Southside Bancshares, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are with December 31, 2023 unless noted. Southside Bancshares is a Texas bank holding company whose wholly owned subsidiary is Southside Bank.
Financial performance
| Metric | Q1 2024 | Comparable period / change |
|---|---|---|
| Net interest income | $53.3 million | Nearly unchanged from $53.4 million in Q1 2023 |
| Net interest margin | 2.72% GAAP; 2.86% FTE | Down from 3.02% and 3.21%, respectively |
| Net income | $21.5 million | Down 17.4% from $26.0 million |
| Diluted EPS | $0.71 | Down from $0.83 |
| Net interest income after provision | $53.3 million | Compared with $53.4 million in Q1 2023 |
| Noninterest income / expense | $9.7 million / $36.9 million | Income down 19.2%; expense up 5.8% |
| Cash flow from operations | $58.3 million | Compared with $23.6 million in Q1 2023 |
Interest income rose 27.1% to $102.8 million, but interest expense increased 79.7% to $49.4 million as deposit and borrowing costs rose. The quarter’s lower noninterest income reflected, among other items, the absence of the prior-year $2.4 million equity-security sale gain, lower BOLI income, and a loss on a commercial real estate loan sale. Higher salaries, software/data processing, and FDIC insurance contributed to increased expenses.
Financial position, liquidity and asset quality
- Assets and loans: Total assets were $8.35 billion, up 0.8%. Loans were $4.58 billion, up 1.2% from year-end and 10.2% from March 2023. Commercial real estate loans increased $244.9 million from year-end; construction loans declined $190.3 million.
- Deposits and funding: Deposits were $6.55 billion, down $3.9 million. Noninterest-bearing deposits were $1.36 billion, or about 20.8% of deposits. Estimated uninsured deposits were 36.5% of total deposits; excluding affiliate and collateralized public-fund deposits, estimated deposits without insurance or collateral were 18.5%.
- Liquidity: Cash and cash equivalents totaled $469.4 million, down $91.1 million during the quarter. Management reported $2.35 billion of available future liquidity across FHLB, Federal Reserve discount-window and correspondent lines. This includes approximately $2.01 billion of additional FHLB capacity and $251.9 million at the discount window. BTFP borrowings were $116.1 million; the Federal Reserve stopped making new BTFP advances on March 11, 2024.
- Borrowings: FHLB borrowings were $312.5 million, up $99.8 million; other borrowings were $457.7 million, down $52.1 million. Long-term subordinated notes and trust-preferred debt totaled $154.2 million.
- Credit quality: Nonperforming assets rose to $8.0 million from $4.0 million, or 0.10% of assets. Nonaccrual loans increased to $7.7 million from $3.9 million, mainly because one commercial real estate loan and one commercial loan relationship entered nonaccrual status. The allowance for loan losses was $43.6 million, or 0.95% of loans; net charge-offs were $287,000.
- Capital and shareholder returns: Shareholders’ equity was $787.9 million, or 9.4% of assets. The Bank’s CET1 ratio was 14.98% and total capital ratio 15.76%; management said the Company and Bank met applicable capital requirements. The quarterly dividend was $0.36 per share. No shares were repurchased during the quarter.
Material changes and unusual items
- Average interest-earning assets increased 10.1% year over year, while average interest-bearing liabilities increased 18.6%; the average cost of interest-bearing deposits rose to 2.97% from 1.82%.
- The securities portfolio increased to $2.71 billion. At March 31, AFS securities had $51.6 million of gross unrealized losses; HTM securities had $161.8 million. Management attributed the losses primarily to interest rates, spreads and market conditions, and reported no securities allowance for credit losses.
- Q1 2024 other comprehensive income was $2.6 million, including positive derivative fair-value changes partly offset by AFS securities valuation changes. AOCI remained a loss of $110.9 million.
- Management reported a $512,000 loss on the sale of a commercial real estate loan relationship. A $7.9 million commercial real estate loan relationship sale contributed to the decline in loans held for sale.
- The company opened a Dallas loan production office in January and announced planned closures of branches in Jasper and Kingwood.
Outlook, commentary and risks
Management described the Texas markets it serves as healthy, supported by job and population growth, while warning that persistent inflation, high interest rates and recession concerns could weigh on borrowers and economic growth. The Federal Reserve held rates steady in Q1 and had indicated possible cuts in 2024; management cautioned that elevated rates and an inverted yield curve could continue to pressure net interest income. The filing provides no specific earnings or full-year financial guidance.
Interest-rate simulations estimate next-12-month net interest income would change by +3.26% under a 100-basis-point increase and +6.40% under a 200-basis-point increase; decreases of 50, 100 and 200 basis points imply -1.12%, -2.38% and -4.88%, respectively. These are model estimates dependent on assumptions, not forecasts. Key disclosed risks include deposit costs and outflows, reliance on wholesale funding, real estate and borrower credit risk, securities valuation and prepayment risk, liquidity, cyber incidents, regulatory changes and economic conditions. Management stated disclosure controls were effective and reported no material changes to internal control over financial reporting. It also said litigation in the ordinary course is not expected to have a material effect and that there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether deposit pricing and mix stabilize, especially given the 2.97% average cost of interest-bearing deposits and the stated uninsured-deposit exposure.
- Whether net interest margin can recover as funding costs, interest rates and wholesale funding needs change, and how the BTFP’s end to new advances affects funding strategy.
- Whether the increase in nonaccrual loans and commercial real estate exposure leads to further credit deterioration or provision needs.
- How the substantial unrealized losses in AFS and HTM securities, and related interest-rate sensitivity, affect capital and liquidity if securities must be sold.
- Whether management’s available-liquidity estimates, collateral availability and regulatory capital ratios remain adequate under stressed conditions.