,138 | |
MBS | MBS | 4,405 | | | 7,048 | | | 15,140 | | | 27,626 | | MBS | 3,238 | | | 4,647 | | | 7,255 | | | 10,735 | |
FHLB stock and equity investments | FHLB stock and equity investments | 111 | | | 249 | | | 355 | | | 1,034 | | FHLB stock and equity investments | 77 | | | 108 | | | 190 | | | 244 | |
Other interest earning assets | Other interest earning assets | 24 | | | 17 | | | 56 | | | 220 | | Other interest earning assets | 204 | | | 17 | | | 232 | | | 32 | |
Total interest income | Total interest income | 55,076 | | | 55,677 | | | 161,227 | | | 174,924 | | Total interest income | 57,100 | | | 52,586 | | | 110,973 | | | 106,151 | |
Interest expense: | Interest expense: | | | | | | | | Interest expense: | | | | | | | |
Deposits | Deposits | 2,234 | | | 4,862 | | | 7,170 | | | 21,010 | | Deposits | 4,264 | | | 2,339 | | | 7,501 | | | 4,936 | |
FHLB borrowings | FHLB borrowings | 1,865 | | | 2,369 | | | 5,590 | | | 9,272 | | FHLB borrowings | 224 | | | 1,817 | | | 590 | | | 3,725 | |
Subordinated notes | Subordinated notes | 2,417 | | | 1,427 | | | 7,235 | | | 4,250 | | Subordinated notes | 1,000 | | | 2,423 | | | 1,998 | | | 4,818 | |
Trust preferred subordinated debentures | Trust preferred subordinated debentures | 345 | | | 378 | | | 1,045 | | | 1,469 | | Trust preferred subordinated debentures | 471 | | | 349 | | | 827 | | | 700 | |
Other borrowings | Other borrowings | 9 | | | 55 | | | 31 | | | 365 | | Other borrowings | 63 | | | 11 | | | 73 | | | 22 | |
Total interest expense | Total interest expense | 6,870 | | | 9,091 | | | 21,071 | | | 36,366 | | Total interest expense | 6,022 | | | 6,939 | | | 10,989 | | | 14,201 | |
Net interest income | Net interest income | 48,206 | | | 46,586 | | | 140,156 | | | 138,558 | | Net interest income | 51,078 | | | 45,647 | | | 99,984 | | | 91,950 | |
Provision for credit losses | (5,071) | | | (4,746) | | | (13,543) | | | 25,746 | | |
Provision for (reversal of) credit losses | | Provision for (reversal of) credit losses | (633) | | | 1,677 | | | (339) | | | (8,472) | |
Net interest income after provision for credit losses | Net interest income after provision for credit losses | 53,277 | | | 51,332 | | | 153,699 | | | 112,812 | | Net interest income after provision for credit losses | 51,711 | | | 43,970 | | | 100,323 | | | 100,422 | |
Noninterest income: | Noninterest income: | | | | | | | | Noninterest income: | | | | | | | |
Deposit services | Deposit services | 6,779 | | | 6,129 | | | 19,513 | | | 17,940 | | Deposit services | 6,496 | | | 6,609 | | | 13,124 | | | 12,734 | |
Net gain on sale of securities AFS | 1,381 | | | 78 | | | 3,399 | | | 8,281 | | |
Net gain (loss) on sale of securities AFS | | Net gain (loss) on sale of securities AFS | (2,177) | | | 15 | | | (3,720) | | | 2,018 | |
Gain on sale of loans | Gain on sale of loans | 299 | | | 1,071 | | | 1,285 | | | 1,924 | | Gain on sale of loans | 208 | | | 393 | | | 386 | | | 986 | |
Trust fees | Trust fees | 1,494 | | | 1,253 | | | 4,373 | | | 3,779 | | Trust fees | 1,520 | | | 1,496 | | | 3,014 | | | 2,879 | |
BOLI | BOLI | 637 | | | 680 | | | 1,908 | | | 1,899 | | BOLI | 720 | | | 645 | | | 1,411 | | | 1,271 | |
Brokerage services | Brokerage services | 846 | | | 564 | | | 2,476 | | | 1,643 | | Brokerage services | 1,098 | | | 850 | | | 1,907 | | | 1,630 | |
Other | Other | 1,333 | | | 1,366 | | | 4,371 | | | 3,366 | | Other | 1,232 | | | 925 | | | 3,700 | | | 3,038 | |
Total noninterest income | Total noninterest income | 12,769 | | | 11,141 | | | 37,325 | | | 38,832 | | Total noninterest income | 9,097 | | | 10,933 | | | 19,822 | | | 24,556 | |
Noninterest expense: | Noninterest expense: | | | | | | | | Noninterest expense: | | | | | | | |
Salaries and employee benefits | Salaries and employee benefits | 19,777 | | | 19,344 | | | 59,825 | | | 57,616 | | Salaries and employee benefits | 20,329 | | | 20,004 | | | 40,298 | | | 40,048 | |
Net occupancy | Net occupancy | 3,532 | | | 3,595 | | | 10,698 | | | 10,574 | | Net occupancy | 3,654 | | | 3,606 | | | 7,310 | | | 7,166 | |
| Advertising, travel & entertainment | Advertising, travel & entertainment | 579 | | | 519 | | | 1,491 | | | 1,643 | | Advertising, travel & entertainment | 716 | | | 475 | | | 1,453 | | | 912 | |
ATM expense | ATM expense | 311 | | | 271 | | | 821 | | | 728 | | ATM expense | 356 | | | 272 | | | 637 | | | 510 | |
Professional fees | Professional fees | 1,135 | | | 961 | | | 3,166 | | | 3,238 | | Professional fees | 1,147 | | | 1,040 | | | 2,074 | | | 2,031 | |
Software and data processing | Software and data processing | 1,503 | | | 1,215 | | | 4,221 | | | 3,737 | | Software and data processing | 1,739 | | | 1,406 | | | 3,370 | | | 2,718 | |
Communications | Communications | 552 | | | 495 | | | 1,689 | | | 1,494 | | Communications | 509 | | | 612 | | | 1,012 | | | 1,137 | |
FDIC insurance | FDIC insurance | 454 | | | 469 | | | 1,343 | | | 668 | | FDIC insurance | 477 | | | 435 | | | 949 | | | 889 | |
Amortization of intangibles | Amortization of intangibles | 695 | | | 881 | | | 2,191 | | | 2,792 | | Amortization of intangibles | 586 | | | 730 | | | 1,208 | | | 1,496 | |
Loss on redemption of subordinated notes | 1,118 | | | — | | | 1,118 | | | — | | |
| Other | Other | 2,107 | | | 3,866 | | | 7,133 | | | 9,502 | | Other | 2,593 | | | 2,119 | | | 4,990 | | | 5,026 | |
Total noninterest expense | Total noninterest expense | 31,763 | | | 31,616 | | | 93,696 | | | 91,992 | | Total noninterest expense | 32,106 | | | 30,699 | | | 63,301 | | | 61,933 | |
Income before income tax expense | Income before income tax expense | 34,283 | | | 30,857 | | | 97,328 | | | 59,652 | | Income before income tax expense | 28,702 | | | 24,204 | | | 56,844 | | | 63,045 | |
Income tax expense | Income tax expense | 4,977 | | | 3,783 | | | 12,614 | | | 7,071 | | Income tax expense | 3,297 | | | 2,887 | | | 6,443 | | | 7,637 | |
Net income | Net income | $ | 29,306 | | | $ | 27,074 | | | $ | 84,714 | | | $ | 52,581 | | Net income | $ | 25,405 | | | $ | 21,317 | | | $ | 50,401 | | | $ | 55,408 | |
| Earnings per common share – basic | Earnings per common share – basic | $ | 0.90 | | | $ | 0.82 | | | $ | 2.60 | | | $ | 1.58 | | Earnings per common share – basic | $ | 0.79 | | | $ | 0.65 | | | $ | 1.56 | | | $ | 1.69 | |
Earnings per common share – diluted | Earnings per common share – diluted | $ | 0.90 | | | $ | 0.82 | | | $ | 2.59 | | | $ | 1.58 | | Earnings per common share – diluted | $ | 0.79 | | | $ | 0.65 | | | $ | 1.56 | | | $ | 1.69 | |
Cash dividends paid per common share | Cash dividends paid per common share | $ | 0.33 | | | $ | 0.31 | | | $ | 0.98 | | | $ | 0.93 | | Cash dividends paid per common share | $ | 0.34 | | | $ | 0.33 | | | $ | 0.68 | | | $ | 0.65 | |
The accompanying notes are an integral part of these consolidated financial statements.
Southside Bancshares, Inc. |4
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands)
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| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net income | $ | 29,306 | | | $ | 27,074 | | | $ | 84,714 | | | $ | 52,581 | |
Other comprehensive income (loss): | | | | | | | |
Securities AFS and transferred securities: | | | | | | | |
Change in unrealized holding (loss) gain on AFS securities during the period | (27,714) | | | 1,601 | | | (43,527) | | | 88,900 | |
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Reclassification adjustment for amortization related to AFS and HTM debt securities | 312 | | | 394 | | | 1,118 | | | 730 | |
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Reclassification adjustment for net gain on sale of AFS securities, included in net income | (1,381) | | | (78) | | | (3,399) | | | (8,281) | |
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Derivatives: | | | | | | | |
Change in net unrealized gain (loss) on effective cash flow hedge interest rate swap derivatives | 377 | | | (197) | | | 8,296 | | | (25,236) | |
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Reclassification adjustment of net loss related to derivatives designated as cash flow hedges | 1,617 | | | 1,587 | | | 4,784 | | | 2,283 | |
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Pension plans: | | | | | | | |
Amortization of net actuarial loss and prior service credit, included in net periodic benefit cost | 316 | | | 819 | | | 948 | | | 2,207 | |
Prior service cost adjustment due to plan amendment | — | | | — | | | — | | | 163 | |
Change in net actuarial loss | — | | | — | | | — | | | (7,558) | |
Other comprehensive income (loss), before tax | (26,473) | | | 4,126 | | | (31,780) | | | 53,208 | |
Income tax benefit (expense) related to items of other comprehensive income (loss) | 5,560 | | | (866) | | | 6,674 | | | (11,173) | |
Other comprehensive (loss) income, net of tax | (20,913) | | | 3,260 | | | (25,106) | | | 42,035 | |
Comprehensive income | $ | 8,393 | | | $ | 30,334 | | | $ | 59,608 | | | $ | 94,616 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net income | $ | 25,405 | | | $ | 21,317 | | | $ | 50,401 | | | $ | 55,408 | |
Other comprehensive income (loss): | | | | | | | |
Securities AFS and transferred securities: | | | | | | | |
Change in unrealized holding gain (loss) on AFS securities during the period | (33,523) | | | 33,166 | | | (195,424) | | | (15,813) | |
| | | | | | | |
Change in net unrealized loss on securities transferred from AFS to HTM | (52,360) | | | — | | | (91,504) | | | — | |
| | | | | | | |
| | | | | | | |
Reclassification adjustment for amortization related to AFS and HTM debt securities | 1,310 | | | 390 | | | 1,553 | | | 806 | |
| | | | | | | |
Reclassification adjustment for net (gain) loss on sale of AFS securities, included in net income | 2,177 | | | (15) | | | 3,720 | | | (2,018) | |
| | | | | | | |
Derivatives: | | | | | | | |
Change in net unrealized gain (loss) on effective cash flow hedge interest rate swap derivatives | 7,047 | | | (3,104) | | | 27,593 | | | 7,919 | |
| | | | | | | |
Reclassification adjustment of net (gain) loss related to derivatives designated as cash flow hedges | 344 | | | 1,599 | | | 1,666 | | | 3,167 | |
| | | | | | | |
Pension plans: | | | | | | | |
Amortization of net actuarial loss, included in net periodic benefit cost | 241 | | | (9) | | | 447 | | | 632 | |
| | | | | | | |
| | | | | | | |
Other comprehensive income (loss), before tax | (74,764) | | | 32,027 | | | (251,949) | | | (5,307) | |
Income tax (expense) benefit related to items of other comprehensive income (loss) | 15,700 | | | (6,726) | | | 52,909 | | | 1,114 | |
Other comprehensive income (loss), net of tax | (59,064) | | | 25,301 | | | (199,040) | | | (4,193) | |
Comprehensive income (loss) | $ | (33,659) | | | $ | 46,618 | | | $ | (148,639) | | | $ | 51,215 | |
The accompanying notes are an integral part of these consolidated financial statements.
Southside Bancshares, Inc. |5
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)
(in thousands, except share and per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Paid In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Total Shareholders’ Equity |
Balance at December 31, 2020 | $ | 47,419 | | | $ | 771,511 | | | $ | 111,208 | | | $ | (123,921) | | | $ | 69,080 | | | $ | 875,297 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Net income | — | | | — | | | 34,091 | | | — | | | — | | | 34,091 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (29,494) | | | (29,494) | |
Issuance of common stock for dividend reinvestment plan (8,918 shares) | 11 | | | 321 | | | — | | | — | | | — | | | 332 | |
Purchase of common stock (427,396 shares) | — | | | — | | | — | | | (15,213) | | | — | | | (15,213) | |
Stock compensation expense | — | | | 674 | | | — | | | — | | | — | | | 674 | |
Net issuance of common stock under employee stock plans (126,260 shares) | — | | | 2,309 | | | (41) | | | 1,118 | | | — | | | 3,386 | |
Cash dividends paid on common stock ($0.32 per share) | — | | | — | | | (10,476) | | | — | | | — | | | (10,476) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Balance at March 31, 2021 | 47,430 | | | 774,815 | | | 134,782 | | | (138,016) | | | 39,586 | | | 858,597 | |
Net income | — | | | — | | | 21,317 | | | — | | | — | | | 21,317 | |
Other comprehensive income | — | | | — | | | — | | | — | | | 25,301 | | | 25,301 | |
Issuance of common stock for dividend reinvestment plan (7,780 shares) | 9 | | | 321 | | | — | | | — | | | — | | | 330 | |
Purchase of common stock (90,884 shares) | — | | | — | | | — | | | (3,497) | | | — | | | (3,497) | |
Stock compensation expense | — | | | 686 | | | — | | | — | | | — | | | 686 | |
Net issuance of common stock under employee stock plans (99,217 shares) | — | | | 1,591 | | | (47) | | | 897 | | | — | | | 2,441 | |
Cash dividends paid on common stock ($0.33 per share) | — | | | — | | | (10,775) | | | — | | | — | | | (10,775) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Balance at June 30, 2021 | 47,439 | | | 777,413 | | | 145,277 | | | (140,616) | | | 64,887 | | | 894,400 | |
Net income | — | | | — | | | 29,306 | | | — | | | — | | | 29,306 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (20,913) | | | (20,913) | |
Issuance of common stock for dividend reinvestment plan (8,631 shares) | 11 | | | 313 | | | — | | | — | | | — | | | 324 | |
Purchase of common stock (420,204 shares) | — | | | — | | | — | | | (15,438) | | | — | | | (15,438) | |
Stock compensation expense | — | | | 829 | | | — | | | — | | | — | | | 829 | |
Net issuance of common stock under employee stock plans (9,426 shares) | — | | | 45 | | | (68) | | | 87 | | | — | | | 64 | |
Cash dividends paid on common stock ($0.33 per share) | — | | | — | | | (10,706) | | | — | | | — | | | (10,706) | |
Balance at September 30, 2021 | $ | 47,450 | | | $ | 778,600 | | | $ | 163,809 | | | $ | (155,967) | | | $ | 43,974 | | | $ | 877,866 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Paid In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Total Shareholders’ Equity |
Balance at December 31, 2021 | $ | 47,461 | | | $ | 780,501 | | | $ | 179,813 | | | $ | (155,308) | | | $ | 59,705 | | | $ | 912,172 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Net income | — | | | — | | | 24,996 | | | — | | | — | | | 24,996 | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | (139,976) | | | (139,976) | |
Issuance of common stock for dividend reinvestment plan (7,671 shares) | 10 | | | 312 | | | — | | | — | | | — | | | 322 | |
Purchase of common stock (82,285 shares) | — | | | — | | | — | | | (3,358) | | | — | | | (3,358) | |
Stock compensation expense | — | | | 819 | | | — | | | — | | | — | | | 819 | |
Net issuance of common stock under employee stock plans (16,551 shares) | — | | | 182 | | | (67) | | | 154 | | | — | | | 269 | |
Cash dividends paid on common stock ($0.34 per share) | — | | | — | | | (11,003) | | | — | | | — | | | (11,003) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Balance at March 31, 2022 | 47,471 | | | 781,814 | | | 193,739 | | | (158,512) | | | (80,271) | | | 784,241 | |
Net income | — | | | — | | | 25,405 | | | — | | | — | | | 25,405 | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | (59,064) | | | (59,064) | |
Issuance of common stock for dividend reinvestment plan (7,717 shares) | 10 | | | 303 | | | — | | | — | | | — | | | 313 | |
Purchase of common stock (223,901 shares) | — | | | — | | | — | | | (8,842) | | | — | | | (8,842) | |
Stock compensation expense | — | | | 847 | | | — | | | — | | | — | | | 847 | |
Net issuance of common stock under employee stock plans (30,162 shares) | — | | | (453) | | | (67) | | | 308 | | | — | | | (212) | |
Cash dividends paid on common stock ($0.34 per share) | — | | | — | | | (10,906) | | | — | | | — | | | (10,906) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Balance at June 30, 2022 | $ | 47,481 | | | $ | 782,511 | | | $ | 208,171 | | | $ | (167,046) | | | $ | (139,335) | | | $ | 731,782 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Southside Bancshares, Inc. |6
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (continued)
(UNAUDITED)
(in thousands, except share and per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Paid In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | | | Total Shareholders’ Equity |
Balance at December 31, 2019 | $ | 47,360 | | | $ | 766,718 | | | $ | 80,274 | | | $ | (94,008) | | | $ | 4,236 | | | | | $ | 804,580 | |
Cumulative effect of accounting change | — | | | — | | | (7,830) | | | — | | | — | | | | | (7,830) | |
Adjusted beginning balance | 47,360 | | | 766,718 | | | 72,444 | | | (94,008) | | | 4,236 | | | | | 796,750 | |
Net income | — | | | — | | | 3,953 | | | — | | | — | | | | | 3,953 | |
Other comprehensive income | — | | | — | | | — | | | — | | | 29,303 | | | | | 29,303 | |
Issuance of common stock for dividend reinvestment plan (10,607 shares) | 13 | | | 334 | | | — | | | — | | | — | | | | | 347 | |
Purchase of common stock (869,723 shares) | — | | | — | | | — | | | (25,842) | | | — | | | | | (25,842) | |
Stock compensation expense | — | | | 695 | | | — | | | — | | | — | | | | | 695 | |
Net issuance of common stock under employee stock plans (47,428 shares) | — | | | 693 | | | (40) | | | 435 | | | — | | | | | 1,088 | |
Cash dividends paid on common stock ($0.31 per share) | — | | | — | | | (10,494) | | | — | | | — | | | | | (10,494) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Balance at March 31, 2020 | 47,373 | | | 768,440 | | | 65,863 | | | (119,415) | | | 33,539 | | | | | 795,800 | |
Net income | — | | | — | | | 21,554 | | | — | | | — | | | | | 21,554 | |
Other comprehensive income | — | | | — | | | — | | | — | | | 9,472 | | | | | 9,472 | |
Issuance of common stock for dividend reinvestment plan (11,532 shares) | 14 | | | 322 | | | — | | | — | | | — | | | | | 336 | |
| | | | | | | | | | | | | |
Stock compensation expense | — | | | 772 | | | — | | | — | | | — | | | | | 772 | |
Net issuance of common stock under employee stock plans (9,342 shares) | — | | | (127) | | | (50) | | | 81 | | | — | | | | | (96) | |
Cash dividends paid on common stock ($0.31 per share) | — | | | — | | | (10,233) | | | — | | | — | | | | | (10,233) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Balance at June 30, 2020 | 47,387 | | | 769,407 | | | 77,134 | | | (119,334) | | | 43,011 | | | | | 817,605 | |
Net income | — | | | — | | | 27,074 | | | — | | | — | | | | | 27,074 | |
Other comprehensive income | — | | | — | | | — | | | — | | | 3,260 | | | | | 3,260 | |
Issuance of common stock for dividend reinvestment plan (12,201 shares) | 15 | | | 322 | | | — | | | — | | | — | | | | | 337 | |
| | | | | | | | | | | | | |
Stock compensation expense | — | | | 786 | | | — | | | — | | | — | | | | | 786 | |
Net issuance of common stock under employee stock plans (27,477 shares) | — | | | 124 | | | (47) | | | 254 | | | — | | | | | 331 | |
Cash dividends paid on common stock ($0.31 per share) | — | | | — | | | (10,245) | | | — | | | — | | | | | (10,245) | |
Balance at September 30, 2020 | $ | 47,402 | | | $ | 770,639 | | | $ | 93,916 | | | $ | (119,080) | | | $ | 46,271 | | | | | $ | 839,148 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Paid In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | | | Total Shareholders’ Equity |
Balance at December 31, 2020 | $ | 47,419 | | | $ | 771,511 | | | $ | 111,208 | | | $ | (123,921) | | | $ | 69,080 | | | | | $ | 875,297 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Net income | — | | | — | | | 34,091 | | | — | | | — | | | | | 34,091 | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | (29,494) | | | | | (29,494) | |
Issuance of common stock for dividend reinvestment plan (8,918 shares) | 11 | | | 321 | | | — | | | — | | | — | | | | | 332 | |
Purchase of common stock (427,396 shares) | — | | | — | | | — | | | (15,213) | | | — | | | | | (15,213) | |
Stock compensation expense | — | | | 674 | | | — | | | — | | | — | | | | | 674 | |
Net issuance of common stock under employee stock plans (126,260 shares) | — | | | 2,309 | | | (41) | | | 1,118 | | | — | | | | | 3,386 | |
Cash dividends paid on common stock ($0.32 per share) | — | | | — | | | (10,476) | | | — | | | — | | | | | (10,476) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Balance at March 31, 2021 | 47,430 | | | 774,815 | | | 134,782 | | | (138,016) | | | 39,586 | | | | | 858,597 | |
Net income | — | | | — | | | 21,317 | | | — | | | — | | | | | 21,317 | |
Other comprehensive income | — | | | — | | | — | | | — | | | 25,301 | | | | | 25,301 | |
Issuance of common stock for dividend reinvestment plan (7,780 shares) | 9 | | | 321 | | | — | | | — | | | — | | | | | 330 | |
Purchase of common stock (90,884 shares) | — | | | — | | | — | | | (3,497) | | | — | | | | | (3,497) | |
Stock compensation expense | — | | | 686 | | | — | | | — | | | — | | | | | 686 | |
Net issuance of common stock under employee stock plans (99,217 shares) | — | | | 1,591 | | | (47) | | | 897 | | | — | | | | | 2,441 | |
Cash dividends paid on common stock ($0.33 per share) | — | | | — | | | (10,775) | | | — | | | — | | | | | (10,775) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Balance at June 30, 2021 | $ | 47,439 | | | $ | 777,413 | | | $ | 145,277 | | | $ | (140,616) | | | $ | 64,887 | | | | | $ | 894,400 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
Southside Bancshares, Inc. |7
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
| | | Nine Months Ended | | Six Months Ended |
| | September 30, | | June 30, |
| | 2021 | | 2020 | | 2022 | | 2021 |
OPERATING ACTIVITIES: | OPERATING ACTIVITIES: | | | | OPERATING ACTIVITIES: | | | |
Net income | Net income | $ | 84,714 | | | $ | 52,581 | | Net income | $ | 50,401 | | | $ | 55,408 | |
Adjustments to reconcile net income to net cash provided by operations: | Adjustments to reconcile net income to net cash provided by operations: | | | | Adjustments to reconcile net income to net cash provided by operations: | | | |
Depreciation and net amortization | Depreciation and net amortization | 8,634 | | | 9,128 | | Depreciation and net amortization | 5,561 | | | 5,780 | |
Securities premium amortization (discount accretion), net | Securities premium amortization (discount accretion), net | 17,709 | | | 17,954 | | Securities premium amortization (discount accretion), net | 9,346 | | | 12,186 | |
Loan (discount accretion) premium amortization, net | Loan (discount accretion) premium amortization, net | (649) | | | (847) | | Loan (discount accretion) premium amortization, net | (323) | | | (683) | |
Provision for credit losses | (13,543) | | | 25,746 | | |
Provision for (reversal of) credit losses | | Provision for (reversal of) credit losses | (339) | | | (8,472) | |
Stock compensation expense | Stock compensation expense | 2,189 | | | 2,253 | | Stock compensation expense | 1,666 | | | 1,360 | |
Deferred tax expense (benefit) | Deferred tax expense (benefit) | 3,612 | | | (4,305) | | Deferred tax expense (benefit) | 643 | | | 2,022 | |
| Net gain on sale of AFS securities | (3,399) | | | (8,281) | | |
Net (gain) loss on sale of AFS securities | | Net (gain) loss on sale of AFS securities | 3,720 | | | (2,018) | |
Loss on impairment of investments | | Loss on impairment of investments | 38 | | | — | |
Net loss on premises and equipment | Net loss on premises and equipment | 315 | | | 821 | | Net loss on premises and equipment | 433 | | | 302 | |
Gross proceeds from sales of loans held for sale | Gross proceeds from sales of loans held for sale | 36,961 | | | 48,343 | | Gross proceeds from sales of loans held for sale | 15,835 | | | 27,286 | |
Gross originations of loans held for sale | Gross originations of loans held for sale | (34,397) | | | (56,646) | | Gross originations of loans held for sale | (14,966) | | | (26,101) | |
Net (gain) loss on OREO | Net (gain) loss on OREO | (180) | | | 129 | | Net (gain) loss on OREO | (12) | | | (2) | |
Retirement plan curtailment expense | — | | | 163 | | |
Loss on redemption of subordinated notes | 1,118 | | | — | | |
| Net change in: | Net change in: | | | | Net change in: | | | |
Interest receivable | Interest receivable | 9,611 | | | (1,987) | | Interest receivable | (2,394) | | | 2,112 | |
Other assets | Other assets | (2,803) | | | (35,530) | | Other assets | (3,472) | | | 8,409 | |
Interest payable | Interest payable | (1,223) | | | (3,673) | | Interest payable | (346) | | | (784) | |
Other liabilities | Other liabilities | 19,981 | | | 4,402 | | Other liabilities | 62,242 | | | 3,414 | |
Net cash provided by operating activities | 128,650 | | | 50,251 | | |
Net cash provided by (used in) operating activities | | Net cash provided by (used in) operating activities | 128,033 | | | 80,219 | |
| INVESTING ACTIVITIES: | INVESTING ACTIVITIES: | | | | INVESTING ACTIVITIES: | | | |
Securities AFS: | Securities AFS: | | Securities AFS: | |
Purchases | Purchases | (569,807) | | | (821,232) | | Purchases | (523,339) | | | (392,788) | |
Sales | Sales | 104,728 | | | 291,581 | | Sales | 264,792 | | | 46,720 | |
Maturities, calls and principal repayments | Maturities, calls and principal repayments | 243,507 | | | 316,072 | | Maturities, calls and principal repayments | 78,779 | | | 181,956 | |
Securities HTM: | Securities HTM: | | | | Securities HTM: | | | |
| Maturities, calls and principal repayments | Maturities, calls and principal repayments | 16,602 | | | 19,820 | | Maturities, calls and principal repayments | 6,097 | | | 14,220 | |
Proceeds from redemption of FHLB stock and equity investments | Proceeds from redemption of FHLB stock and equity investments | 19,240 | | | 20,000 | | Proceeds from redemption of FHLB stock and equity investments | 11,041 | | | 16,240 | |
Purchases of FHLB stock and equity investments | Purchases of FHLB stock and equity investments | (21,113) | | | (5,483) | | Purchases of FHLB stock and equity investments | (9,833) | | | (18,973) | |
Net loan originations | 9,314 | | | (222,342) | | |
Net loan paydowns (originations) | | Net loan paydowns (originations) | (317,731) | | | 15,333 | |
| Purchases of premises and equipment | Purchases of premises and equipment | (6,491) | | | (10,216) | | Purchases of premises and equipment | (4,965) | | | (4,507) | |
Purchases of BOLI | (13,000) | | | (12,500) | | |
| Proceeds from sales of premises and equipment | Proceeds from sales of premises and equipment | 1,853 | | | 114 | | Proceeds from sales of premises and equipment | 7 | | | 1,850 | |
Net proceeds from sales of OREO | Net proceeds from sales of OREO | 797 | | | 277 | | Net proceeds from sales of OREO | 34 | | | 59 | |
Proceeds from sales of repossessed assets | Proceeds from sales of repossessed assets | 247 | | | 158 | | Proceeds from sales of repossessed assets | 47 | | | 44 | |
Net cash used in investing activities | (214,123) | | | (423,751) | | |
Net cash provided by (used in) investing activities | | Net cash provided by (used in) investing activities | (495,071) | | | (139,846) | |
| (continued) | (continued) | | (continued) | |
| |
Southside Bancshares, Inc. | 8
| | SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES | SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES | | SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES | |
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) | CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) | | CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) | |
(UNAUDITED) | (UNAUDITED) | | (UNAUDITED) | |
(in thousands) | (in thousands) | | (in thousands) | |
| | Nine Months Ended | | Six Months Ended |
| | September 30, | | June 30, |
| | 2021 | | 2020 | | 2022 | | 2021 |
FINANCING ACTIVITIES: | FINANCING ACTIVITIES: | | | | FINANCING ACTIVITIES: | | | |
Net change in deposits | Net change in deposits | $ | 399,303 | | | $ | 420,068 | | Net change in deposits | 526,069 | | | 223,822 | |
Net change in other borrowings | Net change in other borrowings | (2,448) | | | 13,210 | | Net change in other borrowings | 35,259 | | | 611 | |
Proceeds from FHLB borrowings | Proceeds from FHLB borrowings | 11,648,180 | | | 10,135,401 | | Proceeds from FHLB borrowings | 1,050,000 | | | 7,080,064 | |
Repayment of FHLB borrowings | Repayment of FHLB borrowings | (11,821,503) | | | (10,155,201) | | Repayment of FHLB borrowings | (1,240,337) | | | (7,191,223) | |
Net proceeds from issuance of subordinated notes | Net proceeds from issuance of subordinated notes | (95) | | | — | | Net proceeds from issuance of subordinated notes | — | | | (95) | |
Redemption of subordinated notes | (100,011) | | | — | | |
| Proceeds from stock option exercises | Proceeds from stock option exercises | 6,108 | | | 1,502 | | Proceeds from stock option exercises | 409 | | | 5,979 | |
Cash paid to tax authority related to tax withholding on share-based awards | Cash paid to tax authority related to tax withholding on share-based awards | (217) | | | (179) | | Cash paid to tax authority related to tax withholding on share-based awards | (352) | | | (152) | |
Purchase of common stock | Purchase of common stock | (34,148) | | | (25,842) | | Purchase of common stock | (12,200) | | | (18,710) | |
Proceeds from the issuance of common stock for dividend reinvestment plan | Proceeds from the issuance of common stock for dividend reinvestment plan | 986 | | | 1,020 | | Proceeds from the issuance of common stock for dividend reinvestment plan | 635 | | | 662 | |
| Cash dividends paid | Cash dividends paid | (31,957) | | | (30,972) | | Cash dividends paid | (21,909) | | | (21,251) | |
Net cash provided by financing activities | 64,198 | | | 359,007 | | |
Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | 337,574 | | | 79,707 | |
| Net (decrease) increase in cash and cash equivalents | (21,275) | | | (14,493) | | |
Net increase (decrease) in cash and cash equivalents | | Net increase (decrease) in cash and cash equivalents | (29,464) | | | 20,080 | |
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | 108,408 | | | 110,697 | | Cash and cash equivalents at beginning of period | 201,753 | | | 108,408 | |
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | $ | 87,133 | | | $ | 96,204 | | Cash and cash equivalents at end of period | $ | 172,289 | | | $ | 128,488 | |
| SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION: | SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION: | | | | SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION: | | | |
| Interest paid | Interest paid | $ | 22,295 | | | $ | 40,039 | | Interest paid | $ | 11,334 | | | $ | 14,984 | |
Income taxes paid | Income taxes paid | $ | 8,750 | | | $ | 9,000 | | Income taxes paid | $ | 5,200 | | | $ | 6,250 | |
| SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: | SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: | | | | SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: | | | |
| Loans transferred to other repossessed assets and real estate through foreclosure | Loans transferred to other repossessed assets and real estate through foreclosure | $ | 740 | | | $ | 627 | | Loans transferred to other repossessed assets and real estate through foreclosure | $ | 197 | | | $ | 531 | |
| Transfer of AFS to HTM securities | | Transfer of AFS to HTM securities | $ | 1,089,978 | | | $ | — | |
| Unsettled trades to purchase securities | | Unsettled trades to purchase securities | $ | (174,038) | | | $ | (41,888) | |
Unsettled trades to sell securities | | Unsettled trades to sell securities | $ | 72,001 | | | $ | — | |
| Unsettled trades to purchase securities | $ | (4,433) | | | $ | (7,294) | | |
|
The accompanying notes are an integral part of these consolidated financial statements.
Southside Bancshares, Inc. |9
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Summary of Significant Accounting and Reporting Policies
Basis of Presentation
In this report, the words “the Company,” “we,” “us,” and “our” refer to the combined entities of Southside Bancshares, Inc. and its subsidiaries, including Southside Bank. The words “Southside” and “Southside Bancshares” refer to Southside Bancshares, Inc. The words “Southside Bank” and “the Bank” refer to Southside Bank.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, not all information required by GAAP for complete financial statements is included in these interim statements. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted only of normal recurring items. The preparation of these consolidated financial statements in accordance with GAAP requires the use of management’s estimates. These estimates are subjective in nature and involve matters of judgment. Actual amounts could differ from these estimates.
Interim results are not necessarily indicative of results for a full year. These financial statements should be read in conjunction with the financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2020.2021.
Accounting Changes and Reclassifications
Certain prior period amounts may be reclassified to conform to current year presentation.
Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 is intended to provide relief for companies preparing for discontinuation of interest rates based on LIBOR. The ASU provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or other reference rates expected to be discontinued. ASU 2020-04 also provides for a one-time sale and/or transfer to AFS or trading to be made for HTM debt securities that both reference an eligible reference rate and were classified as HTM before January 1, 2020. ASU 2020-04 was effective for all entities as of March 12, 2020 and through December 31, 2022. Companies can apply the ASU as of the beginning of the interim period that includes March 12, 2020 or any date thereafter. The guidance requires companies to apply the guidance prospectively to contract modifications and hedging relationships while the one-time election to sell and/or transfer debt securities classified as HTM may be made any time after March 12, 2020. Additionally, in January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope,” which provided additional clarification that certain optional expedients and exceptions noted above apply to derivative instruments that use an interest rate for margining, discounting or contract price alignment that is modified as a result of reference rate reform. We have established an officer level committee to guide our transition from LIBOR and have begun efforts to transitionare transitioning to alternative rates consistent with industry timelines. We continue to evaluate our LIBOR exposure, and note that we have the option to have certain of our interest rate swaps fall back to an adjusted SOFR index. Additionally, we anticipate the trust preferred subordinated debentures will transition to a SOFR index once the Federal Reserve completes the relevant rule. We have identified our products that utilize LIBOR and are implementinghave implemented enhanced fallback language to facilitate the transition to alternative reference rates. We are evaluating existing systems and have begun offering newalternative rates. We are no longer offering LIBOR indexed rates on a limited basis.newly originated loans. ASU 2020-04 and ASU 2021-01 are not expected to have a material impact on our consolidated financial statements.
In March 2022, the FASB issued ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 eliminates the accounting guidance for TDRs, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan. Additionally, ASU 2022-02 requires an entity to disclose current-period gross write-offs by year of origination for financing receivables within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. ASU 2022-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022 for companies that have adopted CECL, which we adopted on January 1, 2020. Early adoption is permitted. The guidance should be applied prospectively with the option to use a modified retrospective transition method for the recognition and measurement of TDRs, resulting in a cumulative-effect adjustment to retained earnings. ASU 2022-02 is not expected to have a material impact on our consolidated financial statements.
Southside Bancshares, Inc. |10
In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security should not be considered in measuring fair value. It also requires the following disclosures for equity securities subject to the contractual sale restrictions: 1) the fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet; 2) the nature and remaining duration of the restriction(s); and 3) the circumstances that could cause a lapse in the restriction(s). ASU 2022-03 is effective for the fiscal years and interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The guidance should be applied prospectively. ASU 2022-04 is not expected to have a material impact on our consolidated financial statements.
Southside Bancshares, Inc. |10
2. Earnings Per Share
Earnings per share on a basic and diluted basis are calculated as follows (in thousands, except per share amounts):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
Basic and Diluted Earnings: | Basic and Diluted Earnings: | | | | | | | | Basic and Diluted Earnings: | | | | | | | |
Net income | Net income | $ | 29,306 | | | $ | 27,074 | | | $ | 84,714 | | | $ | 52,581 | | Net income | $ | 25,405 | | | $ | 21,317 | | | $ | 50,401 | | | $ | 55,408 | |
Basic weighted-average shares outstanding | Basic weighted-average shares outstanding | 32,465 | | | 33,047 | | | 32,641 | | | 33,250 | | Basic weighted-average shares outstanding | 32,119 | | | 32,632 | | | 32,237 | | | 32,730 | |
Add: Stock awards | Add: Stock awards | 91 | | | 51 | | | 118 | | | 81 | | Add: Stock awards | 132 | | | 167 | | | 157 | | | 130 | |
Diluted weighted-average shares outstanding | Diluted weighted-average shares outstanding | 32,556 | | | 33,098 | | | 32,759 | | | 33,331 | | Diluted weighted-average shares outstanding | 32,251 | | | 32,799 | | | 32,394 | | | 32,860 | |
Basic earnings per share: | Basic earnings per share: | | | | | | | | Basic earnings per share: | | | | | | | |
Net income | Net income | $ | 0.90 | | | $ | 0.82 | | | $ | 2.60 | | | $ | 1.58 | | Net income | $ | 0.79 | | | $ | 0.65 | | | $ | 1.56 | | | $ | 1.69 | |
Diluted earnings per share: | Diluted earnings per share: | | | | | | | | Diluted earnings per share: | | | | | | | |
Net income | Net income | $ | 0.90 | | | $ | 0.82 | | | $ | 2.59 | | | $ | 1.58 | | Net income | $ | 0.79 | | | $ | 0.65 | | | $ | 1.56 | | | $ | 1.69 | |
For the three and ninesix months ended SeptemberJune 30, 2021,2022, there were approximately 462,00018,000 and 288,0001,000 anti-dilutive shares, respectively. For the three and ninesix months ended SeptemberJune 30, 2020,2021, there were approximately 3,000 and 835,000 and 811,000231,000 anti-dilutive shares, respectively.
Southside Bancshares, Inc. |11
3. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) by component are as follows (in thousands):
| | | Three Months Ended September 30, 2021 | | Three Months Ended June 30, 2022 |
| | | | | Pension Plans | | |
| | Unrealized Gains (Losses) on Securities | | | Unrealized Gains (Losses) on Derivatives | | Net Prior Service (Cost) Credit | | Net Gain (Loss) | | Total | | Unrealized Gains (Losses) on Securities | | | Unrealized Gains (Losses) on Derivatives | | | | Retirement Plans | | Total |
Beginning balance, net of tax | Beginning balance, net of tax | $ | 102,628 | | | | $ | (8,334) | | | $ | 149 | | | $ | (29,556) | | | $ | 64,887 | | Beginning balance, net of tax | $ | (72,699) | | | | $ | 16,018 | | | | | $ | (23,590) | | | $ | (80,271) | |
Other comprehensive income (loss): | Other comprehensive income (loss): | | | | Other comprehensive income (loss): | | | | | |
Other comprehensive (loss) income before reclassifications | (27,714) | | | | 377 | | | — | | | — | | | (27,337) | | |
Other comprehensive income (loss) before reclassifications | | Other comprehensive income (loss) before reclassifications | (85,883) | | | | 7,047 | | | | | — | | | (78,836) | |
Reclassification adjustments included in net income | Reclassification adjustments included in net income | (1,069) | | | | 1,617 | | | — | | | 316 | | | 864 | | Reclassification adjustments included in net income | 3,487 | | | | 344 | | | | | 241 | | | 4,072 | |
Income tax benefit (expense) | 6,045 | | | | (418) | | | — | | | (67) | | | 5,560 | | |
Net current-period other comprehensive (loss) income, net of tax | (22,738) | | | | 1,576 | | | — | | | 249 | | | (20,913) | | |
Income tax (expense) benefit | | Income tax (expense) benefit | 17,303 | | | | (1,552) | | | | | (51) | | | 15,700 | |
Net current-period other comprehensive income (loss), net of tax | | Net current-period other comprehensive income (loss), net of tax | (65,093) | | | | 5,839 | | | | | 190 | | | (59,064) | |
Ending balance, net of tax | Ending balance, net of tax | $ | 79,890 | | | | $ | (6,758) | | | $ | 149 | | | $ | (29,307) | | | $ | 43,974 | | Ending balance, net of tax | $ | (137,792) | | | | $ | 21,857 | | | | | $ | (23,400) | | | $ | (139,335) | |
| | | Nine Months Ended September 30, 2021 | | Six Months Ended June 30, 2022 |
| | | | | Pension Plans | | |
| | Unrealized Gains (Losses) on Securities | | | Unrealized Gains (Losses) on Derivatives | | Net Prior Service (Cost) Credit | | Net Gain (Loss) | | Total | | Unrealized Gains (Losses) on Securities | | | Unrealized Gains (Losses) on Derivatives | | | | Retirement Plans | | Total |
Beginning balance, net of tax | Beginning balance, net of tax | $ | 116,078 | | | | $ | (17,091) | | | $ | 149 | | | $ | (30,056) | | | $ | 69,080 | | Beginning balance, net of tax | $ | 84,716 | | | | $ | (1,257) | | | | | $ | (23,754) | | | $ | 59,705 | |
Other comprehensive income (loss): | Other comprehensive income (loss): | | | | Other comprehensive income (loss): | | | | | |
Other comprehensive (loss) income before reclassifications | Other comprehensive (loss) income before reclassifications | (43,527) | | | | 8,296 | | | — | | | — | | | (35,231) | | Other comprehensive (loss) income before reclassifications | (286,928) | | | | 27,593 | | | | | — | | | (259,335) | |
Reclassification adjustments included in net income | Reclassification adjustments included in net income | (2,281) | | | | 4,784 | | | — | | | 948 | | | 3,451 | | Reclassification adjustments included in net income | 5,273 | | | | 1,666 | | | | | 447 | | | 7,386 | |
| Income tax benefit (expense) | Income tax benefit (expense) | 9,620 | | | | (2,747) | | | — | | | (199) | | | 6,674 | | Income tax benefit (expense) | 59,147 | | | | (6,145) | | | | | (93) | | | 52,909 | |
Net current-period other comprehensive (loss) income, net of tax | Net current-period other comprehensive (loss) income, net of tax | (36,188) | | | | 10,333 | | | — | | | 749 | | | (25,106) | | Net current-period other comprehensive (loss) income, net of tax | (222,508) | | | | 23,114 | | | | | 354 | | | (199,040) | |
| Ending balance, net of tax | Ending balance, net of tax | $ | 79,890 | | | | $ | (6,758) | | | $ | 149 | | | $ | (29,307) | | | $ | 43,974 | | Ending balance, net of tax | $ | (137,792) | | | | $ | 21,857 | | | | | $ | (23,400) | | | $ | (139,335) | |
|
Southside Bancshares, Inc. |12
| | | Three Months Ended September 30, 2020 | | Three Months Ended June 30, 2021 |
| | | | | Pension Plans | | |
| | Unrealized Gains (Losses) on Securities | | | Unrealized Gains (Losses) on Derivatives | | Net Prior Service (Cost) Credit | | Net Gain (Loss) | | Total | | Unrealized Gains (Losses) on Securities | | | Unrealized Gains (Losses) on Derivatives | | | Retirement Plans | | Total |
Beginning balance, net of tax | Beginning balance, net of tax | $ | 100,790 | | | | $ | (20,904) | | | $ | (20) | | | $ | (36,855) | | | $ | 43,011 | | Beginning balance, net of tax | $ | 76,131 | | | | $ | (7,144) | | | | $ | (29,401) | | | $ | 39,586 | |
Other comprehensive income (loss): | Other comprehensive income (loss): | | | | Other comprehensive income (loss): | | | | | |
Other comprehensive income (loss) before reclassifications | Other comprehensive income (loss) before reclassifications | 1,601 | | | | (197) | | | — | | | — | | | 1,404 | | Other comprehensive income (loss) before reclassifications | 33,166 | | | | (3,104) | | | | — | | | 30,062 | |
Reclassification adjustments included in net income | Reclassification adjustments included in net income | 316 | | | | 1,587 | | | (2) | | | 821 | | | 2,722 | | Reclassification adjustments included in net income | 375 | | | | 1,599 | | | | (9) | | | 1,965 | |
Income tax expense | (403) | | | | (292) | | | — | | | (171) | | | (866) | | |
Income tax (expense) benefit | | Income tax (expense) benefit | (7,044) | | | | 315 | | | | 3 | | | (6,726) | |
Net current-period other comprehensive income (loss), net of tax | Net current-period other comprehensive income (loss), net of tax | 1,514 | | | | 1,098 | | | (2) | | | 650 | | | 3,260 | | Net current-period other comprehensive income (loss), net of tax | 26,497 | | | | (1,190) | | | | (6) | | | 25,301 | |
Ending balance, net of tax | Ending balance, net of tax | $ | 102,304 | | | | $ | (19,806) | | | $ | (22) | | | $ | (36,205) | | | $ | 46,271 | | Ending balance, net of tax | $ | 102,628 | | | | $ | (8,334) | | | | $ | (29,407) | | | $ | 64,887 | |
| | | Nine Months Ended September 30, 2020 | | Six Months Ended June 30, 2021 |
| | | | | Pension Plans | | |
| | Unrealized Gains (Losses) on Securities | | | Unrealized Gains (Losses) on Derivatives | | Net Prior Service (Cost) Credit | | Net Gain (Loss) | | Total | | Unrealized Gains (Losses) on Securities | | | Unrealized Gains (Losses) on Derivatives | | | Retirement Plans | | Total |
Beginning balance, net of tax | Beginning balance, net of tax | $ | 38,038 | | | | $ | (1,672) | | | $ | (145) | | | $ | (31,985) | | | $ | 4,236 | | Beginning balance, net of tax | $ | 116,078 | | | | $ | (17,091) | | | | $ | (29,907) | | | $ | 69,080 | |
| Other comprehensive income (loss): | Other comprehensive income (loss): | | | | Other comprehensive income (loss): | | | | | |
Other comprehensive income (loss) before reclassifications | Other comprehensive income (loss) before reclassifications | 88,900 | | | | (25,236) | | | 163 | | | (7,558) | | | 56,269 | | Other comprehensive income (loss) before reclassifications | (15,813) | | | | 7,919 | | | | — | | | (7,894) | |
Reclassification adjustments included in net income | Reclassification adjustments included in net income | (7,551) | | | | 2,283 | | | (6) | | | 2,213 | | | (3,061) | | Reclassification adjustments included in net income | (1,212) | | | | 3,167 | | | | 632 | | | 2,587 | |
Income tax (expense) benefit | Income tax (expense) benefit | (17,083) | | | | 4,819 | | | (34) | | | 1,125 | | | (11,173) | | Income tax (expense) benefit | 3,575 | | | | (2,329) | | | | (132) | | | 1,114 | |
Net current-period other comprehensive income (loss), net of tax | Net current-period other comprehensive income (loss), net of tax | 64,266 | | | | (18,134) | | | 123 | | | (4,220) | | | 42,035 | | Net current-period other comprehensive income (loss), net of tax | (13,450) | | | | 8,757 | | | | 500 | | | (4,193) | |
Ending balance, net of tax | Ending balance, net of tax | $ | 102,304 | | | | $ | (19,806) | | | $ | (22) | | | $ | (36,205) | | | $ | 46,271 | | Ending balance, net of tax | $ | 102,628 | | | | $ | (8,334) | | | | $ | (29,407) | | | $ | 64,887 | |
Southside Bancshares, Inc. |13
The reclassification adjustments out of accumulated other comprehensive income (loss) included in net income are presented below (in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| | Unrealized gains and losses on securities transferred: | Unrealized gains and losses on securities transferred: | | Unrealized gains and losses on securities transferred: | |
Amortization of unrealized gains and losses (1) | Amortization of unrealized gains and losses (1) | $ | (312) | | | $ | (394) | | | $ | (1,118) | | | $ | (730) | | Amortization of unrealized gains and losses (1) | $ | (1,310) | | | $ | (390) | | | $ | (1,553) | | | $ | (806) | |
Tax benefit | Tax benefit | 66 | | | 82 | | | 235 | | | 153 | | Tax benefit | 275 | | | 82 | | | 326 | | | 169 | |
Net of tax | Net of tax | (246) | | | (312) | | | (883) | | | (577) | | Net of tax | (1,035) | | | (308) | | | (1,227) | | | (637) | |
| Unrealized gains and losses on available for sale securities: | Unrealized gains and losses on available for sale securities: | | Unrealized gains and losses on available for sale securities: | |
Realized net gain on sale of securities (2) | 1,381 | | | 78 | | | 3,399 | | | 8,281 | | |
Realized net gain (loss) on sale of securities (2) | | Realized net gain (loss) on sale of securities (2) | (2,177) | | | 15 | | | (3,720) | | | 2,018 | |
| Tax expense | (290) | | | (16) | | | (714) | | | (1,739) | | |
Tax (expense) benefit | | Tax (expense) benefit | 457 | | | (4) | | | 781 | | | (424) | |
Net of tax | Net of tax | 1,091 | | | 62 | | | 2,685 | | | 6,542 | | Net of tax | (1,720) | | | 11 | | | (2,939) | | | 1,594 | |
| Derivatives: | Derivatives: | | Derivatives: | |
Realized net loss on interest rate swap derivatives (3) | (1,617) | | | (1,593) | | | (4,784) | | | (2,303) | | |
Realized net gain (loss) on interest rate swap derivatives (3) | | Realized net gain (loss) on interest rate swap derivatives (3) | (344) | | | (1,599) | | | (1,666) | | | (3,167) | |
Tax benefit | Tax benefit | 340 | | | 335 | | | 1,005 | | | 484 | | Tax benefit | 72 | | | 336 | | | 350 | | | 665 | |
Net of tax | Net of tax | (1,277) | | | (1,258) | | | (3,779) | | | (1,819) | | Net of tax | (272) | | | (1,263) | | | (1,316) | | | (2,502) | |
| Amortization of unrealized gains on terminated interest rate swap derivatives (3) | — | | | 6 | | | — | | | 20 | | |
Tax expense | — | | | (1) | | | — | | | (4) | | |
Net of tax | — | | | 5 | | | — | | | 16 | | |
| | Amortization of pension plan: | Amortization of pension plan: | | Amortization of pension plan: | |
Net actuarial loss (4) | Net actuarial loss (4) | (316) | | | (821) | | | (948) | | | (2,213) | | Net actuarial loss (4) | (241) | | | 9 | | | (447) | | | (632) | |
Prior service credit (4) | — | | | 2 | | | — | | | 6 | | |
Total before tax | (316) | | | (819) | | | (948) | | | (2,207) | | |
| Tax benefit | Tax benefit | 67 | | | 172 | | | 199 | | | 463 | | Tax benefit | 51 | | | (3) | | | 93 | | | 132 | |
Net of tax | Net of tax | (249) | | | (647) | | | (749) | | | (1,744) | | Net of tax | (190) | | | 6 | | | (354) | | | (500) | |
Total reclassifications for the period, net of tax | Total reclassifications for the period, net of tax | $ | (681) | | | $ | (2,150) | | | $ | (2,726) | | | $ | 2,418 | | Total reclassifications for the period, net of tax | $ | (3,217) | | | $ | (1,554) | | | $ | (5,836) | | | $ | (2,045) | |
(1) Included in interest income on the consolidated statements of income.
(2) Listed as net gain (loss) on sale of securities AFS on the consolidated statements of income.
(3) Included in interest expense for FHLB borrowings and deposits on the consolidated statements of income.
(4) These AOCI components are included in the computation of net periodic pension cost (income) presented in “Note 8 – Employee Benefit Plans.”
Southside Bancshares, Inc. |14
4. Securities
Debt securities
The amortized cost, gross unrealized gains and losses and estimated fair value of investment and mortgage-backed AFS and HTM securities as of SeptemberJune 30, 20212022 and December 31, 20202021 are reflected in the tables below (in thousands):
| | | | September 30, 2021 | | | June 30, 2022 |
| | Amortized | | Gross Unrealized | | Gross Unrealized | | | Estimated | | Amortized | | Gross Unrealized | | Gross Unrealized | | | Estimated |
AVAILABLE FOR SALE | AVAILABLE FOR SALE | | Cost | | Gains | | Losses | | | Fair Value | AVAILABLE FOR SALE | | Cost | | Gains | | Losses | | | Fair Value |
Investment securities: | Investment securities: | | | | | | | | | | Investment securities: | | | | | | | | | |
U.S. Treasury | U.S. Treasury | | $ | 42,806 | | | $ | 741 | | | $ | — | | | | $ | 43,547 | | U.S. Treasury | | $ | 39,465 | | | $ | 198 | | | $ | — | | | | $ | 39,663 | |
| State and political subdivisions | State and political subdivisions | | 1,890,814 | | | 83,140 | | | 6,477 | | | | 1,967,477 | | State and political subdivisions | | 1,255,380 | | | 1,099 | | | 80,248 | | | | 1,176,231 | |
Corporate bonds and other | Corporate bonds and other | | 117,332 | | | 2,563 | | | 196 | | | | 119,699 | | Corporate bonds and other | | 60,215 | | | 65 | | | 1,462 | | | | 58,818 | |
| MBS: (1) | MBS: (1) | | | | | | | | | | MBS: (1) | | | | | | | | | |
Residential | Residential | | 493,505 | | | 20,943 | | | 370 | | | | 514,078 | | Residential | | 451,457 | | | 3,399 | | | 5,344 | | | | 449,512 | |
Commercial | Commercial | | 105,780 | | | 2,800 | | | 277 | | | | 108,303 | | Commercial | | 9,832 | | | — | | | 702 | | | | 9,130 | |
Total | Total | | $ | 2,650,237 | | | $ | 110,187 | | | $ | 7,320 | | | | $ | 2,753,104 | | Total | | $ | 1,816,349 | | | $ | 4,761 | | | $ | 87,756 | | | | $ | 1,733,354 | |
| | HELD TO MATURITY | HELD TO MATURITY | | | | HELD TO MATURITY | | | |
Investment securities: | Investment securities: | | | | | | | | | | Investment securities: | | | | | | | | | |
State and political subdivisions | State and political subdivisions | | $ | 788 | | | $ | 3 | | | $ | — | | | | $ | 791 | | State and political subdivisions | | $ | 876,065 | | | $ | 70 | | | $ | 108,210 | | | | $ | 767,925 | |
Corporate bonds and other | | Corporate bonds and other | | 95,362 | | | 112 | | | 2,435 | | | | 93,039 | |
MBS: (1) | MBS: (1) | | | | MBS: (1) | | | |
Residential | Residential | | 40,128 | | | 2,616 | | | — | | | | 42,744 | | Residential | | 65,494 | | | 55 | | | 2,273 | | | | 63,276 | |
Commercial | Commercial | | 51,563 | | | 2,937 | | | — | | | | 54,500 | | Commercial | | 46,751 | | | — | | | 1,184 | | | | 45,567 | |
Total | Total | | $ | 92,479 | | | $ | 5,556 | | | $ | — | | | | $ | 98,035 | | Total | | $ | 1,083,672 | | | $ | 237 | | | $ | 114,102 | | | | $ | 969,807 | |
|
| | | | December 31, 2020 | | | | December 31, 2021 | |
| | Amortized | | Gross Unrealized | | Gross Unrealized | | Estimated | | | Amortized | | Gross Unrealized | | Gross Unrealized | | Estimated | |
AVAILABLE FOR SALE | AVAILABLE FOR SALE | | Cost | | Gains | | Losses | | Fair Value | | AVAILABLE FOR SALE | | Cost | | Gains | | Losses | | Fair Value | |
Investment securities: | Investment securities: | | | | | | | | | | Investment securities: | | | | | | | | | |
| U.S. Treasury | | U.S. Treasury | | $ | 58,084 | | | $ | 843 | | | $ | 50 | | | $ | 58,877 | | |
| State and political subdivisions | State and political subdivisions | | $ | 1,475,030 | | | $ | 105,601 | | | $ | 37 | | | $ | 1,580,594 | | | State and political subdivisions | | 1,962,257 | | | 93,893 | | | 4,214 | | | 2,051,936 | | |
Corporate bonds and other | Corporate bonds and other | | 77,224 | | | 1,053 | | | 22 | | | 78,255 | | | Corporate bonds and other | | 133,333 | | | 2,408 | | | 209 | | | 135,532 | | |
| MBS: (1) | MBS: (1) | | | | | MBS: (1) | | | | |
Residential | Residential | | 771,409 | | | 38,674 | | | 73 | | | 810,010 | | | Residential | | 411,727 | | | 14,895 | | | 272 | | | 426,350 | | |
Commercial | Commercial | | 113,850 | | | 4,746 | | | 150 | | | 118,446 | | | Commercial | | 90,193 | | | 1,642 | | | 205 | | | 91,630 | | |
Total | Total | | $ | 2,437,513 | | | $ | 150,074 | | | $ | 282 | | | $ | 2,587,305 | | | Total | | $ | 2,655,594 | | | $ | 113,681 | | | $ | 4,950 | | | $ | 2,764,325 | | |
| | HELD TO MATURITY | HELD TO MATURITY | | | HELD TO MATURITY | | |
Investment securities: | Investment securities: | | | Investment securities: | | |
State and political subdivisions | State and political subdivisions | | $ | 907 | | | $ | 13 | | | $ | — | | | $ | 920 | | | State and political subdivisions | | $ | 788 | | | $ | 3 | | | $ | — | | | $ | 791 | | |
MBS: (1) | MBS: (1) | | | | MBS: (1) | | | |
Residential | Residential | | 47,948 | | | 4,187 | | | — | | | 52,135 | | | Residential | | 38,644 | | | 2,103 | | | — | | | 40,747 | | |
Commercial | Commercial | | 60,143 | | | 5,000 | | | — | | | 65,143 | | | Commercial | | 51,348 | | | 2,349 | | | — | | | 53,697 | | |
Total | Total | | $ | 108,998 | | | $ | 9,200 | | | $ | — | | | $ | 118,198 | | | Total | | $ | 90,780 | | | $ | 4,455 | | | $ | — | | | $ | 95,235 | | |
(1) All MBS are issued and/or guaranteed by U.S. government agencies or U.S. GSEs.
From time to time, we transfer securities from AFS to HTM due to overall balance sheet strategies. We transferred securities from AFS to HTM with an estimated fair value of $998.5 million during the six months ended June 30, 2022. There were no securities transferred from AFS to HTM during the year ended December 31, 2021. The remaining net unamortized, unrealized loss on the transferred securities included in AOCI in the accompanying balance sheets totaled $91.5 million ($72.3 million, net of tax) at June 30, 2022 and $1.5 million ($1.2 million, net of tax) at December 31, 2021. Any net unrealized gain or loss on the transferred securities included in AOCI at the time of transfer will be amortized over the remaining life of the underlying security as an adjustment to the yield on those securities. Securities transferred with losses included in AOCI continue to be
Southside Bancshares, Inc. |15
included in management’s assessment for impairment for each individual security. We transferred these securities due to overall balance sheet strategies, and our management has the current intent and ability to hold these securities until maturity.
Investment securities and MBS with carrying values of $1.48$1.41 billion and $1.56$1.61 billion were pledged as of SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively, to collateralize FHLB borrowings, borrowings from the FRDW, repurchase agreements and public fund deposits, for potential liquidity needs or other purposes as required by law.
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The following tables representpresent the fair value and unrealized losses on AFS and HTM investment securities and MBS, if applicable, for which an allowance for credit losses has not been recorded as of SeptemberJune 30, 20212022 and December 31, 2020,2021, segregated by major security type and length of time in a continuous loss position (in thousands):
| | | September 30, 2021 | | June 30, 2022 |
| | Less Than 12 Months | | More Than 12 Months | | Total | | Less Than 12 Months | | More Than 12 Months | | Total |
| | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
AVAILABLE FOR SALE | AVAILABLE FOR SALE | | | | | | | | | | | | AVAILABLE FOR SALE | | | | | | | | | | | |
Investment securities: | Investment securities: | | Investment securities: | |
| State and political subdivisions | State and political subdivisions | $ | 396,345 | | | $ | 6,477 | | | $ | — | | | $ | — | | | $ | 396,345 | | | $ | 6,477 | | State and political subdivisions | $ | 1,034,005 | | | $ | 80,248 | | | $ | — | | | $ | — | | | $ | 1,034,005 | | | $ | 80,248 | |
Corporate bonds and other | Corporate bonds and other | 21,352 | | | 196 | | | — | | | — | | | 21,352 | | | 196 | | Corporate bonds and other | 50,788 | | | 1,462 | | | — | | | — | | | 50,788 | | | 1,462 | |
| MBS: | MBS: | | MBS: | |
Residential | Residential | 15,790 | | | 370 | | | — | | | — | | | 15,790 | | | 370 | | Residential | 254,471 | | | 5,344 | | | — | | | — | | | 254,471 | | | 5,344 | |
Commercial | Commercial | — | | | — | | | 4,602 | | | 277 | | | 4,602 | | | 277 | | Commercial | 6,204 | | | 88 | | | 2,926 | | | 614 | | | 9,130 | | | 702 | |
Total | Total | $ | 433,487 | | | $ | 7,043 | | | $ | 4,602 | | | $ | 277 | | | $ | 438,089 | | | $ | 7,320 | | Total | $ | 1,345,468 | | | $ | 87,142 | | | $ | 2,926 | | | $ | 614 | | | $ | 1,348,394 | | | $ | 87,756 | |
| HELD TO MATURITY | | HELD TO MATURITY | |
Investment securities: | | Investment securities: | |
State and political subdivisions | | State and political subdivisions | $ | 728,547 | | | $ | 103,110 | | | $ | 28,978 | | | $ | 5,100 | | | $ | 757,525 | | | $ | 108,210 | |
Corporate bonds and other | | Corporate bonds and other | 90,569 | | | 2,435 | | | — | | | — | | | 90,569 | | | 2,435 | |
MBS: | | MBS: | |
Residential | | Residential | 58,136 | | | 1,988 | | | 4,255 | | | 285 | | | 62,391 | | | 2,273 | |
Commercial | | Commercial | 45,567 | | | 1,184 | | | — | | | — | | | 45,567 | | | 1,184 | |
Total | | Total | $ | 922,819 | | | $ | 108,717 | | | $ | 33,233 | | | $ | 5,385 | | | $ | 956,052 | | | $ | 114,102 | |
| | | December 31, 2020 | | December 31, 2021 |
| | Less Than 12 Months | | More Than 12 Months | | Total | | Less Than 12 Months | | More Than 12 Months | | Total |
| | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
AVAILABLE FOR SALE | AVAILABLE FOR SALE | | | | | | | | | | | | AVAILABLE FOR SALE | | | | | | | | | | | |
Investment securities: | Investment securities: | | Investment securities: | |
| U.S. Treasury | | U.S. Treasury | $ | 9,947 | | | $ | 50 | | | $ | — | | | $ | — | | | $ | 9,947 | | | $ | 50 | |
| State and political subdivisions | State and political subdivisions | $ | 17,305 | | | $ | 37 | | | $ | — | | | $ | — | | | $ | 17,305 | | | $ | 37 | | State and political subdivisions | 260,509 | | | 3,622 | | | 7,608 | | | 592 | | | 268,117 | | | 4,214 | |
Corporate bonds and other | Corporate bonds and other | 11,562 | | | 22 | | | — | | | — | | | 11,562 | | | 22 | | Corporate bonds and other | 35,597 | | | 209 | | | — | | | — | | | 35,597 | | | 209 | |
| MBS: | MBS: | | MBS: | |
Residential | Residential | 6,287 | | | 73 | | | — | | | — | | | 6,287 | | | 73 | | Residential | 1,225 | | | 3 | | | 5,168 | | | 269 | | | 6,393 | | | 272 | |
Commercial | Commercial | 4,744 | | | 150 | | | — | | | — | | | 4,744 | | | 150 | | Commercial | 4,274 | | | 7 | | | 4,674 | | | 198 | | | 8,948 | | | 205 | |
Total | Total | $ | 39,898 | | | $ | 282 | | | $ | — | | | $ | — | | | $ | 39,898 | | | $ | 282 | | Total | $ | 311,552 | | | $ | 3,891 | | | $ | 17,450 | | | $ | 1,059 | | | $ | 329,002 | | | $ | 4,950 | |
|
For those AFS debt securities in an unrealized loss position where management (i) has the intent to sell or (ii) where it will more-likely-than-not be required to sell the security before the recovery of its amortized cost basis, we write the security down to fair value with an adjustment to earnings. For those AFS debt securities in an unrealized loss position that do not meet either of these criteria, management assesses whether the decline in fair value has resulted from credit-related factors, using both qualitative and quantitative criteria. Determining the allowance under the credit loss method requires the use of a discounted cash flow method to assess the credit losses. Any credit-related impairment will be recognized in allowance for credit losses on the balance sheet with a corresponding adjustment to earnings. Noncredit-related impairment, the portion of the impairment relating to factors other than credit (such as changes in market interest rates), is recognized in other comprehensive income, net of tax.
BasedSouthside Bancshares, Inc. |16
As of June 30, 2022 and December 31, 2021, we did not have an allowance for credit losses on our AFS securities, based on our consideration of the qualitative factors associated with each security type in our AFS portfolio, we did not recognize anyportfolio. The unrealized losses in income on our investment and MBS are due to changes in interest rates and spreads and other market conditions. At June 30, 2022, we had 644 AFS debt securities during the three and nine months ended September 30, 2021 or 2020.in an unrealized loss position. Our state and political subdivisions are highly rated municipal securities with a long history of no credit losses. Our AFS MBS are highly rated securities which are either explicitly or implicitly backed by the U.S. Government through its agencies which are highly rated by major ratings agencies and also have a long history of no credit losses. Our corporate bonds and other investment securities as of September 30, 2021 consist of highly rated investment grade bonds. Management does not intend to sell and it is likely we will not be required to sell those securities in an unrealized loss position prior to the anticipated recovery of the amortized cost basis. These unrealized losses on our investment and MBS are due to changes in interest rates and spreads and other market conditions impacted by COVID-19. As of September 30, 2021 and December 31, 2020, we did not have an allowance for credit losses on our AFS securities.
We assess the likelihood of default and the potential amount of default when assessing our HTM securities for credit losses. We utilize term structures and, due to no prior loss exposure on our state and political subdivision securities or our corporate securities, we currently apply a third-party average loss given default rate to model ourthese securities. Due to a small number of HTM municipal securities in our portfolio as of SeptemberJune 30, 20212022 and 2020,2021, we elected to use the specific identification method to model these securities which aligns with our third-party fair value measurement process. The model determined any expected credit loss over the life of these securities to be remote.insignificant. Management further evaluated the remote expectation of loss along with the qualitative factors
Southside Bancshares, Inc. |16
associated with these securities and concluded that, due to the securities being highly rated municipals and investment grade corporates with a long history of no credit losses, no credit loss should be recognized for these securities for the three and ninesix months ended SeptemberJune 30, 20212022 or 2020.
From time to time, we have transferred securities from AFS to HTM due to overall balance sheet strategies. The remaining net unamortized, unrealized loss on the transferred securities included in AOCI in the accompanying balance sheets totaled $1.7 million ($1.4 million, net of tax) at September 30, 2021 and $2.9 million ($2.3 million, net of tax) at December 31, 2020. Any net unrealized gain or loss on the transferred securities included in AOCI at the time of transfer will be amortized over the remaining life of the underlying security as an adjustment to the yield on those securities. Securities transferred with losses included in AOCI continue to be included in management’s assessment for impairment for each individual security. There were no securities transferred from AFS to HTM during the nine months ended September 30, 2021 or the year ended December 31, 2020.2021.
The accrued interest receivable on our debt securities is excluded from the credit loss estimate and is included in interest receivable on our consolidated balance sheets. As of SeptemberJune 30, 2022, accrued interest receivable on AFS and HTM debt securities totaled $16.1 million and $10.9 million, respectively. As of December 31, 2021, accrued interest receivable on AFS and HTM debt securities totaled $15.5$25.6 million and $240,000, respectively. As of December 31, 2020, accrued interest receivable on AFS and HTM debt securities totaled $22.0 million and $298,000,$244,000, respectively. No HTM debt securities were past-due or on nonaccrual status as of SeptemberJune 30, 20212022 or December 31, 2020.2021.
The following table reflects interest income recognized on securities for the periods presented (in thousands):
| | | | Three Months Ended September 30, | | Three Months Ended June 30, |
| | 2021 | | 2020 | | 2022 | | 2021 |
U.S. Treasury | U.S. Treasury | $ | 182 | | | $ | — | | U.S. Treasury | $ | 59 | | | $ | 169 | |
| State and political subdivisions | State and political subdivisions | 12,223 | | | 9,787 | | State and political subdivisions | 13,788 | | | 10,939 | |
| Corporate bonds and other | Corporate bonds and other | 1,097 | | | 391 | | Corporate bonds and other | 1,390 | | | 986 | |
MBS | MBS | 4,405 | | | 7,048 | | MBS | 3,238 | | | 4,647 | |
Total interest income on securities | Total interest income on securities | $ | 17,907 | | | $ | 17,226 | | Total interest income on securities | $ | 18,475 | | | $ | 16,741 | |
| | | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2022 | | 2021 |
U.S. Treasury | U.S. Treasury | $ | 388 | | | $ | — | | U.S. Treasury | $ | 227 | | | $ | 206 | |
| State and political subdivisions | State and political subdivisions | 33,568 | | | 26,281 | | State and political subdivisions | 27,120 | | | 21,345 | |
Corporate bonds and other | Corporate bonds and other | 2,928 | | | 568 | | Corporate bonds and other | 2,717 | | | 1,831 | |
MBS | MBS | 15,140 | | | 27,626 | | MBS | 7,255 | | | 10,735 | |
Total interest income on securities | Total interest income on securities | $ | 52,024 | | | $ | 54,475 | | Total interest income on securities | $ | 37,319 | | | $ | 34,117 | |
There was a $3.4$3.7 million net realized loss from the AFS securities portfolio for the six months ended June 30, 2022, which consisted of $4.0 million in realized losses and $290,000 in realized gains. There was a $2.0 million net realized gain from the AFS securities portfolio for the ninesix months ended SeptemberJune 30, 2021, which consisted of $3.5$2.1 million in realized gains and $71,000 in realized losses. There was a $8.3 million net realized gain from the AFS securities portfolio for the nine months ended September 30, 2020, which consisted of $8.4 million in realized gains and $89,000$52,000 in realized losses. There were no sales from the HTM portfolio during the ninesix months ended SeptemberJune 30, 20212022 or 2020.2021. We calculate realized gains and losses on sales of securities under the specific identification method.
Expected maturities on our securities may differ from contractual maturities because issuers may have the right to call or prepay obligations. MBS are presented in total by category since MBS are typically issued with stated principal amounts and are backed by pools of mortgages that have loans with varying maturities. The characteristics of the underlying pool of mortgages, such as fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the security holder. The term of a mortgage-backed pass-through security thus approximates the term of the underlying mortgages and can vary significantly due to prepayments.
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The amortized cost and estimated fair value of AFS and HTM securities at SeptemberJune 30, 2021,2022, are presented below by contractual maturity (in thousands):
| | | September 30, 2021 | | June 30, 2022 |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
AVAILABLE FOR SALE | AVAILABLE FOR SALE | | AVAILABLE FOR SALE | |
Investment securities: | Investment securities: | | | | Investment securities: | | | |
Due in one year or less | Due in one year or less | $ | 4,495 | | | $ | 4,532 | | Due in one year or less | $ | 2,039 | | | $ | 2,050 | |
Due after one year through five years | Due after one year through five years | 26,705 | | | 27,841 | | Due after one year through five years | 72,424 | | | 72,561 | |
Due after five years through ten years | Due after five years through ten years | 175,953 | | | 180,006 | | Due after five years through ten years | 86,994 | | | 86,038 | |
Due after ten years | Due after ten years | 1,843,799 | | | 1,918,344 | | Due after ten years | 1,193,603 | | | 1,114,063 | |
| | 2,050,952 | | | 2,130,723 | | | 1,355,060 | | | 1,274,712 | |
MBS: | MBS: | 599,285 | | | 622,381 | | MBS: | 461,289 | | | 458,642 | |
Total | Total | $ | 2,650,237 | | | $ | 2,753,104 | | Total | $ | 1,816,349 | | | $ | 1,733,354 | |
| | | September 30, 2021 | | June 30, 2022 |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
HELD TO MATURITY | HELD TO MATURITY | | HELD TO MATURITY | |
Investment securities: | Investment securities: | | | | Investment securities: | | | |
Due in one year or less | Due in one year or less | $ | 120 | | | $ | 120 | | Due in one year or less | $ | 120 | | | $ | 120 | |
Due after one year through five years | Due after one year through five years | 529 | | | 531 | | Due after one year through five years | 1,024 | | | 1,024 | |
Due after five years through ten years | Due after five years through ten years | 139 | | | 140 | | Due after five years through ten years | 99,549 | | | 97,202 | |
Due after ten years | Due after ten years | — | | | — | | Due after ten years | 870,734 | | | 762,618 | |
| | 788 | | | 791 | | | 971,427 | | | 860,964 | |
MBS: | MBS: | 91,691 | | | 97,244 | | MBS: | 112,245 | | | 108,843 | |
Total | Total | $ | 92,479 | | | $ | 98,035 | | Total | $ | 1,083,672 | | | $ | 969,807 | |
Equity Investments
Equity investments on our consolidated balance sheets include Community Reinvestment Act funds with a readily determinable fair value as well as equity investments without readily determinable fair values. At SeptemberJune 30, 20212022 and December 31, 2020,2021, we had equity investments recorded in our consolidated balance sheets of $11.8$11.3 million and $11.9$11.8 million, respectively.
Any realized and unrealized gains and losses on equity investments are reported in income. Equity investments without readily determinable fair values are recorded at cost less impairment, if any.
The following is a summary of unrealized and realized gains and losses on equity investments recognized in other noninterest income in the consolidated statements of income during the periods presented (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net (losses) gains recognized during the period on equity investments | $ | (28) | | | $ | (232) | | | $ | (118) | | | $ | (178) | |
Less: Net gains recognized during the period on equity investments sold during the period | — | | | — | | | — | | | — | |
Unrealized (losses) gains recognized during the reporting period on equity investments held at the reporting date | $ | (28) | | | $ | (232) | | | $ | (118) | | | $ | (178) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net gains (losses) recognized during the period on equity investments | $ | (191) | | | $ | 17 | | | $ | (466) | | | $ | (90) | |
Less: Net gains recognized during the period on equity investments sold during the period | — | | | — | | | — | | | — | |
Unrealized gains (losses) recognized during the reporting period on equity investments held at the reporting date | $ | (191) | | | $ | 17 | | | $ | (466) | | | $ | (90) | |
Equity investments are assessed quarterly for other-than-temporary impairment. Based upon that evaluation, management does not consider any of our equity investments to be other-than-temporarily impaired at SeptemberJune 30, 2021.2022.
FHLB Stock
Our FHLB stock, which has limited marketability, is carried at cost and is assessed quarterly for other-than-temporary impairment. Based upon evaluation by management at SeptemberJune 30, 2021,2022, our FHLB stock was not impaired and thus was not considered to be other-than-temporarily impaired.
Southside Bancshares, Inc. |18
5. Loans and Allowance for Loan Losses
Loans in the accompanying consolidated balance sheets are classified as follows (in thousands):
| | | September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
Real estate loans: | Real estate loans: | | | | Real estate loans: | | | |
Construction | Construction | $ | 422,095 | | | $ | 581,941 | | Construction | $ | 520,484 | | | $ | 447,860 | |
1-4 family residential | 1-4 family residential | 660,689 | | | 719,952 | | 1-4 family residential | 640,706 | | | 651,140 | |
Commercial | Commercial | 1,605,132 | | | 1,295,746 | | Commercial | 1,834,734 | | | 1,598,172 | |
Commercial loans | Commercial loans | 443,708 | | | 557,122 | | Commercial loans | 428,974 | | | 418,998 | |
Municipal loans | Municipal loans | 427,259 | | | 409,028 | | Municipal loans | 457,239 | | | 443,078 | |
Loans to individuals | Loans to individuals | 88,702 | | | 93,990 | | Loans to individuals | 80,904 | | | 85,914 | |
Total loans | Total loans | 3,647,585 | | | 3,657,779 | | Total loans | 3,963,041 | | | 3,645,162 | |
Less: Allowance for loan losses | Less: Allowance for loan losses | 38,022 | | | 49,006 | | Less: Allowance for loan losses | 35,449 | | | 35,273 | |
Net loans | Net loans | $ | 3,609,563 | | | $ | 3,608,773 | | Net loans | $ | 3,927,592 | | | $ | 3,609,889 | |
Paycheck Protection Program Loans
In April 2020, we began originating loans to qualified small businesses under the PPP administered by the SBA under the provisions of the CARES Act. Loans covered by the PPP may be eligible for loan forgiveness for certain costs incurred related to payroll, group health care benefit costs and qualifying mortgage, rent and utility payments. The remaining loan balance after forgiveness of any amount is still fully guaranteed by the SBA. On December 27, 2020, the Economic Aid Act was signed into law. This second coronavirus relief package granted additional funds for a new round of PPP loans. Additionally, it expanded the eligibility for loans and allowed certain businesses to request a second loan. In return for processing and booking a PPP loan, the SBA paid lenders a processing fee tiered by the size of the loan. These loans are included in commercial loans with an amortized cost basis at SeptemberJune 30, 20212022 and December 31, 20202021 of $67.5$3.0 million and $214.8$31.0 million, respectively.
Construction Real Estate Loans
Our construction loans are collateralized by property located primarily in or near the market areas we serve. A number of our construction loans will be owner occupied upon completion. Construction loans for non-owner occupied projects are financed, but these typically have cash flows from leases with tenants, secondary sources of repayment, and in some cases, additional collateral. Our construction loans have both adjustable and fixed interest rates during the construction period. Construction loans to individuals are typically priced and made with the intention of granting the permanent loan on the completed property. Speculative and commercialCommercial construction loans are subject to underwriting standards similar to that of the commercial portfolio. 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. 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.
Our 1-4 family residential loans generally have maturities ranging from five15 to 30 years. These loans are typically fully amortizing with monthly payments sufficient to repay the total amount of the loan. 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.
Commercial Real Estate Loans
Commercial real estate loans as of SeptemberJune 30, 20212022 consisted of $1.32$1.55 billion of owner and non-owner occupied real estate, $260.1$265.3 million of loans secured by multi-family properties and $22.0$21.6 million of loans secured by farmland. 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. In determining whether to originate commercial real estate loans, we generally consider such factors as the financial
Southside Bancshares, Inc. |19
condition of the borrower and the debt service coverage of the property. Commercial real estate loans are made at both fixed and adjustable interest rates for terms generally up to 20 years.
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Commercial Loans
Our commercial loans are diversified loan types including short-term working capital loans for inventory and accounts receivable and short- and medium-term loans for equipment or other business capital expansion. In our commercial loan underwriting, we assess the creditworthiness, ability to repay and the value and liquidity of the collateral being offered. Terms of commercial loans are generally commensurate with the useful life of the collateral offered.
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 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.
Loans to Individuals
Substantially all originations of our loans to individuals are made to consumers in our market areas. The majority of loans to individuals are collateralized by titled equipment, which are primarily automobiles. Loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. The underwriting standards we employ for consumer loans include an application, a determination of the applicant’s payment history on other debts, with the greatest weight being given to payment history with us and an assessment of the borrower’s ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, in relation to the proposed loan amount. Most of our loans to individuals are collateralized, which management believes assists in limiting our exposure.
Credit Quality Indicators
We categorize loans into risk categories on an ongoing basis based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. We use the following definitions for risk ratings:
•Pass (Rating 1 – 4) – This rating is assigned to all satisfactory loans. This category, by definition, consists of acceptable credit. Credit and collateral exceptions should not be present, although their presence would not necessarily prohibit a loan from being rated Pass, if deficiencies are in the process of correction. These loans are not included in the Watch List.
•Pass Watch (Rating 5) – These loans require some degree of special treatment, but not due to credit quality. This category does not include loans specially mentioned or adversely classified; however, particular attention is warranted to characteristics such as:
▪A lack of, or abnormally extended payment program;
▪A heavy degree of concentration of collateral without sufficient margin;
▪A vulnerability to competition through lesser or extensive financial leverage; and
▪A dependence on a single or few customers or sources of supply and materials without suitable substitutes or alternatives.
•Special Mention (Rating 6) – A Special Mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in our credit position at some future date. Special Mention loans are not adversely classified and do not expose us to sufficient risk to warrant adverse classification.
•Substandard (Rating 7) – Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
•Doubtful (Rating 8) – Loans classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation, in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.
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The following tables set forth the amortized cost basis by class of financing receivable and credit quality indicator for the periods presented (in thousands):
| September 30, 2021 | Term Loans Amortized Cost Basis by Origination Year | | Revolving Loans Amortized Cost Basis | | Total | |
June 30, 2022 | | June 30, 2022 | Term Loans Amortized Cost Basis by Origination Year | | Revolving Loans Amortized Cost Basis | | Total |
| | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | | | | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | | | |
Construction real estate: | Construction real estate: | | | | | | | | | | | | | Construction real estate: | | | | | | | | | | | | |
Pass | Pass | $ | 117,946 | | | $ | 107,623 | | | $ | 56,826 | | | $ | 6,343 | | | $ | 2,209 | | | $ | 6,755 | | | $ | 124,101 | | | $ | 421,803 | | Pass | $ | 70,906 | | | $ | 211,236 | | | $ | 44,569 | | | $ | 9,909 | | | $ | 2,846 | | | $ | 7,289 | | | $ | 173,420 | | | $ | 520,175 | |
Pass watch | Pass watch | — | | | — | | | — | | | — | | | — | | | 21 | | | — | | | 21 | | Pass watch | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Special mention | Special mention | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Special mention | — | | | — | | | — | | | — | | | — | | | 2 | | | — | | | 2 | |
Substandard | Substandard | — | | | — | | | — | | | — | | | — | | | 217 | | | — | | | 217 | | Substandard | — | | | 46 | | | — | | | 12 | | | 46 | | | 203 | | | — | | | 307 | |
Doubtful | Doubtful | — | | | — | | | — | | | 54 | | | — | | | — | | | — | | | 54 | | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total construction real estate | Total construction real estate | $ | 117,946 | | | $ | 107,623 | | | $ | 56,826 | | | $ | 6,397 | | | $ | 2,209 | | | $ | 6,993 | | | $ | 124,101 | | | $ | 422,095 | | Total construction real estate | $ | 70,906 | | | $ | 211,282 | | | $ | 44,569 | | | $ | 9,921 | | | $ | 2,892 | | | $ | 7,494 | | | $ | 173,420 | | | $ | 520,484 | |
| 1-4 family residential real estate: | 1-4 family residential real estate: | | 1-4 family residential real estate: | |
Pass | Pass | $ | 111,806 | | | $ | 134,208 | | | $ | 89,450 | | | $ | 52,699 | | | $ | 38,027 | | | $ | 226,835 | | | $ | 2,239 | | | $ | 655,264 | | Pass | $ | 62,503 | | | $ | 131,797 | | | $ | 116,400 | | | $ | 70,688 | | | $ | 40,570 | | | $ | 212,731 | | | $ | 2,120 | | | $ | 636,809 | |
Pass watch | Pass watch | — | | | — | | | — | | | — | | | — | | | 803 | | | — | | | 803 | | Pass watch | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Special mention | Special mention | — | | | — | | | — | | | — | | | — | | | 62 | | | — | | | 62 | | Special mention | — | | | — | | | 80 | | | — | | | — | | | — | | | — | | | 80 | |
Substandard | Substandard | 9 | | | 483 | | | 54 | | | — | | | 430 | | | 3,227 | | | 89 | | | 4,292 | | Substandard | — | | | 46 | | | 446 | | | 222 | | | 185 | | | 2,714 | | | 42 | | | 3,655 | |
Doubtful | Doubtful | — | | | 9 | | | — | | | — | | | — | | | 259 | | | — | | | 268 | | Doubtful | — | | | — | | | — | | | — | | | — | | | 162 | | | — | | | 162 | |
Total 1-4 family residential real estate | Total 1-4 family residential real estate | $ | 111,815 | | | $ | 134,700 | | | $ | 89,504 | | | $ | 52,699 | | | $ | 38,457 | | | $ | 231,186 | | | $ | 2,328 | | | $ | 660,689 | | Total 1-4 family residential real estate | $ | 62,503 | | | $ | 131,843 | | | $ | 116,926 | | | $ | 70,910 | | | $ | 40,755 | | | $ | 215,607 | | | $ | 2,162 | | | $ | 640,706 | |
| Commercial real estate: | Commercial real estate: | | Commercial real estate: | |
Pass | Pass | $ | 448,184 | | | $ | 237,377 | | | $ | 317,768 | | | $ | 127,342 | | | $ | 154,680 | | | $ | 230,388 | | | $ | 6,281 | | | $ | 1,522,020 | | Pass | $ | 474,786 | | | $ | 594,621 | | | $ | 182,409 | | | $ | 144,639 | | | $ | 74,072 | | | $ | 310,337 | | | $ | 13,916 | | | $ | 1,794,780 | |
Pass watch | Pass watch | — | | | — | | | 4,163 | | | 23,242 | | | 22,159 | | | 1,645 | | | — | | | 51,209 | | Pass watch | — | | | 10,016 | | | — | | | — | | | 887 | | | 249 | | | — | | | 11,152 | |
Special mention | Special mention | — | | | 197 | | | — | | | — | | | 168 | | | 1,919 | | | — | | | 2,284 | | Special mention | — | | | — | | | 2,048 | | | 2,474 | | | 117 | | | 1,946 | | | — | | | 6,585 | |
Substandard | Substandard | 3,449 | | | 609 | | | 8,882 | | | 8,563 | | | — | | | 7,991 | | | — | | | 29,494 | | Substandard | 596 | | | — | | | 646 | | | 12,660 | | | 269 | | | 7,965 | | | — | | | 22,136 | |
Doubtful | Doubtful | — | | | — | | | — | | | — | | | — | | | 125 | | | — | | | 125 | | Doubtful | — | | | — | | | — | | | 81 | | | — | | | — | | | — | | | 81 | |
Total commercial real estate | Total commercial real estate | $ | 451,633 | | | $ | 238,183 | | | $ | 330,813 | | | $ | 159,147 | | | $ | 177,007 | | | $ | 242,068 | | | $ | 6,281 | | | $ | 1,605,132 | | Total commercial real estate | $ | 475,382 | | | $ | 604,637 | | | $ | 185,103 | | | $ | 159,854 | | | $ | 75,345 | | | $ | 320,497 | | | $ | 13,916 | | | $ | 1,834,734 | |
| Commercial loans: | Commercial loans: | | Commercial loans: | |
Pass | Pass | $ | 131,981 | | | $ | 78,247 | | | $ | 28,930 | | | $ | 15,234 | | | $ | 4,147 | | | $ | 6,166 | | | $ | 174,372 | | | $ | 439,077 | | Pass | $ | 84,254 | | | $ | 72,829 | | | $ | 36,975 | | | $ | 11,107 | | | $ | 10,132 | | | $ | 4,183 | | | $ | 158,199 | | | $ | 377,679 | |
Pass watch | Pass watch | 39 | | | 55 | | | 504 | | | 25 | | | — | | | — | | | — | | | 623 | | Pass watch | 226 | | | 17 | | | — | | | 247 | | | 17 | | | — | | | 31,724 | | | 32,231 | |
Special mention | Special mention | — | | | — | | | 124 | | | 381 | | | — | | | 183 | | | 373 | | | 1,061 | | Special mention | 8,515 | | | 5,256 | | | 50 | | | — | | | 326 | | | — | | | 3,398 | | | 17,545 | |
Substandard | Substandard | 91 | | | 194 | | | 379 | | | 165 | | | 20 | | | 1 | | | 1,457 | | | 2,307 | | Substandard | — | | | 54 | | | 88 | | | 317 | | | 96 | | | 13 | | | — | | | 568 | |
Doubtful | Doubtful | 8 | | | 25 | | | 141 | | | 386 | | | — | | | 80 | | | — | | | 640 | | Doubtful | — | | | 441 | | | 33 | | | 130 | | | 284 | | | 57 | | | 6 | | | 951 | |
Total commercial loans | Total commercial loans | $ | 132,119 | | | $ | 78,521 | | | $ | 30,078 | | | $ | 16,191 | | | $ | 4,167 | | | $ | 6,430 | | | $ | 176,202 | | | $ | 443,708 | | Total commercial loans | $ | 92,995 | | | $ | 78,597 | | | $ | 37,146 | | | $ | 11,801 | | | $ | 10,855 | | | $ | 4,253 | | | $ | 193,327 | | | $ | 428,974 | |
| Municipal loans: | Municipal loans: | | Municipal loans: | |
Pass | Pass | $ | 56,206 | | | $ | 65,884 | | | $ | 63,328 | | | $ | 30,504 | | | $ | 57,665 | | | $ | 153,672 | | | $ | — | | | $ | 427,259 | | Pass | $ | 45,435 | | | $ | 78,084 | | | $ | 60,657 | | | $ | 57,729 | | | $ | 26,904 | | | $ | 188,430 | | | $ | — | | | $ | 457,239 | |
Pass watch | Pass watch | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Pass watch | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Special mention | Special mention | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Special mention | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | Substandard | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Substandard | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Doubtful | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total municipal loans | Total municipal loans | $ | 56,206 | | | $ | 65,884 | | | $ | 63,328 | | | $ | 30,504 | | | $ | 57,665 | | | $ | 153,672 | | | $ | — | | | $ | 427,259 | | Total municipal loans | $ | 45,435 | | | $ | 78,084 | | | $ | 60,657 | | | $ | 57,729 | | | $ | 26,904 | | | $ | 188,430 | | | $ | — | | | $ | 457,239 | |
| Loans to individuals: | Loans to individuals: | | Loans to individuals: | |
Pass | Pass | $ | 34,329 | | | $ | 28,335 | | | $ | 14,196 | | | $ | 5,195 | | | $ | 2,188 | | | $ | 1,068 | | | $ | 3,236 | | | $ | 88,547 | | Pass | $ | 19,375 | | | $ | 28,934 | | | $ | 17,699 | | | $ | 7,958 | | | $ | 2,476 | | | $ | 1,619 | | | $ | 2,734 | | | $ | 80,795 | |
Pass watch | Pass watch | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Pass watch | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Special mention | Special mention | — | | | — | | | — | | | 40 | | | — | | | — | | | — | | | 40 | | Special mention | — | | | — | | | — | | | — | | | 30 | | | — | | | — | | | 30 | |
Substandard | Substandard | — | | | 1 | | | 27 | | | 14 | | | 22 | | | 10 | | | 1 | | | 75 | | Substandard | — | | | — | | | — | | | 24 | | | 42 | | | 7 | | | 1 | | | 74 | |
Doubtful | Doubtful | — | | | — | | | 1 | | | 11 | | | 10 | | | 18 | | | — | | | 40 | | Doubtful | — | | | — | | | — | | | — | | | — | | | 5 | | | — | | | 5 | |
Total loans to individuals | Total loans to individuals | $ | 34,329 | | | $ | 28,336 | | | $ | 14,224 | | | $ | 5,260 | | | $ | 2,220 | | | $ | 1,096 | | | $ | 3,237 | | | $ | 88,702 | | Total loans to individuals | $ | 19,375 | | | $ | 28,934 | | | $ | 17,699 | | | $ | 7,982 | | | $ | 2,548 | | | $ | 1,631 | | | $ | 2,735 | | | $ | 80,904 | |
Total loans | Total loans | $ | 904,048 | | | $ | 653,247 | | | $ | 584,773 | | | $ | 270,198 | | | $ | 281,725 | | | $ | 641,445 | | | $ | 312,149 | | | $ | 3,647,585 | | Total loans | $ | 766,596 | | | $ | 1,133,377 | | | $ | 462,100 | | | $ | 318,197 | | | $ | 159,299 | | | $ | 737,912 | | | $ | 385,560 | | | $ | 3,963,041 | |
Southside Bancshares, Inc. |21
| December 31, 2020 | Term Loans Amortized Cost Basis by Origination Year | | Revolving Loans Amortized Cost Basis | | Total | |
December 31, 2021 | | December 31, 2021 | Term Loans Amortized Cost Basis by Origination Year | | Revolving Loans Amortized Cost Basis | | Total |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | | | | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | | | |
Construction real estate: | Construction real estate: | | | | | | | | | | | | | Construction real estate: | | | | | | | | | | | | |
Pass | Pass | $ | 155,693 | | | $ | 180,536 | | | $ | 76,090 | | | $ | 55,636 | | | $ | 3,191 | | | $ | 8,297 | | | $ | 101,793 | | | $ | 581,236 | | Pass | $ | 179,521 | | | $ | 82,862 | | | $ | 38,788 | | | $ | 5,666 | | | $ | 2,126 | | | $ | 6,080 | | | $ | 132,592 | | | $ | 447,635 | |
Pass watch | Pass watch | — | | | — | | | — | | | — | | | 23 | | | — | | | — | | | 23 | | Pass watch | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Special mention | Special mention | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Special mention | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | Substandard | — | | | 382 | | | 62 | | | — | | | — | | | 58 | | | — | | | 502 | | Substandard | — | | | — | | | — | | | — | | | — | | | 175 | | | — | | | 175 | |
Doubtful | Doubtful | — | | | — | | | — | | | — | | | — | | | 180 | | | — | | | 180 | | Doubtful | — | | | — | | | — | | | 50 | | | — | | | — | | | — | | | 50 | |
Total construction real estate | Total construction real estate | $ | 155,693 | | | $ | 180,918 | | | $ | 76,152 | | | $ | 55,636 | | | $ | 3,214 | | | $ | 8,535 | | | $ | 101,793 | | | $ | 581,941 | | Total construction real estate | $ | 179,521 | | | $ | 82,862 | | | $ | 38,788 | | | $ | 5,716 | | | $ | 2,126 | | | $ | 6,255 | | | $ | 132,592 | | | $ | 447,860 | |
| 1-4 family residential real estate: | 1-4 family residential real estate: | | 1-4 family residential real estate: | |
Pass | Pass | $ | 154,003 | | | $ | 114,063 | | | $ | 70,621 | | | $ | 55,557 | | | $ | 57,680 | | | $ | 255,003 | | | $ | 2,833 | | | $ | 709,760 | | Pass | $ | 141,058 | | | $ | 129,681 | | | $ | 81,607 | | | $ | 47,566 | | | $ | 34,236 | | | $ | 209,470 | | | $ | 2,238 | | | $ | 645,856 | |
Pass watch | Pass watch | — | | | — | | | — | | | — | | | 267 | | | 564 | | | — | | | 831 | | Pass watch | — | | | — | | | — | | | — | | | — | | | 777 | | | — | | | 777 | |
Special mention | Special mention | — | | | — | | | — | | | — | | | — | | | 10 | | | — | | | 10 | | Special mention | — | | | 82 | | | — | | | — | | | — | | | — | | | — | | | 82 | |
Substandard | Substandard | 1,473 | | | — | | | 135 | | | 427 | | | 1,588 | | | 5,134 | | | 96 | | | 8,853 | | Substandard | 57 | | | 403 | | | 55 | | | — | | | 295 | | | 3,257 | | | 88 | | | 4,155 | |
Doubtful | Doubtful | — | | | — | | | — | | | 36 | | | 103 | | | 359 | | | — | | | 498 | | Doubtful | — | | | — | | | — | | | — | | | — | | | 270 | | | — | | | 270 | |
Total 1-4 family residential real estate | Total 1-4 family residential real estate | $ | 155,476 | | | $ | 114,063 | | | $ | 70,756 | | | $ | 56,020 | | | $ | 59,638 | | | $ | 261,070 | | | $ | 2,929 | | | $ | 719,952 | | Total 1-4 family residential real estate | $ | 141,115 | | | $ | 130,166 | | | $ | 81,662 | | | $ | 47,566 | | | $ | 34,531 | | | $ | 213,774 | | | $ | 2,326 | | | $ | 651,140 | |
| Commercial real estate: | Commercial real estate: | | Commercial real estate: | |
Pass | Pass | $ | 270,087 | | | $ | 307,161 | | | $ | 143,177 | | | $ | 162,180 | | | $ | 98,828 | | | $ | 179,919 | | | $ | 6,957 | | | $ | 1,168,309 | | Pass | $ | 648,002 | | | $ | 207,370 | | | $ | 209,923 | | | $ | 114,788 | | | $ | 143,350 | | | $ | 209,368 | | | $ | 7,566 | | | $ | 1,540,367 | |
Pass watch | Pass watch | — | | | — | | | 3,153 | | | 40,125 | | | 1,696 | | | 2,582 | | | — | | | 47,556 | | Pass watch | 21,669 | | | — | | | 2,163 | | | 3,074 | | | 374 | | | — | | | — | | | 27,280 | |
Special mention | Special mention | 4,555 | | | 33,020 | | | 7,041 | | | 140 | | | 4,531 | | | 7,850 | | | — | | | 57,137 | | Special mention | — | | | 2,062 | | | 2,217 | | | 119 | | | 163 | | | 1,877 | | | — | | | 6,438 | |
Substandard | Substandard | 7,542 | | | — | | | 2,097 | | | 65 | | | 704 | | | 12,282 | | | — | | | 22,690 | | Substandard | 3,299 | | | 667 | | | 10,830 | | | 1,480 | | | — | | | 7,691 | | | — | | | 23,967 | |
Doubtful | Doubtful | — | | | — | | | — | | | — | | | — | | | 54 | | | — | | | 54 | | Doubtful | — | | | — | | | — | | | — | | | — | | | 120 | | | — | | | 120 | |
Total commercial real estate | Total commercial real estate | $ | 282,184 | | | $ | 340,181 | | | $ | 155,468 | | | $ | 202,510 | | | $ | 105,759 | | | $ | 202,687 | | | $ | 6,957 | | | $ | 1,295,746 | | Total commercial real estate | $ | 672,970 | | | $ | 210,099 | | | $ | 225,133 | | | $ | 119,461 | | | $ | 143,887 | | | $ | 219,056 | | | $ | 7,566 | | | $ | 1,598,172 | |
| Commercial loans: | Commercial loans: | | Commercial loans: | |
Pass | Pass | $ | 313,688 | | | $ | 47,446 | | | $ | 20,386 | | | $ | 7,505 | | | $ | 3,392 | | | $ | 6,142 | | | $ | 140,018 | | | $ | 538,577 | | Pass | $ | 140,628 | | | $ | 51,866 | | | $ | 24,688 | | | $ | 13,204 | | | $ | 2,516 | | | $ | 4,062 | | | $ | 178,263 | | | $ | 415,227 | |
Pass watch | Pass watch | 2,599 | | | 1,318 | | | 2,410 | | | 1,981 | | | — | | | — | | | 370 | | | 8,678 | | Pass watch | — | | | — | | | 280 | | | 22 | | | — | | | — | | | — | | | 302 | |
Special mention | Special mention | 304 | | | 809 | | | 433 | | | 39 | | | 286 | | | 265 | | | 455 | | | 2,591 | | Special mention | — | | | 57 | | | 78 | | | 363 | | | — | | | 157 | | | — | | | 655 | |
Substandard | Substandard | 405 | | | 1,081 | | | 473 | | | 7 | | | — | | | — | | | 4,417 | | | 6,383 | | Substandard | — | | | 283 | | | 296 | | | 174 | | | 16 | | | — | | | 1,457 | | | 2,226 | |
Doubtful | Doubtful | 310 | | | 53 | | | 475 | | | 54 | | | 1 | | | — | | | — | | | 893 | | Doubtful | 7 | | | 26 | | | 124 | | | 359 | | | — | | | 72 | | | — | | | 588 | |
Total commercial loans | Total commercial loans | $ | 317,306 | | | $ | 50,707 | | | $ | 24,177 | | | $ | 9,586 | | | $ | 3,679 | | | $ | 6,407 | | | $ | 145,260 | | | $ | 557,122 | | Total commercial loans | $ | 140,635 | | | $ | 52,232 | | | $ | 25,466 | | | $ | 14,122 | | | $ | 2,532 | | | $ | 4,291 | | | $ | 179,720 | | | $ | 418,998 | |
| Municipal loans: | Municipal loans: | | Municipal loans: | |
Pass | Pass | $ | 72,542 | | | $ | 68,132 | | | $ | 33,735 | | | $ | 61,170 | | | $ | 25,387 | | | $ | 148,062 | | | $ | — | | | $ | 409,028 | | Pass | $ | 80,167 | | | $ | 64,803 | | | $ | 61,348 | | | $ | 29,168 | | | $ | 56,274 | | | $ | 151,318 | | | $ | — | | | $ | 443,078 | |
Pass watch | Pass watch | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Pass watch | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Special mention | Special mention | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Special mention | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | Substandard | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Substandard | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Doubtful | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total municipal loans | Total municipal loans | $ | 72,542 | | | $ | 68,132 | | | $ | 33,735 | | | $ | 61,170 | | | $ | 25,387 | | | $ | 148,062 | | | $ | — | | | $ | 409,028 | | Total municipal loans | $ | 80,167 | | | $ | 64,803 | | | $ | 61,348 | | | $ | 29,168 | | | $ | 56,274 | | | $ | 151,318 | | | $ | — | | | $ | 443,078 | |
| Loans to individuals: | Loans to individuals: | | Loans to individuals: | |
Pass | Pass | $ | 46,722 | | | $ | 25,302 | | | $ | 10,132 | | | $ | 4,716 | | | $ | 1,867 | | | $ | 917 | | | $ | 3,900 | | | $ | 93,556 | | Pass | $ | 40,252 | | | $ | 24,028 | | | $ | 11,813 | | | $ | 4,121 | | | $ | 1,684 | | | $ | 849 | | | $ | 3,052 | | | $ | 85,799 | |
Pass watch | Pass watch | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Pass watch | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Special mention | Special mention | — | | | — | | | 51 | | | — | | | — | | | — | | | 4 | | | 55 | | Special mention | — | | | — | | | — | | | 36 | | | — | | | — | | | — | | | 36 | |
Substandard | Substandard | 6 | | | 35 | | | 28 | | | 30 | | | 9 | | | 11 | | | 1 | | | 120 | | Substandard | — | | | 1 | | | 24 | | | 4 | | | 23 | | | 10 | | | 2 | | | 64 | |
Doubtful | Doubtful | 73 | | | 20 | | | 6 | | | 55 | | | 81 | | | 24 | | | — | | | 259 | | Doubtful | — | | | — | | | 1 | | | 7 | | | 3 | | | 4 | | | — | | | 15 | |
Total loans to individuals | Total loans to individuals | $ | 46,801 | | | $ | 25,357 | | | $ | 10,217 | | | $ | 4,801 | | | $ | 1,957 | | | $ | 952 | | | $ | 3,905 | | | $ | 93,990 | | Total loans to individuals | $ | 40,252 | | | $ | 24,029 | | | $ | 11,838 | | | $ | 4,168 | | | $ | 1,710 | | | $ | 863 | | | $ | 3,054 | | | $ | 85,914 | |
Total loans | Total loans | $ | 1,030,002 | | | $ | 779,358 | | | $ | 370,505 | | | $ | 389,723 | | | $ | 199,634 | | | $ | 627,713 | | | $ | 260,844 | | | $ | 3,657,779 | | Total loans | $ | 1,254,660 | | | $ | 564,191 | | | $ | 444,235 | | | $ | 220,201 | | | $ | 241,060 | | | $ | 595,557 | | | $ | 325,258 | | | $ | 3,645,162 | |
Watchlisted loans reported as 2022 originations as of June 30, 2022 and watchlisted loans reported as 2021 originations as of December 31, 2021 were, for the majority, first originated in various years prior to 2022 and 2021, respectively, but were renewed in the respective year.
Southside Bancshares, Inc. |22
The following tables present the aging of the amortized cost basis in past due loans by class of loans (in thousands):
| | | September 30, 2021 | | June 30, 2022 |
| | 30-59 Days Past Due | | 60-89 Days Past Due | | Greater than 90 Days Past Due | | Total Past Due | | Current | | Total | | 30-59 Days Past Due | | 60-89 Days Past Due | | Greater than 90 Days Past Due | | Total Past Due | | Current | | Total |
Real estate loans: | Real estate loans: | | | | | | | | | | | | Real estate loans: | | | | | | | | | | | |
Construction | Construction | $ | 72 | | | $ | 41 | | | $ | — | | | $ | 113 | | | $ | 421,982 | | | $ | 422,095 | | Construction | $ | 25 | | | $ | 57 | | | $ | 33 | | | $ | 115 | | | $ | 520,369 | | | $ | 520,484 | |
1-4 family residential | 1-4 family residential | 652 | | | 691 | | | 580 | | | 1,923 | | | 658,766 | | | 660,689 | | 1-4 family residential | 1,491 | | | 903 | | | 328 | | | 2,722 | | | 637,984 | | | 640,706 | |
Commercial | Commercial | 885 | | | — | | | — | | | 885 | | | 1,604,247 | | | 1,605,132 | | Commercial | 760 | | | — | | | 154 | | | 914 | | | 1,833,820 | | | 1,834,734 | |
Commercial loans | Commercial loans | 1,402 | | | 233 | | | 31 | | | 1,666 | | | 442,042 | | | 443,708 | | Commercial loans | 1,111 | | | 442 | | | 295 | | | 1,848 | | | 427,126 | | | 428,974 | |
Municipal loans | Municipal loans | 96 | | | — | | | — | | | 96 | | | 427,163 | | | 427,259 | | Municipal loans | — | | | — | | | — | | | — | | | 457,239 | | | 457,239 | |
Loans to individuals | Loans to individuals | 265 | | | 14 | | | 12 | | | 291 | | | 88,411 | | | 88,702 | | Loans to individuals | 151 | | | 10 | | | — | | | 161 | | | 80,743 | | | 80,904 | |
Total | Total | $ | 3,372 | | | $ | 979 | | | $ | 623 | | | $ | 4,974 | | | $ | 3,642,611 | | | $ | 3,647,585 | | Total | $ | 3,538 | | | $ | 1,412 | | | $ | 810 | | | $ | 5,760 | | | $ | 3,957,281 | | | $ | 3,963,041 | |
| | | December 31, 2020 | | December 31, 2021 |
| | 30-59 Days Past Due | | 60-89 Days Past Due | | Greater than 90 Days Past Due | | Total Past Due | | Current | | Total | | 30-59 Days Past Due | | 60-89 Days Past Due | | Greater than 90 Days Past Due | | Total Past Due | | Current | | Total |
Real estate loans: | Real estate loans: | | | | | | | | | | | | Real estate loans: | | | | | | | | | | | |
Construction | Construction | $ | 95 | | | $ | 14 | | | $ | 444 | | | $ | 553 | | | $ | 581,388 | | | $ | 581,941 | | Construction | $ | 82 | | | $ | 58 | | | $ | — | | | $ | 140 | | | $ | 447,720 | | | $ | 447,860 | |
1-4 family residential | 1-4 family residential | 7,872 | | | 2,469 | | | 2,830 | | | 13,171 | | | 706,781 | | | 719,952 | | 1-4 family residential | 3,226 | | | 606 | | | 227 | | | 4,059 | | | 647,081 | | | 651,140 | |
Commercial | Commercial | 467 | | | 315 | | | 86 | | | 868 | | | 1,294,878 | | | 1,295,746 | | Commercial | 1,191 | | | — | | | 99 | | | 1,290 | | | 1,596,882 | | | 1,598,172 | |
Commercial loans | Commercial loans | 1,423 | | | 4,516 | | | 323 | | | 6,262 | | | 550,860 | | | 557,122 | | Commercial loans | 1,523 | | | 251 | | | 537 | | | 2,311 | | | 416,687 | | | 418,998 | |
Municipal loans | Municipal loans | 64 | | | — | | | — | | | 64 | | | 408,964 | | | 409,028 | | Municipal loans | 170 | | | — | | | — | | | 170 | | | 442,908 | | | 443,078 | |
Loans to individuals | Loans to individuals | 519 | | | 123 | | | 27 | | | 669 | | | 93,321 | | | 93,990 | | Loans to individuals | 315 | | | 41 | | | 8 | | | 364 | | | 85,550 | | | 85,914 | |
Total | Total | $ | 10,440 | | | $ | 7,437 | | | $ | 3,710�� | | | $ | 21,587 | | | $ | 3,636,192 | | | $ | 3,657,779 | | Total | $ | 6,507 | | | $ | 956 | | | $ | 871 | | | $ | 8,334 | | | $ | 3,636,828 | | | $ | 3,645,162 | |
Southside Bancshares, Inc. |23
The following table sets forth the amortized cost basis of nonperforming assets for the periods presented (in thousands):
| | | September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
Nonaccrual loans: | Nonaccrual loans: | | | | Nonaccrual loans: | | | |
Real estate loans: | Real estate loans: | | Real estate loans: | |
Construction | Construction | $ | 63 | | | $ | 640 | | Construction | $ | 33 | | | $ | 57 | |
1-4 family residential | 1-4 family residential | 1,432 | | | 3,922 | | 1-4 family residential | 1,087 | | | 969 | |
Commercial | Commercial | 796 | | | 1,269 | | Commercial | 796 | | | 668 | |
Commercial loans | Commercial loans | 674 | | | 1,592 | | Commercial loans | 1,188 | | | 815 | |
| Loans to individuals | Loans to individuals | 48 | | | 291 | | Loans to individuals | 15 | | | 27 | |
Total nonaccrual loans (1) | Total nonaccrual loans (1) | 3,013 | | | 7,714 | | Total nonaccrual loans (1) | 3,119 | | | 2,536 | |
| Accruing loans past due more than 90 days | Accruing loans past due more than 90 days | — | | | — | | Accruing loans past due more than 90 days | — | | | — | |
TDR loans | TDR loans | 9,371 | | | 9,646 | | TDR loans | 8,568 | | | 9,073 | |
OREO | OREO | 25 | | | 106 | | OREO | 128 | | | — | |
Repossessed assets | Repossessed assets | 15 | | | 14 | | Repossessed assets | — | | | — | |
Total nonperforming assets | Total nonperforming assets | $ | 12,424 | | | $ | 17,480 | | Total nonperforming assets | $ | 11,815 | | | $ | 11,609 | |
(1) Includes $1.1 million and $976,000 of restructuredTDR loans as of SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively.
We reversed $5,000$24,000 and $13,000$35,000 of interest income on nonaccrual loans during the three and ninesix months ended SeptemberJune 30, 2022, and $12,000 and $25,000 for the three and six months ended June 30, 2021, respectively, and $147,000 for the nine months ended September 30, 2020. There was no interest income reversed on nonaccrual loans during the three months ended September 30, 2020.respectively. We had $1.1$1.3 million and $2.2$1.2 million of loans on nonaccrual for which there was no related allowance for credit losses as of SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively.
Collateral-dependent loans are loans that we expect the repayment to be provided substantially through the operation or sale of the collateral of the loan and we have determined that the borrower is experiencing financial difficulty. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for selling costs. As of SeptemberJune 30, 20212022 and December 31, 2020,2021, we had $9.1$9.0 million and $11.5$8.5 million, respectively, of collateral-dependent loans, secured mainly by real estate and equipment. There have been no significant changes to the collateral that secures the collateral-dependent assets. Foreclosed assets include OREO and repossessed assets. For 1-4 family residential real estate properties, a loan is recognized as a foreclosed property once legal title to the real estate property has been received upon completion of foreclosure or the borrower has conveyed all interest in the residential property through a deed in lieu of foreclosure. There were no$18,000 and $21,000 loans secured by 1-4 family residential properties for which formal foreclosure proceedings were in process as of SeptemberJune 30, 2021. As of2022 and December 31, 2020, there were $1.2 million in loans secured by 1-4 family residential properties for which formal foreclosure proceedings were in process.
2021, respectively.
Southside Bancshares, Inc. |24
Troubled Debt Restructurings
The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, restructuring amortization schedules and other actions intended to minimize potential losses. We may provide a combination of concessions which may include an extension of the amortization period, interest rate reduction and/or converting the loan to interest-only for a limited period of time.
In response to the impact of the COVID-19 pandemic on the economy, the CARES Act was signed into law. Under the CARES Act, banks may elect to deem that loan modifications do not result in TDRs if they are: (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the national emergency declaration or (B) December 31, 2020. The Economic Aid Act extended this relief to the earlier of 60 days after the national emergency termination date or January 1, 2022. Additionally, in accordance with the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised), other short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs under ASC Subtopic 310-40. This includes short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Loans modified under this guidance are not considered TDRs and as such are not identified in the table below. At September 30, 2021 there were no loans with outstanding payment deferrals. As of December 31, 2020, we had outstanding loans with payment deferrals totaling $47.2 million.
The following tables set forth the recorded balance of loans considered to be TDRs that were restructured and the type of concession by class of loans during the periods presented (dollars in thousands):
| | | | Three Months Ended September 30, 2021 | | Three Months Ended June 30, 2022 |
| | Extend Amortization Period | | Interest Rate Reductions | | Combination | | Total Modifications | | Number of Loans | | Extend Amortization Period | | Interest Rate Reductions | | Combination | | Total Modifications | | Number of Loans |
Real estate loans: | Real estate loans: | | | | | | | | | | Real estate loans: | | | | | | | | | |
| 1-4 family residential | 1-4 family residential | $ | — | | | $ | — | | | $ | 219 | | | $ | 219 | | | 3 | | 1-4 family residential | $ | — | | | $ | — | | | $ | 101 | | | $ | 101 | | | 1 | |
Commercial | — | | | — | | | 453 | | | 453 | | | 1 | | |
| Commercial loans | | Commercial loans | — | | | — | | | 21 | | | 21 | | | 1 | |
| Loans to individuals | | Loans to individuals | — | | | — | | | 6 | | | 6 | | | 1 | |
Total | Total | $ | — | | | $ | — | | | $ | 672 | | | $ | 672 | | | 4 | | Total | $ | — | | | $ | — | | | $ | 128 | | | $ | 128 | | | 3 | |
| | | | Nine Months Ended September 30, 2021 | | Six Months Ended June 30, 2022 |
| | Extend Amortization Period | | Interest Rate Reductions | | Combination | | Total Modifications | | Number of Loans | | Extend Amortization Period | | Interest Rate Reductions | | Combination | | Total Modifications | | Number of Loans |
Real estate loans: | Real estate loans: | | | | | | | | | | Real estate loans: | | | | | | | | | |
| 1-4 family residential | 1-4 family residential | $ | — | | | $ | — | | | $ | 344 | | | $ | 344 | | | 5 | | 1-4 family residential | $ | — | | | $ | — | | | $ | 309 | | | $ | 309 | | | 4 | |
Commercial | — | | | — | | | 453 | | | 453 | | | 1 | | |
| Commercial loans | Commercial loans | — | | | 16 | | | 94 | | | 110 | | | 3 | | Commercial loans | — | | | — | | | 30 | | | 30 | | | 2 | |
| Loans to individuals | | Loans to individuals | — | | | — | | | 10 | | | 10 | | | 2 | |
Total | Total | $ | — | | | $ | 16 | | | $ | 891 | | | $ | 907 | | | 9 | | Total | $ | — | | | $ | — | | | $ | 349 | | | $ | 349 | | | 8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| Three Months Ended June 30, 2021 |
| Extend Amortization Period | | Interest Rate Reductions | | Combination | | Total Modifications | | Number of Loans |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Commercial loans | $ | — | | | $ | — | | | $ | 106 | | | $ | 106 | | | 2 | |
| | | | | | | | | |
| | | | | | | | | |
Total | $ | — | | | $ | — | | | $ | 106 | | | $ | 106 | | | 2 | |
| | | Nine Months Ended September 30, 2020 | | Six Months Ended June 30, 2021 |
| | Extend Amortization Period | | Interest Rate Reductions | | Combination | | Total Modifications | | Number of Loans | | Extend Amortization Period | | Interest Rate Reductions | | Combination | | Total Modifications | | Number of Loans |
Real estate loans: | Real estate loans: | | | | | | | | | | Real estate loans: | | | | | | | | | |
| 1-4 family residential | | 1-4 family residential | $ | — | | | $ | — | | | $ | 128 | | | $ | 128 | | | 2 | |
| Commercial | $ | — | | | $ | — | | | $ | 58 | | | $ | 58 | | | 1 | | |
Commercial loans | Commercial loans | — | | | — | | | 117 | | | 117 | | | 3 | | Commercial loans | — | | | — | | | 122 | | | 122 | | | 3 | |
| Total | Total | $ | — | | | $ | — | | | $ | 175 | | | $ | 175 | | | 4 | | Total | $ | — | | | $ | — | | | $ | 250 | | | $ | 250 | | | 5 | |
There were no TDRs restructured during the three months ended September 30, 2020.
Southside Bancshares, Inc. |25
Interest continues to be charged on principal balances outstanding during the extended term. Therefore, the financial effects of the recorded investment of loans restructured as TDRs during the ninesix months ended SeptemberJune 30, 20212022 and 20202021 were not significant.
On an ongoing basis, the performance of the TDRs is monitored for subsequent payment default. Payment default for TDRs is recognized when the borrower is 90 days or more past due. ForAs of June 30, 2022, the three and nine months ended Septemberamount of TDRs in default was $139,000. As of June 30, 2021, and 2020 the amount of TDRs in default was not significant. Payment defaults for TDRs did not significantly impact the determination of the allowance for loan losses in the periods presented.
At SeptemberJune 30, 20212022 and 2020,2021, there were no commitments to lend additional funds to borrowers whose terms had been modified in TDRs.
Southside Bancshares, Inc. |25
Allowance for Loan Losses
In accordance with ASC 326, the allowance for credit losses on loans is estimated and recognized upon origination of the loan based on expected credit losses. The CECL model uses historical experience and current conditions for homogeneous pools of loans, and reasonable and supportable forecasts about future events. The impact of varying economic conditions and portfolio stress factors are a component of the credit loss models applied to each portfolio. Reserve factors are specific to the loan segments that share similar risk characteristics based on the probability of default assumptions and loss given default assumptions, over the contractual term. The forecasted periods gradually mean-revert the economic inputs to their long-run historical trends. Management evaluates the economic data points used in the Moody’s forecasting scenarios on a quarterly basis to determine the most appropriate impact to the various portfolio characteristics based on management’s view and applies weighting to various forecasting scenarios as deemed appropriate based on known and expected economic activities. Management also considers and may apply relevant qualitative factors, not previously considered, to determine the appropriate allowance level. The use of the CECL model includes significant judgment by management and may differ from those of our peers due to different historical loss patterns, economic forecasts, and the length of time of the reasonable and supportable forecast period and reversion period.
We utilize Moody’s Analytics economic forecast scenarios and assign probability weighting to those scenarios which best reflect management’s views on the economic forecast. The probability weighting and scenarios utilized for the estimate of the allowance were generally reflective of an improved economic forecast based on known and knowable information as of September 30, 2021.
When determining the appropriate allowance for credit losses on our loan portfolio, our commercial construction and real estate loans, commercial loans and municipal loans utilize the probability of default/loss given default discounted cash flow approach. Reserves on these loans are based upon risk factors including the loan type and structure, collateral type, leverage ratio, refinancing risk and origination quality, among others. Our consumer construction real estate loans, 1-4 family residential loans and our loans to individuals use a loss rate based upon risk factors including loan types, origination year and credit scores. Loans covered by the PPP may be eligible for loan forgiveness. The remaining loan balance after forgiveness of any amount is still fully guaranteed by the SBA and therefore does not have an associated allowance.
Loans evaluated collectively in a pool are monitored to ensure they continue to exhibit similar risk characteristics with other loans in the pool. If a loan does not share similar risk characteristics with other loans, expected credit losses for that loan are evaluated individually.
Southside Bancshares, Inc. |26
The following tables detail activity in the allowance for loan losses by portfolio segment for the periods presented (in thousands):
| | | | Three Months Ended September 30, 2021 | | Three Months Ended June 30, 2022 |
| | Real Estate | | | | | | | | | | | Real Estate | | | | | | | | | |
| | Construction | | 1-4 Family Residential | | Commercial | | Commercial Loans | | Municipal Loans | | Loans to Individuals | | | Total | | Construction | | 1-4 Family Residential | | Commercial | | Commercial Loans | | Municipal Loans | | Loans to Individuals | | | Total |
Balance at beginning of period | Balance at beginning of period | $ | 8,018 | | | $ | 2,520 | | | $ | 28,930 | | | $ | 3,097 | | | $ | 47 | | | $ | 301 | | | | $ | 42,913 | | Balance at beginning of period | $ | 3,604 | | | $ | 1,982 | | | $ | 27,225 | | | $ | 2,454 | | | $ | 48 | | | $ | 211 | | | | $ | 35,524 | |
Loans charged-off | Loans charged-off | — | | | (35) | | | — | | | (508) | | | — | | | (397) | | | | (940) | | Loans charged-off | — | | | — | | | — | | | (46) | | | — | | | (433) | | | | (479) | |
Recoveries of loans charged-off | Recoveries of loans charged-off | 1 | | | 4 | | | 12 | | | 74 | | | — | | | 346 | | | | 437 | | Recoveries of loans charged-off | 1 | | | 53 | | | 34 | | | 114 | | | — | | | 314 | | | | 516 | |
Net loans (charged-off) recovered | Net loans (charged-off) recovered | 1 | | | (31) | | | 12 | | | (434) | | | — | | | (51) | | | | (503) | | Net loans (charged-off) recovered | 1 | | | 53 | | | 34 | | | 68 | | | — | | | (119) | | | | 37 | |
Provision for (reversal of) loan losses | Provision for (reversal of) loan losses | (3,036) | | | (543) | | | (684) | | | (103) | | | (1) | | | (21) | | | | (4,388) | | Provision for (reversal of) loan losses | (206) | | | (11) | | | (38) | | | 36 | | | (2) | | | 109 | | | | (112) | |
Balance at end of period | Balance at end of period | $ | 4,983 | | | $ | 1,946 | | | $ | 28,258 | | | $ | 2,560 | | | $ | 46 | | | $ | 229 | | | | $ | 38,022 | | Balance at end of period | $ | 3,399 | | | $ | 2,024 | | | $ | 27,221 | | | $ | 2,558 | | | $ | 46 | | | $ | 201 | | | | $ | 35,449 | |
| | | | Nine Months Ended September 30, 2021 | | Six Months Ended June 30, 2022 |
| | Real Estate | | | | | | | | | | | Real Estate | | | | | | | | | |
| | Construction | | 1-4 Family Residential | | Commercial | | Commercial Loans | | Municipal Loans | | Loans to Individuals | | | Total | | Construction | | 1-4 Family Residential | | Commercial | | Commercial Loans | | Municipal Loans | | Loans to Individuals | | | Total |
Balance at beginning of period | Balance at beginning of period | $ | 6,490 | | | $ | 2,270 | | | $ | 35,709 | | | $ | 4,107 | | | $ | 46 | | | $ | 384 | | | | $ | 49,006 | | Balance at beginning of period | $ | 3,787 | | | $ | 1,866 | | | $ | 26,980 | | | $ | 2,397 | | | $ | 47 | | | $ | 196 | | | | $ | 35,273 | |
Loans charged-off | Loans charged-off | — | | | (136) | | | — | | | (943) | | | — | | | (1,183) | | | | (2,262) | | Loans charged-off | — | | | — | | | — | | | (177) | | | — | | | (857) | | | | (1,034) | |
Recoveries of loans charged-off | Recoveries of loans charged-off | 2 | | | 71 | | | 13 | | | 535 | | | — | | | 904 | | | | 1,525 | | Recoveries of loans charged-off | 1 | | | 92 | | | 81 | | | 330 | | | — | | | 552 | | | | 1,056 | |
Net loans (charged-off) recovered | Net loans (charged-off) recovered | 2 | | | (65) | | | 13 | | | (408) | | | — | | | (279) | | | | (737) | | Net loans (charged-off) recovered | 1 | | | 92 | | | 81 | | | 153 | | | — | | | (305) | | | | 22 | |
Provision for (reversal of) loan losses | Provision for (reversal of) loan losses | (1,509) | | | (259) | | | (7,464) | | | (1,139) | | | — | | | 124 | | | | (10,247) | | Provision for (reversal of) loan losses | (389) | | | 66 | | | 160 | | | 8 | | | (1) | | | 310 | | | | 154 | |
Balance at end of period | Balance at end of period | $ | 4,983 | | | $ | 1,946 | | | $ | 28,258 | | | $ | 2,560 | | | $ | 46 | | | $ | 229 | | | | $ | 38,022 | | Balance at end of period | $ | 3,399 | | | $ | 2,024 | | | $ | 27,221 | | | $ | 2,558 | | | $ | 46 | | | $ | 201 | | | | $ | 35,449 | |
| | | | Three Months Ended September 30, 2020 | | Three Months Ended June 30, 2021 |
| | Real Estate | | | | | | | | | | | Real Estate | | | | | | | | | |
| | Construction | | 1-4 Family Residential | | Commercial | | Commercial Loans | | Municipal Loans | | Loans to Individuals | | | Total | | Construction | | 1-4 Family Residential | | Commercial | | Commercial Loans | | Municipal Loans | | Loans to Individuals | | | Total |
Balance at beginning of period | Balance at beginning of period | $ | 8,500 | | | $ | 2,702 | | | $ | 43,785 | | | $ | 4,221 | | | $ | 47 | | | $ | 613 | | | | $ | 59,868 | | Balance at beginning of period | $ | 8,201 | | | $ | 2,508 | | | $ | 27,236 | | | $ | 3,108 | | | $ | 46 | | | $ | 355 | | | | $ | 41,454 | |
| Loans charged-off | Loans charged-off | (6) | | | (18) | | | (12) | | | (279) | | | — | | | (403) | | | | (718) | | Loans charged-off | — | | | (28) | | | — | | | (116) | | | — | | | (383) | | | | (527) | |
Recoveries of loans charged-off | Recoveries of loans charged-off | — | | | 9 | | | 13 | | | 61 | | | — | | | 278 | | | | 361 | | Recoveries of loans charged-off | — | | | 12 | | | 1 | | | 179 | | | — | | | 274 | | | | 466 | |
Net loans (charged-off) recovered | Net loans (charged-off) recovered | (6) | | | (9) | | | 1 | | | (218) | | | — | | | (125) | | | | (357) | | Net loans (charged-off) recovered | — | | | (16) | | | 1 | | | 63 | | | — | | | (109) | | | | (61) | |
Provision for (reversal of) loan losses | Provision for (reversal of) loan losses | (2,868) | | | (58) | | | (2,001) | | | 489 | | | (1) | | | 38 | | | | (4,401) | | Provision for (reversal of) loan losses | (183) | | | 28 | | | 1,693 | | | (74) | | | 1 | | | 55 | | | | 1,520 | |
Balance at end of period | Balance at end of period | $ | 5,626 | | | $ | 2,635 | | | $ | 41,785 | | | $ | 4,492 | | | $ | 46 | | | $ | 526 | | | | $ | 55,110 | | Balance at end of period | $ | 8,018 | | | $ | 2,520 | | | $ | 28,930 | | | $ | 3,097 | | | $ | 47 | | | $ | 301 | | | | $ | 42,913 | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| Real Estate | | | | | | | | | | |
| Construction | | 1-4 Family Residential | | Commercial | | Commercial Loans | | Municipal Loans | | Loans to Individuals | | | | Total |
Balance at beginning of period | $ | 3,539 | | | $ | 3,833 | | | $ | 9,572 | | | $ | 6,351 | | | $ | 570 | | | $ | 932 | | | | | $ | 24,797 | |
Impact of CECL adoption - cumulative effect adjustment | 2,968 | | | (1,447) | | | 7,730 | | | (3,532) | | | (522) | | | (125) | | | | | 5,072 | |
Impact of CECL adoption - purchased loans with credit deterioration | (15) | | | (6) | | | 333 | | | (22) | | | — | | | (59) | | | | | 231 | |
Loans charged-off | (39) | | | (74) | | | (33) | | | (800) | | | — | | | (1,313) | | | | | (2,259) | |
Recoveries of loans charged-off | 11 | | | 29 | | | 94 | | | 191 | | | — | | | 923 | | | | | 1,248 | |
Net loans (charged-off) recovered | (28) | | | (45) | | | 61 | | | (609) | | | — | | | (390) | | | | | (1,011) | |
Provision for (reversal of) loan losses(1) | (838) | | | 300 | | | 24,089 | | | 2,304 | | | (2) | | | 168 | | | | | 26,021 | |
Balance at end of period | $ | 5,626 | | | $ | 2,635 | | | $ | 41,785 | | | $ | 4,492 | | | $ | 46 | | | $ | 526 | | | | | $ | 55,110 | |
(1) The increase in the provision for credit losses during the nine months ended September 30, 2020 was primarily due to the economic impact of COVID-19 on macroeconomic factors used in the CECL model. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
| Real Estate | | | | | | | | | | |
| Construction | | 1-4 Family Residential | | Commercial | | Commercial Loans | | Municipal Loans | | Loans to Individuals | | | | Total |
Balance at beginning of period | $ | 6,490 | | | $ | 2,270 | | | $ | 35,709 | | | $ | 4,107 | | | $ | 46 | | | $ | 384 | | | | | $ | 49,006 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Loans charged-off | — | | | (101) | | | — | | | (435) | | | — | | | (786) | | | | | (1,322) | |
Recoveries of loans charged-off | 1 | | | 67 | | | 1 | | | 461 | | | — | | | 558 | | | | | 1,088 | |
Net loans (charged-off) recovered | 1 | | | (34) | | | 1 | | | 26 | | | — | | | (228) | | | | | (234) | |
Provision for (reversal of) loan losses(1) | 1,527 | | | 284 | | | (6,780) | | | (1,036) | | | 1 | | | 145 | | | | | (5,859) | |
Balance at end of period | $ | 8,018 | | | $ | 2,520 | | | $ | 28,930 | | | $ | 3,097 | | | $ | 47 | | | $ | 301 | | | | | $ | 42,913 | |
The accrued interest receivable on our loan receivables is excluded from the allowance for credit loss estimate and is included in interest receivable on our consolidated balance sheets. As of SeptemberJune 30, 20212022 and December 31, 2020,2021, the accrued interest on our loan portfolio was $13.3$14.6 million and $16.4$13.3 million, respectively.
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6. Borrowing Arrangements
Information related to borrowings is provided in the table below (dollars in thousands):
| | | September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
Other borrowings: | Other borrowings: | | | | | Other borrowings: | | | | |
Balance at end of period | Balance at end of period | | $ | 20,724 | | | $ | 23,172 | | Balance at end of period | | $ | 58,478 | | | $ | 23,219 | |
Average amount outstanding during the period (1) | Average amount outstanding during the period (1) | | 22,387 | | | 91,940 | | Average amount outstanding during the period (1) | | 29,323 | | | 22,257 | |
Maximum amount outstanding during the period (2) | Maximum amount outstanding during the period (2) | | 24,549 | | | 219,259 | | Maximum amount outstanding during the period (2) | | 58,478 | | | 24,549 | |
Weighted average interest rate during the period (3) | Weighted average interest rate during the period (3) | | 0.2 | % | | 0.4 | % | Weighted average interest rate during the period (3) | | 0.5 | % | | 0.2 | % |
Interest rate at end of period (4) | Interest rate at end of period (4) | | 0.2 | % | | 0.1 | % | Interest rate at end of period (4) | | 1.0 | % | | 0.2 | % |
| FHLB borrowings: | FHLB borrowings: | | | | | FHLB borrowings: | | | | |
Balance at end of period | Balance at end of period | | $ | 659,204 | | | $ | 832,527 | | Balance at end of period | | $ | 153,701 | | | $ | 344,038 | |
Average amount outstanding during the period (1) | Average amount outstanding during the period (1) | | 684,280 | | | 1,032,269 | | Average amount outstanding during the period (1) | | 89,202 | | | 665,384 | |
Maximum amount outstanding during the period (2) | Maximum amount outstanding during the period (2) | | 723,584 | | | 1,274,370 | | Maximum amount outstanding during the period (2) | | 153,701 | | | 723,584 | |
Weighted average interest rate during the period (3) | Weighted average interest rate during the period (3) | | 1.1 | % | | 1.1 | % | Weighted average interest rate during the period (3) | | 1.3 | % | | 1.1 | % |
Interest rate at end of period (5) | Interest rate at end of period (5) | | 1.1 | % | | 1.0 | % | Interest rate at end of period (5) | | 1.8 | % | | 1.3 | % |
(1)The average amount outstanding during the period was computed by dividing the total daily outstanding principal balances by the number of days in the period.
(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 (annualized for interim periods) by the average amount outstanding during the period. The weighted average interest rate on the FHLB borrowings includes the effect of interest rate swaps.
(4)Stated rate.
(5)The interest rate on the FHLB borrowings includes the effect of interest rate swaps.
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Maturities of the obligations associated with our borrowing arrangements based on scheduled repayments at SeptemberJune 30, 20212022 are as follows (in thousands):
| | | Payments Due by Period | | Payments Due by Period |
| | | Less than 1 Year | | 1-2 Years | | 2-3 Years | | 3-4 Years | | 4-5 Years | | Thereafter | | Total | | | Less than 1 Year | | 1-2 Years | | 2-3 Years | | 3-4 Years | | 4-5 Years | | Thereafter | | Total |
Other borrowings | Other borrowings | | $ | 20,724 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 20,724 | | Other borrowings | | $ | 58,478 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 58,478 | |
FHLB borrowings | FHLB borrowings | | 655,673 | | | 702 | | | 733 | | | 764 | | | 582 | | | 750 | | | 659,204 | | FHLB borrowings | | 150,695 | | | 724 | | | 756 | | | 679 | | | 396 | | | 451 | | | 153,701 | |
Total obligations | Total obligations | | $ | 676,397 | | | $ | 702 | | | $ | 733 | | | $ | 764 | | | $ | 582 | | | $ | 750 | | | $ | 679,928 | | Total obligations | | $ | 209,173 | | | $ | 724 | | | $ | 756 | | | $ | 679 | | | $ | 396 | | | $ | 451 | | | $ | 212,179 | |
Other borrowings may include federal funds purchased, repurchase agreements and borrowings from the FRDW. Southside Bank has 3 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 SeptemberJune 30, 20212022 or December 31, 2020.2021. To provide more liquidity in response to the economic impact of the COVID-19 pandemic, the Federal Reserve took steps to encourage broader use of the discount window. At SeptemberJune 30, 2021,2022, the amount of additional funding the Bank could obtain from the FRDW, collateralized by securities, was approximately $476.1$391.1 million. There were $29.0 million in borrowings from the FRDW at June 30, 2022. There were no borrowings from the FRDW at September 30, 2021 or December 31, 2020.2021. Southside Bank has a $5.0 million line of credit with Frost Bank to be used to issue letters of credit, and at SeptemberJune 30, 2021,2022, the line had 1 outstanding letter of credit for $91,000.$155,000. Southside Bank currently has no outstanding letters of credit from FHLB held as collateral for its public fund deposits.
Southside Bank enters into sales of securities under repurchase agreements. These repurchase agreements totaled $20.7$29.5 million at SeptemberJune 30, 20212022 and $23.2 million at December 31, 2020,2021, and had maturities of less than one year. Repurchase agreements are secured by investment and MBS securities and are stated at the amount of cash received in connection with the transaction.
FHLB borrowings represent borrowings with fixed interest rates ranging from 0.13%1.72% to 4.799% and with remaining maturities of four22 days to 6.86.0 years at SeptemberJune 30, 2021.2022. FHLB borrowings may be collateralized by FHLB stock, nonspecified loans
Southside Bancshares, Inc. |29
and/or securities. At SeptemberJune 30, 2021,2022, the amount of additional funding Southside Bank could obtain from FHLB, collateralized by securities, FHLB stock and nonspecified loans and securities, was approximately $1.22$1.73 billion, net of FHLB stock purchases required.
Southside Bank has entered into various variable rate agreements and fixed rate short-term pay agreements with third-party financial institutions with rates tied to LIBOR. These agreements totaled $605.0 million at September 30, 2021 and $670.0 million at December 31, 2020. NaN of the agreements have an interest rate tied to three-month LIBOR, and the remaining agreements have interest rates tied to one-month LIBOR. In connection with all of these agreements, Southside Bank also entered into various interest rate swap contracts that are treated as cash flow hedges under ASC Topic 815, “Derivatives and Hedging” that are expected to be effective in hedging the variability in future cash flows attributable to fluctuations in the underlying LIBOR interest rate. The interest rate swap contracts had a weighted average rate of 1.18% with a weighted average maturity of 3.4 years at September 30, 2021. Refer to “Note 9 – 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.
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7. Long-term Debt
Information related to our long-term debt is summarized as follows for the periods presented (in thousands):
| | | September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| Subordinated notes: (1) | Subordinated notes: (1) | | | | Subordinated notes: (1) | | | |
3.875% Subordinated notes, net of unamortized debt issuance costs (2) | 3.875% Subordinated notes, net of unamortized debt issuance costs (2) | $ | 98,500 | | | $ | 98,497 | | 3.875% Subordinated notes, net of unamortized debt issuance costs (2) | $ | 98,604 | | | $ | 98,534 | |
5.50% Subordinated notes, net of unamortized debt issuance costs (3) | — | | | 98,754 | | |
| Total Subordinated notes | Total Subordinated notes | 98,500 | | | 197,251 | | Total Subordinated notes | 98,604 | | | 98,534 | |
Trust preferred subordinated debentures: (4)(3) | Trust preferred subordinated debentures: (4)(3) | | Trust preferred subordinated debentures: (4)(3) | |
Southside Statutory Trust III, net of unamortized debt issuance costs (5)(4) | Southside Statutory Trust III, net of unamortized debt issuance costs (5)(4) | 20,567 | | | 20,563 | | Southside Statutory Trust III, net of unamortized debt issuance costs (5)(4) | 20,570 | | | 20,568 | |
Southside Statutory Trust IV | Southside Statutory Trust IV | 23,196 | | | 23,196 | | Southside Statutory Trust IV | 23,196 | | | 23,196 | |
Southside Statutory Trust V | Southside Statutory Trust V | 12,887 | | | 12,887 | | Southside Statutory Trust V | 12,887 | | | 12,887 | |
Magnolia Trust Company I | Magnolia Trust Company I | 3,609 | | | 3,609 | | Magnolia Trust Company I | 3,609 | | | 3,609 | |
Total Trust preferred subordinated debentures | Total Trust preferred subordinated debentures | 60,259 | | | 60,255 | | Total Trust preferred subordinated debentures | 60,262 | | | 60,260 | |
| Total Long-term debt | Total Long-term debt | $ | 158,759 | | | $ | 257,506 | | Total Long-term debt | $ | 158,866 | | | $ | 158,794 | |
(1)This debt consists of subordinated notes with a remaining maturity greater than one year that qualify under the risk-based capital guidelines as Tier 2 capital, subject to certain limitations.
(2)The unamortized discount and debt issuance costs reflected in the carrying amount of the subordinated notes totaled approximately $1.5$1.4 million at SeptemberJune 30, 20212022 and December 31, 2020.
(3)The unamortized discount and debt issuance costs reflected in the carrying amount of the subordinated notes totaled approximately $1.2$1.5 million at December 31, 2020.2021.
(4)(3)This debt consists of trust preferred securities that qualify under the risk-based capital guidelines as Tier 1 capital, subject to certain limitations.
(5)(4)The unamortized debt issuance costs reflected in the carrying amount of the Southside Statutory Trust III junior subordinated debentures totaled $52,000$49,000 at SeptemberJune 30, 20212022 and $56,000$51,000 at December 31, 2020.2021.
As of SeptemberJune 30, 2021,2022, the details of the subordinated notes and the trust preferred subordinated debentures are summarized below (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Date Issued | | Amount Issued | | Fixed or Floating Rate | | Interest Rate | | Maturity Date |
3.875% Subordinated Notes | November 6, 2020 | | $ | 100,000 | | | Fixed-to-Floating | | 3.875% | | November 15, 2030 |
| | | | | | | | | |
Southside Statutory Trust III | September 4, 2003 | | $ | 20,619 | | | Floating | | 3 month LIBOR + 2.94% | | September 4, 2033 |
Southside Statutory Trust IV | August 8, 2007 | | $ | 23,196 | | | Floating | | 3 month LIBOR + 1.30% | | October 30, 2037 |
Southside Statutory Trust V | August 10, 2007 | | $ | 12,887 | | | Floating | | 3 month LIBOR + 2.25% | | September 15, 2037 |
Magnolia Trust Company I (1) | May 20, 2005 | | $ | 3,609 | | | Floating | | 3 month LIBOR + 1.80% | | November 23, 2035 |
(1)On October 10, 2007, as part of an acquisition we assumed $3.6 million of floating rate junior subordinated debentures issued in 2005 to Magnolia Trust Company I.
On September 19, 2016, the Company issued $100.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes that mature on September 30, 2026. This debt initially bore interest at a fixed rate of 5.50% through September 29, 2021 and thereafter, was to adjust quarterly at a floating rate equal to three-month LIBOR plus 429.7 basis points. On September 30, 2021, the Company completed the redemption of these subordinated notes. The redemption price for
Southside Bancshares, Inc. |31
the subordinated notes was equal to 100% of the principal amount of the subordinated notes redeemed, plus any accrued and unpaid interest. The remaining unamortized discount and debt issuance costs associated with these notes were recorded on our consolidated income statements as loss on redemption of subordinated notes in noninterest expense.
On November 6, 2020, the Company issued $100.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes that mature on November 15, 2030. This debt initially bears interest at a fixed rate of 3.875% per year through November 14, 2025 and thereafter, adjusts quarterly at a floating rate equal to the then current three-month term SOFR, as published by the FRBNY, plus 366 basis points. The proceeds from the sale of the subordinated notes were used for general corporate purposes.
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8. Employee Benefit Plans
The components of net periodic benefit cost (income) related to our employee benefit plans are as follows (in thousands):
| | | | | Three Months Ended September 30, | | | Three Months Ended June 30, |
| | Defined Benefit Pension Plan | | Defined Benefit Pension Plan Acquired | | Restoration Plan | | Retirement Plan | | Acquired Retirement Plan | | Restoration Plan |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Service cost | | $ | — | | | $ | 483 | | | $ | — | | | $ | — | | | $ | — | | | $ | 149 | | |
| Interest cost | Interest cost | | 642 | | | 672 | | | 23 | | | 41 | | | 130 | | | 126 | | Interest cost | | $ | 691 | | | $ | 657 | | | $ | 25 | | | $ | 22 | | | $ | 150 | | | $ | 139 | |
Expected return on assets | Expected return on assets | | (1,355) | | | (1,344) | | | (53) | | | (75) | | | — | | | — | | Expected return on assets | | (1,462) | | | (1,273) | | | (57) | | | (47) | | | — | | | — | |
Net loss amortization | Net loss amortization | | 251 | | | 694 | | | 1 | | | 2 | | | 64 | | | 125 | | Net loss amortization | | 169 | | | (19) | | | — | | | — | | | 72 | | | 10 | |
Prior service (credit) cost amortization | | — | | | (4) | | | — | | | — | | | — | | | 2 | | |
| Net periodic benefit (income) cost | | $ | (462) | | | $ | 501 | | | $ | (29) | | | $ | (32) | | | $ | 194 | | | $ | 402 | | |
| Net periodic benefit cost (income) | | Net periodic benefit cost (income) | | $ | (602) | | | $ | (635) | | | $ | (32) | | | $ | (25) | | | $ | 222 | | | $ | 149 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | Defined Benefit Pension Plan | | Defined Benefit Pension Plan Acquired | | Restoration Plan |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Service cost | | $ | — | | | $ | 1,311 | | | $ | — | | | $ | — | | | $ | — | | | $ | 280 | |
Interest cost | | 1,927 | | | 2,359 | | | 69 | | | 122 | | | 390 | | | 442 | |
Expected return on assets | | (4,065) | | | (4,332) | | | (158) | | | (226) | | | — | | | — | |
Net loss amortization | | 752 | | | 1,780 | | | 4 | | | 7 | | | 192 | | | 426 | |
Prior service (credit) cost amortization | | — | | | (11) | | | — | | | — | | | — | | | 5 | |
Loss due to curtailment | | — | | | 151 | | | — | | | — | | | — | | | 12 | |
Net periodic benefit (income) cost | | $ | (1,386) | | | $ | 1,258 | | | $ | (85) | | | $ | (97) | | | $ | 582 | | | $ | 1,165 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | Defined Benefit Pension Plan | | Defined Benefit Pension Plan Acquired | | Restoration Plan |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | | | | | |
Interest cost | | $ | 1,371 | | | $ | 1,285 | | | $ | 51 | | | $ | 46 | | | $ | 289 | | | $ | 260 | |
Expected return on assets | | (2,923) | | | (2,710) | | | (116) | | | (105) | | | — | | | — | |
Net loss amortization | | 320 | | | 501 | | | — | | | 3 | | | 127 | | | 128 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Net periodic benefit cost (income) | | $ | (1,232) | | | $ | (924) | | | $ | (65) | | | $ | (56) | | | $ | 416 | | | $ | 388 | |
Prior to the freeze of all future benefit accruals and accrual of benefit service as of December 31, 2020, the service cost component was recorded on our consolidated income statements as salaries and employee benefits in noninterest expense. All other components other than service costs are recorded in other noninterest expense.
During the three months ended June 30, 2021, we updated our expected long-term rate of return on plan assets for the Retirement Plan and the Acquired Retirement Plan from 6.50% to 6.125%.
The noncash adjustment to the employee benefit plan liabilities, consisting of changes in prior service cost and net loss, was $948,000$447,000 and $5.2 million$632,000 for the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, respectively.
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9. Derivative Financial Instruments and Hedging Activities
Our hedging policy allows the use of interest rate derivative instruments to manage our exposure to interest rate risk or hedge specified assets and liabilities. These instruments may include interest rate swaps and interest rate caps and floors. All derivative instruments are carried on the balance sheet at their estimated fair value and are recorded in other assets or other liabilities, as appropriate.
Derivative instruments may be designated as cash flow hedges of variable rate assets or liabilities, cash flow hedges of forecasted transactions, fair value hedges of a recognized asset or liability or as non-hedging instruments. Gains and losses on derivative instruments designated as cash flow hedges are recorded in AOCI to the extent they are effective. If the hedge is effective, the amount recorded in other comprehensive income is reclassified to earnings in the same periods that the hedged cash flows impact earnings. The ineffective portion of changes in fair value is reported in current earnings. Gains and losses on derivative instruments designated as fair value hedges, as well as the change in fair value on the hedged item, are recorded in interest income in the consolidated statements of income. Gains and losses due to changes in fair value of the interest rate swap agreements completely offset changes in the fair value of the hedged portion of the hedged item. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change.
We have entered into certain interest rate swap contracts on specific variable rate agreements and fixed rate short-term pay agreements with third-party financial institutions.third-parties. These interest rate swap contracts were designated as hedging instruments in cash flow hedges under ASC Topic 815. The objective of the interest rate swap contracts is to manage the expected future cash flows on $605.0$575.0 million of debt.Bank liabilities. The cash flows from the swap contracts are expected to be effective in hedging the variability in future cash flows attributable to fluctuations in the underlying LIBOR interest rate.
During the three months ended June 30, 2022, we entered into partial term fair value hedges, as allowed under ASU 2017-12, for certain of our fixed rate callable AFS municipal securities. These partial term hedges of selected cash flows covering the time periods to the call dates of the hedged securities are expected to be effective in offsetting changes in the fair value of the hedge securities. As of June 30, 2022, hedged securities with a carrying amount of $138.2 million are included in our AFS securities portfolio in our consolidated balance sheets. Changes in the fair value of the interest rate swap are expected to be effective in offsetting changes in the fair value of the hedged item attributable to changes in the SOFR swap rate.
In accordance with ASC Topic 815, if a hedging item is terminated prior to maturity for a cash settlement, the existing gain or loss within AOCI will continue to be reclassified into earnings during the period or periods in which the hedged forecasted transaction affects earnings unless it is probable the forecasted transaction will not occur by the end of the originally specified time period. These transactions are reevaluated on a monthly basis to determine if the hedged forecasted transactions are still probable of occurring. If at a subsequent evaluation, it is determined that the transactions will not occur, any related gains or losses recorded in AOCI are immediately recognized in earnings.
From time to time, we may enter into certain interest rate swaps, cap and floor contracts that are not designated as hedging instruments. These interest rate derivative contracts relate to transactions in which we enter into an interest rate swap, cap or floor with a customer while concurrently entering into an offsetting interest rate swap, cap or floor with a third party financial institution. We agree to pay interest to the customer on a notional amount at a variable rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, we agree to pay a third party financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. These interest rate derivative contracts allow our customers to effectively convert a variable rate loan to a fixed rate loan. The changes in the fair value of the underlying derivative contracts primarily offset each other and do not significantly impact our results of operations. We recognized swap fee income associated with these derivative contracts immediately based upon the difference in the bid/ask spread of the underlying transactions with the customer and the third party financial institution. The swap fee income is included in other noninterest income in our consolidated statements of income.
At SeptemberJune 30, 2021 and2022, net derivative asset included $39.1 million of cash collateral received from counterparties under master netting agreements. At December 31, 2020,2021, net derivative liabilities included $21.4$12.8 million, and $39.3 million, respectively, of cash collateral held by counterparties subject to master netting agreements.
The notional amounts of the derivative instruments represent the contractual cash flows pertaining to the underlying agreements. These amounts are not exchanged and are not reflected in the consolidated balance sheets. The fair value of the interest rate swaps are presented at net in other assets and other liabilities and in the net change in each of these financial statement line items in the accompanying consolidated statements of cash flows when a right of offset exists, based on transactions with a single counterparty that are subject to a legally enforceable master netting agreement.
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The following tables present the notional and estimated fair value amount of derivative positions outstanding (in thousands):
| | | September 30, 2021 | | December 31, 2020 | | | June 30, 2022 | | December 31, 2021 | |
| | | Estimated Fair Value | | | Estimated Fair Value | | | | Estimated Fair Value | | | Estimated Fair Value | |
| | | Notional Amount (1) | | Asset Derivative | | Liability Derivative | | Notional Amount (1) | | Asset Derivative | | Liability Derivative | | | | Notional Amount (1) | | Asset Derivative | | Liability Derivative | | Notional Amount (1) | | Asset Derivative | | Liability Derivative | |
Derivatives designated as hedging instruments | Derivatives designated as hedging instruments | | | | | | | | | | | | Derivatives designated as hedging instruments | | | | | | | | | | | |
Interest rate contracts: | Interest rate contracts: | | | Interest rate contracts: | | |
Swaps-Cash Flow Hedge-Financial institution counterparties | Swaps-Cash Flow Hedge-Financial institution counterparties | | $ | 605,000 | | | $ | 1,543 | | | $ | 10,098 | | | $ | 670,000 | | | $ | — | | | $ | 21,635 | | | Swaps-Cash Flow Hedge-Financial institution counterparties | | $ | 575,000 | | | $ | 27,667 | | | $ | — | | | $ | 605,000 | | | $ | 4,274 | | | $ | 5,866 | | |
Swaps-Fair Value Hedge-Financial institution counterparties | | Swaps-Fair Value Hedge-Financial institution counterparties | | 129,650 | | | 401 | | | 367 | | | — | | | — | | | — | | |
Derivatives designated as non-hedging instruments | Derivatives designated as non-hedging instruments | | | Derivatives designated as non-hedging instruments | | |
Interest rate contracts: | Interest rate contracts: | | | Interest rate contracts: | | |
Swaps-Financial institution counterparties | Swaps-Financial institution counterparties | | 215,502 | | | 462 | | | 14,345 | | | 152,280 | | | — | | | 18,537 | | | Swaps-Financial institution counterparties | | 231,223 | | | 11,708 | | | 279 | | | 214,379 | | | 545 | | | 13,412 | | |
Swaps-Customer counterparties | Swaps-Customer counterparties | | 215,502 | | | 14,345 | | | 462 | | | 152,280 | | | 18,537 | | | — | | | Swaps-Customer counterparties | | 231,223 | | | 279 | | | 11,708 | | | 214,379 | | | 13,412 | | | 545 | | |
Gross derivatives | Gross derivatives | | 16,350 | | | 24,905 | | | 18,537 | | | 40,172 | | | Gross derivatives | | 40,055 | | | 12,354 | | | 18,231 | | | 19,823 | | |
Offsetting derivative assets/liabilities | Offsetting derivative assets/liabilities | | (2,005) | | | (2,005) | | | — | | | — | | | Offsetting derivative assets/liabilities | | (646) | | | (646) | | | (4,819) | | | (4,819) | | |
Cash collateral received/posted | Cash collateral received/posted | | — | | | (21,380) | | | — | | | (39,270) | | | Cash collateral received/posted | | (39,130) | | | — | | | — | | | (12,810) | | |
Net derivatives included in the consolidated balance sheets (2) | Net derivatives included in the consolidated balance sheets (2) | | $ | 14,345 | | | $ | 1,520 | | | $ | 18,537 | | | $ | 902 | | | Net derivatives included in the consolidated balance sheets (2) | | $ | 279 | | | $ | 11,708 | | | $ | 13,412 | | | $ | 2,194 | | |
(1) Notional amounts, which represent the extent of involvement in the derivatives market, are used to determine the contractual cash flows required in accordance with the terms of the agreement. These amounts are typically not exchanged, significantly exceed amounts subject to credit or market risk and are not reflected in the consolidated balance sheets.
(2) Net derivative assets are included in other assets and net derivative liabilities are included in other liabilities on the consolidated balance sheets. Included in the fair value of net derivative assets and net derivative liabilities are credit valuation adjustments reflecting counterparty credit risk and our credit risk. We had no credit exposure related to interest rate swaps with financial institutions and $14.3 million$279,000 related to interest rate swaps with customers at SeptemberJune 30, 2021.2022. We had no credit exposure related to interest rate swaps with financial institutions and $18.5$13.4 million related to interest rate swaps with customers at December 31, 2020.2021. The credit risk associated with customer transactions is partially mitigated as these are generally secured by the non-cash collateral securing the underlying transaction being hedged.
The summarized expected weighted average remaining maturity of the notional amount of interest rate swaps and the weighted average interest rates associated with the amounts expected to be received or paid on interest rate swap agreements are presented below (dollars in thousands). Variable rates received on fixed pay swaps are based on one-month or three-month LIBOR rates in effect at SeptemberJune 30, 20212022 and December 31, 2020:2021:
| | | September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| | | Weighted Average | | | Weighted Average | | | Weighted Average | | | Weighted Average |
| | Notional Amount | | Remaining Maturity (in years) | | Receive Rate | | Pay Rate | | Notional Amount | | Remaining Maturity (in years) | | Receive Rate | | Pay Rate | | Notional Amount | | Remaining Maturity (in years) | | Receive Rate | | Pay Rate | | Notional Amount | | Remaining Maturity (in years) | | Receive Rate | | Pay Rate |
Swaps-Cash Flow hedge | Swaps-Cash Flow hedge | | | | | | | | | | | | | | | | | Swaps-Cash Flow hedge | | | | | | | | | | | | | | | | |
Financial institution counterparties | Financial institution counterparties | | $ | 605,000 | | | 3.4 | | 0.10 | % | | 1.18 | % | | $ | 670,000 | | | 3.8 | | 0.17 | % | | 1.12 | % | Financial institution counterparties | | $ | 575,000 | | | 2.8 | | 1.54 | % | | 0.96 | % | | $ | 605,000 | | | 3.2 | | 0.13 | % | | 1.10 | % |
Swaps-Fair Value hedge | | Swaps-Fair Value hedge | |
Financial institution counterparties | | Financial institution counterparties | | 129,650 | | | 9.2 | | 1.05 | % | | 2.53 | % | | — | | | — | | | — | | | — | |
Swaps-Non-hedging | Swaps-Non-hedging | | Swaps-Non-hedging | |
Financial institution counterparties | Financial institution counterparties | | 215,502 | | | 10.5 | | 0.45 | % | | 2.43 | % | | 152,280 | | | 9.8 | | 0.50 | % | | 2.57 | % | Financial institution counterparties | | 231,223 | | | 9.4 | | 1.92 | % | | 2.68 | % | | 214,379 | | | 10.3 | | 0.47 | % | | 2.42 | % |
Customer counterparties | Customer counterparties | | 215,502 | | | 10.5 | | 2.43 | % | | 0.45 | % | | 152,280 | | | 9.8 | | 2.57 | % | | 0.50 | % | Customer counterparties | | 231,223 | | | 9.4 | | 2.68 | % | | 1.92 | % | | 214,379 | | | 10.3 | | 2.42 | % | | 0.47 | % |
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10. Fair Value Measurement
Fair value is the price that would be received upon the sale of an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants. A fair value measurement assumes the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
Valuation techniques including the market approach, the income approach and/or the cost approach are utilized to determine fair value. Inputs to valuation techniques refer to the assumptions market participants would use in pricing the asset or liability. Valuation policies and procedures are determined by our investment department and reported to our ALCO for review. An entity must consider all aspects of nonperforming risk, including the entity’s own credit standing, when measuring fair value of a liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. A fair value hierarchy for valuation inputs gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
Certain financial assets are measured at fair value in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of fair value accounting or write-downs of individual assets. A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Securities AFS and Equity Investments with readily determinable fair values – U.S. Treasury securities and equity investments with readily determinable fair values are reported at fair value utilizing Level 1 inputs. Other securities classified as AFS are reported at fair value utilizing Level 2 inputs. For these securities, we obtain fair value measurements from independent pricing services and obtain an understanding of the pricing methodologies used by these independent pricing services. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things, as stated in the pricing methodologies of the independent pricing services.
We review and validate the prices supplied by the independent pricing services for reasonableness by comparison to prices obtained from, in some cases, 2 additional third-party sources. For securities where prices are outside a reasonable range, we further review those securities, based on internal ALCO approved procedures, to determine what a reasonable fair value measurement is for those securities, given available data.
Derivatives – Derivatives are reported at fair value utilizing Level 2 inputs. We obtain fair value measurements from 2 sources including an independent pricing service and the counterparty to the derivatives designated as hedges. The fair value measurements consider observable data that may include dealer quotes, market spreads, the U.S. Treasury yield curve, live trading levels, trade execution data, credit information and the derivatives’ terms and conditions, among other things. We review the prices supplied by the sources for reasonableness. In addition, we obtain a basic understanding of their underlying pricing methodology. We validate prices supplied by the sources by comparison to one another.
Certain nonfinancial assets and nonfinancial liabilities measured at fair value on a recurring basis include reporting units measured at fair value and tested for goodwill impairment.
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Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis, which means that the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and financial liabilities measured at fair value on a nonrecurring basis included foreclosed assets and collateral-dependent loans at SeptemberJune 30, 20212022 and December 31, 2020.2021.
Foreclosed Assets – Foreclosed assets are initially recorded at fair value less costs to sell. The fair value measurements of foreclosed assets can include Level 2 measurement inputs such as real estate appraisals and comparable real estate sales information, in conjunction with Level 3 measurement inputs such as cash flow projections, qualitative adjustments and sales cost estimates. As a result, the categorization of foreclosed assets is Level 3 of the fair value hierarchy. In connection with the measurement and initial recognition of certain foreclosed assets, we may recognize charge-offs through the allowance for credit losses.
Collateral-Dependent Loans (Impaired loans prior to the adoption of ASU 2016-13) – Certain loans may be reported at the fair value of the underlying collateral if repayment is expected substantially from the operation or sale of the collateral. Collateral values are estimated using Level 3 inputs based on customized discounting criteria or appraisals. At SeptemberJune 30, 20212022 and December 31, 2020,2021, the impact of the fair value of collateral-dependent loans was reflected in our allowance for loan losses.
The fair value estimate of financial instruments for which quoted market prices are unavailable is dependent upon the assumptions used. Consequently, those estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented in the fair value tables do not necessarily represent their underlying value.
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The following tables summarize assets measured at fair value on a recurring and nonrecurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
| | | | | | | Fair Value Measurements at the End of the Reporting Period Using | | | | | Fair Value Measurements at the End of the Reporting Period Using |
September 30, 2021 | | Carrying Amount | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | |
June 30, 2022 | | June 30, 2022 | | Carrying Amount | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Recurring fair value measurements | Recurring fair value measurements | | | | | | | | | Recurring fair value measurements | | | | | | | | |
Investment securities: | Investment securities: | | | | | | | | | Investment securities: | | | | | | | | |
U.S. Treasury | U.S. Treasury | | $ | 43,547 | | | $ | 43,547 | | | $ | — | | | $ | — | | U.S. Treasury | | $ | 39,663 | | | $ | 39,663 | | | $ | — | | | $ | — | |
| State and political subdivisions | State and political subdivisions | | 1,967,477 | | | — | | | 1,967,477 | | | — | | State and political subdivisions | | 1,176,231 | | | — | | | 1,176,231 | | | — | |
Corporate bonds and other | Corporate bonds and other | | 119,699 | | | — | | | 119,699 | | | — | | Corporate bonds and other | | 58,818 | | | — | | | 58,818 | | | — | |
MBS: (1) | MBS: (1) | | | | | MBS: (1) | | | | |
Residential | Residential | | 514,078 | | | — | | | 514,078 | | | — | | Residential | | 449,512 | | | — | | | 449,512 | | | — | |
Commercial | Commercial | | 108,303 | | | — | | | 108,303 | | | — | | Commercial | | 9,130 | | | — | | | 9,130 | | | — | |
Equity investments: | Equity investments: | | Equity investments: | |
Equity investments | Equity investments | | 5,976 | | | 5,976 | | | — | | | — | | Equity investments | | 5,454 | | | 5,454 | | | — | | | — | |
Derivative assets: | Derivative assets: | | Derivative assets: | |
Interest rate swaps | Interest rate swaps | | 16,350 | | | — | | | 16,350 | | | — | | Interest rate swaps | | 40,055 | | | — | | | 40,055 | | | — | |
Total asset recurring fair value measurements | Total asset recurring fair value measurements | | $ | 2,775,430 | | | $ | 49,523 | | | $ | 2,725,907 | | | $ | — | | Total asset recurring fair value measurements | | $ | 1,778,863 | | | $ | 45,117 | | | $ | 1,733,746 | | | $ | — | |
| Derivative liabilities: | Derivative liabilities: | | Derivative liabilities: | |
Interest rate swaps | Interest rate swaps | | $ | 24,905 | | | $ | — | | | $ | 24,905 | | | $ | — | | Interest rate swaps | | $ | 12,354 | | | $ | — | | | $ | 12,354 | | | $ | — | |
Total liability recurring fair value measurements | Total liability recurring fair value measurements | | $ | 24,905 | | | $ | — | | | $ | 24,905 | | | $ | — | | Total liability recurring fair value measurements | | $ | 12,354 | | | $ | — | | | $ | 12,354 | | | $ | — | |
| Nonrecurring fair value measurements | Nonrecurring fair value measurements | | | | | | | Nonrecurring fair value measurements | | | | | | |
Foreclosed assets | Foreclosed assets | | $ | 40 | | | $ | — | | | $ | — | | | $ | 40 | | Foreclosed assets | | $ | 128 | | | $ | — | | | $ | — | | | $ | 128 | |
Collateral-dependent loans (2) | Collateral-dependent loans (2) | | 8,579 | | | — | | | — | | | 8,579 | | Collateral-dependent loans (2) | | 8,451 | | | — | | | — | | | 8,451 | |
Total asset nonrecurring fair value measurements | Total asset nonrecurring fair value measurements | | $ | 8,619 | | | $ | — | | | $ | — | | | $ | 8,619 | | Total asset nonrecurring fair value measurements | | $ | 8,579 | | | $ | — | | | $ | — | | | $ | 8,579 | |
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| | | | | | | Fair Value Measurements at the End of the Reporting Period Using | | | | | Fair Value Measurements at the End of the Reporting Period Using |
December 31, 2020 | | Carrying Amount | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | |
December 31, 2021 | | December 31, 2021 | | Carrying Amount | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Recurring fair value measurements | Recurring fair value measurements | | | | | | | | | Recurring fair value measurements | | | | | | | | |
Investment securities: | Investment securities: | | | | | | | | | Investment securities: | | | | | | | | |
| U.S. Treasury | | U.S. Treasury | | $ | 58,877 | | | $ | 58,877 | | | $ | — | | | $ | — | |
| State and political subdivisions | State and political subdivisions | | $ | 1,580,594 | | | $ | — | | | $ | 1,580,594 | | | $ | — | | State and political subdivisions | | 2,051,936 | | | — | | | 2,051,936 | | | — | |
Corporate bonds and other | Corporate bonds and other | | 78,255 | | | — | | | 78,255 | | | — | | Corporate bonds and other | | 135,532 | | | — | | | 135,532 | | | — | |
MBS: (1) | MBS: (1) | | | | MBS: (1) | | | |
Residential | Residential | | 810,010 | | | — | | | 810,010 | | | — | | Residential | | 426,350 | | | — | | | 426,350 | | | — | |
Commercial | Commercial | | 118,446 | | | — | | | 118,446 | | | — | | Commercial | | 91,630 | | | — | | | 91,630 | | | — | |
Equity investments: | Equity investments: | | Equity investments: | |
Equity investments | Equity investments | | 6,094 | | | 6,094 | | | — | | | — | | Equity investments | | 5,920 | | | 5,920 | | | — | | | — | |
Derivative assets: | Derivative assets: | | Derivative assets: | |
Interest rate swaps | Interest rate swaps | | 18,537 | | | — | | | 18,537 | | | — | | Interest rate swaps | | 18,231 | | | — | | | 18,231 | | | — | |
Total asset recurring fair value measurements | Total asset recurring fair value measurements | | $ | 2,611,936 | | | $ | 6,094 | | | $ | 2,605,842 | | | $ | — | | Total asset recurring fair value measurements | | $ | 2,788,476 | | | $ | 64,797 | | | $ | 2,723,679 | | | $ | — | |
| Derivative liabilities: | Derivative liabilities: | | Derivative liabilities: | |
Interest rate swaps | Interest rate swaps | | $ | 40,172 | | | $ | — | | | $ | 40,172 | | | $ | — | | Interest rate swaps | | $ | 19,823 | | | $ | — | | | $ | 19,823 | | | $ | — | |
Total liability recurring fair value measurements | Total liability recurring fair value measurements | | $ | 40,172 | | | $ | — | | | $ | 40,172 | | | $ | — | | Total liability recurring fair value measurements | | $ | 19,823 | | | $ | — | | | $ | 19,823 | | | $ | — | |
| Nonrecurring fair value measurements | Nonrecurring fair value measurements | | | | | | | | | Nonrecurring fair value measurements | | | | | | | | |
Foreclosed assets | | $ | 120 | | | $ | — | | | $ | — | | | $ | 120 | | |
| Collateral-dependent loans (2) | Collateral-dependent loans (2) | | 10,653 | | | — | | | — | | | 10,653 | | Collateral-dependent loans (2) | | $ | 8,458 | | | $ | — | | | $ | — | | | $ | 8,458 | |
| Total asset nonrecurring fair value measurements | Total asset nonrecurring fair value measurements | | $ | 10,773 | | | $ | — | | | $ | — | | | $ | 10,773 | | Total asset nonrecurring fair value measurements | | $ | 8,458 | | | $ | — | | | $ | — | | | $ | 8,458 | |
(1)All MBS are issued and/or guaranteed by U.S. government agencies or U.S. GSEs.
(2)Consists of individually evaluated loans. Loans for which the fair value of the collateral and commercial real estate fair value of the properties is less than cost basis are presented net of allowance. Losses on these loans represent charge-offs which are netted against the allowance for loan losses.
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Disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, is required when it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other estimation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Such techniques and assumptions, as they apply to individual categories of our financial instruments, are as follows:
Cash and cash equivalents – The carrying amount for cash and cash equivalents is a reasonable estimate of those assets’ fair value.
Investment and MBS HTM – Fair values for these securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices for similar securities or estimates from independent pricing services.
FHLB stock – The carrying amount of FHLB stock is a reasonable estimate of the fair value of those assets.
Equity investments – The carrying value of equity investments without readily determinable fair values are measured at cost less impairment, if any, adjusted for observable price changes for an identical or similar investment of the same issuer. This carrying value is a reasonable estimate of the fair value of those assets.
Loans receivable – We estimate the fair value of our loan portfolio to an exit price notion with adjustments for liquidity, credit and prepayment factors. Nonperforming loans continue to be estimated using discounted cash flow analyses or the underlying value of the collateral where applicable.
Loans held for sale – The fair value of loans held for sale is determined based on expected proceeds, which are based on sales contracts and commitments.
Deposit liabilities – The fair value of demand deposits, savings accounts and certain money market deposits is the amount on demand at the reporting date, which is the carrying value. Fair values for fixed rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities.
Other borrowings – Federal funds purchased generally have original terms to maturity of one day and repurchase agreements generally have terms of less than one year, and therefore both are considered short-term borrowings. Consequently, their carrying value is a reasonable estimate of fair value.
FHLB borrowings – The fair value of these borrowings is estimated by discounting the future cash flows using rates at which borrowings would be made to borrowers with similar credit ratings and for the same remaining maturities.
Subordinated notes – The fair value of the subordinated notes is estimated by discounting future cash flows using estimated rates at which long-term debt would be made to borrowers with similar credit ratings and for the remaining maturities.
Trust preferred subordinated debentures – The fair value of the long-term debt is estimated by discounting future cash flows using estimated rates at which long-term debt would be made to borrowers with similar credit ratings and for the remaining maturities.
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The following tables present our financial assets and financial liabilities measured on a nonrecurring basis at both their respective carrying amounts and estimated fair value (in thousands):
| | | | | | Estimated Fair Value | | | | | Estimated Fair Value |
September 30, 2021 | | Carrying Amount | | Total | | Level 1 | | Level 2 | | Level 3 | |
June 30, 2022 | | June 30, 2022 | | Carrying Amount | | Total | | Level 1 | | Level 2 | | Level 3 |
Financial assets: | Financial assets: | | | | | | | | | | | Financial assets: | | | | | | | | | | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 87,133 | | | $ | 87,133 | | | $ | 87,133 | | | $ | — | | | $ | — | | Cash and cash equivalents | | $ | 172,289 | | | $ | 172,289 | | | $ | 172,289 | | | $ | — | | | $ | — | |
Investment securities: | Investment securities: | | Investment securities: | |
HTM, at carrying value | HTM, at carrying value | | 788 | | | 791 | | | — | | | 791 | | | — | | HTM, at carrying value | | 971,427 | | | 860,964 | | | — | | | 860,964 | | | — | |
MBS: | MBS: | | MBS: | |
HTM, at carrying value | HTM, at carrying value | | 91,691 | | | 97,244 | | | — | | | 97,244 | | | — | | HTM, at carrying value | | 112,245 | | | 108,843 | | | — | | | 108,843 | | | — | |
FHLB stock, at cost | FHLB stock, at cost | | 27,248 | | | 27,248 | | | — | | | 27,248 | | | — | | FHLB stock, at cost | | 13,726 | | | 13,726 | | | — | | | 13,726 | | | — | |
Equity investments | Equity investments | | 5,818 | | | 5,818 | | | — | | | 5,818 | | | — | | Equity investments | | 5,828 | | | 5,828 | | | — | | | 5,828 | | | — | |
Loans, net of allowance for loan losses | Loans, net of allowance for loan losses | | 3,609,563 | | | 3,755,534 | | | — | | | — | | | 3,755,534 | | Loans, net of allowance for loan losses | | 3,927,592 | | | 3,872,618 | | | — | | | — | | | 3,872,618 | |
Loans held for sale | Loans held for sale | | 1,131 | | | 1,131 | | | — | | | 1,131 | | | — | | Loans held for sale | | 815 | | | 815 | | | — | | | 815 | | | — | |
Financial liabilities: | Financial liabilities: | | Financial liabilities: | |
Deposits | Deposits | | $ | 5,331,655 | | | $ | 5,333,064 | | | $ | — | | | $ | 5,333,064 | | | $ | — | | Deposits | | $ | 6,248,409 | | | $ | 6,211,740 | | | $ | — | | | $ | 6,211,740 | | | $ | — | |
Other borrowings | Other borrowings | | 20,724 | | | 20,724 | | | — | | | 20,724 | | | — | | Other borrowings | | 58,478 | | | 58,478 | | | — | | | 58,478 | | | — | |
FHLB borrowings | FHLB borrowings | | 659,204 | | | 668,232 | | | — | | | 668,232 | | | — | | FHLB borrowings | | 153,701 | | | 153,781 | | | — | | | 153,781 | | | — | |
Subordinated notes, net of unamortized debt issuance costs | Subordinated notes, net of unamortized debt issuance costs | | 98,500 | | | 98,722 | | | — | | | 98,722 | | | — | | Subordinated notes, net of unamortized debt issuance costs | | 98,604 | | | 93,595 | | | — | | | 93,595 | | | — | |
Trust preferred subordinated debentures, net of unamortized debt issuance costs | Trust preferred subordinated debentures, net of unamortized debt issuance costs | | 60,259 | | | 48,436 | | | — | | | 48,436 | | | — | | Trust preferred subordinated debentures, net of unamortized debt issuance costs | | 60,262 | | | 56,545 | | | — | | | 56,545 | | | — | |
| | | | | | Estimated Fair Value | | | | | Estimated Fair Value |
December 31, 2020 | | Carrying Amount | | Total | | Level 1 | | Level 2 | | Level 3 | |
December 31, 2021 | | December 31, 2021 | | Carrying Amount | | Total | | Level 1 | | Level 2 | | Level 3 |
Financial assets: | Financial assets: | | | | | | | | | | | Financial assets: | | | | | | | | | | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 108,408 | | | $ | 108,408 | | | $ | 108,408 | | | $ | — | | | $ | — | | Cash and cash equivalents | | $ | 201,753 | | | $ | 201,753 | | | $ | 201,753 | | | $ | — | | | $ | — | |
Investment securities: | Investment securities: | | Investment securities: | |
HTM, at carrying value | HTM, at carrying value | | 907 | | | 920 | | | — | | | 920 | | | — | | HTM, at carrying value | | 788 | | | 791 | | | — | | | 791 | | | — | |
Mortgage-backed securities: | Mortgage-backed securities: | | | | Mortgage-backed securities: | | | |
HTM, at carrying value | HTM, at carrying value | | 108,091 | | | 117,278 | | | — | | | 117,278 | | | — | | HTM, at carrying value | | 89,992 | | | 94,444 | | | — | | | 94,444 | | | — | |
FHLB stock, at cost | FHLB stock, at cost | | 25,259 | | | 25,259 | | | — | | | 25,259 | | | — | | FHLB stock, at cost | | 14,375 | | | 14,375 | | | — | | | 14,375 | | | — | |
Equity investments | Equity investments | | 5,811 | | | 5,811 | | | — | | | 5,811 | | | — | | Equity investments | | 5,921 | | | 5,921 | | | — | | | 5,921 | | | — | |
Loans, net of allowance for loan losses | Loans, net of allowance for loan losses | | 3,608,773 | | | 3,784,291 | | | — | | | — | | | 3,784,291 | | Loans, net of allowance for loan losses | | 3,609,889 | | | 3,748,116 | | | — | | | — | | | 3,748,116 | |
Loans held for sale | Loans held for sale | | 3,695 | | | 3,695 | | | — | | | 3,695 | | | — | | Loans held for sale | | 1,684 | | | 1,684 | | | — | | | 1,684 | | | — | |
Financial liabilities: | Financial liabilities: | | Financial liabilities: | |
Deposits | Deposits | | $ | 4,932,322 | | | $ | 4,936,188 | | | $ | — | | | $ | 4,936,188 | | | $ | — | | Deposits | | $ | 5,722,327 | | | $ | 5,721,694 | | | $ | — | | | $ | 5,721,694 | | | $ | — | |
Other borrowings | Other borrowings | | 23,172 | | | 23,172 | | | — | | | 23,172 | | | — | | Other borrowings | | 23,219 | | | 23,219 | | | — | | | 23,219 | | | — | |
FHLB borrowings | FHLB borrowings | | 832,527 | | | 854,865 | | | — | | | 854,865 | | | — | | FHLB borrowings | | 344,038 | | | 346,604 | | | — | | | 346,604 | | | — | |
Subordinated notes, net of unamortized debt issuance costs | Subordinated notes, net of unamortized debt issuance costs | | 197,251 | | | 198,391 | | | — | | | 198,391 | | | — | | Subordinated notes, net of unamortized debt issuance costs | | 98,534 | | | 98,642 | | | — | | | 98,642 | | | — | |
Trust preferred subordinated debentures, net of unamortized debt issuance costs | Trust preferred subordinated debentures, net of unamortized debt issuance costs | | 60,255 | | | 51,993 | | | — | | | 51,993 | | | — | | Trust preferred subordinated debentures, net of unamortized debt issuance costs | | 60,260 | | | 48,480 | | | — | | | 48,480 | | | — | |
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11. Income Taxes
The income tax expense included in the accompanying consolidated statements of income consists of the following (in thousands):
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | | 2022 | | 2021 |
Current income tax expense | Current income tax expense | | $ | 3,387 | | | $ | 3,133 | | | $ | 9,002 | | | $ | 11,376 | | Current income tax expense | | $ | 2,939 | | | $ | 3,026 | | | $ | 5,800 | | | $ | 5,615 | |
Deferred income tax expense (benefit) | Deferred income tax expense (benefit) | | 1,590 | | | 650 | | | 3,612 | | | (4,305) | | Deferred income tax expense (benefit) | | 358 | | | (139) | | | 643 | | | 2,022 | |
Income tax expense | Income tax expense | | $ | 4,977 | | | $ | 3,783 | | | $ | 12,614 | | | $ | 7,071 | | Income tax expense | | $ | 3,297 | | | $ | 2,887 | | | $ | 6,443 | | | $ | 7,637 | |
The net deferred tax liabilityasset totaled $12.5$34.5 million at SeptemberJune 30, 2021 and $15.52022 as compared to a net deferred tax liability of $17.8 million at December 31, 2020.2021. The increase in the net deferred tax asset is primarily the result of an increase in unrealized losses in the AFS securities portfolio. No valuation allowance was recorded at SeptemberJune 30, 20212022 or December 31, 2020,2021, as management believes it is more likely than not that all of the deferred tax asset items will be realized in future years. Unrecognized tax benefits were not material at SeptemberJune 30, 20212022 or December 31, 2020.2021.
We recognized income tax expense of $5.0$3.3 million and $12.6$6.4 million, resulting infor an ETR of 14.5%11.5% and 13.0%11.3% for the three and ninesix months ended SeptemberJune 30, 2021,2022, respectively, compared to income tax expense of $3.8$2.9 million and $7.1$7.6 million, withfor an ETR of 12.3%11.9% and 11.9%12.1%, for the three and ninesix months ended SeptemberJune 30, 2020,2021, respectively. The higherlower ETR for the three and ninesix months ended SeptemberJune 30, 20212022 was primarily due to a decreasean increase in tax-exempt income as a percentage of pre-tax income as compared to the same periods in 2020.2021. The ETR differs from the statutory rate of 21% for the three and ninesix months ended SeptemberJune 30, 20212022 and 20202021 primarily due to the effect of tax-exempt income from municipal loans and securities, as well as BOLI. We file income tax returns in the U.S. federal jurisdictions and in certain states. We are no longer subject to U.S. federal income tax examinations by tax authorities for years before 2018 or Texas state tax examinations by tax authorities for years before 2017.
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12. Off-Balance-Sheet Arrangements, Commitments and Contingencies
Financial Instruments with Off-Balance-Sheet Risk. In the normal course of business, we are a party to certain financial instruments with off-balance-sheet risk to meet the financing needs of our customers. These off-balance-sheet instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount reflected in the financial statements. The contract or notional amounts of these instruments reflect the extent of involvement and exposure to credit loss that we have in these particular classes of financial instruments. The allowance for credit losses on these off-balance-sheet credit exposures is calculated using the same methodology as loans including a conversion or usage factor to anticipate ultimate exposure and expected losses and is included in other liabilities on our consolidated balance sheets.
Allowance for off-balance-sheet credit exposures were as follows (in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| Balance at beginning of period | Balance at beginning of period | $ | 3,773 | | | $ | 6,365 | | | $ | 6,386 | | | $ | 1,455 | | Balance at beginning of period | $ | 2,412 | | | $ | 3,616 | | | $ | 2,384 | | | $ | 6,386 | |
Impact of CECL adoption | — | | | — | | | — | | | 4,840 | | |
| Provision for (reversal of) off-balance-sheet credit exposures | Provision for (reversal of) off-balance-sheet credit exposures | (683) | | | (345) | | | (3,296) | | | (275) | | Provision for (reversal of) off-balance-sheet credit exposures | (521) | | | 157 | | | (493) | | | (2,613) | |
Balance at end of period | Balance at end of period | $ | 3,090 | | | $ | 6,020 | | | $ | 3,090 | | | $ | 6,020 | | Balance at end of period | $ | 1,891 | | | $ | 3,773 | | | $ | 1,891 | | | $ | 3,773 | |
Contractual commitments to extend credit are agreements to lend to a customer provided the terms established in the contract are met. Commitments to extend credit generally have fixed expiration dates and may require the payment of fees. Since some commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in commitments to extend credit and similarly do not necessarily represent future cash obligations.
Financial instruments with off-balance-sheet risk were as follows (in thousands):
| | | September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| | | | | | | | |
Commitments to extend credit | Commitments to extend credit | $ | 954,258 | | | $ | 793,138 | | Commitments to extend credit | $ | 1,198,782 | | | $ | 1,053,002 | |
Standby letters of credit | Standby letters of credit | 10,812 | | | 13,658 | | Standby letters of credit | 8,602 | | | 12,708 | |
Total | Total | $ | 965,070 | | | $ | 806,796 | | Total | $ | 1,207,384 | | | $ | 1,065,710 | |
We apply the same credit policies in making commitments to extend credit and standby letters of credit as we do for on-balance-sheet instruments. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit is based on management’s credit evaluation of the borrower. Collateral held varies but may include cash or cash equivalents, negotiable instruments, real estate, accounts receivable, inventory, oil, gas and mineral interests, property, plant and equipment.
Leases. During the three and ninesix months ended SeptemberJune 30, 2022, there were no operating lease ROU assets obtained in exchange for new operating lease liabilities. During the three months ended June 30, 2021, there were $240,000 and $1.3no operating lease ROU assets obtained in exchange for new operating lease liabilities. During the six months ended June 30, 2021, there was $1.1 million respectively, of operating lease ROU assets obtained in exchange for new operating lease liabilities, primarily due to 1 lease that commenced in January 2021 with an initial ROU asset of $1.1 million. During the three months ended September 30, 2020, there was a reduction to operating lease ROU assets obtained in exchange for operating lease liabilities of $89,000 due to a lease amendment that granted additional lease incentives. During the nine months ended September 30, 2020, there were $7.9 million of operating lease ROU assets obtained in exchange for new operating lease liabilities, primarily due to 1 lease that commenced in May 2020 with an initial ROU asset of $6.6 million.
Securities. In the normal course of business we buy and sell securities. At SeptemberJune 30, 2021,2022, there were $4.4$174.0 million of unsettled trades to purchase securities and no$72.0 million unsettled trades to sell securities. At December 31, 2020,2021, there were no$19.0 million unsettled trades to purchase securities and no unsettled trades to sell securities.
Deposits. There were no unsettled issuances of brokered CDs at SeptemberJune 30, 20212022 or December 31, 2020.2021.
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Litigation. We are involved with various litigation in the normal course of business. Management, after consulting with our legal counsel, believes that any liability resulting from litigation will not have a material effect on our financial position, results of operations or liquidity.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of our consolidated financial condition, changes in our financial condition and results of our operations, and should be read and reviewed in conjunction with the financial statements, and the notes thereto, in this Quarterly Report on Form 10-Q and in our 20202021 Form 10-K. Certain risks, uncertainties and other factors, including those set forth under "Risk Factors" in Part I, Item 1A. of the 20202021 Form 10-K and elsewhere in this Quarterly Report on Form 10-Q, may cause actual results to differ materially from the results discussed in the forward-looking statements appearing in this discussion and analysis.
Forward-Looking Statements
Certain statements of other than historical fact that are contained in this report may be considered to be “forward-looking statements” within the meaning of and subject to the safe harbor protections of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date. These statements may include words such as “expect,” “estimate,” “project,” “anticipate,” “appear,” “believe,” “could,” “should,” “may,” “might,” “will,” “would,” “seek,” “intend,” “probability,” “risk,” “goal,” “target,” “objective,” “plans,” “potential,” and similar expressions. Forward-looking statements are statements with respect to our beliefs, plans, expectations, objectives, goals, anticipations, assumptions, estimates, intentions and future performance and are subject to significant known and unknown risks and uncertainties, which could cause our actual results to differ materially from the results discussed in the forward-looking statements. For example, discussions of the effect of our expansion, benefits of the Share Repurchase Plan, trends in asset quality, capital, liquidity, our ability to sell nonperforming assets, expense reductions, planned operational efficiencies and earnings from growth and certain market risk disclosures, including the impact of interest rates, tax reform, inflation, andthe impacts related to or resulting from other economic factors are based upon information presently available to management and are dependent on choices about key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future. Accordingly, our results could materially differ from those that have been estimated. The most recentsignificant factor that could cause future results to differ materially from those anticipated by our forward-looking statements include the negativeongoing impact of the COVID-19 pandemic and related variants on our business, financial position, operations and prospects, including our ability to continue our business activities in certain communities we serve, the duration of the pandemic and its continued effects on local, national and global financial markets, a reduction in financial transactions and business activities resulting in decreased deposits and reduced loan originations, increases in unemployment rates impacting our borrowers’ ability to repay their loans, our ability to manage liquidity in a rapidly changing and unpredictable market, additionalsupply chain disruptions, heightened inflation, labor shortages and interest rate changesincreases by the Federal Reserve and other government actions in response to the pandemic including regulations or laws enacted to counter the effects of the COVID-19 pandemic on the economy. Other factors that could cause actual results to differ materially from those indicated by forward-looking statements include, but are not limited to, the following:
•the impact of the COVID-19 pandemic and related variants on our future consolidated financial condition and results of operations;
•general (i) political conditions, including, without limitation, governmental action and uncertainty resulting from U.S. and global political trends and (ii) economic conditions, either globally, nationally, in the State of Texas, or in the specific markets in which we operate, including, without limitation, the deterioration of the commercial real estate, residential real estate, construction and development, energy, oil and gas, credit or liquidity markets, which could cause an adverse change in our net interest margin, or a decline in the value of our assets, which could result in realized losses;
•current or future legislation, regulatory changes or changes in monetary or fiscal policy that adversely affect the businesses in which we or our customers or our borrowers are engaged, including the impact of the Dodd-Frank Act, the Federal Reserve’s actions with respect to interest rates, the capital requirements promulgated by the Basel Committee, the CARES Act, the Economic Aid Act, uncertainty relating to calculationthe discontinuation of interest rates based on LIBOR and other regulatory responses to economic conditions;
•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;
•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;
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•our ability to identify and address cyber-security risks such as data security breaches, malware, “denial of service” attacks, “hacking” and identity theft, which could disrupt our business and result in the disclosure of and/or misuse or misappropriation of confidential or proprietary information, disruption or damage of our systems, increased costs, significant losses, or adverse effects to our reputation;
•the risk that our enterprise risk management framework, compliance program or our corporate governance and supervisory oversight functions may not identify or address risks adequately, which may result in unexpected losses;
•changes in the interest rate yield curve such as flat, inverted or steep yield curves, or changes in the interest rate environment that impact net interest margins and may impact prepayments on our MBS portfolio;
•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, including the costs and effects of litigation related to our participation in government stimulus programs associated with the COVID-19 pandemic;us;
•changes impacting our balance sheet and leverage strategy;
•risks related to actual mortgage prepayments diverging from projections;
•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;
•our ability to monitor interest rate risk;
•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 compliance with legislation or regulatory changes;
•the effect of changes in accounting policies and practices, including the implementation of the CECL model;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 of borrowers, including any increase in those related to actual U.S. agency MBS prepayments exceeding projected prepayment levels;
•risks related to U.S. agency MBS prepayments increasing due to changing economic conditions;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 related to environmental liability as a result of certain lending activity;
•risks associated with our common stock and our other securities, including fluctuations in our stock price and general volatility in the stock market; and
•other risks and uncertainties discussed in “Part I - Item 1A. Risk Factors” in the 20202021 Form 10-K.
All written or oral forward-looking statements made by us or attributable to us are expressly qualified by this cautionary notice. We disclaim any obligation to update any factors or to announce publicly the result of revisions to any of the forward-looking statements included herein to reflect future events or developments, unless otherwise required by law.
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Critical Accounting Estimates
Our accounting and reporting estimates conform with U.S. GAAP and general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We consider accounting estimates that can (1) be replaced by other reasonable estimates and/or (2) changes to an estimate from period to period that have a material impact on the presentation of our financial condition, changes in financial condition or results of operations as well as (3) those estimates that require significant and complex assumptions about matters that are highly uncertain to be critical accounting estimates. We consider our critical accounting policies to include allowance for credit losses on loans estimation of fair value and pension plan accounting.off-balance-sheet credit exposure.
Critical accounting estimates include a high degree of uncertainty in the underlying assumptions. Management bases its estimates on historical experience, current information and other factors deemed relevant. The development, selection and disclosure of our critical accounting estimates are reviewed with the Audit Committee of the Company's Board of Directors. Actual results could differ from these estimates. For additional information regarding critical accounting policies, refer to “Note 1 – Summary of Significant Accounting and Reporting Policies,” “Note 5 – Loans and Allowance for Loan Losses,” “Note 8 – Employee Benefit Plans” and “Note 10 – Fair Value Measurement” in the notes to the consolidated financial statements and refer to “Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates,,” “Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Allowance for Credit Losses - Loans and Allowance for Credit Losses - Off-Balance-Sheet Credit Exposures,” “Note 1 – Summary of Significant Accounting and Reporting Policies”Policies,” “Note 5 – Loans and Allowance for Loan Losses” and “Note 17 - Off-Balance-Sheet Arrangements, Commitments and Contingencies” in the 20202021 Form 10-K. As of SeptemberJune 30, 2021,2022, there have been no significant changes to our critical accounting estimates.
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Non-GAAP Financial Measures
Certain non-GAAP measures are used by management to supplement the evaluation of our performance. These include the following fully taxable-equivalent measures: Net interest income (FTE), net interest margin (FTE) and net interest spread (FTE), which include the effects of taxable-equivalent adjustments using a federal income tax rate of 21% for the three and nine months ended September 30, 2021 and 2020, to increase tax-exempt interest income to a tax-equivalent basis. Interest income earned on certain assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments.
Net interest income (FTE), net interest margin (FTE) and net interest spread (FTE). Net interest income (FTE) is a non-GAAP measure that adjusts for the tax-favored status of net interest income from certain loans and investments and is not permitted under GAAP in the consolidated statements of income. We believe this measure to be the preferred industry measurement of net interest income, and that it enhances comparability of net interest income arising from taxable and tax-exempt sources. The most directly comparable financial measure calculated in accordance with GAAP is our net interest income. Net interest margin (FTE) is the ratio of net interest income (FTE) to average earning assets. The most directly comparable financial measure calculated in accordance with GAAP is our net interest margin. Net interest spread (FTE) is the difference in the average yield on average earning assets on a tax-equivalent basis and the average rate paid on average interest bearing liabilities. The most directly comparable financial measure calculated in accordance with GAAP is our net interest spread.
These non-GAAP financial measures should not be considered alternatives to GAAP-basis financial statements and other bank holding companies may define or calculate these non-GAAP measures or similar measures differently. Whenever we present a non-GAAP financial measure in an SEC filing, we are also required to present the most directly comparable financial measure calculated and presented in accordance with GAAP and reconcile the differences between the non-GAAP financial measure and such comparable GAAP measure.
In the following table we present the reconciliation of net interest income to net interest income adjusted to a fully taxable-equivalent basis assuming a 21% marginal tax rate for the three and nine months ended September 30, 2021 and 2020, for interest earned on tax-exempt assets such as municipal loans and investment securities (dollars in thousands), along with the calculation of net interest margin (FTE) and net interest spread (FTE).
| Non-GAAP Reconciliations | Non-GAAP Reconciliations | | Non-GAAP Reconciliations | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
Net interest income (GAAP) | Net interest income (GAAP) | | $ | 48,206 | | | $ | 46,586 | | | $ | 140,156 | | | $ | 138,558 | | Net interest income (GAAP) | | $ | 51,078 | | | $ | 45,647 | | | $ | 99,984 | | | $ | 91,950 | |
Tax equivalent adjustments: | Tax equivalent adjustments: | | Tax equivalent adjustments: | |
Loans | Loans | | 722 | | | 688 | | | 2,180 | | | 2,035 | | Loans | | 762 | | | 722 | | | 1,507 | | | 1,458 | |
Tax-exempt investment securities | Tax-exempt investment securities | | 2,666 | | | 2,415 | | | 7,289 | | | 6,385 | | Tax-exempt investment securities | | 2,994 | | | 2,412 | | | 5,458 | | | 4,623 | |
Net interest income (FTE) (1) | Net interest income (FTE) (1) | | $ | 51,594 | | | $ | 49,689 | | | $ | 149,625 | | | $ | 146,978 | | Net interest income (FTE) (1) | | $ | 54,834 | | | $ | 48,781 | | | $ | 106,949 | | | $ | 98,031 | |
| Average earning assets | Average earning assets | | $ | 6,467,545 | | | $ | 6,548,935 | | | $ | 6,368,906 | | | $ | 6,498,162 | | Average earning assets | | $ | 6,670,821 | | | $ | 6,395,251 | | | $ | 6,612,589 | | | $ | 6,318,767 | |
| Net interest margin | Net interest margin | | 2.96 | % | | 2.83 | % | | 2.94 | % | | 2.85 | % | Net interest margin | | 3.07 | % | | 2.86 | % | | 3.05 | % | | 2.93 | % |
Net interest margin (FTE) (1) | Net interest margin (FTE) (1) | | 3.16 | % | | 3.02 | % | | 3.14 | % | | 3.02 | % | Net interest margin (FTE) (1) | | 3.30 | % | | 3.06 | % | | 3.26 | % | | 3.13 | % |
| Net interest spread | Net interest spread | | 2.79 | % | | 2.65 | % | | 2.77 | % | | 2.64 | % | Net interest spread | | 2.91 | % | | 2.70 | % | | 2.90 | % | | 2.77 | % |
Net interest spread (FTE) (1) | Net interest spread (FTE) (1) | | 3.00 | % | | 2.84 | % | | 2.97 | % | | 2.81 | % | Net interest spread (FTE) (1) | | 3.14 | % | | 2.89 | % | | 3.12 | % | | 2.96 | % |
(1) These amounts are presented on a fully taxable-equivalent basis and are non-GAAP measures.
Management believes adjusting net interest income, net interest margin and net interest spread to a fully taxable-equivalent basis is a standard practice in the banking industry as these measures provide useful information to make peer comparisons. Tax-equivalent adjustments are reported in the respective earning asset categories as listed in the “Average Balances with Average Yields and Rates” tables under Results of Operations.
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OVERVIEW
COVID-19
During March 2020, the World Health Organization declared COVID-19 a global pandemic in response to the rapidly growing outbreak of the virus. COVID-19 significantly impacted local, national and global economies due to stay-at-home orders and social distancing guidelines. In compliance with social distancing guidelines issued by federal, state and local governments, we initially closed allimplemented a number of precautionary actions to safeguard our grocery store branches. As stay-at-home orders were issued by local governments inbusiness and our market areas to combat the spread of the virus, we closed all traditional lobbies and wealth management and trust offices to walk-in customers, however, most of these traditional locations were offering certain services by appointment only. All other banking services were available to customers through our drive-thrus, ATMs/ITMs and automated telephone, internet and mobile banking products. After careful consideration and implementation of additional safety precautions, all locations were reopened on June 1, 2020. We have since made adjustments to select branch hours and openings, and we continue to closely monitor the COVID-19 situation. Approximately 45% of our workforce has remote working capabilities, however most of our workforce have returned to our office and branch locations.
employees from COVID-19. Additionally, COVID-19 significantly disrupted supply chains, business activity and the overall economic and financial markets. As of September 30, 2021, economic conditionsmarkets globally and in Texas have returned to levels close to pre-pandemic levels. Commercial activity has improved to levels close to those existing prior toour footprint.
Since the outbreakimplementation of the pandemic. While the overall outlook has improved based on the availability of the vaccine, the risk of further resurgence and possible reimplementation of restrictions remains. Until the pandemic fully subsides, the potential for adverse impact on the marketsPPP in which we operate and on our business, operations and financial condition is expected to remain elevated.
In response to the COVID-19 pandemic, the CARES Act was signed into law on March 27, 2020. The CARES Act provided an estimated $2.2 trillion to address the economic impact of the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of financial relief. The CARES Act also included provisions to encourage financial institutions to work prudently with borrowers. As an SBA lender, we were well positioned to assist business customers in accessing funds available through the PPP implemented in April of 2020. On December 27, 2020, the Economic Aid Act was signed into law. This second coronavirus relief package granted additional funds for a new round of PPP loans. Additionally, it expanded the eligibility for loans and allowed certain businesses to request a second loan. The SBA began accepting applications for the second round of PPP loans on January 13, 2021, and we accepted new applications through April 6, 2021. During the first half 2021, we originated $112.3over $420 million of additional PPP loans underin this second roundprogram, of PPP loans. At Septemberwhich $3.0 million were still outstanding as of June 30, 2021, we had $67.5 million of approved PPP loans outstanding.2022.
Additionally, we assisted both our consumer and commercial borrowers that experienced financial hardship due to COVID-19 related challenges. As of SeptemberJune 30, 2021,2022, there were no remaining loans with payment deferrals. As of June 30, 2021, we had outstanding loans with payment deferrals of $182,000. The decrease in the COVID-19 modified loans are the result of the loans coming out of the deferral periods and resuming performance.
Operating Results
Net income increased $2.2 million, or 8.2%, forWe continue to monitor and assess the three months ended September 30, 2021, to $29.3 million compared to the same period in 2020. The increase was primarily a resultimpacts of the $1.6 million increaseCOVID-19 pandemic on our employees and customers. The ongoing pandemic could continue to adversely impact the markets in noninterest income,which we operate and our business, operations and financial condition.
ECONOMIC CONDITIONS
The economic conditions and growth prospects for our markets, even against the $1.6 million increase in net interest income, partially offset by the $1.2 million increase in income tax expense. Earnings per diluted common share increased $0.08, or 9.8%,headwinds of inflation and recessionary concerns, continue to $0.90 for the three months ended September 30, 2021 compared to $0.82 for the three months ended September 30, 2020.
During the nine months ended September 30, 2021, our net income increased $32.1 million, or 61.1%, to $84.7 million from $52.6 million for the same period in 2020. The increase in net income wasreflect a direct result of a reversal of provision for credit losses of $13.5 million compared to a large build-up in the allowance for credit losses of $25.7 million in the same period in 2020. The decrease in the provision was primarily due to an improved economic forecast. The increase in net income was also due to the $15.3 million decrease in interest expense, partially offset by the $13.7 million decrease in interest income, the $5.5 million increase in income tax expense, the $1.7 million increase in noninterest expensesolid and the $1.5 million decrease in noninterest income. Earnings per diluted common share increased $1.01, or 63.9%, to $2.59 for the nine months ended September 30, 2021, from $1.58 for the same period in 2020.
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Financial Condition
Our total assets increased $127.5 million, or 1.8%, to $7.14 billion at September 30, 2021 from $7.01 billion at December 31, 2020. Our securities portfolio increased by $149.3 million, or 5.5%, to $2.85 billion, compared to $2.70 billion at December 31, 2020. The increase in our securities portfolio was comprised of an increase of $471.8 million in investment securities, partially offset by a decrease of $322.5 million in MBS, as the composition of the securities portfolio continued to change as municipal bonds and, to a lesser extent, corporate bonds and U.S. Treasury Notes increased while MBS decreased. Our FHLB stock increased $2.0 million, or 7.9%, to $27.2 million from $25.3 million at December 31, 2020, primarily due to increases in the amount of FHLB stock we were required to hold in relation to our FHLB borrowings.
Loans decreased $10.2 million, or 0.3%, to $3.65 billion at September 30, 2021 from $3.66 billion at December 31, 2020. The net decrease in our loan portfolio was comprised of decreases of $159.8 million of construction loans, $59.3 million of 1-4 family residential loans and $5.3 million of loans to individuals, partially offset by increases of $309.4 million of commercial real estate loans, $33.9 million of commercial loans, excluding PPP loans, and $18.2 million of municipal loans. Our PPP loans, a component of the commercial loan category, decreased $147.3 million, or 68.6%, to $67.5 million as of September 30, 2021, from $214.8 million at December 31, 2020, due to forgiveness payments received from loans funded under the CARES Act. Loans held for sale decreased $2.6 million, or 69.4%, to $1.1 million at September 30, 2021 from $3.7 million at December 31, 2020.
Our nonperforming assets at September 30, 2021 decreased $5.1 million, or 28.9%, to $12.4 million and represented 0.17% of total assets, compared to $17.5 million, or 0.25% of total assets at December 31, 2020. Nonaccruing loans decreased $4.7 million, or 60.9%, to $3.0 million, and the ratio of nonaccruing loans to total loans decreased to 0.08% at September 30, 2021 compared to 0.21% at December 31, 2020. Restructured loans were $9.4 million at September 30, 2021, a decrease of 2.9%, from $9.6 million at December 31, 2020. OREO decreased to $25,000 at September 30, 2021 from $106,000 at December 31, 2020.
Our deposits increased $399.3 million, or 8.1%, to $5.33 billion at September 30, 2021 from $4.93 billion at December 31, 2020, which was comprised of an increase of $242.0 million in noninterest bearing deposits and $157.4 million in interest bearing deposits. The increase was largely driven by PPP loan disbursements and stimulus checks deposited during the first half of 2021. Brokered deposits decreased $24.5 million, or 17.7%, for the nine months ended September 30, 2021.
Total FHLB borrowings decreased $173.3 million, or 20.8%, to $659.2 million at September 30, 2021 from $832.5 million at December 31, 2020.
Our subordinated notes, net of unamortized debt issuance costs, decreased $98.8 million, or 50.1%, to $98.5 million at September 30, 2021 from $197.3 million at December 31, 2020, a result of the redemption of $100.0 million in aggregate principal amount subordinated notes on September 30, 2021.
Our total shareholders’ equity at September 30, 2021 increased 0.3%, or $2.6 million, to $877.9 million, or 12.3% of total assets, compared to $875.3 million, or 12.5% of total assets, at December 31, 2020. The increase in shareholders’ equity was the result of net income of $84.7 million, net issuance of common stock under employee stock plans of $5.9 million, stock compensation expense of $2.2 million and common stock issued under our dividend reinvestment plan of $986,000. These increases were partially offset by the repurchase of $34.1 million of our common stock, cash dividends paid of $32.0 million and other comprehensive loss of $25.1 million.
Economic conditions in our market areas are relatively strongpositive overall outlook with economic activity having quickly returned to levels close to pre-pandemic levels. Increasing interest rates and rising building costs have caused some slowing of the highly robust single family housing market, however there continues to be a shortage of housing in several Texas markets. Worker shortages especially in the restaurant, hospitality and retail industries combined with supply chain disruptions impacting numerous industries and inflationary conditions has had some impact on the level of economic growth. Ongoing higher inflation levels and higher interest rates could have a negative impact on both our consumer and commercial borrowers. Overall, Texas continues to experience economic growth due to company relocations and expansions combined with overall population growth.
Operating Results
Net income increased $4.1 million, or 19.2%, for the three months ended June 30, 2022, to $25.4 million compared to the same period in 2021. The increase in net income was primarily a result of a $5.4 million increase in net interest income and a reversal of provision for credit losses, partially offset by net losses on sales of securities AFS. For the three months ended June 30, 2022, we reversed $633,000 of provision for credit losses compared to a provision for credit losses of $1.7 million for the same period in 2021. Earnings per diluted common share increased $0.14, or 21.5%, to $0.79 for the three months ended June 30, 2022, compared to $0.65 for the three months ended June 30, 2021.
During the six months ended June 30, 2022, our net income decreased $5.0 million, or 9.0%, to $50.4 million from $55.4 million for the same period in 2021. The decrease in net income was largely driven by a decrease in the reversals of provision for credit losses and the net losses on the sales of securities AFS, partially offset by the increase in net interest income. For the six months ended June 30, 2022, we reversed $339,000 of provision for credit losses compared to a reversal of provision for credit losses of $8.5 million in the same period in 2021. Earnings per diluted common share decreased $0.13, or 7.7%, to $1.56 for the six months ended June 30, 2022, from $1.69 for the same period in 2021.
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Financial Condition
Our total assets increased $346.5 million, or 4.8%, to $7.61 billion at June 30, 2022 from $7.26 billion at December 31, 2021. Our securities portfolio decreased by $38.1 million, or 1.3%, to $2.82 billion, compared to $2.86 billion at December 31, 2021. The decrease in the securities portfolio was due to the increase in the unrealized loss in the portfolio, sales of securities, and principal payments, which more than offset the securities purchased during the first half of 2022.Our FHLB stock decreased $649,000, or 4.5%, to $13.7 million from $14.4 million at December 31, 2021, due to the decline in our FHLB borrowings during the first half of 2022, reducing the amount of FHLB stock we are required to hold.
Loans at June 30, 2022 were $3.96 billion, an increase of $317.9 million, or 8.7%, compared to $3.65 billion at December 31, 2021. Our PPP loans, a component of the commercial loan category, decreased $28.1 million during the six months ended June 30, 2022 due to forgiveness payments received for loans funded under the CARES Act. Excluding PPP loans, total loans increased $345.9 million, or 9.6%, due to increases of $236.5 million in commercial real estate loans, $72.6 million in construction loans, $38.0 million in commercial loans (excluding PPP loans) and $14.2 million in municipal loans. The increases were partially offset by decreases of $10.4 million in 1-4 family residential loans and $5.0 million in loans to individuals. Loans held for sale decreased $869,000, or 51.6%, to $815,000 at June 30, 2022 from $1.7 million at December 31, 2021.
Our nonperforming assets at June 30, 2022 increased $206,000, or 1.8%, to $11.8 million and represented 0.16% of total assets, compared to $11.6 million, or 0.16% of total assets at December 31, 2021. Nonaccruing loans increased $583,000, or 23.0%, to $3.1 million, and the ratio of nonaccruing loans to total loans increased to 0.08% at June 30, 2022 compared to 0.07% at December 31, 2021. TDR loans were $8.6 million and $9.1 million at June 30, 2022 and December 31, 2021, respectively. There was $128,000 of OREO at June 30, 2022 and none at December 31, 2021.
Our deposits increased $526.1 million, or 9.2%, to $6.25 billion at June 30, 2022 from $5.72 billion at December 31, 2021. The increase was primarily due to the increase in our brokered deposits of $364.9 million, or 123.8%, associated with funding our cash flow hedge swaps in place of the FHLB advances to obtain lower cost funding.
Total FHLB borrowings decreased $190.3 million, or 55.3%, to $153.7 million at June 30, 2022 from $344.0 million at December 31, 2021.
Our total shareholders’ equity at June 30, 2022 decreased 19.8%, or $180.4 million, to $731.8 million, or 9.6% of total assets, compared to $912.2 million, or 12.6% of total assets, at December 31, 2021. The decrease in shareholders’ equity was the result of other comprehensive loss of $199.0 million, cash dividends paid of $21.9 million and the repurchase of $12.2 million of our common stock. These decreases were partially offset by net income of $50.4 million, stock compensation expense of $1.7 million, common stock issued under our dividend reinvestment plan of $635,000 and net issuance of common stock under employee stock plans of $57,000.
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.
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Balance Sheet Strategy
Determining the appropriate size of the balance sheet is one of the critical decisions any bank makes. Our balance sheet is not merely the result of a series of micro-decisions, but rather the size is controlled based on the economics of assets compared to the economics of funding and funding sources. Changing interest rate environments and economic conditions require that we monitor the interest rate sensitivity of the assets, the funding driving our growth and closely align ALCO objectives accordingly.
During the first quarter of 2022, we replaced $310 million of FHLB advances with brokered deposits as the funding source of our cash flow hedge swaps to lower our funding cost. Over the past two years, management has used the significant increase in non-maturity deposits, net of brokered deposits, to reduce dependence on more interest rate sensitive wholesale funding. At June 30, 2022, of the remaining wholesale funding, 68% is swapped at a fixed rate, providing protection from rising interest rates. The securities portfolio is currently funded primarily by non-maturity deposits with wholesale funding accounting for approximately 29% of the funding source.
We utilize wholesale funding and securities to enhance overall profitability by maximizing the use of our profitability and balance sheet composition bycapital, determining acceptable levels of credit, interest rate and liquidity risk consistent with prudent capital management. This balance sheet strategy currently consists of borrowing a combination of long- and short-term funds from the FHLB, the FRDW or the brokered funds market.market and the FHLB. These funds are invested primarily in U.S. agency MBS and long-term municipal securities. Although U.S. agency MBS often carry lower yields than traditional mortgage loans and other types of loans we make, these securities generally (i) increase the overall quality of our assets because of either the implicit or explicit guarantees of the U.S. Government, (ii) are more liquid than individual loans and (iii) may be used to collateralize our borrowings or other obligations. While the strategy of investing a portion of our assets in U.S. Agency MBS and municipal securities has historically resulted in lower interest rate spreads and margins, we believe the lower operating expenses and reduced credit risk, combined with the managed interest rate risk of this strategy, has enhanced our overall profitability for many years. At this time, we utilize this balance sheet strategy with the goal of enhancing overall profitability by maximizing the use of our capital.
Risks associated with thethis asset structure we maintain include a potentially lower net interest rate spread and margin when compared to our peers, changes in the slope of the yield curve, which can reduce our net interest rate spread and margin, increased interest rate risk, the length of interest rate cycles, changes in volatility or spreads associated with the MBS and municipal securities, the unpredictable nature of MBS prepayments and credit risks associated with the municipal securities. See “Part I - Item 1A. Risk Factors – Risks Related to Our Business” in the 20202021 Form 10-K for a discussion of risks related to interest rates. Our asset structure, net interest spread and net interest margin require us to closely monitor our interest rate risk. An additional risk is the change in fair value of the AFS securities portfolio as a result of changes in interest rates. Significantsignificant increases in interest rates, especially long-term interest rates, which could adversely impact the fair value of the AFS securities portfolio whichand could also significantly impact our equity capital. Due to the unpredictable nature of MBS prepayments, the length of interest rate cycles and the slope of the interest rate yield curve, net interest income could fluctuate more than simulated under the scenarios modeled by our ALCO and described under “Item 3. Quantitative and Qualitative Disclosures about Market Risk” in this Quarterly Report on Form 10-Q.
Determining the appropriate size of the balance sheet is one of the critical decisions any bank makes. Our balance sheet is not merely the result of a series of micro-decisions, but rather the size is controlled based on the economics of assets compared to the economics of funding and funding sources. The low interest rate environment and economic landscape requires that we monitor the interest rate sensitivity of the assets driving our growth and closely align ALCO objectives accordingly.
The management of our securities portfolio as a percentage of earning assets is guided by the current economics associated with the securities portfolio, changes in our overall loan and deposit levels and changes in our wholesale funding levels. Our balance sheet strategy is designed such that our securities portfolio should help mitigate financial performance associated with potential business and economic cycles that include slower loan growth and higher credit costs.
Our investment securities and U.S. Agency MBS increaseddecreased from $2.70$2.86 billion at December 31, 20202021 to $2.85$2.82 billion at SeptemberJune 30, 2021.2022. The increasedecrease in the securities portfolio was due to the increase in conjunction with our balance sheet strategythe unrealized loss in the portfolio, sales of securities, and ALCO objectives.principal payments, which more than offset the securities purchased during the six months ended June 30, 2022.
During the nine months ended September 30, 2021,first half of 2022, the composition of the securities portfolio continued to change as municipal and corporate bonds increased while MBSthe remaining categories in the portfolio decreased. The decrease in MBS was attributable to very fewthe sales of U.S. Agency MBS and regular principal payments, partially offset by additional MBS purchases and higher MBS prepayment speeds due toduring the significantly low interest rate environment.second quarter. During the ninesix months ended SeptemberJune 30, 2021,2022, we increased security purchases when compared to the latter half of 2020, including $463.5purchased $302 million in highly rated primarily Texas municipal securities, $226.2$41.2 million of which were taxable, $52.3$49 million in U.S. Treasury Notes $45.3and $26 million in investment grade subordinated debt, and $13.1sold $13 million in U.S. Agency MBS. Wemunicipal securities. In March of 2022, we sold approximately $35.1$68.1 million AFS electric utility revenue municipalsof U.S. Treasury Notes due to electric utility company uncertainties caused by the severe winter storm in Texas during February. We also sold $56.6 million in U.S Agency MBS and $9.6 million in U.S. Treasury Notes.rising rate environment. Sales of AFS securities for the three and ninesix months ended SeptemberJune 30, 2021,2022, resulted in a net realized gainloss of $1.4$2.2 million and $3.4$3.7 million, respectively.
During the three and six months ended June 30, 2022, management transferred to HTM, long duration AFS municipal securities with fair values of approximately $489.1 million and $874.8 million, respectively. Additionally, during the three and six months ended June 30, 2022, management transferred to HTM, $95.3 million in corporate bonds and $28.3 million in MBS. These transfers were made due to management’s intent and ability to hold these securities to maturity. Long duration securities experience greater fair value volatility when interest rates either rise or fall. These transfers reduce any future volatility resulting from unrealized gains or losses, reflected in AOCI. These transfers were made to align the investment portfolio with the current balance sheet strategy.
At SeptemberJune 30, 2021,2022, securities as a percentage of assets totaled 39.9%37.0%, compared to 38.5%39.3% at December 31, 2020,2021, due to an increase in total assets of $346.5 million and the $149.3$38.1 million, or 5.5%1.3%, increasedecrease in the securities portfolio. Our balance sheet management strategy is dynamic and is continually evaluated as market conditions warrant. As interest rates, yield curves, MBS prepayments, funding costs, security spreads and loan and deposit portfolios change, our determination of the proper types, amount and maturities of securities to invest in, as well as funding needs and funding sources, will continue to be evaluated. Should the economics of purchasing securities decrease, we may allow the securities portfolio to shrink through run-off or security sales. However, should the economics become more attractive, we may strategically increase the securities portfolio and the balance sheet.
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With respect to liabilities,funding sources, we continue to primarily utilize a combination of deposits and FHLB borrowingsto 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
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ALCO. Our primary wholesale funding source issources are brokered deposits and FHLB borrowings. Our FHLB borrowings anddecreased 55.3%, or $190.3 million, to a lesser extent we utilize federal funds purchased, the FRDW and brokered deposits.$153.7 million at June 30, 2022 from $344.0 million at December 31, 2021.
For the ninesix months ended SeptemberJune 30, 2021,2022, our total wholesale funding as a percentage of deposits, not including brokered deposits, decreasedincreased to 14.8%15.1%, from 20.2%11.8% at December 31, 2020,2021, and 27.1%decreased from 15.3% at SeptemberJune 30, 2020. The decrease2021.
Our brokered deposits consist of CDs and non-maturity deposits. Our brokered CDs increased $24.8 million, or 100.4%, from both of the prior year periods was due to the increase in our non-maturity deposits which were used to decrease FHLB borrowings and brokered deposits.
Our FHLB borrowings decreased 20.8%, or $173.3 million, to $659.2 million at September 30, 2021 from $832.5$24.7 million at December 31, 2020. 2021 to $49.5 million at June 30, 2022. At June 30, 2022, our brokered CDs had a weighted average cost of 44 basis points and remaining maturities of less than 8 months. Our brokered non-maturity deposits increased to $610.2 million at June 30, 2022 from $270.1 million at December 31, 2021, with a weighted average cost of 100 basis points and 91 basis points, respectively. Our wholesale funding policy currently allows for maximum brokered deposits of $800 million, with an additional $50 million of flexibility for deposits maturing within 30 days. Potential higher interest expense and lack of customer loyalty are risks associated with the use of brokered deposits.
In connection with most of our borrowings,wholesale funds, the Bank has entered into various variable rate agreements and fixed or variable rate short-term pay agreements. These agreements totaled $605.0 million and $670.0 million at September 30, 2021 and December 31, 2020, respectively. Six of the agreements havewith an interest rate tied to three-month LIBOR and the remaining agreements have interest rates tiedor to one-month LIBOR. In connection with all$575.0 million and $605.0 million of the agreements outstanding on Septemberat June 30, 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. The interest rate swap contracts had an average interest rate of 1.18%0.96% with ana remaining average weighted maturity of 3.42.8 years at SeptemberJune 30, 2021. These transactions are reevaluated on a monthly basis to determine if the hedged forecasted transactions are still probable of occurring. If at a subsequent evaluation, it is determined that the transactions will not occur, any related gains or losses recorded in AOCIare immediately recognized in earnings.2022. Refer to “Note 911 – 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.
Our brokered deposits typically consist of CDs and non-maturity money market deposits. Our brokered CDs decreased $24.5 million, or 23.8%, from $102.8 million at December 31, 2020 to $78.4 million at September 30, 2021. At September 30, 2021, our brokered CDs had a weighted average cost of 12 basis points and remaining maturities of less than 10 months. Our brokered non-maturity money market deposits were $35.1 million at September 30, 2021 and December 31, 2020, with a weighted average cost of five basis points and 17 basis points, respectively. To provide management flexibility in managing the interest rate risk of wholesale funding, the ALCO has approved up to $50 million to issue brokered deposits to replace those maturing within 30 days. Our wholesale funding policy allows for maximum brokered deposits of $450 million. This brokered deposit maximum limit could increase or decrease depending on changes in ALCO objectives. Potential higher interest expense and lack of customer loyalty are risks associated with the use of brokered deposits.
On November 6, 2020, we issued 3.875% coupon $100 million in aggregate principal amount of fixed-to-floating rate subordinated notes due on November 15, 2030. Refer to “Note 7 – Long-term Debt” in our consolidated financial statements included in this report for a detailed description of the terms of the subordinated notes.
On September 30, 2021, we redeemed our 5.5% coupon $100 million subordinated notes due September 30, 2026. Refer to “Note 7 – Long-term Debt” in our consolidated financial statements included in this report for a detailed description of the terms of the redemption of the subordinated notes.
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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. Results of operations are also affected by our noninterest income, provision for credit losses, noninterest expenses and income tax expense. General economic and competitive conditions, particularly changes in interest rates, changes in interest rate yield curves, prepayment rates of MBS and loans, repricing of loan relationships, government policies and actions of regulatory authorities also significantly affect our results of operations. Future changes in applicable law, regulations or government policies may also have a material impact on us. The adoption of CECL and the COVID-19 pandemic significantly impacted our results of operations in 2020 and 2021 and may continue to impact our results of operations for the remainder of 2021.
The following table presents net interest income for the periods presented (in thousands):
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
| | | September 30, | | September 30, | | | June 30, | | June 30, |
| | | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | | 2022 | | 2021 |
Interest income: | Interest income: | | | | | | | | | Interest income: | | | | | | | | |
Loans | Loans | | $ | 37,034 | | | $ | 38,185 | | | $ | 108,792 | | | $ | 119,195 | | Loans | | $ | 38,344 | | | $ | 35,720 | | | $ | 73,232 | | | $ | 71,758 | |
Taxable investment securities | Taxable investment securities | | 3,853 | | | 1,175 | | | 9,097 | | | 2,419 | | Taxable investment securities | | 4,632 | | | 2,921 | | | 9,240 | | | 5,244 | |
Tax-exempt investment securities | Tax-exempt investment securities | | 9,649 | | | 9,003 | | | 27,787 | | | 24,430 | | Tax-exempt investment securities | | 10,605 | | | 9,173 | | | 20,824 | | | 18,138 | |
MBS | MBS | | 4,405 | | | 7,048 | | | 15,140 | | | 27,626 | | MBS | | 3,238 | | | 4,647 | | | 7,255 | | | 10,735 | |
FHLB stock and equity investments | FHLB stock and equity investments | | 111 | | | 249 | | | 355 | | | 1,034 | | FHLB stock and equity investments | | 77 | | | 108 | | | 190 | | | 244 | |
Other interest earning assets | Other interest earning assets | | 24 | | | 17 | | | 56 | | | 220 | | Other interest earning assets | | 204 | | | 17 | | | 232 | | | 32 | |
Total interest income | Total interest income | | 55,076 | | | 55,677 | | | 161,227 | | | 174,924 | | Total interest income | | 57,100 | | | 52,586 | | | 110,973 | | | 106,151 | |
Interest expense: | Interest expense: | | | | | | | | | Interest expense: | | | | | | | | |
Deposits | Deposits | | 2,234 | | | 4,862 | | | 7,170 | | | 21,010 | | Deposits | | 4,264 | | | 2,339 | | | 7,501 | | | 4,936 | |
FHLB borrowings | FHLB borrowings | | 1,865 | | | 2,369 | | | 5,590 | | | 9,272 | | FHLB borrowings | | 224 | | | 1,817 | | | 590 | | | 3,725 | |
Subordinated notes | Subordinated notes | | 2,417 | | | 1,427 | | | 7,235 | | | 4,250 | | Subordinated notes | | 1,000 | | | 2,423 | | | 1,998 | | | 4,818 | |
Trust preferred subordinated debentures | Trust preferred subordinated debentures | | 345 | | | 378 | | | 1,045 | | | 1,469 | | Trust preferred subordinated debentures | | 471 | | | 349 | | | 827 | | | 700 | |
Repurchase agreements | | Repurchase agreements | | 18 | | | 11 | | | 28 | | | 22 | |
Other borrowings | Other borrowings | | 9 | | | 55 | | | 31 | | | 365 | | Other borrowings | | 45 | | | — | | | 45 | | | — | |
Total interest expense | Total interest expense | | 6,870 | | | 9,091 | | | 21,071 | | | 36,366 | | Total interest expense | | 6,022 | | | 6,939 | | | 10,989 | | | 14,201 | |
Net interest income | Net interest income | | $ | 48,206 | | | $ | 46,586 | | | $ | 140,156 | | | $ | 138,558 | | Net interest income | | $ | 51,078 | | | $ | 45,647 | | | $ | 99,984 | | | $ | 91,950 | |
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. Fluctuations in interest rates or interest rate yield curves, as well as repricing characteristics and volume and changes in the mix of interest earning assets and interest bearing liabilities, materially impact net interest income. During the first quarterhalf of 2020,2022, the Federal Reserve reducedincreased the target federal funds rate by 150 basis points to 25175 basis points.points and has indicated it anticipates multiple additional rate increases during 2022. The increase in the federal funds rate to date has increased our net interest income. However, as the federal funds rate increases further and the yield curve remains flat, it may be less beneficial to our net interest income.
Net interest income for the three months ended SeptemberJune 30, 20212022 increased $1.6$5.4 million, or 3.5%11.9%, compared to the same period in 2020.2021. The increase in net interest income for the three months ended SeptemberJune 30, 20212022 was due to the decrease in interest expense on our interest bearing liabilities due to the overall decline in interest rates and a decline in the average balance of our interest bearing liabilities, partially offset by the decreaseincrease in interest income, a result of a decreasecombined increase in the average balance as well as the average yield on our interest earning assets. The increase in net interest income is also attributable to a decrease in interest expense due to the change in the mix of our interest bearing liabilities. Total interest income decreased $601,000,increased $4.5 million, or 1.1%8.6%, to $55.1$57.1 million for the three months ended SeptemberJune 30, 2021,2022, compared to $55.7$52.6 million during the same period in 2020.2021. Total interest expense decreased $2.2 million,$917,000, or 24.4%13.2%, to $6.9$6.0 million for the three months ended SeptemberJune 30, 2021,2022, compared to $9.1$6.9 million for the same period in 2020.2021. Our net interest margin (FTE), a non-GAAP measure, increased to 3.16%3.30% for the three months ended SeptemberJune 30, 2021,2022, compared to 3.02%3.06% for the same period in 20202021, and our net interest spread (FTE), also a non-GAAP measure, increased to 3.00%3.14%, compared to 2.84%2.89% for the same period in 2020.
Net interest income was $140.2 million for the nine months ended September 30, 2021 compared to $138.6 million, an increase of $1.6 million, or 1.2%, compared to the same period in 2020. The increase in net interest income for the nine months ended September 30, 2021 was due to the decrease in interest expense on our interest bearing liabilities, partially offset by the decrease in interest income, both primarily a result of an overall decline in interest rates. Total interest expense decreased $15.3 million,2021.
Southside Bancshares, Inc. |52|49
or 42.1%, to $21.1Net interest income was $100.0 million for the ninesix months ended SeptemberJune 30, 2021,2022 compared to $36.4$92.0 million for the same period in 2020.2021, an increase of $8.0 million, or 8.7%. The increase in net interest income for the six months ended June 30, 2022 was due to a result of a combined increase in the average balance as well as the average yield on interest earning assets. The increase in net interest income is also attributable to a decrease in interest expense due to the change in the mix of our interest bearing liabilities. Total interest income decreased $13.7increased $4.8 million, or 7.8%4.5%, to $161.2$111.0 million for the ninesix months ended SeptemberJune 30, 2021,2022, compared to $174.9$106.2 million for the same period in 2020.2021. Total interest expense decreased $3.2 million, or 22.6%, to $11.0 million for the six months ended June 30, 2022, compared to $14.2 million for the same period in 2021. Our net interest margin (FTE), a non-GAAP measure, increased to 3.14%3.26% for the ninesix months ended SeptemberJune 30, 2021,2022, compared to 3.02%3.13% for the same period in 2020,2021, and our net interest spread (FTE), also a non-GAAP measure, increased to 2.97%3.12%, compared to 2.81%2.96% for the same period in 2020.2021. See “Non-GAAP Financial Measures” for more information and for a reconciliation to GAAP.
Quarterly 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. Volume/Yield/Rate variances (change in volume times change in yield/rate) have been allocated to amounts attributable to changes in volumes and to changes in yields/rates in proportion to the amounts directly attributable to those changes (in thousands):
| | | Three Months Ended September 30, 2021 Compared to 2020 | | Three Months Ended June 30, 2022 Compared to 2021 |
| | Change Attributable to | | Total | | Change Attributable to | | Total |
Fully Taxable-Equivalent Basis: | Fully Taxable-Equivalent Basis: | Average Volume | | Average Yield/Rate | | Change | Fully Taxable-Equivalent Basis: | Average Volume | | Average Yield/Rate | | Change |
Interest income on: | Interest income on: | | | | | | Interest income on: | | | | | |
Loans (1) | Loans (1) | $ | (1,577) | | | $ | 479 | | | $ | (1,098) | | Loans (1) | $ | 1,407 | | | $ | 1,252 | | | $ | 2,659 | |
Loans held for sale | Loans held for sale | (17) | | | (2) | | | (19) | | Loans held for sale | (1) | | | 6 | | | 5 | |
Taxable investment securities | Taxable investment securities | 2,811 | | | (133) | | | 2,678 | | Taxable investment securities | 1,657 | | | 54 | | | 1,711 | |
Tax-exempt investment securities (1) | Tax-exempt investment securities (1) | 1,353 | | | (456) | | | 897 | | Tax-exempt investment securities (1) | 2,397 | | | (383) | | | 2,014 | |
Mortgage-backed and related securities | Mortgage-backed and related securities | (2,810) | | | 167 | | | (2,643) | | Mortgage-backed and related securities | (2,899) | | | 1,490 | | | (1,409) | |
FHLB stock, at cost, and equity investments | FHLB stock, at cost, and equity investments | (71) | | | (67) | | | (138) | | FHLB stock, at cost, and equity investments | (68) | | | 37 | | | (31) | |
Interest earning deposits | Interest earning deposits | 15 | | | (8) | | | 7 | | Interest earning deposits | 22 | | | 86 | | | 108 | |
| Federal funds sold | | Federal funds sold | 79 | | | — | | | 79 | |
Total earning assets | Total earning assets | (296) | | | (20) | | | (316) | | Total earning assets | 2,594 | | | 2,542 | | | 5,136 | |
Interest expense on: | Interest expense on: | | | | | | Interest expense on: | | | | | |
Savings accounts | Savings accounts | 57 | | | — | | | 57 | | Savings accounts | 43 | | | 52 | | | 95 | |
CDs | CDs | (1,223) | | | (1,556) | | | (2,779) | | CDs | (178) | | | (180) | | | (358) | |
Interest bearing demand accounts | Interest bearing demand accounts | 212 | | | (118) | | | 94 | | Interest bearing demand accounts | 421 | | | 1,767 | | | 2,188 | |
FHLB borrowings | FHLB borrowings | (998) | | | 494 | | | (504) | | FHLB borrowings | (2,186) | | | 593 | | | (1,593) | |
Subordinated notes, net of unamortized debt issuance costs | Subordinated notes, net of unamortized debt issuance costs | 1,221 | | | (231) | | | 990 | | Subordinated notes, net of unamortized debt issuance costs | (1,056) | | | (367) | | | (1,423) | |
Trust preferred subordinated debentures, net of unamortized debt issuance costs | Trust preferred subordinated debentures, net of unamortized debt issuance costs | — | | | (33) | | | (33) | | Trust preferred subordinated debentures, net of unamortized debt issuance costs | — | | | 122 | | | 122 | |
Repurchase agreements | | Repurchase agreements | 5 | | | 2 | | | 7 | |
Other borrowings | Other borrowings | (26) | | | (20) | | | (46) | | Other borrowings | 45 | | | — | | | 45 | |
Total interest bearing liabilities | Total interest bearing liabilities | (757) | | | (1,464) | | | (2,221) | | Total interest bearing liabilities | (2,906) | | | 1,989 | | | (917) | |
Net change | Net change | $ | 461 | | | $ | 1,444 | | | $ | 1,905 | | Net change | $ | 5,500 | | | $ | 553 | | | $ | 6,053 | |
(1)Interest yields on loans and securities that are nontaxable for federal income tax purposes are presented on a fully taxable-equivalent basis. See “Non-GAAP Financial Measures” for more information and for a reconciliation to GAAP.
The decreaseincrease in total interest income was primarily attributable to an increase in the mixaverage balance of average interest earning assets of $275.6 million, or 4.3%, for the three months ended SeptemberJune 30, 20212022 compared to the same period in 2020, and a slight decrease2021, as well as an increase in the average yield on interest earning assets.
assets to 3.66% from 3.49% for the same period in 2021. The decrease in total interest expense for the three months ended SeptemberJune 30, 20212022 was attributable to an overall declinethe change in interest rates paid on totalthe mix of our interest bearing liabilities to 0.59% for the three months ended SeptemberJune 30, 2021 from 0.73% for2022, when compared to the same period in 2020, and the decrease in average interest bearing liabilities.2021.
Southside Bancshares, Inc. |53|50
The “Average Balances with Average Yields and Rates” table that follows shows average earning assets and interest bearing liabilities together with the average yield on the earning assets and the average rate of the interest bearing liabilities (dollars in thousands) for the three months ended SeptemberJune 30, 20212022 and 2020.2021. The interest and related yields presented are on a fully taxable-equivalent basis and are therefore non-GAAP measures. See "Non-GAAP“Non-GAAP Financial Measures"Measures” for more information, and for a reconciliation to GAAP.
| | | Average Balances with Average Yields and Rates (Annualized) | | Average Balances with Average Yields and Rates (Annualized) |
| | (unaudited) | | (unaudited) |
| | Three Months Ended | | Three Months Ended |
| | September 30, 2021 | | September 30, 2020 | | June 30, 2022 | | June 30, 2021 |
| | Average Balance | | Interest | | Average Yield/Rate | | Average Balance | | Interest | | Average Yield/Rate | | Average Balance | | Interest | | Average Yield/Rate | | Average Balance | | Interest | | Average Yield/Rate |
ASSETS | ASSETS | | | | | | | | | | | | ASSETS | | | | | | | | | | | |
Loans (1) | Loans (1) | $ | 3,662,496 | | | $ | 37,744 | | | 4.09 | % | | $ | 3,815,989 | | | $ | 38,842 | | | 4.05 | % | Loans (1) | $ | 3,847,614 | | | $ | 39,088 | | | 4.07 | % | | $ | 3,706,959 | | | $ | 36,429 | | | 3.94 | % |
Loans held for sale | Loans held for sale | 1,640 | | | 12 | | | 2.90 | % | | 3,934 | | | 31 | | | 3.13 | % | Loans held for sale | 1,776 | | | 18 | | | 4.07 | % | | 1,846 | | | 13 | | | 2.82 | % |
Securities: | Securities: | | Securities: | |
Taxable investment securities (2) | Taxable investment securities (2) | 532,679 | | | 3,853 | | | 2.87 | % | | 145,724 | | | 1,175 | | | 3.21 | % | Taxable investment securities (2) | 617,603 | | | 4,632 | | | 3.01 | % | | 396,504 | | | 2,921 | | | 2.95 | % |
Tax-exempt investment securities (2) | Tax-exempt investment securities (2) | 1,453,275 | | | 12,315 | | | 3.36 | % | | 1,295,179 | | | 11,418 | | | 3.51 | % | Tax-exempt investment securities (2) | 1,653,871 | | | 13,599 | | | 3.30 | % | | 1,363,678 | | | 11,585 | | | 3.41 | % |
Mortgage-backed and related securities (2) | Mortgage-backed and related securities (2) | 738,287 | | | 4,405 | | | 2.37 | % | | 1,209,913 | | | 7,048 | | | 2.32 | % | Mortgage-backed and related securities (2) | 417,057 | | | 3,238 | | | 3.11 | % | | 847,206 | | | 4,647 | | | 2.20 | % |
Total securities | Total securities | 2,724,241 | | | 20,573 | | | 3.00 | % | | 2,650,816 | | | 19,641 | | | 2.95 | % | Total securities | 2,688,531 | | | 21,469 | | | 3.20 | % | | 2,607,388 | | | 19,153 | | | 2.95 | % |
FHLB stock, at cost, and equity investments | FHLB stock, at cost, and equity investments | 39,786 | | | 111 | | | 1.11 | % | | 60,528 | | | 249 | | | 1.64 | % | FHLB stock, at cost, and equity investments | 17,663 | | | 77 | | | 1.75 | % | | 35,883 | | | 108 | | | 1.21 | % |
Interest earning deposits | Interest earning deposits | 39,382 | | | 24 | | | 0.24 | % | | 17,668 | | | 17 | | | 0.38 | % | Interest earning deposits | 77,894 | | | 125 | | | 0.64 | % | | 43,175 | | | 17 | | | 0.16 | % |
| Federal funds sold | | Federal funds sold | 37,343 | | | 79 | | | 0.85 | % | | — | | | — | | | — | |
Total earning assets | Total earning assets | 6,467,545 | | | 58,464 | | | 3.59 | % | | 6,548,935 | | | 58,780 | | | 3.57 | % | Total earning assets | 6,670,821 | | | 60,856 | | | 3.66 | % | | 6,395,251 | | | 55,720 | | | 3.49 | % |
Cash and due from banks | Cash and due from banks | 99,113 | | | 80,368 | | | Cash and due from banks | 100,231 | | | 90,735 | | |
Accrued interest and other assets | Accrued interest and other assets | 684,917 | | | 699,351 | | | Accrued interest and other assets | 446,136 | | | 656,245 | | |
Less: Allowance for loan losses | Less: Allowance for loan losses | (43,052) | | | (61,212) | | | Less: Allowance for loan losses | (35,895) | | | (41,768) | | |
Total assets | Total assets | $ | 7,208,523 | | | $ | 7,267,442 | | | Total assets | $ | 7,181,293 | | | $ | 7,100,463 | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | |
Savings accounts | Savings accounts | $ | 598,118 | | | 249 | | | 0.17 | % | | $ | 461,895 | | | 192 | | | 0.17 | % | Savings accounts | $ | 670,187 | | | 326 | | | 0.20 | % | | $ | 571,907 | | | 231 | | | 0.16 | % |
CDs | CDs | 629,718 | | | 789 | | | 0.50 | % | | 1,172,179 | | | 3,568 | | | 1.21 | % | CDs | 518,104 | | | 578 | | | 0.45 | % | | 658,708 | | | 936 | | | 0.57 | % |
Interest bearing demand accounts | Interest bearing demand accounts | 2,496,037 | | | 1,196 | | | 0.19 | % | | 2,069,751 | | | 1,102 | | | 0.21 | % | Interest bearing demand accounts | 3,175,385 | | | 3,360 | | | 0.42 | % | | 2,459,335 | | | 1,172 | | | 0.19 | % |
Total interest bearing deposits | Total interest bearing deposits | 3,723,873 | | | 2,234 | | | 0.24 | % | | 3,703,825 | | | 4,862 | | | 0.52 | % | Total interest bearing deposits | 4,363,676 | | | 4,264 | | | 0.39 | % | | 3,689,950 | | | 2,339 | | | 0.25 | % |
FHLB borrowings | FHLB borrowings | 656,474 | | | 1,865 | | | 1.13 | % | | 1,037,855 | | | 2,369 | | | 0.91 | % | FHLB borrowings | 55,990 | | | 224 | | | 1.60 | % | | 669,633 | | | 1,817 | | | 1.09 | % |
Subordinated notes, net of unamortized debt issuance costs | Subordinated notes, net of unamortized debt issuance costs | 195,204 | | | 2,417 | | | 4.91 | % | | 98,686 | | | 1,427 | | | 5.75 | % | Subordinated notes, net of unamortized debt issuance costs | 98,586 | | | 1,000 | | | 4.07 | % | | 197,284 | | | 2,423 | | | 4.93 | % |
Trust preferred subordinated debentures, net of unamortized debt issuance costs | Trust preferred subordinated debentures, net of unamortized debt issuance costs | 60,258 | | | 345 | | | 2.27 | % | | 60,253 | | | 378 | | | 2.50 | % | Trust preferred subordinated debentures, net of unamortized debt issuance costs | 60,262 | | | 471 | | | 3.13 | % | | 60,257 | | | 349 | | | 2.32 | % |
Repurchase agreements | | Repurchase agreements | 30,055 | | | 18 | | | 0.24 | % | | 22,024 | | | 11 | | | 0.20 | % |
Other borrowings | Other borrowings | 21,634 | | | 9 | | | 0.17 | % | | 63,526 | | | 55 | | | 0.34 | % | Other borrowings | 6,549 | | | 45 | | | 2.76 | % | | — | | | — | | | — | |
Total interest bearing liabilities | Total interest bearing liabilities | 4,657,443 | | | 6,870 | | | 0.59 | % | | 4,964,145 | | | 9,091 | | | 0.73 | % | Total interest bearing liabilities | 4,615,118 | | | 6,022 | | | 0.52 | % | | 4,639,148 | | | 6,939 | | | 0.60 | % |
Noninterest bearing deposits | Noninterest bearing deposits | 1,551,298 | | | 1,371,748 | | | Noninterest bearing deposits | 1,702,985 | | | 1,485,383 | | |
Accrued expenses and other liabilities | Accrued expenses and other liabilities | 97,954 | | | 96,219 | | | Accrued expenses and other liabilities | 98,870 | | | 97,137 | | |
Total liabilities | Total liabilities | 6,306,695 | | | 6,432,112 | | | Total liabilities | 6,416,973 | | | 6,221,668 | | |
Shareholders’ equity | Shareholders’ equity | 901,828 | | | 835,330 | | | Shareholders’ equity | 764,320 | | | 878,795 | | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | $ | 7,208,523 | | | $ | 7,267,442 | | | Total liabilities and shareholders’ equity | $ | 7,181,293 | | | $ | 7,100,463 | | |
Net interest income (FTE) | Net interest income (FTE) | | | $ | 51,594 | | | | | $ | 49,689 | | | Net interest income (FTE) | | | $ | 54,834 | | | | | $ | 48,781 | | |
Net interest margin (FTE) | Net interest margin (FTE) | | | | 3.16 | % | | | | 3.02 | % | Net interest margin (FTE) | | | | 3.30 | % | | | | 3.06 | % |
Net interest spread (FTE) | Net interest spread (FTE) | | 3.00 | % | | 2.84 | % | Net interest spread (FTE) | | 3.14 | % | | 2.89 | % |
(1)Interest on loans includes net fees on loans that are not material in amount.
(2)For the purpose of calculating the average yield, the average balance of securities is presented at historical cost.
Note: As of SeptemberJune 30, 20212022 and 2020,2021, loans totaling $3.0$3.1 million and $6.0$5.2 million, respectively, were on nonaccrual status. Our policy is to reverse previously accrued but unpaid interest on nonaccrual loans; thereafter, interest income is recorded to the extent received when appropriate.
Southside Bancshares, Inc. |54|51
Year-to-Date 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. Volume/Yield/Rate variances (change in volume times change in yield/rate) have been allocated to amounts attributable to changes in volumes and to changes in yields/rates in proportion to the amounts directly attributable to those changes (in thousands):
| | | Nine Months Ended September 30, 2021 Compared to 2020 | | Six Months Ended June 30, 2022 Compared to 2021 |
| | Change Attributable to | | Total | | Change Attributable to | | Total |
Fully Taxable-Equivalent Basis: | Fully Taxable-Equivalent Basis: | Average Volume | | Average Yield/Rate | | Change | Fully Taxable-Equivalent Basis: | Average Volume | | Average Yield/Rate | | Change |
Interest income on: | Interest income on: | | | | | | Interest income on: | | | | | |
Loans (1) | Loans (1) | $ | (2,406) | | | $ | (7,829) | | | $ | (10,235) | | Loans (1) | $ | 2,090 | | | $ | (560) | | | $ | 1,530 | |
Loans held for sale | Loans held for sale | (13) | | | (10) | | | (23) | | Loans held for sale | (16) | | | 9 | | | (7) | |
Taxable investment securities | Taxable investment securities | 6,800 | | | (122) | | | 6,678 | | Taxable investment securities | 4,172 | | | (176) | | | 3,996 | |
Tax-exempt investment securities (1) | Tax-exempt investment securities (1) | 5,248 | | | (987) | | | 4,261 | | Tax-exempt investment securities (1) | 4,549 | | | (1,028) | | | 3,521 | |
Mortgage-backed and related securities | Mortgage-backed and related securities | (10,053) | | | (2,433) | | | (12,486) | | Mortgage-backed and related securities | (5,563) | | | 2,083 | | | (3,480) | |
Federal Home Loan Bank stock, at cost, and equity investments | Federal Home Loan Bank stock, at cost, and equity investments | (342) | | | (337) | | | (679) | | Federal Home Loan Bank stock, at cost, and equity investments | (139) | | | 85 | | | (54) | |
Interest earning deposits | Interest earning deposits | 63 | | | (227) | | | (164) | | Interest earning deposits | 31 | | | 86 | | | 117 | |
| Federal funds sold | | Federal funds sold | 83 | | | — | | | 83 | |
Total earning assets | Total earning assets | (703) | | | (11,945) | | | (12,648) | | Total earning assets | 5,207 | | | 499 | | | 5,706 | |
Interest expense on: | Interest expense on: | | | | | | Interest expense on: | | | | | |
Savings accounts | Savings accounts | 179 | | | (106) | | | 73 | | Savings accounts | 102 | | | 57 | | | 159 | |
CDs | CDs | (4,942) | | | (6,835) | | | (11,777) | | CDs | (423) | | | (570) | | | (993) | |
Interest bearing demand accounts | Interest bearing demand accounts | 992 | | | (3,128) | | | (2,136) | | Interest bearing demand accounts | 877 | | | 2,522 | | | 3,399 | |
FHLB borrowings | FHLB borrowings | (3,236) | | | (446) | | | (3,682) | | FHLB borrowings | (3,861) | | | 726 | | | (3,135) | |
Subordinated notes, net of unamortized debt issuance costs | Subordinated notes, net of unamortized debt issuance costs | 3,683 | | | (698) | | | 2,985 | | Subordinated notes, net of unamortized debt issuance costs | (2,105) | | | (715) | | | (2,820) | |
Trust preferred subordinated debentures, net of unamortized debt issuance costs | Trust preferred subordinated debentures, net of unamortized debt issuance costs | — | | | (424) | | | (424) | | Trust preferred subordinated debentures, net of unamortized debt issuance costs | — | | | 127 | | | 127 | |
Repurchase agreements | | Repurchase agreements | 3 | | | 3 | | | 6 | |
Other borrowings | Other borrowings | (195) | | | (139) | | | (334) | | Other borrowings | 45 | | | — | | | 45 | |
Total interest bearing liabilities | Total interest bearing liabilities | (3,519) | | | (11,776) | | | (15,295) | | Total interest bearing liabilities | (5,362) | | | 2,150 | | | (3,212) | |
Net change | Net change | $ | 2,816 | | | $ | (169) | | | $ | 2,647 | | Net change | $ | 10,569 | | | $ | (1,651) | | | $ | 8,918 | |
(1)Interest yields on loans and securities that are nontaxable for federal income tax purposes are presented on a fully taxable-equivalent basis. See “Non-GAAP Financial Measures” for more information and for a reconciliation to GAAP.
The decreaseincrease in total interest income was attributable to the decreaseincrease in average earning assets of $293.8 million, or 4.6%, for the six months ended June 30, 2022, compared to the same period in 2021, and to a lesser extent, an increase in the average yield on earning assets to 3.58%3.60% from 3.77%3.58% for the same period in 2020, and a decrease in average earning assets of $129.3 million, or 2.0% for the nine months ended September 30, 2021, compared to the same period in 2020. The decrease in the average yield on total earning assets during the nine months ended September 30, 2021 was a result of decreases in the short-term interest rate yield curve during the first half of 2021 and the tightening credit spreads that occurred primarily during the last half of 2020 and into the first half of 2021. The decrease in average earning assets was primarily the result of a decrease in MBS and loans, partially offset by an increase in investment securities.
The decrease in total interest expense for the ninesix months ended SeptemberJune 30, 20212022 was attributable to an overall declinethe change in interest rates paid on totalthe mix of our interest bearing liabilities when compared to 0.61% for the nine months ended September 30, 2021 from 0.96% for the same period in 2020, and the decrease in average interest bearing liabilities. 2021.
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The “Average Balances with Average Yields and Rates” table that follows shows average earning assets and interest bearing liabilities together with the average yield on the earning assets and the average rate of the interest bearing liabilities (dollars in thousands) for the ninesix months ended SeptemberJune 30, 20212022 and 20202021. The interest and related yields presented are on a fully taxable-equivalent basis and are therefore non-GAAP measures. See “Non-GAAP Financial Measures” for more information, and for a reconciliation to GAAP.
| | | Average Balances with Average Yields and Rates (Annualized) | | Average Balances with Average Yields and Rates (Annualized) |
| | (unaudited) | | (unaudited) |
| | Nine Months Ended | | Six Months Ended |
| | September 30, 2021 | | September 30, 2020 | | June 30, 2022 | | June 30, 2021 |
| | Average Balance | | Interest | | Average Yield/Rate | | Average Balance | | Interest | | Average Yield/Rate | | Average Balance | | Interest | | Average Yield/Rate | | Average Balance | | Interest | | Average Yield/Rate |
ASSETS | ASSETS | | | | | | | | | | | | ASSETS | | | | | | | | | | | |
Loans (1) | Loans (1) | $ | 3,667,941 | | | $ | 110,927 | | | 4.04 | % | | $ | 3,743,437 | | | $ | 121,162 | | | 4.32 | % | Loans (1) | $ | 3,776,194 | | | $ | 74,713 | | | 3.99 | % | | $ | 3,670,708 | | | $ | 73,183 | | | 4.02 | % |
Loans held for sale | Loans held for sale | 2,092 | | | 45 | | | 2.88 | % | | 2,664 | | | 68 | | | 3.41 | % | Loans held for sale | 1,354 | | | 26 | | | 3.87 | % | | 2,321 | | | 33 | | | 2.87 | % |
Securities: | Securities: | | Securities: | |
Taxable investment securities (2) | Taxable investment securities (2) | 409,251 | | | 9,097 | | | 2.97 | % | | 103,576 | | | 2,419 | | | 3.12 | % | Taxable investment securities (2) | 631,079 | | | 9,240 | | | 2.95 | % | | 346,514 | | | 5,244 | | | 3.05 | % |
Tax-exempt investment securities (2) | Tax-exempt investment securities (2) | 1,373,206 | | | 35,076 | | | 3.42 | % | | 1,168,749 | | | 30,815 | | | 3.52 | % | Tax-exempt investment securities (2) | 1,608,779 | | | 26,282 | | | 3.29 | % | | 1,332,507 | | | 22,761 | | | 3.44 | % |
Mortgage-backed and related securities (2) | Mortgage-backed and related securities (2) | 841,361 | | | 15,140 | | | 2.41 | % | | 1,388,754 | | | 27,626 | | | 2.66 | % | Mortgage-backed and related securities (2) | 491,585 | | | 7,255 | | | 2.98 | % | | 893,752 | | | 10,735 | | | 2.42 | % |
Total securities | Total securities | 2,623,818 | | | 59,313 | | | 3.02 | % | | 2,661,079 | | | 60,860 | | | 3.05 | % | Total securities | 2,731,443 | | | 42,777 | | | 3.16 | % | | 2,572,773 | | | 38,740 | | | 3.04 | % |
FHLB stock, at cost, and equity investments | FHLB stock, at cost, and equity investments | 37,116 | | | 355 | | | 1.28 | % | | 63,683 | | | 1,034 | | | 2.17 | % | FHLB stock, at cost, and equity investments | 19,161 | | | 190 | | | 2.00 | % | | 35,760 | | | 244 | | | 1.38 | % |
Interest earning deposits | Interest earning deposits | 37,939 | | | 56 | | | 0.20 | % | | 27,299 | | | 220 | | | 1.08 | % | Interest earning deposits | 61,360 | | | 149 | | | 0.49 | % | | 37,205 | | | 32 | | | 0.17 | % |
| Federal funds sold | | Federal funds sold | 23,077 | | | 83 | | | 0.73 | % | | — | | | — | | | — | |
Total earning assets | Total earning assets | 6,368,906 | | | 170,696 | | | 3.58 | % | | 6,498,162 | | | 183,344 | | | 3.77 | % | Total earning assets | 6,612,589 | | | 117,938 | | | 3.60 | % | | 6,318,767 | | | 112,232 | | | 3.58 | % |
Cash and due from banks | Cash and due from banks | 92,206 | | | 78,484 | | | Cash and due from banks | 103,669 | | | 88,696 | | |
Accrued interest and other assets | Accrued interest and other assets | 672,558 | | | 656,952 | | | Accrued interest and other assets | 522,167 | | | 666,280 | | |
Less: Allowance for loan losses | Less: Allowance for loan losses | (44,664) | | | (49,208) | | | Less: Allowance for loan losses | (35,766) | | | (45,483) | | |
Total assets | Total assets | $ | 7,089,006 | | | $ | 7,184,390 | | | Total assets | $ | 7,202,659 | | | $ | 7,028,260 | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | |
Savings accounts | Savings accounts | $ | 562,699 | | | 689 | | | 0.16 | % | | $ | 424,530 | | | 616 | | | 0.19 | % | Savings accounts | $ | 661,339 | | | 599 | | | 0.18 | % | | $ | 544,696 | | | 440 | | | 0.16 | % |
CDs | CDs | 674,452 | | | 2,954 | | | 0.59 | % | | 1,240,506 | | | 14,731 | | | 1.59 | % | CDs | 540,726 | | | 1,172 | | | 0.44 | % | | 697,190 | | | 2,165 | | | 0.63 | % |
Interest bearing demand accounts | Interest bearing demand accounts | 2,433,120 | | | 3,527 | | | 0.19 | % | | 2,019,968 | | | 5,663 | | | 0.37 | % | Interest bearing demand accounts | 3,136,890 | | | 5,730 | | | 0.37 | % | | 2,401,140 | | | 2,331 | | | 0.20 | % |
Total interest bearing deposits | Total interest bearing deposits | 3,670,271 | | | 7,170 | | | 0.26 | % | | 3,685,004 | | | 21,010 | | | 0.76 | % | Total interest bearing deposits | 4,338,955 | | | 7,501 | | | 0.35 | % | | 3,643,026 | | | 4,936 | | | 0.27 | % |
FHLB borrowings | FHLB borrowings | 684,280 | | | 5,590 | | | 1.09 | % | | 1,077,861 | | | 9,272 | | | 1.15 | % | FHLB borrowings | 89,202 | | | 590 | | | 1.33 | % | | 698,413 | | | 3,725 | | | 1.08 | % |
Subordinated notes, net of unamortized debt issuance costs | Subordinated notes, net of unamortized debt issuance costs | 196,572 | | | 7,235 | | | 4.92 | % | | 98,642 | | | 4,250 | | | 5.76 | % | Subordinated notes, net of unamortized debt issuance costs | 98,569 | | | 1,998 | | | 4.09 | % | | 197,268 | | | 4,818 | | | 4.93 | % |
Trust preferred subordinated debentures, net of unamortized debt issuance costs | Trust preferred subordinated debentures, net of unamortized debt issuance costs | 60,257 | | | 1,045 | | | 2.32 | % | | 60,252 | | | 1,469 | | | 3.26 | % | Trust preferred subordinated debentures, net of unamortized debt issuance costs | 60,261 | | | 827 | | | 2.77 | % | | 60,256 | | | 700 | | | 2.34 | % |
Repurchase agreements | | Repurchase agreements | 25,798 | | | 28 | | | 0.22 | % | | 22,769 | | | 22 | | | 0.19 | % |
Other borrowings | Other borrowings | 22,387 | | | 31 | | | 0.19 | % | | 112,851 | | | 365 | | | 0.43 | % | Other borrowings | 3,525 | | | 45 | | | 2.57 | % | | — | | | — | | | — | |
Total interest bearing liabilities | Total interest bearing liabilities | 4,633,767 | | | 21,071 | | | 0.61 | % | | 5,034,610 | | | 36,366 | | | 0.96 | % | Total interest bearing liabilities | 4,616,310 | | | 10,989 | | | 0.48 | % | | 4,621,732 | | | 14,201 | | | 0.62 | % |
Noninterest bearing deposits | Noninterest bearing deposits | 1,475,828 | | | 1,242,055 | | | Noninterest bearing deposits | 1,673,145 | | | 1,437,468 | | |
Accrued expenses and other liabilities | Accrued expenses and other liabilities | 94,536 | | | 87,170 | | | Accrued expenses and other liabilities | 87,408 | | | 92,802 | | |
Total liabilities | Total liabilities | 6,204,131 | | | 6,363,835 | | | Total liabilities | 6,376,863 | | | 6,152,002 | | |
Shareholders’ equity | Shareholders’ equity | 884,875 | | | 820,555 | | | Shareholders’ equity | 825,796 | | | 876,258 | | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | $ | 7,089,006 | | | $ | 7,184,390 | | | Total liabilities and shareholders’ equity | $ | 7,202,659 | | | $ | 7,028,260 | | |
Net interest income (FTE) | Net interest income (FTE) | | | $ | 149,625 | | | | | $ | 146,978 | | | Net interest income (FTE) | | | $ | 106,949 | | | | | $ | 98,031 | | |
Net interest margin (FTE) | Net interest margin (FTE) | | | | 3.14 | % | | | | 3.02 | % | Net interest margin (FTE) | | | | 3.26 | % | | | | 3.13 | % |
Net interest spread (FTE) | Net interest spread (FTE) | | 2.97 | % | | 2.81 | % | Net interest spread (FTE) | | 3.12 | % | | 2.96 | % |
(1)Interest on loans includes net fees on loans that are not material in amount.
(2)For the purpose of calculating the average yield, the average balance of securities is presented at historical cost.
Note: As of SeptemberJune 30, 20212022 and 2020,2021, loans totaling $3.0$3.1 million and $6.0$5.2 million, respectively, were on nonaccrual status. Our policy is to reverse previously accrued but unpaid interest on nonaccrual loans; thereafter, interest income is recorded to the extent received when appropriate.
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Noninterest Income
Noninterest income consists of revenue generated from a broad range of financial services and activities and other fee generating services that we either provide or in which we participate.
The following table details the categories included in noninterest income (dollars in thousands):
| | | Three Months Ended September 30, | | 2021 | | | Three Months Ended June 30, | | 2022 | |
| | Change From | | | Three Months Ended June 30, | Change From | |
| | 2021 | | 2020 | | 2020 | | | 2022 | | 2021 | | 2021 | |
Deposit services | Deposit services | $ | 6,779 | | | $ | 6,129 | | | $ | 650 | | | 10.6 | % | | Deposit services | $ | 6,496 | | | $ | 6,609 | | | $ | (113) | | | (1.7) | % | |
Net gain on sale of securities AFS | 1,381 | | | 78 | | | 1,303 | | | 1,670.5 | % | | |
Net gain (loss) on sale of securities AFS | | Net gain (loss) on sale of securities AFS | (2,177) | | | 15 | | | (2,192) | | | (14,613.3) | % | |
Gain on sale of loans | Gain on sale of loans | 299 | | | 1,071 | | | (772) | | | (72.1) | % | | Gain on sale of loans | 208 | | | 393 | | | (185) | | | (47.1) | % | |
Trust fees | Trust fees | 1,494 | | | 1,253 | | | 241 | | | 19.2 | % | | Trust fees | 1,520 | | | 1,496 | | | 24 | | | 1.6 | % | |
BOLI | BOLI | 637 | | | 680 | | | (43) | | | (6.3) | % | | BOLI | 720 | | | 645 | | | 75 | | | 11.6 | % | |
Brokerage services | Brokerage services | 846 | | | 564 | | | 282 | | | 50.0 | % | | Brokerage services | 1,098 | | | 850 | | | 248 | | | 29.2 | % | |
Other noninterest income | Other noninterest income | 1,333 | | | 1,366 | | | (33) | | | (2.4) | % | | Other noninterest income | 1,232 | | | 925 | | | 307 | | | 33.2 | % | |
Total noninterest income | Total noninterest income | $ | 12,769 | | | $ | 11,141 | | | $ | 1,628 | | | 14.6 | % | | Total noninterest income | $ | 9,097 | | | $ | 10,933 | | | $ | (1,836) | | | (16.8) | % | |
| | | | | Nine Months Ended September 30, | | 2021 | | | Six Months Ended June 30, | | 2022 |
| | | | Change From | | | | Six Months Ended June 30, | Change From |
| | | 2021 | | 2020 | | 2020 | | | 2022 | | 2021 | | 2021 |
Deposit services | Deposit services | | $ | 19,513 | | | $ | 17,940 | | | $ | 1,573 | | | 8.8 | % | Deposit services | | $ | 13,124 | | | $ | 12,734 | | | $ | 390 | | | 3.1 | % |
Net gain on sale of securities AFS | | 3,399 | | | 8,281 | | | (4,882) | | | (59.0) | % | |
Net gain (loss) on sale of securities AFS | | Net gain (loss) on sale of securities AFS | | (3,720) | | | 2,018 | | | (5,738) | | | (284.3) | % |
Gain on sale of loans | Gain on sale of loans | | 1,285 | | | 1,924 | | | (639) | | | (33.2) | % | Gain on sale of loans | | 386 | | | 986 | | | (600) | | | (60.9) | % |
Trust fees | Trust fees | | 4,373 | | | 3,779 | | | 594 | | | 15.7 | % | Trust fees | | 3,014 | | | 2,879 | | | 135 | | | 4.7 | % |
BOLI | BOLI | | 1,908 | | | 1,899 | | | 9 | | | 0.5 | % | BOLI | | 1,411 | | | 1,271 | | | 140 | | | 11.0 | % |
Brokerage services | Brokerage services | | 2,476 | | | 1,643 | | | 833 | | | 50.7 | % | Brokerage services | | 1,907 | | | 1,630 | | | 277 | | | 17.0 | % |
Other noninterest income | Other noninterest income | | 4,371 | | | 3,366 | | | 1,005 | | | 29.9 | % | Other noninterest income | | 3,700 | | | 3,038 | | | 662 | | | 21.8 | % |
Total noninterest income | Total noninterest income | | $ | 37,325 | | | $ | 38,832 | | | $ | (1,507) | | | (3.9) | % | Total noninterest income | | $ | 19,822 | | | $ | 24,556 | | | $ | (4,734) | | | (19.3) | % |
The 14.6% increase16.8% decrease in noninterest income for the three months ended SeptemberJune 30, 2021,2022, when compared to the same period in 2020,2021, was due to increases ina net gainloss on sale of securities AFS deposit services income, brokerage services income and trust fees, partially offset by a decrease in gain on sale of loans.loans, partially offset by increases in other noninterest income and brokerage services income. The 3.9%19.3% decrease in noninterest income for the ninesix months ended SeptemberJune 30, 2021,2022, when compared to the same period in 2020,2021, was due to decreases in net gain on sale of securities AFS and gain on sale of loans, partially offset by increases in other noninterest income, deposit services income other noninterest income,and brokerage services income and trust fees.income.
The increase in deposit services income for the threesix months ended SeptemberJune 30, 2021,2022, when compared to the same period in 2020,2021, was primarily the result of increases in debit card income, service charges on commercial deposit accounts and overdraft income. The increase for the nine months ended September 30, 2021, when compared to the same period in 2020, was primarily the result of increases in debit card income and service charges on commercial deposit accounts, partially offset by a decrease in overdraft income due to an increase in funds available to customers through government issued stimulus checks and PPP loans. The increase in debit card income was the result of an increase in debit card transactions for the three and nine months ended September 30, 2021.accounts.
During the three and ninesix months ended SeptemberJune 30, 2021,2022, we sold MBS, municipal securities and U.S. Treasury securities, MBS and municipal securities that resulted in a net gainloss on sale of AFS securities of $1.4$2.2 million and $3.4$3.7 million, respectively.
Gain on sale of loans decreased for the three and ninesix months ended SeptemberJune 30, 2022, when compared to the same period in 2021, due to a decrease in the volume of loans sold.
The increase in BOLI income for the three and six months ended June 30, 2022, when compared to the same periods in 2020. Overall mortgage loan production2021, was due to $13.0 million in additional BOLI purchased during the third quarter of 2021.
Brokerage services income increased during 2020 and into 2021 as a result of lower interest rates, however, the volume of loans we decided to sell decreased for the three and ninesix months ended SeptemberJune 30, 2021,2022, when compared to the same periods in 2020.2021, due to growth in our client base and revenue.
Trust feesOther noninterest income increased for the three and nine months ended SeptemberJune 30, 2021,2022, when compared to the same periodsperiod in 2020,2021, primarily due to an increase mortgage serving fee income, partially offset by a decrease in assets under management. The market value of our wealth management and trust assets under management,equity investment income. For the six months ended June 30, 2022, noninterest income increased when compared to same period in 2021, primarily due to
Southside Bancshares, Inc. |57|54
which are not reflected in our consolidated balance sheets, increased 8.2%, and were approximately $1.64 billion at September 30, 2021, compared to $1.52 billion at September 30, 2020.
Brokerage services income increased for the three and nine months ended September 30, 2021, when compared to the same periods in 2020, due to growth in our client base and recurring revenue.
Other noninterest income increased for the nine months ended September 30, 2021, when compared to the same period in 2020, primarily due to increases in mortgage servicing feeinvestment income and swapmortgage servicing fee income, partially offset by decreasesa decrease in mortgage derivativeswap fee income and equity investment income.
Noninterest Expense
We incur certain types of noninterest expenses associated with the operation of our various business activities. The following table details the categories included in noninterest expense (dollars in thousands):
| | | Three Months Ended September 30, | | 2021 | | | Three Months Ended June 30, | | 2022 | |
| | Change From | | | Three Months Ended June 30, | Change From | |
| | 2021 | | 2020 | | 2020 | | | 2022 | | 2021 | | 2021 | |
Salaries and employee benefits | Salaries and employee benefits | $ | 19,777 | | | $ | 19,344 | | | $ | 433 | | | 2.2 | % | | Salaries and employee benefits | $ | 20,329 | | | $ | 20,004 | | | $ | 325 | | | 1.6 | % | |
Net occupancy | Net occupancy | 3,532 | | | 3,595 | | | (63) | | | (1.8) | % | | Net occupancy | 3,654 | | | 3,606 | | | 48 | | | 1.3 | % | |
| Advertising, travel & entertainment | Advertising, travel & entertainment | 579 | | | 519 | | | 60 | | | 11.6 | % | | Advertising, travel & entertainment | 716 | | | 475 | | | 241 | | | 50.7 | % | |
ATM expense | ATM expense | 311 | | | 271 | | | 40 | | | 14.8 | % | | ATM expense | 356 | | | 272 | | | 84 | | | 30.9 | % | |
Professional fees | Professional fees | 1,135 | | | 961 | | | 174 | | | 18.1 | % | | Professional fees | 1,147 | | | 1,040 | | | 107 | | | 10.3 | % | |
Software and data processing | Software and data processing | 1,503 | | | 1,215 | | | 288 | | | 23.7 | % | | Software and data processing | 1,739 | | | 1,406 | | | 333 | | | 23.7 | % | |
Communications | Communications | 552 | | | 495 | | | 57 | | | 11.5 | % | | Communications | 509 | | | 612 | | | (103) | | | (16.8) | % | |
FDIC insurance | FDIC insurance | 454 | | | 469 | | | (15) | | | (3.2) | % | | FDIC insurance | 477 | | | 435 | | | 42 | | | 9.7 | % | |
Amortization of intangibles | Amortization of intangibles | 695 | | | 881 | | | (186) | | | (21.1) | % | | Amortization of intangibles | 586 | | | 730 | | | (144) | | | (19.7) | % | |
Loss on redemption of subordinated notes | 1,118 | | | — | | | 1,118 | | | 100.0 | % | | |
| Other noninterest expense | Other noninterest expense | 2,107 | | | 3,866 | | | (1,759) | | | (45.5) | % | | Other noninterest expense | 2,593 | | | 2,119 | | | 474 | | | 22.4 | % | |
Total noninterest expense | Total noninterest expense | $ | 31,763 | | | $ | 31,616 | | | $ | 147 | | | 0.5 | % | | Total noninterest expense | $ | 32,106 | | | $ | 30,699 | | | $ | 1,407 | | | 4.6 | % | |
| | | | | Nine Months Ended September 30, | | 2021 | | | Six Months Ended June 30, | | 2022 |
| | | | Change From | | | | Six Months Ended June 30, | Change From |
| | | 2021 | | 2020 | | 2020 | | | 2022 | | 2021 | | 2021 |
Salaries and employee benefits | Salaries and employee benefits | | $ | 59,825 | | | $ | 57,616 | | | $ | 2,209 | | | 3.8 | % | Salaries and employee benefits | | $ | 40,298 | | | $ | 40,048 | | | $ | 250 | | | 0.6 | % |
Net occupancy | Net occupancy | | 10,698 | | | 10,574 | | | 124 | | | 1.2 | % | Net occupancy | | 7,310 | | | 7,166 | | | 144 | | | 2.0 | % |
| Advertising, travel & entertainment | Advertising, travel & entertainment | | 1,491 | | | 1,643 | | | (152) | | | (9.3) | % | Advertising, travel & entertainment | | 1,453 | | | 912 | | | 541 | | | 59.3 | % |
ATM expense | ATM expense | | 821 | | | 728 | | | 93 | | | 12.8 | % | ATM expense | | 637 | | | 510 | | | 127 | | | 24.9 | % |
Professional fees | Professional fees | | 3,166 | | | 3,238 | | | (72) | | | (2.2) | % | Professional fees | | 2,074 | | | 2,031 | | | 43 | | | 2.1 | % |
Software and data processing | Software and data processing | | 4,221 | | | 3,737 | | | 484 | | | 13.0 | % | Software and data processing | | 3,370 | | | 2,718 | | | 652 | | | 24.0 | % |
Communications | Communications | | 1,689 | | | 1,494 | | | 195 | | | 13.1 | % | Communications | | 1,012 | | | 1,137 | | | (125) | | | (11.0) | % |
FDIC insurance | FDIC insurance | | 1,343 | | | 668 | | | 675 | | | 101.0 | % | FDIC insurance | | 949 | | | 889 | | | 60 | | | 6.7 | % |
Amortization of intangibles | Amortization of intangibles | | 2,191 | | | 2,792 | | | (601) | | | (21.5) | % | Amortization of intangibles | | 1,208 | | | 1,496 | | | (288) | | | (19.3) | % |
Loss on redemption of subordinated notes | | 1,118 | | | — | | | 1,118 | | | 100.0 | % | |
| Other noninterest expense | Other noninterest expense | | 7,133 | | | 9,502 | | | (2,369) | | | (24.9) | % | Other noninterest expense | | 4,990 | | | 5,026 | | | (36) | | | (0.7) | % |
Total noninterest expense | Total noninterest expense | | $ | 93,696 | | | $ | 91,992 | | | $ | 1,704 | | | 1.9 | % | Total noninterest expense | | $ | 63,301 | | | $ | 61,933 | | | $ | 1,368 | | | 2.2 | % |
The increase in noninterest expense for the three months ended SeptemberJune 30, 2021,2022, when compared to the same period in 2020,2021, was primarily the result of a loss on the redemption of subordinated notesincreases in other noninterest expense, software and increases indata processing expense, salaries and employee benefits and softwareadvertising, travel and data processing expense, partially offset by decreases in other noninterestentertainment expense. The increase for the ninesix months ended SeptemberJune 30, 2021,2022, when compared to the same period in 2020,2021, was the result of increases in salaries and employee benefits, a loss on the redemption of subordinated notes, increases in FDIC insurance and software and data processing expense, advertising, travel and entertainment expense, salaries and employee benefits, partially offset by decreases in other noninterest expense andthe amortization of intangibles.
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Salaries and employee benefits increased for the three and ninesix months ended SeptemberJune 30, 2021,2022, when compared to the same periods in 2020,2021, due to increasesan increase in health insurance expense and direct salary expense, partially offset by a decreasedecreases in in health insurance expense and retirement expense.
For the three and six months ended June 30, 2022, direct salary expense increased $1.0 million, or 6.0%, and $1.4 million, or 4.3%, respectively, when compared to the same periods in 2021, primarily due to normal salary increases effective in the first quarter of 2022 and market increases in the second quarter of 2022.
Health and life insurance expense, included in salaries and employee benefits, increased $757,000,decreased $525,000, or 49.1%21.8%, and $1.5 million,$736,000, or 28.6%16.9%, for the three and ninesix months ended SeptemberJune 30, 2021,2022, respectively, when compared to the same periods in 2020.2021. We have a self-insured health plan which is supplemented with a stop loss insurance policy. Health insurance costs are rising nationwide and these costs may continue to increase during the remainder
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For the three and nine months ended September 30, 2021, direct salary expense increased $336,000, or 2.1%, and $1.75 million, or 3.6%, respectively, when compared to the same periods in 2020, primarily due to normal salary increases effective in the first quarter of 2021.
Retirement expense, included in salaries and employee benefits, decreased $660,000,$151,000, or 37.6%14.5%, and $1.0 million,$451,000, or 24.4%21.8%, for the three and ninesix months ended SeptemberJune 30, 2021,2022, respectively, when compared to the same periods in 2020. The2021. This decrease was primarily due to the freeze of the Retirement Plan and Restoration Plan to further benefit accruals as of December 31, 2020, which resulted in no defined benefit plan service cost expense in 2021. Deferred compensation plan expense also decreased for the three and nine months ended September 30, 2021. These decreases were partially offset by increasesa decrease in our split dollar agreement expense and 401k plan matching expense.
Advertising, travel and entertainment expense increased for the three and six months ended SeptemberJune 30, 2021,2022, when compared to the same periodperiods in 2020,2021, primarily due to increased activity asincreases in travel restrictions eased during 2021. Media advertising, included in advertising, travelrelated expenses, donations and entertainment, also increased for the three months ended September 30, 2021, when compared to the same period in 2020. These increases were partially offset by a decrease in donations for the three months ended September 30, 2021.media advertising.
ATM expense increased for the three and ninesix months ended SeptemberJune 30, 2021,2022, when compared to the same periods in 2020,2021, due primarily to higher ATM maintenance expense as new ATMs and ITMs were put into service and hardware upgrades were completed.armored car expense.
Professional fees increased for the three and six months ended SeptemberJune 30, 2021,2022, when compared to the same period in 2020,2021, due to an increase in legal fees, and, to a lesser extent, an increase in professional fees related to a system conversion and consulting fees.
Software and data processing expense increased for the three and ninesix months ended SeptemberJune 30, 2021,2022, when compared to the same periods in 2020,2021, due to entry into several new software contracts and increases in existing contract renewal costs.
Communications expense increaseddecreased for the three and ninesix months ended SeptemberJune 30, 2021,2022, when compared to the same periods in 2020,2021, driven by an increasea decrease in phone and internet costs.
FDIC insurance increased for the nine months ended September 30, 2021, when compared to the same period in 2020, due to a small bank assessment credit issued by the FDIC and utilized in the first half of 2020.
Amortization of intangibles decreased for the three and ninesix months ended SeptemberJune 30, 2021,2022, when compared to the same periods in 2020,2021, due primarily to a decrease in core deposit intangible amortization which is recognized on an accelerated method resulting in a decline in expense over the amortization period.
Loss on redemption of subordinated notes consisted of the remaining unamortized discount of $856,000 and debt issuance costs of $251,000 associated with the notes at the time of redemption on September 30, 2021.
Other noninterest expense decreasedincreased for the three and nine months ended SeptemberJune 30, 2021,2022, when compared to the same periodsperiod in 2020,2021, primarily due to increases in losses on retired assets, associated with a branch closureother losses and branch right sizing during the three months ended September 30, 2020, decreases in retirement expense related to the Retirement Plan and the Restoration Plan and a decrease in losses on other real estate owned for the three and nine months ended September 30, 2021.Plan.
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Income Taxes
Pre-tax income for the three and ninesix months ended SeptemberJune 30, 20212022 was $34.3$28.7 million and $97.3$56.8 million, respectively, an increase of 11.1%18.6% and 63.2%a decrease of 9.8%, compared to $30.9$24.2 million and $59.7$63.0 million for the same periods in 2020.2021. We recorded income tax expense of $5.0$3.3 million and $12.6$6.4 million, for the three and ninesix months ended SeptemberJune 30, 2021,2022, respectively, compared to income tax expense of $3.8$2.9 million and $7.1$7.6 million for the same periods in 2020.2021. The ETR as a percentage of pre-tax income was 14.5%11.5% and 13.0%11.3% for the three and ninesix months ended SeptemberJune 30, 2021, respectively,2022, compared to an ETR as a percentage of pre-tax income of 12.3%11.9% and 11.9%12.1% for the same periods in 2020.2021. The higherdecrease in the income tax expense for the six months ended June 30, 2022 was a result of a decrease in pre-tax income and the ETR. The decrease in the ETR for the three and ninesix months ended SeptemberJune 30, 2021 was2022 is primarily due to a decreasean increase in tax-exempt income as a percentage of pre-tax income as compared to the same period in 2020.2021.
The ETR differs from the statutory rate of 21% for the three and nine months ended September 30, 2021 and 2020 primarily due to the effect of tax-exempt income from municipal loans and securities, as well as BOLI. The net deferred tax liabilityasset totaled $12.5$34.5 million at SeptemberJune 30, 2021,2022 as compared to $15.5a net deferred tax liability of $17.8 million at December 31, 2020.2021. The decreaseincrease in the net deferred tax liabilityasset is primarily the result of the decreasean increase in unrealized gainslosses in the AFS securities portfolio.
See “Note 11 – Income Taxes” to our consolidated financial statements included in this report. No valuation allowance was recorded at SeptemberJune 30, 20212022 or December 31, 2020,2021, as management believes it is more likely than not that all of the deferred tax asset items will be realized in future years.
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Composition of Loans
One of our main objectives is to seek attractive lending opportunities in Texas, primarily in the market areas in which we operate. Refer to “Part I - Item 1. Business - Market Area” in the 20202021 Form 10-K for a discussion of our primary market area and the geographic concentration of our loan portfolio as of December 31, 2020.2021. There were no substantial changes in these concentrations during the ninesix months ended SeptemberJune 30, 2021.2022. 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, with the exception of municipal loans, which are made primarily throughout the state of Texas. Municipal loans are made to municipalities, counties, school districts and colleges.
The following table sets forth loan totals by class as of the dates presented (dollars in thousands):
| | | | Compared to | | | Compared to |
| | | December 31, 2020 | | | September 30, 2020 | | | December 31, 2021 | | | June 30, 2021 |
| | September 30, 2021 | | December 31, 2020 | | September 30, 2020 | | | Change (%) | | | Change (%) | | June 30, 2022 | | December 31, 2021 | | June 30, 2021 | | | Change (%) | | | Change (%) |
| Real estate loans: | Real estate loans: | | | | | | | | | | | | Real estate loans: | | | | | | | | | | | |
Construction | Construction | $ | 422,095 | | | $ | 581,941 | | | $ | 610,394 | | | | (27.5) | % | | | (30.8) | % | Construction | $ | 520,484 | | | $ | 447,860 | | | $ | 528,157 | | | | 16.2 | % | | | (1.5) | % |
1-4 family residential | 1-4 family residential | 660,689 | | | 719,952 | | | 738,343 | | | | (8.2) | % | | | (10.5) | % | 1-4 family residential | 640,706 | | | 651,140 | | | 678,402 | | | | (1.6) | % | | | (5.6) | % |
Commercial | Commercial | 1,605,132 | | | 1,295,746 | | | 1,327,233 | | | | 23.9 | % | | | 20.9 | % | Commercial | 1,834,734 | | | 1,598,172 | | | 1,430,900 | | | | 14.8 | % | | | 28.2 | % |
Commercial loans | Commercial loans | 443,708 | | | 557,122 | | | 629,170 | | | | (20.4) | % | | | (29.5) | % | Commercial loans | 428,974 | | | 418,998 | | | 497,513 | | | | 2.4 | % | | | (13.8) | % |
Municipal loans | Municipal loans | 427,259 | | | 409,028 | | | 387,286 | | | | 4.5 | % | | | 10.3 | % | Municipal loans | 457,239 | | | 443,078 | | | 417,398 | | | | 3.2 | % | | | 9.5 | % |
Loans to individuals | Loans to individuals | 88,702 | | | 93,990 | | | 97,549 | | | | (5.6) | % | | | (9.1) | % | Loans to individuals | 80,904 | | | 85,914 | | | 89,976 | | | | (5.8) | % | | | (10.1) | % |
Total loans | Total loans | $ | 3,647,585 | | | $ | 3,657,779 | | | $ | 3,789,975 | | | | (0.3) | % | | | (3.8) | % | Total loans | $ | 3,963,041 | | | $ | 3,645,162 | | | $ | 3,642,346 | | | | 8.7 | % | | | 8.8 | % |
Our total loan portfolio decreased $10.2increased $317.9 million, or 0.3%8.7%, at SeptemberJune 30, 20212022 compared to December 31, 2020, with decreases in construction loans, commercial loans, 1-4 family residential loans and loans to individuals, partially offset by increases in commercial real estate and municipal loans.2021. For the ninesix months ended SeptemberJune 30, 2021,2022, our PPP loans experienced a net decrease of $147.3decreased $28.1 million, or 68.6%90.4%, from $214.8$31.0 million at December 31, 2020,2021, primarily due to forgiveness payments received from loans funded under the CARES Act.
Our loan portfolio decreased $142.4 Excluding PPP loans, total loans increased $345.9 million, or 3.8%9.6%, at September 30, 2021 compared to September 30, 2020, with decreasesincreases in commercial real estate loans, construction loans, commercial loans and municipal loans, partially offset by decreases in 1-4 family residential loans and loans to individuals, partially offset byindividuals.
Excluding a $129.1 million year-over-year decrease in PPP loans, total loans increased $449.8 million, or 12.8%, compared to June 30, 2021, with increases in commercial real estate loans, commercial loans and municipal loans, partially offset by decreases in 1-4 family residential loans, loans to individuals and construction loans.
At SeptemberJune 30, 2021,2022, our real estate loans represented 73.7%75.6% of our loan portfolio and were comprised of commercial real estate loans of 59.7%61.2%, 1-4 family residential loans of 24.6%21.4% and construction loans of 15.7%17.4%. Commercial real estate loans primarily include loans collateralized by retail, commercial office buildings, multi-family residential buildings, medical facilities and offices, senior living, assisted living and skilled nursing facilities, warehouse facilities, hotels and churches. Our 1-4 family residential loans consist primarily of loans secured by first mortgages on owner occupied 1-4 family residences. Our construction loans are collateralized by property located primarily in or near the market areas we serve. A number of our construction loans will be owner occupied upon completion. Construction loans for non-owner occupied projects are financed, but these typically have cash flows from leases with tenants, secondary sources of repayment, and in some cases, additional collateral.
Loan Portfolios Most at Risk due to Economic Stress Resulting from Impact of COVID-19
The banking industry is affected by general economic conditions such as interest rates, inflation, recession, unemployment and other factors beyond our control, including the ongoing impact of the COVID-19 pandemic. During the last 30 years the Texas economy has continued to diversify, decreasing the overall impact of fluctuations in oil and gas prices; however, the oil and gas industry is still a significant component of the Texas economy. Oil prices have experiencedincreased significantly during 2022 as a recovery duringresult of strong demand, global supply disruptions and the nine months ended September 30, 2021 following a significant reduction primarily reflective of the economic impact of COVID-19.Ukraine/Russia conflict. We cannot predict whether current economic conditions or oil prices will improve, remain the same or decline.
As of SeptemberJune 30, 2021,2022, the Company’s exposure to the oil and gas industry totaled $70.7$154.5 million, or 1.94%3.90% of gross loans, a decreasean increase of $33.9$84.8 million, or 121.6%, from December 31, 2020,2021, and consisted primarily of (i) support/service loans of 1.26%3.30%, (ii) upstream of 0.54%0.44%, (iii) midstream of 0.08%,0.12% and (iv) downstream of 0.06%0.04%. Expanded monitoring and analysis of these loans has been implemented to address the uncertainty in oil and gas prices as needed.
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The following table sets forth our loans outstanding in the oil and gas industryinformation for the periods presented (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | September 30, | | December 31, 2020 |
| | 2021 | | 2020 | |
Oil and gas related loans | | $ | 70,685 | | | $ | 116,428 | | | $ | 104,548 | |
Oil and gas related loans as a % of loans | | 1.94 | % | | 3.07 | % | | 2.86 | % |
Classified oil and gas related loans | | $ | 4,418 | | | $ | 6,788 | | | $ | 6,385 | |
Classified oil and gas related loans as a % of oil and gas related loans | | 6.25 | % | | 5.83 | % | | 6.11 | % |
Nonaccrual oil and gas related loans | | $ | 342 | | | $ | 718 | | | $ | 620 | |
Net (recoveries) charge-offs for oil and gas related loans | | $ | (7) | | | $ | 7 | | | $ | 7 | |
Allowance for oil and gas related loans as a % of oil and gas loans | | 1.24 | % | | 1.48 | % | | 1.36 | % |
| | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 | | June 30, 2021 |
Oil and gas related loans | | $ | 154,456 | | | $ | 69,688 | | | $ | 94,297 | |
Oil and gas related loans as a % of loans | | 3.90 | % | | 1.91 | % | | 2.59 | % |
Classified oil and gas related loans | | $ | 420 | | | $ | 4,104 | | | $ | 4,899 | |
Classified oil and gas related loans as a % of oil and gas related loans | | 0.27 | % | | 5.89 | % | | 5.20 | % |
Nonaccrual oil and gas related loans | | $ | 258 | | | $ | 334 | | | $ | 386 | |
Net (recoveries) charge-offs for oil and gas related loans | | $ | — | | | $ | (7) | | | $ | (7) | |
Allowance for oil and gas related loans as a % of oil and gas loans | | 0.49 | % | | 1.19 | % | | 1.51 | % |
As of SeptemberJune 30, 2021,2022, economic conditions in Texas have returned to levels close to pre-pandemic levels. Commercial activity has improvedresumed to levels close to those existing prior to the outbreak of the pandemic. When the pandemic occurred, in addition to the oil and gas industry, we considered the sectors set forth in the table below to be most vulnerable to financial risks from business disruptions caused by the pandemic mitigation efforts based on North American Industry Classification System categories as of SeptemberJune 30, 20212022 (dollars in thousands). As of SeptemberJune 30, 2022, the percent of loans classified in the hotel sector increased to 29.72%, from 14.33% compared to December 31, 2021, a direct result of payoffs in this category of approximately 52%, reducing the remaining balance of loans held in the hotel sector. No additional loans in the hotel sector have been classified since December 31, 2021. As of June 30, 2022, our customers in these industries have not experienced long-term business disruptions initially thought possible. We are, however, continuing to monitor these customers closely.
| | | September 30, 2021 | | June 30, 2022 |
| | Loans | | Percent of Total Loans | | Percent Classified (1) | | Loans | | Percent of Total Loans | | Percent Classified (1) |
Retail commercial real estate (2) | Retail commercial real estate (2) | | $ | 338,123 | | | 9.27 | % | | — | | Retail commercial real estate (2) | | $ | 489,300 | | | 12.35 | % | | — | |
Retail goods and services | Retail goods and services | | 72,166 | | | 1.98 | % | | 0.27 | % | Retail goods and services | | 62,579 | | | 1.58 | % | | 0.21 | % |
Hotels | Hotels | | 62,677 | | | 1.72 | % | | 14.17 | % | Hotels | | 29,884 | | | 0.75 | % | | 29.72 | % |
Food services | Food services | | 46,731 | | | 1.28 | % | | — | | Food services | | 45,841 | | | 1.16 | % | | 7.99 | % |
Arts, entertainment and recreation | Arts, entertainment and recreation | | 6,480 | | | 0.18 | % | | 2.88 | % | Arts, entertainment and recreation | | 5,823 | | | 0.14 | % | | 2.33 | % |
Total | Total | | $ | 526,177 | | | 14.43 | % | | 1.76 | % | Total | | $ | 633,427 | | | 15.98 | % | | 2.02 | % |
| | | December 31, 2020 | | December 31, 2021 |
| | Loans | | Percent of Total Loans | | Percent Classified (1) | | Loans | | Percent of Total Loans | | Percent Classified (1) |
Retail commercial real estate (2) | Retail commercial real estate (2) | | $ | 342,919 | | | 9.38 | % | | 0.02 | % | Retail commercial real estate (2) | | $ | 384,381 | | | 10.54 | % | | — | |
Retail goods and services | Retail goods and services | | 82,936 | | | 2.27 | % | | 9.12 | % | Retail goods and services | | 72,650 | | | 1.99 | % | | 0.20 | % |
Hotels | Hotels | | 69,578 | | | 1.90 | % | | — | | Hotels | | 61,992 | | | 1.70 | % | | 14.33 | % |
Food services | Food services | | 35,502 | | | 0.97 | % | | — | | Food services | | 45,019 | | | 1.24 | % | | 4.33 | % |
Arts, entertainment and recreation | Arts, entertainment and recreation | | 9,206 | | | 0.25 | % | | 3.80 | % | Arts, entertainment and recreation | | 6,039 | | | 0.17 | % | | 2.95 | % |
Total | Total | | $ | 540,141 | | | 14.77 | % | | 1.48 | % | Total | | $ | 570,081 | | | 15.64 | % | | 1.96 | % |
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| | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 |
| | Loans | | Percent of Total Loans | | Percent Classified (1) |
Retail commercial real estate (2) | | $ | 329,645 | | | 8.70 | % | | 0.03 | % |
Retail goods and services | | 85,443 | | | 2.25 | % | | 9.04 | % |
Hotels | | 68,881 | | | 1.82 | % | | 6.34 | % |
Food services | | 43,401 | | | 1.15 | % | | 0.12 | % |
Arts, entertainment and recreation | | 10,400 | | | 0.27 | % | | 0.81 | % |
Total | | $ | 537,770 | | | 14.19 | % | | 2.29 | % |
| | | | | | | | | | | | | | | | | | | | |
| | June 30, 2021 |
| | Loans | | Percent of Total Loans | | Percent Classified (1) |
Retail commercial real estate (2) | | $ | 307,581 | | | 8.44 | % | | 0.02 | % |
Retail goods and services | | 76,840 | | | 2.11 | % | | 8.82 | % |
Hotels | | 68,456 | | | 1.88 | % | | — | |
Food services | | 49,772 | | | 1.37 | % | | — | |
Arts, entertainment and recreation | | 7,498 | | | 0.21 | % | | 4.20 | % |
Total | | $ | 510,147 | | | 14.01 | % | | 1.40 | % |
(1) Sector classified loans as a percentage of sector total loans.
(2) Loans in the retail commercial real estate sector are included in our commercial real estate portfolio.
Allowance for Credit Losses - Loans
In accordance with ASC 326, the allowance for credit losses on loans is estimated and recognized upon origination of the loan based on expected credit losses. The CECL model uses historical experience and current conditions for homogeneous pools of loans, and reasonable and supportable forecasts about future events. The impact of varying economic conditions and portfolio stress factors are a component of the credit loss models applied to each portfolio. Reserve factors are specific to the loan segments that share similar risk characteristics based on the probability of default assumptions and loss given default assumptions, over the contractual term. The forecasted periods gradually mean-revert the economic inputs to their long-run historical trends. Management evaluates the economic data points used in the Moody’s forecasting scenarios on a quarterly basis to determine the most appropriate impact to the various portfolio characteristics based on management’s view and applies weighting to various forecasting scenarios as deemed appropriate based on known and expected economic activities. Management also considers and may apply relevant qualitative factors, not previously considered, to determine the appropriate allowance level. The use of the CECL model includes significant judgment by management and may differ from those of our peers due to different historical loss patterns, economic forecasts, and the length of time of the reasonable and supportable forecast period and reversion period.
We utilize Moody’s Analytics economic forecast scenarios and assign probability weighting to those scenarios which best reflect management’s views on the economic forecast. The probability weighting and scenarios utilized for the estimate of the allowance were generally reflective of an improved economic forecast as based on known and knowable information as of September 30, 2021.
When determining the appropriate allowance for credit losses on our loan portfolio, our commercial construction and real estate loans, commercial loans and municipal loans utilize the probability of default/loss given default discounted cash flow approach. Reserves on these loans are based upon risk factors including the loan type and structure, collateral type, leverage ratio, refinancing risk and origination quality, among others. Our consumer construction real estate loans, 1-4 family residential loans and our loans to individuals use a loss rate based upon risk factors including loan types, origination year and credit scores. Loans covered by the PPP may be eligible for loan forgiveness. The remaining loan balance after forgiveness of any amount is still fully guaranteed by the SBA and therefore does not have an associated allowance.
Loans evaluated collectively in a pool are monitored to ensure they continue to exhibit similar risk characteristics with other loans in the pool. If a loan does not share similar risk characteristics with other loans, expected credit losses for that loan are evaluated individually.
As of September 30, 2021, our review of the loan portfolio indicated that an allowance for loan losses of $38.0 million was appropriate to cover expected losses in the portfolio. Changes in economic and other conditions, including the application of the CECL model and the economic uncertainty related to COVID-19, may require future adjustments to the allowance for loan losses.
During the nine months ended September 30, 2021, the allowance for loan losses decreased $11.0 million, or 22.4%, to $38.0 million, or 1.04% of total loans, when compared to $49.0 million, or 1.34% of total loans at December 31, 2020. The decrease in the allowance for credit losses was primarily reflective of an improved economic forecast based on known and knowable information as of September 30, 2021.
For the three and nine months ended September 30, 2021, loan charge-offs were $940,000 and $2.3 million, respectively, and recoveries were $437,000 and $1.5 million, respectively. For the three and nine months ended September 30, 2020, loan charge-offs were $718,000 and $2.3 million, respectively, and recoveries were $361,000 and $1.2 million, respectively. For the three and nine months ended September 30, 2021 we recorded a reversal of provision for credit losses for loans of $4.4 million
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and $10.2 million, respectively. For the three and nine months ended September 30, 2020, we recorded a reversal of provision of $4.4 million and a provision of $26.0 million, respectively. The decrease during the nine months ended September 30, 2021, was primarily due to improvement in the economic forecast.
PCD Loans
We have purchased certain loans that as of the date of purchase have experienced more-than-insignificant deterioration in credit quality since origination. Management evaluates these loans against a probability threshold to determine if substantially all of the contractually required payments will be received. PCD loans are recorded at the purchase price plus an allowance for credit losses which becomes the PCD loan's initial amortized cost. The non-credit related discount or premium, the difference between the initial amortized cost and the par value, will be amortized into interest income over the life of the loan. Any further changes to the allowance for credit losses are recorded through provision expense. In accordance with the adoption of ASU 2016-13, management did not reassess whether PCI assets met the criteria of PCD assets and elected to not maintain pools of loans as of the date of adoption. All PCD loans are evaluated based upon product type within the underlying segment.
Nonperforming Assets
Nonperforming assets consist of delinquent loans 90 days or more past due, nonaccrual loans, OREO, repossessed assets and TDR loans. Nonaccrual loans are loans 90 days or more delinquent and collection in full of both the principal and interest is not expected. Additionally, some loans that are not delinquent or that are delinquent less than 90 days may be placed on nonaccrual status if it is probable that we will not receive contractual principal and interest payments in accordance with the terms of the respective loan agreements. When a loan is categorized as nonaccrual, the accrual of interest is discontinued and any accrued balance is reversed for financial statement purposes. OREO represents real estate taken in full or partial satisfaction of debts previously contracted. The dollar amount of OREO is based on a current evaluation of the OREO at the time it is recorded on our books, net of estimated selling costs. Updated valuations are obtained as needed and any additional impairments are recognized. Restructured loans represent loans that have been renegotiated to provide a below market interest rate or deferral of interest or principal because of deterioration in the financial position of the borrowers. The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, restructuring amortization schedules and other actions intended to minimize potential losses. Categorization of a loan as nonperforming is not in itself a reliable indicator of potential loan loss. Other factors, such as the value of collateral securing the loan and the financial condition of the borrower are considered in judgments as to potential loan loss.
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The following table sets forth nonperforming assets for the periods presented (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Compared to |
| | | | | | | December 31, 2020 | | September 30, 2020 |
| September 30, 2021 | | December 31, 2020 | | September 30, 2020 | | Change (%) | | Change (%) |
Loans on nonaccrual: | | | | | | | | | |
Real estate loans: | | | | | | | | | |
Construction | $ | 63 | | | $ | 640 | | | $ | 1,246 | | | (90.2) | % | | (94.9) | % |
1-4 family residential | 1,432 | | | 3,922 | | | 2,838 | | | (63.5) | % | | (49.5) | % |
Commercial | 796 | | | 1,269 | | | 884 | | | (37.3) | % | | (10.0) | % |
Commercial loans | 674 | | | 1,592 | | | 784 | | | (57.7) | % | | (14.0) | % |
Loans to individuals | 48 | | | 291 | | | 219 | | | (83.5) | % | | (78.1) | % |
Total nonaccrual loans | 3,013 | | | 7,714 | | | 5,971 | | | (60.9) | % | | (49.5) | % |
| | | | | | | | | |
Accruing loans past due more than 90 days | — | | | — | | | — | | | — | | | — | |
TDR loans | 9,371 | | | 9,646 | | | 10,307 | | | (2.9) | % | | (9.1) | % |
OREO | 25 | | | 106 | | | 536 | | | (76.4) | % | | (95.3) | % |
Repossessed assets | 15 | | | 14 | | | 8 | | | 7.1 | % | | 87.5 | % |
Total nonperforming assets | $ | 12,424 | | | $ | 17,480 | | | $ | 16,822 | | | (28.9) | % | | (26.1) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Compared to |
| | | | | | | December 31, 2021 | | June 30, 2021 |
| June 30, 2022 | | December 31, 2021 | | June 30, 2021 | | Change (%) | | Change (%) |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Nonaccrual loans | $ | 3,119 | | | $ | 2,536 | | | $ | 5,154 | | | 23.0 | % | | (39.5) | % |
Accruing loans past due more than 90 days | — | | | — | | | — | | | — | | | — | |
TDR loans | 8,568 | | | 9,073 | | | 9,549 | | | (5.6) | % | | (10.3) | % |
OREO | 128 | | | — | | | 566 | | | 100.0 | % | | (77.4) | % |
Repossessed assets | — | | | — | | | — | | | — | | | — | |
Total nonperforming assets | $ | 11,815 | | | $ | 11,609 | | | $ | 15,269 | | | 1.8 | % | | (22.6) | % |
| | | | | | | | | |
Total loans | $ | 3,963,041 | | | $ | 3,645,162 | | | $ | 3,642,346 | | | | | |
Allowance for loan losses at end of period | 35,449 | | | 35,273 | | | 42,913 | | | | | |
| Ratio of nonaccruing loans to: | Ratio of nonaccruing loans to: | | | | | | Ratio of nonaccruing loans to: | | | | | |
Total loans | Total loans | 0.08 | % | | 0.21 | % | | 0.16 | % | Total loans | 0.08 | % | | 0.07 | % | | 0.14 | % |
Ratio of nonperforming assets to: | Ratio of nonperforming assets to: | | Ratio of nonperforming assets to: | |
Total assets | Total assets | 0.17 | % | | 0.25 | % | | 0.23 | % | Total assets | 0.16 | % | | 0.16 | % | | 0.21 | % |
Total loans | Total loans | 0.34 | % | | 0.48 | % | | 0.44 | % | Total loans | 0.30 | % | | 0.32 | % | | 0.42 | % |
Total loans and OREO | Total loans and OREO | 0.34 | % | | 0.48 | % | | 0.44 | % | Total loans and OREO | 0.30 | % | | 0.32 | % | | 0.42 | % |
Total loans, excluding PPP loans, and OREO | Total loans, excluding PPP loans, and OREO | 0.35 | % | | 0.51 | % | | 0.48 | % | Total loans, excluding PPP loans, and OREO | 0.30 | % | | 0.32 | % | | 0.43 | % |
Ratio of allowance for loan losses to: | Ratio of allowance for loan losses to: | | Ratio of allowance for loan losses to: | |
Nonaccruing loans | Nonaccruing loans | 1,261.93 | % | | 635.29 | % | | 922.96 | % | Nonaccruing loans | 1,136.55 | % | | 1,390.89 | % | | 832.62 | % |
Nonperforming assets | Nonperforming assets | 306.04 | % | | 280.35 | % | | 327.61 | % | Nonperforming assets | 300.03 | % | | 303.84 | % | | 281.05 | % |
Total loans | Total loans | 1.04 | % | | 1.34 | % | | 1.45 | % | Total loans | 0.89 | % | | 0.97 | % | | 1.18 | % |
Total loans, excluding PPP loans | Total loans, excluding PPP loans | 1.06 | % | | 1.42 | % | | 1.58 | % | Total loans, excluding PPP loans | 0.90 | % | | 0.98 | % | | 1.22 | % |
Net charge-offs to average loans outstanding | Net charge-offs to average loans outstanding | 0.03 | % | | 0.03 | % | | 0.04 | % | Net charge-offs to average loans outstanding | — | | | 0.02 | % | | 0.01 | % |
We are actively marketingmarket all OREO properties and none are being helddo not hold them for investment purposes.
Allowance for Credit Losses - Loans
In accordance with ASC 326, the allowance for credit losses on loans is estimated and recognized upon origination of the loan based on expected credit losses. The CECL model uses historical experience and current conditions for homogeneous pools of loans, and reasonable and supportable forecasts about future events. The impact of varying economic conditions and portfolio stress factors are a component of the credit loss models applied to each portfolio. Reserve factors are specific to the loan segments that share similar risk characteristics based on the probability of default assumptions and loss given default assumptions, over the contractual term. The forecasted periods gradually mean-revert the economic inputs to their long-run historical trends. Management evaluates the economic data points used in the Moody’s forecasting scenarios on a quarterly basis to determine the most appropriate impact to the various portfolio characteristics based on management’s view and applies weighting to various forecasting scenarios as deemed appropriate based on known and expected economic activities. Management also considers and may apply relevant qualitative factors, not previously considered, to determine the appropriate allowance level. The use of the CECL model includes significant judgment by management and may differ from those of our peers due to different historical loss patterns, economic forecasts, and the length of time of the reasonable and supportable forecast period and reversion period.
We utilize Moody’s Analytics economic forecast scenarios and assign probability weighting to those scenarios which best reflect management’s views on the economic forecast. The probability weighting and scenarios utilized for the estimate of the allowance were generally reflective of an improved economic forecast as based on known and knowable information as of June 30, 2022.
When determining the appropriate allowance for credit losses on our loan portfolio, our commercial construction and real estate loans, commercial loans and municipal loans utilize the probability of default/loss given default discounted cash flow approach.
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LiquidityReserves on these loans are based upon risk factors including the loan type and Interest Rate Sensitivitystructure, collateral type, leverage ratio, refinancing risk and origination quality, among others. Our consumer construction real estate loans, 1-4 family residential loans and our loans to individuals use a loss rate based upon risk factors including loan types, origination year and credit scores. Loans covered by the PPP may be eligible for loan forgiveness. The remaining loan balance after forgiveness of any amount is still fully guaranteed by the SBA and therefore does not have an associated allowance.
Loans evaluated collectively in a pool are monitored to ensure they continue to exhibit similar risk characteristics with other loans in the pool. If a loan does not share similar risk characteristics with other loans, expected credit losses for that loan are evaluated individually.
As of June 30, 2022, our review of the loan portfolio indicated that an allowance for loan losses of $35.4 million was appropriate to cover expected losses in the portfolio. Changes in economic and other conditions, including the application of the CECL model and the economic uncertainty related to COVID-19, rising interest rates and heightened inflation, may require future adjustments to the allowance for loan losses.
During the six months ended June 30, 2022, the allowance for loan losses increased $176,000, or 0.5%, to $35.4 million, or 0.89% of total loans, when compared to $35.3 million, or 0.97% of total loans at December 31, 2021.
For the three and six months ended June 30, 2022, loan charge-offs were $479,000 and $1.0 million, respectively, and recoveries were $516,000 and $1.1 million, respectively. For the three and six months ended June 30, 2021, loan charge-offs were $527,000 and $1.3 million, respectively, and recoveries were $466,000 and $1.1 million, respectively. For the three months ended June 30, 2022, we recorded a reversal of provision for credit losses for loans of $112,000 and for the six months ended June 30, 2022 we recorded a provision of $154,000. For the three months ended June 30, 2021, we recorded a provision for credit losses for loans of $1.5 million and for the six months ended June 30, 2021, we recorded a reversal of provision for credit losses of $5.9 million, respectively.
Liquidity management involves
Allowance for Credit Losses - Off-Balance-Sheet Credit Exposures
Allowance for off-balance-sheet credit exposures were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
Balance at beginning of period | $ | 2,412 | | | $ | 3,616 | | | $ | 2,384 | | | $ | 6,386 | |
| | | | | | | |
Provision for (reversal of) off-balance-sheet credit exposures | (521) | | | 157 | | | (493) | | | (2,613) | |
Balance at end of period | $ | 1,891 | | | $ | 3,773 | | | $ | 1,891 | | | $ | 3,773 | |
Our off-balance-sheet credit exposures include contractual commitments to extend credit and standby letters of credit. For these credit exposures we evaluate the expected credit losses using usage given defaults and credit conversion factors depending on the type of commitment and based upon historical usage rates. These assumptions are reevaluated on an annual basis and adjusted if necessary. For the three and six months ended June 30, 2022, there was a reversal of provision for credit losses for off-balance-sheet exposures of $521,000 and $493,000, respectively, compared to a provision of $157,000 and a reversal of $2.6 million, for the three and six months ended June 30, 2021, respectively. For additional information regarding our abilitymethodology used to convert assets to cash with minimum risk of loss while enabling us to meet our obligationsestimate the allowance for credit losses on off-balance-sheet credit exposures, see “Note 12 - Off-Balance-Sheet Arrangements, Commitments and Contingencies” to our customers at any time. This means addressing (1) the immediate cash withdrawal requirements of depositors and other fund providers; (2) the funding requirements of lines and letters of credit; and (3) the short-term credit needs of customers. Liquidity is provided by cash, interest earning deposits and short-term investments that can be readily liquidated with a minimum risk of loss. At September 30, 2021, these investments were 4.8% of total assets, as compared with 7.4% for December 31, 2020 and 7.9% for September 30, 2020. The decrease to 4.8% at September 30, 2021 as compared to December 31, 2020, is reflective of the increase in total assets combined with the decrease in the short-term investment portfolio. Liquidity is further provided through the matching, by time period, of rate sensitive interest earning assets with rate sensitive interest bearing liabilities. The Bank has three unsecured lines of credit for the purchase of overnight federal funds at prevailing rates with Frost Bank, TIB – The Independent Bankers Bank and Comerica Bank for $40.0 million, $15.0 million and $7.5 million, respectively. There were no federal funds purchased at September 30, 2021 or December 31, 2020. To provide more liquidity in response to the economic impact of the COVID-19 pandemic, the Federal Reserve took steps to encourage broader use of the discount window. At September 30, 2021, the amount of additional funding the Bank could obtain from the FRDW, collateralized by securities, was approximately $476.1 million. There were no borrowings from the FRDW at September 30, 2021 or December 31, 2020. At September 30, 2021, the amount of additional funding Southside Bank could obtain from FHLB, collateralized by securities, FHLB stock and nonspecified loans and securities, was approximately $1.22 billion, net of FHLB stock purchases required. The Bank has a $5.0 million line of credit with Frost Bank to be used to issue letters of credit, and at September 30, 2021, the line had one outstanding letter of credit for $91,000. The Bank currently has no outstanding letters of credit from FHLB held as collateral for its public fund deposits.
Management continually evaluates our liquidity position and currently believes the Company has adequate funding to meet ourconsolidated financial needs.
Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates. The ALCO closely monitors various liquidity ratios and interest rate spreads and margins. The ALCO utilizes a simulation model to perform interest rate simulation tests that apply various interest rate scenarios including immediate shocks and MVPE to assist in determining our overall interest rate risk and the adequacy of our liquidity position. In addition, the ALCO utilizes this simulation model to determine the impact on net interest income of various interest rate scenarios. By utilizing this technology, we can determine changes that need to be made to the asset and liability mix to minimize the change in net interest income under these various interest rate scenarios. See Part I - “Item 3. Quantitative and Qualitative Disclosures about Market Risk”statements included in this Quarterly Report on Form 10-Q.report.
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Capital Resources and Liquidity
Our total shareholders’ equity at SeptemberJune 30, 2021 increased 0.3%2022 decreased 19.8%, or $2.6$180.4 million, to $877.9$731.8 million, or 12.3%9.6% of total assets, compared to $875.3$912.2 million, or 12.5%12.6% of total assets, at December 31, 2020.2021. The increasedecrease in shareholders’ equity was the result of other comprehensive loss of $199.0 million, cash dividends paid of $21.9 million and the repurchase of $12.2 million of our common stock. These decreases were partially offset by net income of $84.7$50.4 million, stock compensation expense of $1.7 million, common stock issued under our dividend reinvestment plan of $635,000 and net issuance of common stock under employee stock plans of $5.9 million, stock compensation expense of $2.2 million and common stock issued under our dividend reinvestment plan of $986,000. These increases were partially offset by the repurchase of $34.1 million of our common stock, cash dividends paid of $32.0 million and other comprehensive loss of $25.1 million.$57,000.
The Company’s Common Equity Tier 1 capital includes common stock and related paid-in capital, net of treasury stock, and retained earnings. The Bank’s Common Equity Tier 1 capital includes common stock and related paid-in capital, and retained earnings. In connection with the adoption of the Basel III Capital Rules, we elected to opt-out of the requirement to include accumulated other comprehensive income in Common Equity Tier 1. We also elected, for a five-year transitional period, the effects of credit loss accounting under CECL from Common Equity Tier 1, as further discussed below. Common Equity Tier 1 for both the Company and the Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities.
Tier 1 capital includes Common Equity Tier 1 capital and additional Tier 1 capital. For the Company, additional Tier 1 capital at SeptemberJune 30, 20212022 included $58.4$58.5 million of trust preferred securities. For bank holding companies that had assets of less than $15 billion as of December 31, 2009, trust preferred securities issued prior to May 19, 2010 can be treated as Tier 1 capital to the extent that they do not exceed 25% of Tier 1 capital after the application of capital deductions and adjustments. The Bank did not have any additional Tier 1 capital beyond Common Equity Tier 1 at SeptemberJune 30, 2021.2022.
Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital for both the Company and the Bank includes a permissible portion of the allowance for credit losses on loans and off-balance sheet exposures. Tier 2 capital for the Company also includes $98.5$98.6 million of qualified subordinated debt as of SeptemberJune 30, 2021.2022. The permissible portion of qualified subordinated notes decreases 20% per year during the final five years of the term of the notes.
In April 2020, the FDIC, Federal Reserve, and the Office of the Comptroller of the Currency issued supplemental instructions allowing banking organizations that implement CECL before the end of 2020, the option to delay for two years an estimate of the CECL methodologies’ effect on regulatory capital, relative to the incurred loss methodologies effect on capital, followed by a three-year transition period. We elected to adopt the five-year transition option. Accordingly,In accordance with CECL guidance, a CECL transitional amount totaling $9.0$6.1 million has been added back to CET1 as of SeptemberJune 30, 2021. The CECL2022, representing 75% of the $8.2 million transitional amount includes $7.8 million related to a cumulative effect of adopting CECL and $1.2 million related to the estimated incremental effect of CECL since adoption.at December 31, 2021.
Also in April 2020, we began originating loans to qualified small businesses under the PPP administered by the SBA. Federal bank regulatory agencies have issued an interim final rule that permits banks to neutralize the regulatory capital effects of participating in the Paycheck Protection Program Lending Facility and clarify that PPP loans have a zero percent risk weight under applicable risk-based capital rules. Specifically, a bank may exclude all PPP loans pledged as collateral to the PPP Facility from its average total consolidated assets for the purposes of calculating its leverage ratio, while PPP loans that are not pledged as collateral to the PPP Facility will be included. Our PPP loans are included in the calculation of our leverage ratio as of SeptemberJune 30, 20212022, as we did not utilize the PPP Facility for funding purposes.
Management believes that, as of SeptemberJune 30, 2021,2022, we met all capital adequacy requirements to which we were subject. It is management’s intention to maintain our capital at a level acceptable to all regulatory authorities and future dividend payments will be determined accordingly. Regulatory authorities require that any dividend payments made by either us or the Bank not exceed earnings for that year. Accordingly, shareholders should not anticipate a continuation of the cash dividend payments simply because of the existence of a dividend reinvestment program. The payment of dividends will depend upon future earnings, our financial condition and other related factors including the discretion of the board of directors.
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To be categorized as well capitalized we must maintain minimum Common Equity Tier 1 risk-based, Tier 1 risk-based, Total capital risk-based and Tier 1 leverage ratios as set forth in the following table (dollars in thousands):
| | | Actual | | For Capital Adequacy Purposes | | To Be Well Capitalized Under Prompt Corrective Actions Provisions | | Actual | | For Capital Adequacy Purposes | | To Be Well Capitalized Under Prompt Corrective Actions Provisions |
September 30, 2021 | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Amount | |
June 30, 2022 | | June 30, 2022 | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Amount |
Common Equity Tier 1 (to Risk-Weighted Assets) | Common Equity Tier 1 (to Risk-Weighted Assets) | | | | | | | | | | | | | Common Equity Tier 1 (to Risk-Weighted Assets) | | | | | | | | | | | | |
Consolidated | Consolidated | | $ | 638,756 | | | 14.07 | % | | $ | 204,358 | | | 4.50 | % | | N/A | | N/A | Consolidated | | $ | 674,464 | | | 12.83 | % | | $ | 236,532 | | | 4.50 | % | | N/A | | N/A |
Bank Only | Bank Only | | $ | 787,517 | | | 17.35 | % | | $ | 204,284 | | | 4.50 | % | | $ | 295,077 | | | 6.50 | % | Bank Only | | $ | 807,434 | | | 15.37 | % | | $ | 236,466 | | | 4.50 | % | | $ | 341,563 | | | 6.50 | % |
| Tier 1 Capital (to Risk-Weighted Assets) | Tier 1 Capital (to Risk-Weighted Assets) | | Tier 1 Capital (to Risk-Weighted Assets) | |
Consolidated | Consolidated | | $ | 697,204 | | | 15.35 | % | | $ | 272,477 | | | 6.00 | % | | N/A | | N/A | Consolidated | | $ | 732,915 | | | 13.94 | % | | $ | 315,376 | | | 6.00 | % | | N/A | | N/A |
Bank Only | Bank Only | | $ | 787,517 | | | 17.35 | % | | $ | 272,379 | | | 6.00 | % | | $ | 363,172 | | | 8.00 | % | Bank Only | | $ | 807,434 | | | 15.37 | % | | $ | 315,289 | | | 6.00 | % | | $ | 420,385 | | | 8.00 | % |
| Total Capital (to Risk-Weighted Assets) | Total Capital (to Risk-Weighted Assets) | | Total Capital (to Risk-Weighted Assets) | |
Consolidated | Consolidated | | $ | 825,573 | | | 18.18 | % | | $ | 363,302 | | | 8.00 | % | | N/A | | N/A | Consolidated | | $ | 861,075 | | | 16.38 | % | | $ | 420,501 | | | 8.00 | % | | N/A | | N/A |
Bank Only | Bank Only | | $ | 817,386 | | | 18.01 | % | | $ | 363,172 | | | 8.00 | % | | $ | 453,965 | | | 10.00 | % | Bank Only | | $ | 836,990 | | | 15.93 | % | | $ | 420,385 | | | 8.00 | % | | $ | 525,481 | | | 10.00 | % |
| Tier 1 Capital (to Average Assets) (1) | Tier 1 Capital (to Average Assets) (1) | | Tier 1 Capital (to Average Assets) (1) | |
Consolidated | Consolidated | | $ | 697,204 | | | 10.14 | % | | $ | 275,091 | | | 4.00 | % | | N/A | | N/A | Consolidated | | $ | 732,915 | | | 10.34 | % | | $ | 283,481 | | | 4.00 | % | | N/A | | N/A |
Bank Only | Bank Only | | $ | 787,517 | | | 11.46 | % | | $ | 274,964 | | | 4.00 | % | | $ | 343,705 | | | 5.00 | % | Bank Only | | $ | 807,434 | | | 11.40 | % | | $ | 283,384 | | | 4.00 | % | | $ | 354,230 | | | 5.00 | % |
| | | Actual | | For Capital Adequacy Purposes | | To Be Well Capitalized Under Prompt Corrective Actions Provisions | | Actual | | For Capital Adequacy Purposes | | To Be Well Capitalized Under Prompt Corrective Actions Provisions |
December 31, 2020 | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | |
December 31, 2021 | | December 31, 2021 | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | Common Equity Tier 1 (to Risk-Weighted Assets) | Common Equity Tier 1 (to Risk-Weighted Assets) | | | | | | | | | | | | | Common Equity Tier 1 (to Risk-Weighted Assets) | | | | | | | | | | | | |
Consolidated | Consolidated | | $ | 612,703 | | | 14.68 | % | | $ | 187,814 | | | 4.50 | % | | N/A | | N/A | Consolidated | | $ | 657,043 | | | 14.17 | % | | $ | 208,616 | | | 4.50 | % | | N/A | | N/A |
Bank Only | Bank Only | | $ | 768,200 | | | 18.41 | % | | $ | 187,801 | | | 4.50 | % | | $ | 271,268 | | | 6.50 | % | Bank Only | | $ | 793,271 | | | 17.11 | % | | $ | 208,576 | | | 4.50 | % | | $ | 301,277 | | | 6.50 | % |
| Tier 1 Capital (to Risk-Weighted Assets) | Tier 1 Capital (to Risk-Weighted Assets) | | Tier 1 Capital (to Risk-Weighted Assets) | |
Consolidated | Consolidated | | $ | 671,147 | | | 16.08 | % | | $ | 250,418 | | | 6.00 | % | | N/A | | N/A | Consolidated | | $ | 715,492 | | | 15.43 | % | | $ | 278,155 | | | 6.00 | % | | N/A | | N/A |
Bank Only | Bank Only | | $ | 768,200 | | | 18.41 | % | | $ | 250,402 | | | 6.00 | % | | $ | 333,869 | | | 8.00 | % | Bank Only | | $ | 793,271 | | | 17.11 | % | | $ | 278,102 | | | 6.00 | % | | $ | 370,803 | | | 8.00 | % |
| Total Capital (to Risk-Weighted Assets) | Total Capital (to Risk-Weighted Assets) | | | | | | | | | | | | | Total Capital (to Risk-Weighted Assets) | | | | | | | | | | | | |
Consolidated | Consolidated | | $ | 908,873 | | | 21.78 | % | | $ | 333,891 | | | 8.00 | % | | N/A | | N/A | Consolidated | | $ | 841,300 | | | 18.15 | % | | $ | 370,874 | | | 8.00 | % | | N/A | | N/A |
Bank Only | Bank Only | | $ | 808,675 | | | 19.38 | % | | $ | 333,869 | | | 8.00 | % | | $ | 417,336 | | | 10.00 | % | Bank Only | | $ | 820,545 | | | 17.70 | % | | $ | 370,803 | | | 8.00 | % | | $ | 463,503 | | | 10.00 | % |
| Tier 1 Capital (to Average Assets) (1) | Tier 1 Capital (to Average Assets) (1) | | Tier 1 Capital (to Average Assets) (1) | |
Consolidated | Consolidated | | $ | 671,147 | | | 9.81 | % | | $ | 273,558 | | | 4.00 | % | | N/A | | N/A | Consolidated | | $ | 715,492 | | | 10.33 | % | | $ | 277,065 | | | 4.00 | % | | N/A | | N/A |
Bank Only | Bank Only | | $ | 768,200 | | | 11.24 | % | | $ | 273,432 | | | 4.00 | % | | $ | 341,790 | | | 5.00 | % | Bank Only | | $ | 793,271 | | | 11.46 | % | | $ | 276,932 | | | 4.00 | % | | $ | 346,165 | | | 5.00 | % |
(1)Refers to quarterly average assets as calculated in accordance with policies established by bank regulatory agencies.
As of SeptemberJune 30, 2021,2022, 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. Refer to the Supervision and Regulation section in the 20202021 Form 10-K for further discussion of our capital requirements.
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The table below summarizes our key equity ratios for the periods presented:
| | | Three Months Ended September 30, | | Three Months Ended June 30, |
| | 2021 | | 2020 | | 2022 | | 2021 |
Return on average assets | Return on average assets | 1.61 | % | | 1.48 | % | Return on average assets | 1.42 | % | | 1.20 | % |
Return on average shareholders’ equity | Return on average shareholders’ equity | 12.89 | % | | 12.89 | % | Return on average shareholders’ equity | 13.33 | % | | 9.73 | % |
Dividend payout ratio – Basic | Dividend payout ratio – Basic | 36.67 | % | | 37.80 | % | Dividend payout ratio – Basic | 43.04 | % | | 50.77 | % |
Dividend payout ratio – Diluted | Dividend payout ratio – Diluted | 36.67 | % | | 37.80 | % | Dividend payout ratio – Diluted | 43.04 | % | | 50.77 | % |
Average shareholders’ equity to average total assets | Average shareholders’ equity to average total assets | 12.51 | % | | 11.49 | % | Average shareholders’ equity to average total assets | 10.64 | % | | 12.38 | % |
| | Nine Months Ended September 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2022 | | 2021 |
Return on average assets | Return on average assets | 1.60 | % | | 0.98 | % | Return on average assets | 1.41 | % | | 1.59 | % |
Return on average shareholders’ equity | Return on average shareholders’ equity | 12.80 | % | | 8.56 | % | Return on average shareholders’ equity | 12.31 | % | | 12.75 | % |
Dividend payout ratio – Basic | Dividend payout ratio – Basic | 37.69 | % | | 58.86 | % | Dividend payout ratio – Basic | 43.59 | % | | 38.46 | % |
Dividend payout ratio – Diluted | Dividend payout ratio – Diluted | 37.84 | % | | 58.86 | % | Dividend payout ratio – Diluted | 43.59 | % | | 38.46 | % |
Average shareholders’ equity to average total assets | Average shareholders’ equity to average total assets | 12.48 | % | | 11.42 | % | Average shareholders’ equity to average total assets | 11.47 | % | | 12.47 | % |
Off-Balance-Sheet Arrangements, Commitments and ContingenciesManagement of Liquidity
Financial InstrumentsLiquidity management involves our ability to convert assets to cash with Off-Balance-Sheet Risk. In the normal courseminimum risk of business, we are a party to certain financial instruments with off-balance-sheet riskloss while enabling us to meet our current and future obligations to our customers at any time. This means addressing (1) the financingimmediate cash withdrawal requirements of depositors and other fund providers; (2) the funding requirements of lines and letters of credit; and (3) the short-term credit needs of our customers. These off-balance-sheet instruments include commitmentsLiquidity is provided by cash, interest earning deposits and short-term investments that can be readily liquidated with a minimum risk of loss. At June 30, 2022, these investments were 3.1% of total assets, as compared with 5.9% for December 31, 2021 and 6.5% for June 30, 2021. The decrease to extend3.1% at June 30, 2022 as compared to December 31, 2021 and June 30, 2021, is reflective of the increase in total assets combined with decreases in the short-term investment portfolio and interest earning deposits. Liquidity is further provided through the matching, by time period, of rate sensitive interest earning assets with rate sensitive interest bearing liabilities. The Bank has three unsecured lines of credit for the purchase of overnight federal funds at prevailing rates with Frost Bank, TIB – The Independent Bankers Bank and standbyComerica Bank for $40.0 million, $15.0 million and $7.5 million, respectively. There were no federal funds purchased at June 30, 2022 or December 31, 2021. To provide more liquidity in response to the economic impact of the COVID-19 pandemic, the Federal Reserve took steps to encourage broader use of the discount window. At June 30, 2022, the amount of additional funding the Bank could obtain from the FRDW, collateralized by securities, was approximately $391.1 million. There were $29.0 million in borrowings from the FRDW at June 30, 2022. There were no borrowings from the FRDW at December 31, 2021. At June 30, 2022, the amount of additional funding Southside Bank could obtain from FHLB, collateralized by securities, FHLB stock and nonspecified loans and securities, was approximately $1.73 billion, net of FHLB stock purchases required. The Bank has a $5.0 million line of credit with Frost Bank to be used to issue letters of credit. These instruments involve, to varying degrees, elements of credit, and at June 30, 2022, the line had one outstanding letter of credit for $155,000. The Bank currently has no outstanding letters of credit from FHLB held as collateral for its public fund deposits.
Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates. The ALCO closely monitors various liquidity ratios and interest rate spreads and margins. The ALCO utilizes a simulation model to perform interest rate simulation tests that apply various interest rate scenarios including immediate shocks and MVPE to assist in determining our overall interest rate risk and the adequacy of our liquidity position. In addition, the ALCO utilizes this simulation model to determine the impact on net interest income of various interest rate scenarios. By utilizing this technology, we can determine changes that need to be made to the asset and liability mix to minimize the change in excess ofnet interest income under these various interest rate scenarios.
Management continually evaluates our liquidity position and currently believes the amount reflected in theCompany has adequate funding to meet our financial statements. The contract or notional amounts of these instruments reflect the extent of involvement and exposure to credit loss that we have in these particular classes of financial instruments. The allowance for credit losses on these off-balance-sheet credit exposures is calculated using the same methodology as loans including conversion or usage factor to anticipate ultimate exposure and expected losses and is included in other liabilities on our consolidated balance sheets.
Allowance for off-balance-sheet credit exposures were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | |
Balance at beginning of period | $ | 3,773 | | | $ | 6,365 | | | $ | 6,386 | | | $ | 1,455 | |
Impact of CECL adoption | — | | | — | | | — | | | 4,840 | |
Provision for (reversal of) off-balance-sheet credit exposures | (683) | | | (345) | | | (3,296) | | | (275) | |
Balance at end of period | $ | 3,090 | | | $ | 6,020 | | | $ | 3,090 | | | $ | 6,020 | |
Commitments to extend credit are agreements to lend to a customer provided that the terms established in the contract are met. Commitments to extend credit generally have fixed expiration dates and may require the payment of fees. Since some commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in commitments to extend credit and similarly do not necessarily represent future cash obligations.needs.
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Financial instruments with off-balance-sheet risk were as follows (in thousands):
| | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
Unused commitments: | | | |
Commitments to extend credit | $ | 954,258 | | | $ | 793,138 | |
Standby letters of credit | 10,812 | | | 13,658 | |
Total | $ | 965,070 | | | $ | 806,796 | |
We apply the same credit policies in making commitments to extend credit and standby letters of credit as we do for on-balance-sheet instruments. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit is based on management’s credit evaluation of the borrower. Collateral held varies but may include cash or cash equivalents, negotiable instruments, real estate, accounts receivable, inventory, oil, gas and mineral interests, property, plant and equipment.
Leases. During the three and nine months ended September 30, 2021, there were $240,000 and $1.3 million, respectively, of operating lease ROU assets obtained in exchange for new operating lease liabilities, primarily due to one lease that commenced in January 2021 with an initial ROU asset of $1.1 million. During the three months ended September 30, 2020, there was a reduction to operating lease ROU assets obtained in exchange for operating lease liabilities of $89,000 due to a lease amendment that granted additional lease incentives. During the nine months ended September 30, 2020, there were $7.9 million of operating lease ROU assets obtained in exchange for new operating lease liabilities, primarily due to one lease that commenced in May 2020 with an initial ROU asset of $6.6 million.
Securities. In the normal course of business we buy and sell securities. At September 30, 2021, there were $4.4 million of unsettled trades to purchase securities and no unsettled trades to sell securities. At December 31, 2020, there were no unsettled trades to purchase securities and no unsettled trades to sell securities.
Deposits. There were no unsettled issuances of brokered CDs at September 30, 2021 or December 31, 2020.
Litigation. We are a party to various litigation in the normal course of business. Management, after consulting with our legal counsel, believes that any liability resulting from litigation will not have a material effect on our financial position, results of operations or liquidity.
Recent Accounting Pronouncements
See “Note 1 – Summary of Significant Accounting and Reporting Policies” in our consolidated financial statements included in this Quarterly Report on Form 10-Q.
Subsequent Events
Subsequent to June 30, 2022 and through July 27, 2022, we purchased 8,613 shares of common stock at an average price of $35.93 pursuant to the Stock Repurchase Plan.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosures set forth in this item are qualified by the section captioned “Forward-Looking Statements” included in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report and other cautionary statements set forth elsewhere in this Quarterly Report on Form 10-Q.
Refer to the discussion of market risks included in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in the 20202021 Form 10-K.
In the banking industry, a major risk exposure is changing interest rates. The primary objective of monitoring our interest rate sensitivity, or risk, is to provide management the tools necessary to manage the balance sheet to minimize adverse changes in net interest income as a result of changes in the direction and level of interest rates. Federal Reserve monetary control efforts, the effects of deregulation, economic uncertainty and legislative changes have been significant factors affecting the task of managing interest rate sensitivity positions in recent years.
In an attempt to manage our exposure to changes in interest rates, management closely monitors our exposure to interest rate risk through our ALCO. Our ALCO meets regularly and reviews our interest rate risk position and makes recommendations to our board for adjusting this position. In addition, our board regularly reviews our asset/liability position on a monthly basis.position. We primarily use two methods for measuring and analyzing interest rate risk: net income simulation analysis and MVPE modeling. We utilize the net income simulation model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. This model quantifies the effects of various interest rate scenarios on projected net interest income and net income over the next 12 months. The model is used to measure the impact on net interest income relative to a base case scenario of rates immediately increasing 100 and 200 basis points or decreasing 50 and 100 basis points over the next 12 months. These simulations incorporate assumptions regarding balance sheet growth and mix, pricing and the repricing and maturity characteristics of the existing and projected balance sheet. The impact of interest rate-related risks such as prepayment, basis and option risk are also considered. The model has interest rate floors and no interest rates are assumed to go negative. The interest rate environment declined duringin 2020 toand much of 2021 was at a point where most treasury terms were under 100 basis points; therefore, we dodid not believe an analysis of an assumed decrease in interest rates beyond 50 basis points would provide meaningful results. We will continue to monitor interesthave resumed the simulation of rates decreasing 100 basis points and we will resume the simulation of rates decreasing 100 and 200 basis points once rates beginrise further. We are continuing to rise.monitor interest rates and anticipate additional rate increases in the second half of 2022.
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 | | Anticipated impact over the next 12 months |
| | September 30, | | June, 30 |
Rate projections: | Rate projections: | 2021 | | 2020 | Rate projections: | 2022 | | 2021 |
Increase: | Increase: | | | | Increase: | | | |
100 basis points | 100 basis points | 2.03 | % | | 1.73 | % | 100 basis points | 5.13 | % | | 2.13 | % |
200 basis points | 200 basis points | 4.58 | % | | 3.82 | % | 200 basis points | 6.46 | % | | 4.58 | % |
| Decrease: | Decrease: | | Decrease: | |
50 basis points | 50 basis points | (1.47) | % | | (2.05) | % | 50 basis points | (1.51) | % | | (1.64) | % |
100 basis points | | 100 basis points | (3.59) | % | | N/A |
|
As part of the overall assumptions, certain assets and liabilities are given reasonable floors. This type of simulation analysis requires numerous assumptions including but not limited to changes in balance sheet mix, prepayment rates on mortgage-related assets and fixed rate loans, cash flows and repricing of all financial instruments, changes in volumes and pricing, future shapes of the yield curve, relationship of market interest rates to each other (basis risk), credit spread and deposit sensitivity. Assumptions are based on management’s best estimates but may not accurately reflect actual results under certain changes in interest rates.
In addition to interest rate risk, beginning in 2020, the COVID-19 pandemic exposed us and will likelycould continue to expose us to additional market value risk.risk in the future. Protracted business closures, furloughs and lay-offs curtailed economic activity, and could curtail economic activity in the future and could result in lower fair values for collateral in our commercial and 1-4 family portfolio segments in the event that COVID-19 and related variants are not contained.
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Economic conditions and growth prospects are currently impacted by record inflation and recessionary concerns. Increasing interest rates and rising building costs have caused some slowing of the single family housing market. Furthermore, worker shortages especially in the restaurant, hospitality and retail industries combined with supply chain disruptions impacting numerous industries and inflationary conditions has had some impact on the level of economic growth. Ongoing higher inflation levels and higher interest rates could have a negative impact on both our consumer and commercial borrowers.
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. Using this analysis, management from time to time assumes calculated
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interest sensitivity gap positions to maximize net interest income based upon anticipated movements in the general level of interest rates. Regulatory authorities also monitor our gap position along with other liquidity ratios. In addition, as described above, we utilize a simulation model to determine the impact of net interest income under several different interest rate scenarios. 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.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), undertook an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report, and, based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report, in recording, processing, summarizing and reporting in a timely manner the information that the Company is required to disclose in its reports under the Exchange Act and in accumulating and communicating to the Company’s management, including the Company’s CEO and CFO, such information as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
No changes were made to our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended SeptemberJune 30, 20212022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a party to various litigation in the normal course of business. Management, after consulting with our legal counsel, believes that any liability resulting from litigation will not have a material effect on our financial position, results of operations or liquidity.
ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors previously disclosed in the 20202021 Form 10-K.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
On September 5, 2019,March 1, 2022, our board of directors authorizedapproved 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 understock. 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 Stock Repurchase Plan. On March 12, 2020, our board of directors increased the authorizationExchange Act. The Company has no obligation to repurchase any shares under the Stock Repurchase Plan by an additional 1.0 million shares, for a total authorization to repurchase up to 2.0 million shares. As of September 30, 2021, there were no authorized shares remaining to be purchased underand may suspend or discontinue the Stock Repurchase Plan.plan at any time.
The 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 SeptemberJune 30, 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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 |
July 1, 2021 - July 31, 2021 | | 80,537 | | | $ | 35.61 | | | 80,537 | | | 339,667 | |
August 1, 2021 - August 31, 2021 | | 259,433 | | | 36.79 | | | 259,433 | | | 80,234 | |
September 1, 2021 - September 30, 2021 | | 80,234 | | | 37.69 | | | 80,234 | | | — | |
Total | | 420,204 | | | $ | 36.74 | | | 420,204 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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 |
April 1, 2022 - April 30, 2022 | | 223,901 | | | $ | 39.49 | | | 223,901 | | | 693,814 | |
May 1, 2022 - May 31, 2022 | | — | | | — | | | — | | | 693,814 | |
June 1, 2022 - June 30, 2022 | | — | | | — | | | — | | | 693,814 | |
Total | | 223,901 | | | $ | 39.49 | | | 223,901 | | | |
Subsequent to June 30, 2022 and through July 27, 2022, we purchased 8,613 shares of common stock at an average price of $35.93 pursuant to the Stock Repurchase Plan.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
Exhibit Index
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Incorporated by Reference |
Exhibit Number | | Exhibit Description | | Filed Herewith | | Exhibit | | Form | | Filing Date | | File No. |
| | | | | | | | | | | | |
(3) | | Articles of Incorporation and Bylaws | | | | | | | | | | |
3.1 | | | | | | 3.1 | | 8-K | | 05/14/2018 | | 0-12247 |
| | | | | | | | | | | | |
3.2 | | | | | | 3.1 | | 8-K | | 02/22/2018 | | 0-12247 |
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| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
(31) | | Rule 13a-14(a)/15d-14(a) Certifications | | | | | | | | | | |
31.1 | | | | X | | | | | | | | |
| | | | | | | | | | | | |
31.2 | | | | X | | | | | | | | |
| | | | | | | | | | | | |
(32) | | Section 1350 Certification | | | | | | | | | | |
†32 | | | | X | | | | | | | | |
| | | | | | | | | | | | |
(101) | | Interactive Date File | | | | | | | | | | |
101.INS | | XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document. | | X | | | | | | | | |
| | | | | | | | | | | | |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document. | | X | | | | | | | | |
| | | | | | | | | | | | |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | | X | | | | | | | | |
| | | | | | | | | | | | |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. | | X | | | | | | | | |
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101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | | X | | | | | | | | |
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101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. | | X | | | | | | | | |
| | | | | | | | | | | | |
104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document). | | X | | | | | | | | |
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† The certification attached as Exhibit 32 accompanies this Quarterly Report on Form 10-Q and is “furnished” to the Commission pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by us for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | SOUTHSIDE BANCSHARES, INC. |
| | |
DATE: | OctoberJuly 29, 20212022 | BY: | /s/ Lee R. Gibson |
| | | Lee R. Gibson, CPA |
| | | President and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | |
| | | |
| | | |
| | | |
DATE: | OctoberJuly 29, 20212022 | BY: | /s/ Julie N. Shamburger |
| | | Julie N. Shamburger, CPA |
| | | Chief Financial Officer |
| | | (Principal Financial and Accounting Officer) |
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