Southside Bancshares, Inc. — Q1 2019 Form 10-Q
Business context and reporting period. Southside Bancshares is a Texas bank holding company. This unaudited filing covers the three months ended March 31, 2019; comparisons below are with Q1 2018 for income and cash-flow items, and December 31, 2018 for balance-sheet items. Dollar amounts are in millions unless otherwise noted.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparison |
|---|---|---|
| Net income; diluted EPS | $18.8; $0.56 | $16.3; $0.46 in Q1 2018 |
| Interest income / interest expense | $59.0 / $17.9 | $57.2 / $13.1 in Q1 2018 |
| Net interest income; FTE net interest margin | $41.1; 3.07% | $44.1; 3.19% in Q1 2018 |
| Noninterest income / expense | $9.5 / $29.6 | $9.6 / $31.7 in Q1 2018 |
| Assets; loans; deposits | $6,217.2; $3,305.1; $4,567.9 | Assets +1.5%, loans -0.2%, deposits +3.2% from year-end |
| Cash and cash equivalents | $269.9 | $120.7 at year-end |
| FHLB borrowings; long-term debt | $619.9; $158.7 | FHLB borrowings down $99.2 from year-end |
| Shareholders’ equity | $758.0; 12.2% of assets | $731.3; 11.9% of assets at year-end |
- Net income rose 15.8% and diluted EPS rose 21.7%. The improvement reflected a $4.7 million reduction in loan-loss provision (including a $0.9 million reversal), $2.0 million lower noninterest expense and higher interest income. These gains were partly offset by $4.8 million higher interest expense and $1.0 million higher tax expense.
- Net interest income fell 6.8%. FTE net interest margin declined to 3.07% from 3.19%; average earning assets decreased 2.7%, while the average rate paid on interest-bearing liabilities increased to 1.62% from 1.14%.
- Q1 operating cash flow was $20.5 million, investing cash flow was $108.9 million and financing cash flow was $19.9 million. Cash and cash equivalents increased $149.2 million. Securities sales and purchases were substantial: management said it sold more than $520 million of available-for-sale securities, mainly lower-yielding municipal and agency mortgage securities, and reinvested in higher-yielding securities.
- Nonperforming assets were $38.1 million, or 0.61% of assets, down from $42.9 million, or 0.70%, at year-end. Nonaccrual loans fell to $17.7 million, primarily after the sale of three commercial real estate loans. Restructured loans increased to $11.5 million from $5.9 million. Loans past due more than 90 days were $7.9 million; the filing says the loan involved paid off in full on April 15, 2019.
- The allowance for loan losses was $24.2 million, or 0.73% of loans, versus $27.0 million, or 0.82%, at year-end. Q1 charge-offs were $2.3 million and recoveries were $0.3 million; net charge-offs to average loans were 0.24%, compared with 0.07% in Q1 2018.
- Liquidity indicators included cash and cash equivalents equal to 6.6% of assets and approximately $1.34 billion of additional potential FHLB funding, subject to collateral. Brokered CDs rose to $368.1 million, near the stated $400 million policy maximum; their weighted average cost was 2.31% and remaining maturities were under ten months.
- Capital ratios remained above stated minimums. Consolidated CET1 and total risk-based capital ratios were 14.38% and 19.06%; Southside Bank’s were 17.83% and 18.50%, respectively. The quarterly dividend was $0.30 per share, up from $0.28 in Q1 2018.
Material changes, outlook and risks
- Management attributed margin pressure to funding-cost increases and a flattening yield curve. It described securities sales and changes in the mix of FHLB borrowings and brokered deposits as balance-sheet and interest-rate-risk actions. The filing gives no specific earnings or growth guidance.
- Interest-rate simulations projected that an immediate +100 or +200 basis-point rate shock would raise next-12-month net interest income by 2.74% or 1.28%; a -100 or -200 basis-point shock would reduce it by 1.60% or 5.76%. These are model estimates dependent on assumptions, not forecasts.
- On January 1, 2019, adoption of ASU 2017-08 reduced retained earnings by $16.5 million before tax; management said subsequent sales of most affected securities limited the standard’s impact on net income. Adoption of the lease standard added $9.5 million of right-of-use assets and $9.8 million of lease liabilities at March 31. The company plans to adopt CECL on January 1, 2020 and was evaluating its impact.
- Unrealized gains on available-for-sale securities materially improved other comprehensive income and reduced accumulated other comprehensive loss by $34.5 million during the quarter. Management reported no other-than-temporary impairment in securities at March 31.
- Key risks include interest-rate and yield-curve changes, mortgage-security prepayments and fair-value movements, credit quality and real-estate collateral values, reliance on wholesale funding and brokered deposits, liquidity, Texas economic and energy exposure, cybersecurity, regulatory changes and execution of risk-management assumptions. Energy loans were 3.06% of the portfolio, up from 1.92% at year-end.
- The company reported ordinary-course litigation and said management did not expect resulting liabilities to materially affect financial position, results or liquidity. No material changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether lower net interest margin and higher deposit and wholesale funding costs continue to constrain earnings.
- Whether brokered-deposit levels, pricing and maturities remain within funding and liquidity objectives.
- Whether improved nonaccrual and total nonperforming-asset measures persist, given higher restructured loans and Q1 net charge-offs.
- How much of the reported earnings increase reflects the lower provision and expense reductions, and whether those factors are repeatable.
- The effects of securities portfolio repositioning, interest-rate movements and CECL adoption on earnings, AOCI, capital and the allowance.
- Whether the filed rate-sensitivity scenarios and stated collateral-based FHLB capacity remain reasonable as market conditions change.