Southside Bancshares, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Southside is a Texas bank holding company whose business includes banking, securities investing and automobile lending through Southside Financial Group (SFG). Financial amounts below are in millions of dollars unless noted.
Financial performance and condition
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net interest income | $24.6 | $19.4 | $46.8 | $42.4 |
| Provision for loan losses | $1.9 | $2.3 | $4.0 | $6.1 |
| Noninterest income | $10.2 | $13.2 | $18.2 | $27.5 |
| Noninterest expense | $18.1 | $18.0 | $36.8 | $35.4 |
| Net income attributable to Southside | $11.0 | $9.3 | $18.4 | $20.9 |
| Diluted earnings per share | $0.67 | $0.56 | $1.12 | $1.26 |
- Q2 attributable net income rose about 19% year over year, while six-month attributable net income fell about 12%. Lower loan-loss provision and stronger net interest income supported Q2; lower securities gains weighed on both quarterly and year-to-date noninterest income.
- Q2 net interest margin was 3.81%, versus 3.09% a year earlier; net interest spread was 3.52%, versus 2.77%. For the first half, margin was 3.68%, versus 3.41%.
- At June 30, total assets were $3.12 billion, compared with $3.00 billion at year-end 2010. Deposits were $2.24 billion, up from $2.13 billion. Loans were $1.04 billion, down from $1.08 billion; municipal lending grew, while commercial and individual loans declined.
- Cash and cash equivalents were $48.5 million, down from $79.1 million at year-end. Six-month operating cash flow was $35.8 million; investing cash outflow was $140.1 million and financing cash inflow was $73.7 million, producing a $30.6 million net decrease in cash.
- Total FHLB advances were $532.8 million, down from $562.6 million at year-end; long-term debt was $60.3 million. Shareholders’ equity was $242.5 million, or 7.8% of assets. The Bank’s reported capital ratios were 21.83% total risk-based, 20.57% Tier 1 risk-based and 8.88% Tier 1 leverage; management said the company met applicable capital requirements.
- Nonperforming assets were $15.7 million, down from $17.7 million at year-end and $19.7 million a year earlier. The allowance for loan losses was $19.4 million, 1.87% of loans and 146.95% of nonaccrual loans. Six-month net charge-offs were $5.3 million, versus $6.7 million in 2010.
Material changes and management commentary
- Net interest income increased 10.3% for the first half, mainly as funding costs declined: the average yield on interest-bearing liabilities fell to 1.62% from 2.02%. Interest income was nearly flat, as lower loan yields offset asset growth.
- First-half securities gains declined to $5.8 million from $15.0 million; Q2 gains were $4.0 million versus $6.7 million. Management cautioned that securities gains may not continue at these levels.
- Southside continued restructuring its securities portfolio, selling selected lower-coupon or longer-duration holdings and reinvesting in shorter-duration municipal and higher-coupon mortgage-backed securities. Securities were 59.0% of assets at June 30, up from 55.5% at year-end.
- Management described near-term asset growth as uncertain and said it may allow the balance sheet to shrink or expand depending on economics. It cited competitive loan pricing, economic and credit conditions, changing interest rates, mortgage prepayments, liquidity, and new regulation as risks. No specific earnings or revenue guidance was provided.
- Liquidity sources included short-term investments equal to 15.5% of assets and approximately $600.1 million of additional FHLB borrowing capacity against unpledged securities. Management’s interest-rate simulations projected negative 12-month net interest income variances under all modeled immediate rate shocks: 0.70% and 1.77% for +100 and +200 basis points; 0.86% and 3.91% for −100 and −200 basis points.
- The pooled trust preferred securities (TRUPs) had $2.9 million amortized cost and $0.96 million fair value. Management estimated a $3.1 million credit impairment and $2.0 million noncredit impairment; there was no additional earnings write-down in the first half of 2011. Fair value depends on illiquid-market and management-model assumptions.
- On July 15, 2011, Southside acquired the remaining 50% of SFG for $4.8 million, bringing ownership to 100%. SFG was already consolidated in the financial statements. The filing states the transaction followed changes under Dodd-Frank affecting nonbank operations.
- Outstanding unused commitments to extend credit were $118.1 million and standby letters of credit were $5.7 million. Management considered ordinary-course litigation not material. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether improved Q2 net interest margin and lower funding costs can persist amid competitive loan pricing and interest-rate sensitivity.
- Credit performance and reserve adequacy, particularly for construction and real estate exposures and SFG automobile loans, as well as the trend in charge-offs and nonperforming assets.
- Valuation assumptions and potential recovery for the illiquid TRUPs, and the impact of securities portfolio gains, fair-value changes and further restructuring.
- Funding mix, deposit stability, FHLB reliance and the terms and likelihood of exercising the $200 million of forward FHLB advance commitments.
- Integration and economics of the post-quarter SFG buyout, and the effects of Dodd-Frank implementation and other regulatory changes.