Business context and reporting period
Southside Bancshares, Inc. is a Texas bank holding company operating through Southside Bank. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020; balance-sheet comparisons are to December 31, 2019. Amounts below are in U.S. dollars unless noted.
Key financial results and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $46.6m | $42.4m | $138.6m | $126.6m |
| Provision for credit losses | $(4.7)m reversal | $1.0m expense | $25.7m expense | $2.6m expense |
| Noninterest income | $11.1m | $11.1m | $38.8m | $31.9m |
| Noninterest expense | $31.6m | $29.0m | $92.0m | $88.4m |
| Net income | $27.1m | $19.8m | $52.6m | $57.2m |
| Diluted earnings per share | $0.82 | $0.58 | $1.58 | $1.69 |
- Q3 net income rose 36.8%; nine-month net income fell 8.1%. Lower funding costs and the Q3 credit-loss provision reversal supported quarterly earnings; the substantially higher year-to-date credit-loss provision was the main drag on nine-month earnings.
- Q3 net interest margin was 2.83% GAAP and 3.02% on a fully taxable-equivalent (FTE, non-GAAP) basis; comparable 2019 figures were 2.91% and 3.03%. Nine-month FTE margin was 3.02%, versus 3.09%.
- For the first nine months, operating cash flow was $50.3m, investing cash use was $423.8m, and financing cash flow was $359.0m. Cash and cash equivalents declined $14.5m to $96.2m.
- At September 30, assets were $7.19bn, loans $3.79bn, deposits $5.10bn, and shareholders’ equity $839.1m. Equity was 11.7% of assets. Total loans grew 6.2% from year-end; deposits grew 8.5%.
- The allowance for loan losses was $55.1m, or 1.45% of loans, versus $24.8m, or 0.69%, at year-end. Nonperforming assets were $16.8m (0.23% of assets), down from $17.4m (0.26%). Nonaccrual loans were $6.0m.
- FHLB borrowings were $952.9m, other borrowings $41.6m, and long-term debt $159.0m. The company reported approximately $785.8m of additional Federal Reserve discount-window capacity and $1.16bn of additional FHLB capacity; it had no discount-window borrowings. Management said liquidity was adequate.
- Consolidated regulatory capital ratios included CET1 of 14.24%, Tier 1 capital of 15.63%, and total capital of 19.03%. Management reported meeting applicable capital requirements. The company elected regulatory relief to defer CECL’s effect on regulatory capital.
- Quarterly cash dividends were $0.31 per share, unchanged from Q3 2019. The company repurchased $25.8m of stock during the first nine months.
Material changes versus comparable periods
- Interest expense fell 50.0% in Q3 and 32.2% for the first nine months, reflecting lower deposit and borrowing costs after Federal Reserve rate cuts. Interest income declined 8.1% in Q3 and 3.0% year to date as asset yields fell.
- Year-to-date noninterest income increased 21.7%, principally from an $8.3m net securities-sale gain, compared with $0.7m in 2019. Deposit-service and trust-fee income declined.
- Commercial loans increased 56.7% from year-end, driven by $302.8m of outstanding PPP loans net of deferred fees. Total loan growth was partly offset by declines in residential and construction loans.
- AFS securities increased in fair value; accumulated other comprehensive income was $46.3m versus $4.2m at year-end, substantially reflecting securities gains, partly offset by derivative and pension-related items.
- Adoption of CECL on January 1, 2020 reduced opening retained earnings by $7.8m net of tax and increased the opening loan-loss allowance by $5.3m and off-balance-sheet allowance by $4.8m. Prior periods were not restated.
Outlook, commentary, risks and unusual items
- The filing gives no numerical earnings or revenue guidance. Management said COVID-19 was likely to continue affecting results through the remainder of 2020 and into 2021, and could constrain loan growth and funding access.
- As of October 27, 2020, loans with payment deferrals totaled $68.9m, down about 78.9% from $326m on July 20; remaining deferrals included $41.0m in hotels. These are post-quarter figures. PPP loans outstanding at September 30 were $302.8m net of deferred fees.
- Management reported that third-quarter CECL economic scenarios generally reflected an improvement from prior quarters, contributing to a $4.4m reversal of loan-loss provision. The nine-month provision increase was attributed primarily to COVID-19-related economic assumptions. Management cautioned that a prolonged downturn could raise credit losses and nonperforming assets.
- Potentially vulnerable exposures included $537.8m in selected pandemic-sensitive sectors (14.19% of loans), of which 2.29% was classified, and $116.4m in oil-and-gas-related loans. Hotel loans were $68.9m; the filing reports $6.8m of classified oil-and-gas loans.
- Other risks include interest-rate and yield-curve changes, MBS prepayments and fair-value swings, real-estate collateral values, and the judgment inherent in CECL estimates. The company hedged $670m of debt with cash-flow interest-rate swaps. Litigation in the ordinary course was not expected by management to have a material effect.
- Unusual items included the $8.3m year-to-date securities-sale gain, the Q3 provision reversal, and a pension-plan freeze effective December 31, 2020. The plan remeasurement reduced AOCI by approximately $6.0m, primarily due to a lower discount rate.
Important facts for investors to verify
- Whether remaining COVID-19 deferrals, particularly hotel exposures, return to payment performance and whether PPP forgiveness or runoff affects reported loan growth and income.
- How credit quality, criticized/classified loans, charge-offs, and the CECL allowance evolve as economic forecasts change.
- Whether lower asset yields, funding costs, securities mix, and MBS prepayments sustain or weaken net interest margin.
- How much of earnings growth depends on nonrecurring securities gains and provision releases rather than recurring operations.
- Liquidity and funding capacity under stress, including reliance on FHLB funding and the availability of collateralized facilities; also monitor capital and dividend decisions.