Southside Bancshares, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods. The December 2014 acquisition of OmniAmerican Bancorp (Omni) materially increased the scale of the business, so year-over-year comparisons include acquisition-related growth. Share and per-share data reflect a 5% stock dividend paid in May 2015.
Financial performance
- Profit: Third-quarter net income was $11.8 million, versus $6.1 million; diluted EPS was $0.46 versus $0.31. Nine-month net income was $32.3 million, versus $24.8 million; diluted EPS was $1.27 versus $1.25.
- Net interest: GAAP net interest income was $33.3 million for Q3 and $100.0 million for nine months, up from $25.7 million and $81.5 million, respectively. Nine-month net interest margin declined to 3.41% from 3.89%; net interest spread declined to 3.32% from 3.75%. Lower asset yields partly offset growth in average earning assets, largely attributable to Omni.
- Credit costs and fee income: Provision for loan losses was $2.3 million in Q3 and $6.4 million year to date, compared with $4.9 million and $11.7 million. Noninterest income was $9.1 million in Q3 and $28.6 million year to date; it benefited from deposit fees, securities and loan-sale gains, and Omni-related income.
- Expenses and taxes: Noninterest expense rose to $26.4 million in Q3 and $84.0 million year to date, from $20.0 million and $60.6 million. Omni integration, staffing, branches, technology, and other costs contributed; nine-month salary expense included $4.1 million of nonrecurring salary, severance, and stay-pay items. Nine-month effective tax rate was 15.3%, versus 6.6%.
- Balance sheet and funding: Assets were $4.84 billion at September 30, 2015, versus $4.81 billion at year-end 2014. Loans were $2.24 billion, up 2.7%; deposits were $3.33 billion, down 1.4%. Cash and cash equivalents were $71.9 million, down from $84.7 million. Shareholders’ equity was $447.1 million, or 9.2% of assets.
- Debt and liquidity: FHLB advances totaled $941.3 million, up from $897.4 million at year-end; long-term debt was $60.3 million. Management reported approximately $744 million of additional FHLB borrowing capacity against unpledged securities. Wholesale funding was 30.8% of deposits, versus 27.5% at year-end. Nine-month operating cash flow was $59.7 million; cash declined by $12.8 million overall.
- Capital: At September 30, consolidated CET1, Tier 1, and total risk-based capital ratios were 13.81%, 15.84%, and 16.57%, respectively; the Tier 1 leverage ratio was 8.81%. Management said the company and bank met applicable capital requirements.
Material changes and credit quality
- Nonperforming assets increased to $33.6 million from $12.3 million at year-end 2014. Nonaccrual loans rose to $21.0 million from $4.1 million; restructured loans increased to $11.8 million from $5.9 million. The company attributed much of the increase to a large commercial relationship downgraded earlier in 2015 and a large acquired PCI commercial loan restructured in Q3.
- The allowance for loan losses was $18.4 million, or 0.82% of loans, versus $13.3 million, or 0.61%, at year-end. Nine-month net charge-offs were $1.3 million, down from $17.1 million in 2014, when SFG subprime auto loans drove significant charge-offs. A $6.8 million PCI commercial loan restructuring resulted in approximately $0.4 million of additional provision.
- Loans grew in construction, other real estate, and commercial categories, particularly in Austin and Dallas–Fort Worth. Loans to individuals declined from year-end as the acquired indirect auto portfolio continued to run off. The allowance and asset-quality trends merit attention alongside the lower charge-offs.
Outlook, risks, and unusual items
- No specific earnings or growth guidance was provided. Management said competitive loan pricing could continue to pressure loan yields and profitability, and described ongoing review of securities and funding strategy.
- Management highlighted interest-rate, yield-curve, mortgage prepayment, liquidity, credit, and real-estate collateral risks. The bank’s Texas exposure includes sensitivity to prolonged low oil prices. Rate simulations projected negative 12-month net interest income variances under both rising and falling rate shocks.
- The company transferred $57.7 million of commercial mortgage-backed securities from available-for-sale to held-to-maturity in Q2, citing balance-sheet strategy. It reported no other-than-temporary impairment in the securities portfolio at quarter-end.
- The 2014 comparison includes a $2.2 million SFG investment impairment; SFG was dissolved in April 2015 after its subprime auto portfolio was sold. The Omni purchase-price allocation remained preliminary, with a $148,000 goodwill increase from measurement-period adjustments.
- Management stated that ordinary-course litigation was not expected to materially affect financial position, results, or liquidity. Disclosure controls were judged effective; Omni integration was described as virtually complete, with evaluation of internal controls continuing.
Important facts for investors to verify
- Whether the rise in nonaccrual and restructured commercial loans stabilizes, and whether the allowance adequately reflects current credit risks.
- How much reported growth and earnings improvement is attributable to Omni versus organic performance, and the ongoing cost of integration.
- Whether net interest margin pressure, competitive loan pricing, and increased wholesale funding affect future earnings and liquidity.
- Exposure of the Texas loan portfolio to prolonged low oil prices, real-estate weakness, and any concentration in commercial borrowers.
- Future securities valuation, mortgage prepayments, and interest-rate sensitivity, including the effect on accumulated other comprehensive income and capital.