Southside Bancshares, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited consolidated results. Comparisons are with the corresponding 2014 periods unless noted. Southside completed its acquisition of OmniAmerican Bancorp in December 2014, materially affecting year-over-year scale and expenses.
Financial performance
| Metric | Q2 2015 | Six months 2015 | Comparable 2014 |
|---|---|---|---|
| Net interest income | $32.9 million | $66.7 million | $27.9 million; $55.7 million |
| Provision for loan losses | $0.3 million | $4.1 million | $2.7 million; $6.8 million |
| Noninterest income | $8.4 million | $19.5 million | $6.5 million; $12.3 million |
| Noninterest expense | $27.9 million | $57.6 million | $20.4 million; $40.6 million |
| Net income | $11.2 million | $20.5 million | $10.5 million; $18.7 million |
| Diluted EPS | $0.44 | $0.81 | $0.53; $0.94 |
Net income rose about 7% for Q2 and 10% for the half year, while diluted EPS declined, reflecting a larger share base following the Omni acquisition and stock dividend. Six-month net interest income increased 19.6%, primarily on higher average earning assets; the net interest margin fell to 3.44% from 3.93% (Q2: 3.39% versus 3.94%). Six-month return on average assets was 0.86%, versus 1.09%.
Noninterest expense increased 41.9% for the first half, reflecting Omni-related staffing, branches and integration, as well as $4.1 million of nonrecurring salary, severance and stay-pay costs during the half. First-half securities-sale gains were $2.6 million, versus $0.5 million in 2014. The effective tax rate increased to 15.9% from 9.7%, primarily because tax-exempt income was a smaller share of pretax income.
Financial position, cash flow and capital
- At June 30, total assets were $4.86 billion, up 1.0% from year-end 2014. Deposits were $3.47 billion, up 2.8%; loans were $2.18 billion, essentially unchanged from year-end but up 56.7% from June 2014, largely due to Omni.
- Cash and cash equivalents totaled $77.0 million. Investment and mortgage-backed securities totaled approximately $2.21 billion. Securities were 45.5% of assets, up from 43.5% at year-end. A $57.7 million commercial mortgage-backed securities transfer from available-for-sale to held-to-maturity occurred in Q2.
- FHLB advances totaled $855.0 million, down $42.5 million from year-end; long-term debt was $60.3 million. Shareholders’ equity was $431.7 million, or 8.9% of assets.
- For the six months, operating cash flow was $28.7 million, investing cash outflow was $76.4 million and financing cash inflow was $40.0 million. Cash decreased $7.6 million to $77.0 million.
- Regulatory capital ratios exceeded stated minimums. At June 30, consolidated CET1 was 14.04%, total capital was 16.82% and Tier 1 leverage was 8.79%; management said the company and bank met capital adequacy requirements.
Asset quality, outlook and risks
Nonperforming assets rose to $27.8 million from $12.3 million at year-end, mainly after one large commercial borrowing relationship was downgraded. Nonaccrual loans increased to $21.2 million from $4.1 million; the allowance for loan losses was $16.8 million, or 0.77% of loans, covering 79.3% of nonaccrual loans. Management recorded $4.1 million of first-half provision, while net charge-offs fell to $0.6 million from $7.3 million in the first half of 2014.
Management gave no specific earnings or revenue guidance. It said competitive loan pricing may require lower loan rates, potentially weighing on yields and profitability. Its balance-sheet strategy uses FHLB funding and securities, especially agency mortgage-backed securities; management cited risks from interest rates, yield-curve movements, security spreads and unpredictable mortgage prepayments. Model estimates showed net interest income declines under all immediate rate shocks tested: 2.83% and 5.83% for +100 and +200 basis points, and 4.03% and 4.28% for -100 and -200 basis points over 12 months.
The filing also flags falling oil prices as a potential risk to Texas borrowers and the regional economy. Unused credit commitments and standby letters of credit totaled $438.3 million. Management considered ordinary-course litigation unlikely to materially affect financial position, results or liquidity. It reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether the large commercial relationship behind the increase in nonaccrual loans and nonperforming assets has stabilized, and whether additional provision or charge-offs may be needed.
- How much reported earnings growth is sustainable after Omni-related integration costs, nonrecurring compensation and securities gains.
- Whether deposit growth can offset wholesale funding needs and support liquidity as securities and loan yields remain pressured.
- How interest-rate changes, mortgage prepayments and falling Texas oil-sector activity could affect margins, securities values and borrower credit quality.
- How the larger share count and 5% stock dividend affect per-share results and future dividend capacity; the filing says dividends remain subject to earnings, financial condition and board discretion.