Business Context and Reporting Period
Company: Southside Bancshares, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: Southside Bancshares operates Southside Bank and Southside Financial Group (SFG). The company utilizes a balance sheet strategy involving wholesale funding (FHLB advances and brokered CDs) to invest primarily in U.S. agency mortgage-backed securities and municipal securities, aiming to maximize capital usage while managing credit and interest rate risk.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Net Income (Attributable to Southside) | $11.0 million | $31.9 million |
| Earnings Per Share (Diluted) | $0.70 | $2.02 |
| Total Assets | $3.02 billion | $3.02 billion |
| Total Loans | $1.04 billion | $1.04 billion |
| Total Deposits | $2.02 billion | $2.02 billion |
| Net Interest Income | $21.3 million | $63.7 million |
| Net Interest Margin | 3.35% | 3.39% |
| Allowance for Loan Losses | $18.7 million | $18.7 million |
| Shareholders' Equity | $222.1 million | $222.1 million |
Material Changes vs. Prior Period
- Profitability: Net income for the three months ended September 30, 2010, increased 5.3% to $11.0 million compared to $10.5 million in the prior year quarter. However, for the nine-month period, net income decreased 6.1% to $31.9 million from $34.0 million.
- Interest Income: Total interest income decreased 8.6% for the nine months ended September 30, 2010, primarily due to increased amortization expense from Fannie Mae and Freddie Mac repurchases of delinquent loans and lower yields on the securities portfolio.
- Interest Expense: Total interest expense decreased 13.9% for the nine-month period, driven by a decline in the average yield on interest-bearing liabilities from 2.50% to 2.01%.
- Asset Quality: Total nonperforming assets decreased 20.3% to $18.7 million from $23.5 million at year-end 2009. Nonaccrual loans declined to $14.6 million.
- Capital: Shareholders' equity increased 10.0% to $222.1 million from December 31, 2009, driven by net income and stock issuances, partially offset by dividends and stock repurchases.
Guidance, Outlook, and Risks
- Balance Sheet Strategy: Management continues to utilize wholesale funding to invest in high-quality securities. The company recently restructured its mortgage-backed securities portfolio to reduce volatility associated with Fannie Mae and Freddie Mac repurchase programs, resulting in a lower average coupon and maturity.
- Expansion: The company opened a new branch in Tyler, Texas, in August 2010 and is constructing a new Trust department facility. Plans are underway to open a branch in a grocery store in South Tyler in 2011.
- Regulatory Impact: The Dodd-Frank Act was signed into law in July 2010. Management is evaluating its impact, noting potential adverse effects from increased compliance costs and reporting requirements, including changes to deposit insurance assessments.
- Investment Securities: The company holds $2.9 million in amortized cost of pooled trust preferred securities (TRUPs) with a fair value of approximately $188,000. Management has recognized an other-than-temporary impairment (OTTI) of $3.1 million, with $75,000 recognized in earnings for the nine months ended September 30, 2010.
- Interest Rate Risk: Simulations indicate the company is asset-sensitive; a 100 basis point increase in rates is projected to increase net interest income by 4.27%, while a 100 basis point decrease would reduce it by 1.07%.
Investor Verification Checklist
- TRUPs Valuation: Verify the assumptions used in the cash flow modeling for the $2.9 million TRUPs portfolio, which carries a significant unrealized loss and is classified as Level 3 fair value.
- Wholesale Funding Reliance: Assess the sustainability of the funding mix, as wholesale funding (FHLB advances and brokered CDs) represents a significant portion of liabilities.
- Loan Growth vs. Securities: Monitor the shift in asset mix; securities averaged 61.0% of earning assets for the nine months ended September 30, 2010, compared to 57.6% in the prior year, indicating a reliance on securities over loan growth.
- Nonperforming Asset Trends: While nonperforming assets have decreased, verify the composition of the remaining $14.6 million in nonaccrual loans, noting that 33.2% are loans to individuals (primarily SFG automobile loans).
- Stock Repurchase Activity: Confirm the status of the $6.0 million stock repurchase plan, which was replenished by the Board subsequent to the quarter-end after $4.7 million was utilized in Q3.