Southside Bancshares, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Southside Bancshares is a Texas bank holding company whose principal subsidiary is Southside Bank. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless otherwise indicated.
Key financial results
| Metric | Q1 2022 | Comparable period / change |
|---|---|---|
| Net interest income | $48.9 million | Up 5.6% from $46.3 million in Q1 2021 |
| Net interest margin | 3.03% GAAP; 3.22% FTE | 3.01% GAAP; 3.20% FTE in Q1 2021 |
| Provision for credit losses | $0.3 million expense | Compared with a $10.1 million reversal in Q1 2021 |
| Noninterest income | $10.7 million | Down 21.3% from $13.6 million |
| Noninterest expense | $31.2 million | Essentially unchanged from $31.2 million |
| Net income / diluted EPS | $25.0 million / $0.77 | Down 26.7% / 26.0% from $34.1 million / $1.04 |
| Cash dividends per share | $0.34 | $0.32 in Q1 2021 |
Net interest income improved as lower interest expense more than offset slightly higher interest income. The earnings decline primarily reflected the prior-year credit-loss provision reversal, along with lower noninterest income, including a $1.5 million securities-sale loss versus a $2.0 million gain in Q1 2021. Q1 2022 pretax income was $28.1 million and the effective tax rate was 11.2%, versus 12.2% in Q1 2021.
Financial position, liquidity and capital
- Assets and loans: Total assets were $7.12 billion at March 31, down 1.9% from year-end 2021. Loans were $3.80 billion, up 4.3% during the quarter; excluding PPP loans, they grew 4.8%. Commercial real estate loans were $1.72 billion and construction loans $490.2 million.
- Deposits and funding: Deposits rose 6.1% to $6.07 billion. FHLB borrowings fell 98.9% to $3.9 million, while other borrowings were $30.2 million. Management said it replaced about $310 million of FHLB advances with brokered deposits to reduce funding costs. Brokered deposits increased, including brokered non-maturity deposits of $582.5 million; brokered CDs totaled $93.1 million and had a weighted-average cost of 25 basis points.
- Cash and liquidity: Cash and cash equivalents were $187.1 million, versus $201.8 million at December 31, 2021. Management reported additional borrowing capacity of approximately $435.9 million at the Federal Reserve discount window and $1.72 billion from the FHLB, subject to collateral. Liquid cash, interest-earning deposits and short-term investments were 4.4% of assets, down from 5.9% at year-end.
- Debt: Subordinated notes and trust preferred subordinated debentures totaled $158.8 million. The filing reports $30.2 million of repurchase agreements within other borrowings. The subordinated notes carry a 3.875% fixed rate through November 2025, then convert to a floating rate.
- Securities and equity: The securities portfolio totaled about $2.54 billion, down 11.0% from year-end. Shareholders’ equity fell 14.0% to $784.2 million, or 11.0% of assets, chiefly reflecting $140.0 million of after-tax other comprehensive loss associated largely with securities marks. AFS securities had $65.3 million of gross unrealized losses at quarter-end. The company transferred securities with a fair value of approximately $385.8 million from AFS to HTM during Q1.
- Cash flow: Operating activities provided $85.4 million; investing activities used $102.3 million; financing activities provided $2.2 million. Cash and cash equivalents decreased $14.6 million during the quarter.
- Capital: The company and bank reported regulatory capital ratios above applicable well-capitalized thresholds. At March 31, the bank’s CET1 ratio was 16.36% and total capital ratio was 16.98%; the company’s corresponding ratios were 13.67% and 17.50%.
Material changes and credit quality
- Compared with Q1 2021, net interest income increased, but earnings were lower because the prior-year period included substantial credit-loss provision reversals. The Q1 2022 credit-loss provision was $294,000; loan provision was $266,000 and off-balance-sheet provision was $28,000.
- Nonperforming assets were $11.5 million, or 0.16% of assets, compared with $11.6 million at year-end 2021. Nonaccrual loans were $2.4 million; TDR loans were $9.1 million; there was no OREO. The allowance for loan losses was $35.5 million, or 0.93% of loans.
- Texas economic activity had returned close to pre-pandemic levels, according to management; the company nevertheless continued to monitor pandemic effects, labor shortages, supply-chain disruption and economic conditions. Oil-and-gas-related loans totaled $85.9 million, or 2.26% of loans.
Outlook, risks and unusual items
- Outlook: The filing gives no specific earnings or revenue guidance. Management noted the Federal Reserve’s March 2022 rate increase and anticipated further increases during 2022. Its modeled 12-month net interest income sensitivity was +2.50% for a 100-basis-point rate increase, +5.29% for a 200-basis-point increase and −2.45% for a 50-basis-point decrease; outcomes depend on assumptions and actual results may differ.
- Rate and securities exposure: Rising rates contributed to unrealized AFS losses and lower reported equity. Management transferred long-duration securities to HTM to reduce future AOCI volatility, stating it had the intent and ability to hold them to maturity. The filing also notes risks from yield-curve changes, securities spreads and unpredictable mortgage prepayments.
- Funding risk: Increased use of brokered deposits may raise interest expense and presents customer-loyalty risk. The company also has substantial commitments to extend credit—$1.10 billion—and standby letters of credit of $9.4 million; these do not necessarily become funded obligations.
- Other risks and contingencies: Management cited credit, real estate collateral, liquidity, inflation, competition, cyber-security, regulatory and economic risks, among others. It said ordinary-course litigation was not expected to materially affect financial position, results or liquidity. No material changes to the risk factors in the 2021 Form 10-K were reported.
- Subsequent events: From April 1 through April 26, 2022, the company repurchased 173,005 shares at an average $39.57. On April 1, it transferred additional municipal securities and agency MBS, with fair values of approximately $276.0 million in total, to HTM.
Important facts for investors to verify
- How the growth and cost of brokered deposits affect funding expense, liquidity and deposit retention.
- Changes in AFS securities marks, AOCI and equity, and the accounting and hold-to-maturity intent for transferred securities.
- Whether loan growth—especially commercial real estate and construction—changes asset quality, concentration or allowance needs.
- Actual net interest income and margin performance against management’s rate-sensitivity assumptions as rates and the yield curve change.
- Capital and liquidity developments, including the scale of credit commitments and the pace of share repurchases and dividends.