Southside Bancshares, Inc. — Q2 2022 Form 10-Q
Business context and period: Southside Bancshares is a Texas bank holding company operating through Southside Bank. This unaudited filing covers the quarter and six months ended June 30, 2022; comparisons are to the corresponding 2021 periods unless stated otherwise. Interim results are not necessarily indicative of full-year results.
Financial results and position
| Metric | Q2 2022 / June 30, 2022 | Comparison |
|---|---|---|
| Net interest income | $51.1 million | Up 11.9% from $45.6 million in Q2 2021 |
| Net interest margin (FTE, non-GAAP) | 3.30% | 3.06% in Q2 2021 |
| Net income | $25.4 million; diluted EPS $0.79 | Net income up 19.2%; EPS was $0.65 in Q2 2021 |
| Six-month net income and diluted EPS | $50.4 million; $1.56 | Down 9.0% and 7.7%, respectively, from first-half 2021 |
| Total assets | $7.61 billion | Up 4.8% from December 31, 2021 |
| Total loans | $3.96 billion | Up 8.7% from year-end; excluding PPP loans, up 9.6% |
| Total deposits | $6.25 billion | Up 9.2% from year-end |
| Shareholders’ equity | $731.8 million; 9.6% of assets | Down 19.8% from $912.2 million, primarily reflecting $199.0 million of other comprehensive loss |
| Cash and cash equivalents | $172.3 million | Down from $201.8 million at year-end |
Six-month cash flows: Operating activities provided $128.0 million, investing activities used $495.1 million, and financing activities provided $337.6 million. Cash and cash equivalents decreased $29.5 million. Investing outflows included $317.7 million of net loan originations and securities purchases, partly offset by securities sales and repayments.
Debt and liquidity: FHLB borrowings were $153.7 million, down 55.3% from year-end; other borrowings were $58.5 million. Subordinated notes and trust-preferred debentures totaled $158.9 million. Management reported approximately $391.1 million of additional discount-window capacity and $1.73 billion of additional FHLB funding capacity, subject to collateral. Short-term investments and cash were 3.1% of assets, down from 5.9% at year-end.
Capital and credit: At June 30, the consolidated CET1, Tier 1, total capital and leverage ratios were 12.83%, 13.94%, 16.38% and 10.34%, respectively; the Bank was above applicable “well-capitalized” thresholds. The allowance for loan losses was $35.4 million, or 0.89% of loans. Nonperforming assets were $11.8 million, 0.16% of assets, versus $11.6 million at year-end. Nonaccrual loans were $3.1 million; TDR loans were $8.6 million.
Material changes and drivers
- Q2 net interest income benefited from higher average earning assets and yields, plus lower overall interest expense. The first-half increase was 8.7%; FTE net interest margin rose to 3.26% from 3.13% in first-half 2021.
- First-half net income fell despite higher net interest income, mainly because the credit-loss provision reversal was much smaller than in 2021 and securities sales produced net losses. The company reversed $0.3 million of total provision for credit losses in first-half 2022, compared with an $8.5 million reversal in first-half 2021.
- Noninterest income declined 16.8% in Q2 and 19.3% in the first half, including net AFS securities losses of $2.2 million and $3.7 million, respectively. Noninterest expense rose 4.6% in Q2 and 2.2% in the first half.
- Loans grew primarily in commercial real estate and construction. Commercial real estate was $1.83 billion; total real estate loans were 75.6% of the loan portfolio. Oil-and-gas-related loans increased to $154.5 million, or 3.90% of loans, from $69.7 million at year-end.
- Deposits grew partly because brokered deposits increased $364.9 million; the company said these deposits replaced FHLB advances as funding for cash-flow hedges. Brokered non-maturity deposits were $610.2 million, and brokered CDs were $49.5 million.
- The company transferred long-duration AFS securities to HTM, reporting approximately $998.5 million of transfers at fair value for the first half. HTM securities rose to $1.08 billion from $90.8 million at year-end. AFS securities had $87.8 million of gross unrealized losses at June 30; total AOCI shifted from positive $59.7 million to negative $139.3 million.
Outlook, commentary and risks
Management gave no specific earnings or full-year financial guidance. It reported that the Federal Reserve had raised its target rate by 150 basis points in the first half and anticipated further increases in 2022. Company simulations estimated next-12-month net interest income would rise 5.13% under a 100-basis-point increase and 6.46% under a 200-basis-point increase, while falling 50 basis points would reduce it 1.51% and falling 100 basis points would reduce it 3.59%. These are model estimates dependent on assumptions, not forecasts of actual results.
Management described Texas economic activity as close to pre-pandemic levels but cited inflation, rising rates and building costs, worker shortages, supply-chain disruption and recession concerns. It warned these factors could pressure borrowers, collateral values, loan demand, liquidity and margins. Other material sensitivities include interest-rate and yield-curve changes, MBS prepayments, commercial real estate and energy exposure, brokered-funding costs, credit-loss estimation, cyber and operational risks, and COVID-19 effects. Management said liquidity was adequate, the allowance was appropriate, and litigation was not expected to materially affect financial position, results or liquidity. There were no material changes to previously disclosed risk factors.
The company repurchased 223,901 shares in April at an average $39.49 under its 1.0 million-share authorization; it reported purchasing another 8,613 shares through July 27 at an average $35.93. The quarterly dividend was $0.34 per share. Management stated dividend payments depend on future earnings, financial condition and board discretion.
Important facts for investors to verify
- How the large shift in unrealized securities losses and AOCI affects tangible capital, regulatory capital and future earnings; distinguish market-rate losses from credit impairment.
- Whether rapid loan growth—especially commercial real estate, construction and oil-and-gas exposure—changes credit quality, concentrations or required reserves.
- The cost, stability and limits of brokered deposits, and the ongoing replacement of FHLB funding, as rates and deposit competition change.
- Whether actual net interest income responds as modeled to further rate increases, including effects of a flat yield curve, deposit repricing and securities prepayments.
- Changes in nonperforming loans, TDRs, charge-offs and allowance assumptions, given that credit-loss estimates rely on economic forecasts and management judgment.