Southside Bancshares, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Southside is a Texas-based bank holding company. Results reflect the December 2014 acquisition of OmniAmerican Bancorp, including 14 branches in the Fort Worth area; year-over-year comparisons are therefore materially affected by the acquisition.
Financial and operating highlights
| Metric | Q1 2015 | Comparable / prior period |
|---|---|---|
| Net interest income | $33.8 million | $27.9 million, Q1 2014 |
| Net interest margin / spread | 3.50% / 3.42% | 3.93% / 3.80%, Q1 2014 |
| Noninterest income | $11.0 million | $5.8 million, Q1 2014 |
| Noninterest expense | $29.7 million | $20.2 million, Q1 2014 |
| Provision for loan losses | $3.8 million | $4.1 million, Q1 2014 |
| Net income | $9.4 million | $8.2 million, Q1 2014 |
| Diluted EPS | $0.37 | $0.41, Q1 2014 |
| Operating cash flow | $21.7 million | $26.8 million, Q1 2014 |
- Balance sheet at March 31: Assets were $4.73 billion, down from $4.81 billion at year-end 2014. Deposits were $3.50 billion, up from $3.37 billion. Cash and cash equivalents were $107.2 million, versus $84.7 million.
- Loans and securities: Loans totaled $2.17 billion, slightly below $2.18 billion at year-end. Investment and mortgage-backed securities totaled about $2.07 billion. Management reported securities at 43.8% of assets, versus 43.5% at year-end.
- Funding and equity: Total FHLB advances were $690.8 million, down from $897.4 million; long-term debt was $60.3 million. Shareholders’ equity was $434.8 million, or 9.2% of assets, compared with $425.2 million, or 8.8%, at year-end. The bank reported a 15.91% CET1 ratio and 16.62% total capital ratio.
- Credit quality: Allowance for loan losses rose to $16.9 million, or 0.78% of loans, from $13.3 million, or 0.61%, at year-end. Nonperforming assets increased to $27.3 million from $12.3 million; nonaccrual loans rose to $20.3 million from $4.1 million. Management attributed the increase primarily to one large commercial relationship downgraded to impaired status. Net charge-offs were $0.2 million, compared with $4.2 million in Q1 2014.
- Liquidity: Management reported that cash, interest-earning deposits and short-term investments were 13.1% of assets. The bank estimated about $798.7 million of additional FHLB borrowing capacity against unpledged securities. Unused credit commitments and standby letters of credit totaled $432.1 million.
Changes and management commentary
- Net income increased 14% year over year, but diluted EPS declined from $0.41 to $0.37. Management cited the increase in average shares following Omni as a factor in the per-share comparison.
- Net interest income rose 21%, principally as average interest-earning assets increased 33.4%, largely following Omni. Lower average earning-asset yields and narrower margin partly offset the volume increase. Average earning-asset yield fell to 3.95% from 4.46%.
- Noninterest income rose 90%, including a $2.5 million gain on available-for-sale securities, compared with $11,000 in Q1 2014. Management said it sold approximately $148 million of longer-duration, low-coupon U.S. Agency mortgage-backed securities acquired from Omni as part of a portfolio restructuring.
- Noninterest expense increased 47%, reflecting Omni’s employees, branches, technology and integration, among other items. Management also cited nonrecurring salary payments and costs related to the wind-down of SFG Finance.
- The company completed the sale of SFG’s subprime auto loan portfolio and repossessed assets in Q4 2014 and said it would make no further loan-pool purchases through SFG.
- The board declared a 5% stock dividend on April 13, payable May 14, 2015. Cash dividends paid during Q1 were $0.23 per share.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management said competitive loan pricing may require lower rates, potentially pressuring loan yields and profitability; it also described securities and funding decisions as subject to changing market economics.
- Interest-rate simulations projected lower net interest income under all modeled immediate rate shocks over the next 12 months: down 3.81% and 5.27% for increases of 100 and 200 basis points, and down 2.52% and 2.07% for decreases of 100 and 200 basis points, respectively. These are model estimates, not forecasts.
- Key stated risks include economic and real-estate deterioration, borrower credit losses, interest-rate and yield-curve changes, mortgage prepayments, securities valuation, liquidity and funding costs, competition, regulation, and the assumptions used in the loan-loss allowance. Management noted that actual outcomes may differ from estimates.
- Management said it met applicable capital requirements and expected to meet fully phased-in Basel III requirements. It reported no material change in previously disclosed risk factors. Ordinary-course litigation was not expected by management to materially affect financial position, results or liquidity.
- The securities portfolio had unrealized losses, but management concluded there was no other-than-temporary impairment and said it did not intend, nor expect to be required, to sell affected securities before recovery.
Important facts for investors to verify
- Whether the increase in nonaccrual loans and nonperforming assets reflects further deterioration in the large commercial borrower relationship, and the adequacy of related reserves.
- Whether Omni integration costs, acquired-loan performance and deposit retention develop as expected.
- Whether margin pressure, securities portfolio changes and FHLB funding reductions affect recurring earnings and liquidity.
- How much of Q1 noninterest income and earnings depended on securities-sale gains and other nonrecurring items.
- How the declared stock dividend affects share counts and per-share comparisons; verify the reported EPS and share data on the filing’s retroactively adjusted basis.