Southside Bancshares, Inc. — Q1 2016 Form 10-Q
Business context and reporting period. Southside Bancshares is a Texas-based bank holding company. This unaudited filing covers the three months ended March 31, 2016; balance-sheet comparisons are with December 31, 2015, and operating comparisons with Q1 2015. Dollar amounts below are in millions unless noted.
Financial performance and position
- Revenue and earnings: Net interest income was $36.6, up 8.4% from $33.8. Net income rose 44.1% to $13.5 from $9.4; diluted EPS was $0.54 versus $0.37. The $2.8 increase in net interest income, $1.5 lower loan-loss provision, and $0.8 higher noninterest income were partly offset by $1.6 higher interest expense and $1.1 higher income tax expense.
- Margins and other income: Tax-equivalent net interest margin was 3.51% versus 3.50%; tax-equivalent net interest spread was 3.40% versus 3.42%. Noninterest income increased 7.5% to $11.6, including $2.4 of gains on securities sales. Noninterest expense was nearly flat at $29.4.
- Cash flow: Operating activities provided $26.1, investing activities provided $141.2, and financing activities used $179.8. Cash and cash equivalents declined $12.5 to $68.5.
- Balance sheet and liquidity: Total assets fell 2.8% to $5,019.0, primarily as the securities portfolio declined 5.7% to $2,116.9. Loans increased 0.5% to $2,443.2; deposits rose 4.7% to $3,619.4. Management reported liquid assets of 11.2% of total assets and approximately $772.7 of additional FHLB funding capacity against unpledged securities. Three unsecured federal-funds lines totaled $52.5; none was drawn at quarter-end.
- Funding and debt: Total FHLB advances declined to $819.1 from $1,147.7, while long-term debt remained $60.3. Deposit growth—primarily brokered and public-fund deposits—and a smaller securities portfolio contributed to the reduction in FHLB borrowings. Wholesale funding fell to 25.8% of deposits from 36.6%.
- Credit quality: The allowance for loan losses increased to $21.8, or 0.89% of loans, from $19.7, or 0.81%. Q1 provision was $2.3 versus $3.8 a year earlier; charge-offs were $1.1 and recoveries $0.9 in both periods. Nonperforming assets rose to $34.0 from $32.5, or 0.68% of assets versus 0.63%; nonaccrual loans increased to $21.9 from $20.5. Restructured loans were $11.8 versus $11.1.
- Capital and shareholder returns: Shareholders’ equity was $457.6, or 9.1% of assets, versus $444.1, or 8.6%. Consolidated regulatory capital ratios were 12.46% CET1, 14.37% Tier 1 risk-based, 15.16% total risk-based, and 8.46% Tier 1 leverage. The quarterly dividend was $0.23 per share. The company repurchased 443,426 shares for $10.2.
Material changes versus comparable periods
- Average loans grew 11.2% year over year, while period-end loans were up 12.4% from March 31, 2015. Growth was concentrated in construction and commercial real estate; loans to individuals continued to run off, partly reflecting the acquired Omni auto portfolio.
- Interest income increased 11.4% year over year, alongside higher average earning assets and a higher average earning-asset yield. Interest expense increased 32.8%, reflecting higher average interest-bearing liabilities and rates paid.
- Nonperforming assets increased 24.9% from March 31, 2015, and restructured loans roughly doubled to $11.8. The allowance-to-nonaccrual-loan ratio improved to 99.42% from 83.29% a year earlier.
- Other comprehensive income was $15.3, largely reflecting unrealized securities gains; accumulated other comprehensive loss narrowed to $3.4 from $18.7 at year-end.
Outlook, management commentary, and risks
- Management expected the national and served-market economies to grow at a slow to modest pace in 2016, while noting declining oil prices as a headwind. No quantified earnings or revenue guidance was provided.
- Management described continued loan growth opportunities in Austin and Dallas-Fort Worth and planned to open a loan production office in Frisco, Texas, in Q3 2016. Competitive loan pricing may pressure loan yields.
- Balance-sheet strategy uses FHLB funding and securities, including agency mortgage-backed securities and municipal securities. Management cited risks from interest rates and yield-curve changes, MBS prepayments, funding costs, securities valuation, credit quality, and liquidity. The filing’s modeled 12-month net-interest-income sensitivity showed gains of 0.96% and 2.36% under immediate rate increases of 100 and 200 basis points, and declines of 1.98% and 2.16% under decreases of 100 and 200 basis points; these are model estimates, not forecasts.
- Unusual or potentially nonrecurring items included approximately $1.7 of early-retirement package costs for 16 employees and increased consulting fees tied to process-improvement and rebranding efforts. Management also reported a $2.4 securities-sale gain.
- Off-balance-sheet credit commitments and standby letters of credit totaled $539.1. Management said routine litigation was not expected to materially affect financial position, results, or liquidity. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether rising nonperforming and restructured loans, especially the impaired commercial relationship cited as driving additional provision, require further reserve increases.
- Whether deposit growth is durable and how reliance on public funds, brokered deposits, and FHLB funding evolves.
- How loan growth, competitive pricing, and higher funding costs affect margins and earnings in subsequent quarters.
- Whether securities valuations, MBS prepayments, and interest-rate movements materially affect earnings, liquidity, or equity.
- Whether the early-retirement costs and process-improvement consulting are one-time items, and the pace and price of further share repurchases.