Southside Bancshares, Inc. — Q3 2021 Form 10-Q
Business context and period: Texas-based bank holding company reporting unaudited consolidated results for the three and nine months ended September 30, 2021. Comparisons are with Q3 and the first nine months of 2020; balance-sheet changes are generally versus December 31, 2020. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q3 / September 30, 2021 | Comparable period / prior date |
|---|---|---|
| Net income | $29.3; diluted EPS $0.90 | Q3 2020: $27.1; $0.82 |
| Nine-month net income | $84.7; diluted EPS $2.59 | Nine months 2020: $52.6; $1.58 |
| Net interest income | Q3: $48.2; nine months: $140.2 | Q3 2020: $46.6; nine months 2020: $138.6 |
| Net interest margin, FTE (non-GAAP) | Q3: 3.16%; nine months: 3.14% | Q3 2020: 3.02%; nine months 2020: 3.02% |
| Noninterest income | Q3: $12.8; nine months: $37.3 | Q3 2020: $11.1; nine months 2020: $38.8 |
| Noninterest expense | Q3: $31.8; nine months: $93.7 | Q3 2020: $31.6; nine months 2020: $92.0 |
| Total assets | $7,135.7 | December 31, 2020: $7,008.2 |
| Total loans / allowance | $3,647.6 / $38.0; allowance equals 1.04% of loans | December 31, 2020: loans $3,657.8 / allowance $49.0 |
| Total deposits | $5,331.7 | December 31, 2020: $4,932.3 |
| Shareholders’ equity | $877.9; 12.3% of assets | December 31, 2020: $875.3; 12.5% of assets |
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $128.7, investing cash flow was negative $214.1, and financing cash flow was $64.2. Cash and cash equivalents declined $21.3 to $87.1.
- FHLB borrowings decreased $173.3, to $659.2; subordinated notes declined $98.8 to $98.5 after redemption of $100.0 principal on September 30. Total long-term debt was $158.8, including $60.3 of trust preferred subordinated debentures.
- Management reported available additional secured funding capacity of approximately $1.22 billion from FHLB and $476.1 million from the Federal Reserve discount window. The company reported no discount-window borrowings at quarter-end and believed funding was adequate.
- Regulatory capital ratios were above stated “well capitalized” thresholds. At September 30, consolidated CET1 was 14.07%, Tier 1 risk-based capital 15.35%, total capital 18.18%, and Tier 1 leverage 10.14%.
Material changes versus comparable periods
- Q3 net income rose 8.2% year over year, supported by higher net interest income and noninterest income. Nine-month net income rose 61.1%, primarily because the company recorded a $13.5 provision reversal for credit losses versus a $25.7 provision in 2020, alongside lower interest expense.
- For nine months, interest income fell $13.7 while interest expense fell $15.3. Lower deposit and borrowing costs supported higher net interest income and FTE margin.
- Loan balances were nearly flat versus year-end, but composition shifted: commercial real estate loans rose $309.4, while construction loans fell $159.8. PPP loans declined $147.3 to $67.5, primarily from forgiveness payments.
- Deposits increased $399.3, attributed largely to PPP disbursements and stimulus deposits. FHLB borrowings decreased as non-maturity deposits increased.
- Nonperforming assets fell to $12.4 (0.17% of assets) from $17.5 (0.25%) at year-end; nonaccrual loans declined to $3.0 from $7.7.
- Q3 included a $1.1 loss on redemption of subordinated notes. The AFS securities portfolio recorded a $27.7 pre-tax unrealized holding loss in Q3, contributing to nine-month other comprehensive loss of $25.1 net of tax.
Outlook, commentary and risks
- No specific earnings or financial guidance was provided. Management said Texas economic activity had returned close to pre-pandemic levels, while noting continued risks from COVID-19 variants, labor shortages and supply-chain disruption.
- Management’s interest-rate simulations estimated next-12-month net interest income changes of +2.03% for a 100-basis-point rate increase, +4.58% for a 200-basis-point increase, and −1.47% for a 50-basis-point decrease. These are model estimates subject to assumptions, not forecasts.
- Key exposures include interest-rate and yield-curve movements, MBS prepayments and fair-value changes, credit deterioration (including commercial real estate and energy), liquidity, economic conditions, cybersecurity, regulatory changes and COVID-19 effects. Management noted that higher rates could reduce AFS securities fair value and affect equity.
- Off-balance-sheet commitments to extend credit were $954.3 and standby letters of credit were $10.8. Management stated that ordinary-course litigation was not expected to materially affect financial position, results or liquidity. No material changes to previously disclosed risk factors were reported.
- The company repurchased $34.1 of shares during the first nine months; its existing 2.0-million-share authorization was fully used by September 30. Cash dividends paid in the period were $32.0.
Important facts for investors to verify
- Whether the provision reversals and improved credit forecast are sustainable, and how the allowance responds to changing economic assumptions.
- Commercial real estate concentration, energy exposure, loan growth and subsequent performance of loans previously modified or classified as nonperforming.
- Interest-rate, MBS prepayment and AFS valuation sensitivity, including the potential effect of further rate changes on earnings and equity.
- Deposit stability and funding needs as PPP-related deposits and other pandemic-era balances change; confirm available borrowing capacity and collateral requirements.
- Effect of the subordinated-note redemption, continued repurchases, dividends and changes in regulatory capital on future capital flexibility.