Southside Bancshares, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited consolidated results. Southside is a Texas bank holding company. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Interest income | $32.1 | $29.2 | $64.3 | $55.8 |
| Net interest income | $27.9 | $24.9 | $55.7 | $46.3 |
| Provision for loan losses | $2.7 | $2.0 | $6.8 | $2.5 |
| Noninterest income | $6.5 | $11.1 | $12.3 | $21.3 |
| Noninterest expense | $20.4 | $21.2 | $40.6 | $41.5 |
| Net income | $10.5 | $11.1 | $18.7 | $20.1 |
| Diluted EPS | $0.55 | $0.59 | $0.99 | $1.07 |
- Net income declined about 5.5% in Q2 and 7.1% for the first half. Lower securities-sale gains were the main reason: gains were $0.5 million in Q2 and $0.5 million year to date, versus $5.0 million and $9.3 million in the comparable 2013 periods.
- Net interest income rose 12.0% in Q2 and 20.3% year to date. Reported net interest margin was 3.94% for Q2 and 3.93% for the first half, compared with 3.66% and 3.50% in 2013. Higher securities yields and lower funding costs supported improvement.
- Credit costs increased: first-half provision was $6.8 million versus $2.5 million, and net charge-offs were $7.3 million versus $4.7 million. Management attributed the increase mainly to consumer-portfolio charge-offs and higher nonperforming assets.
Balance sheet, liquidity and capital
- Total assets were $3.50 billion at June 30, up from $3.45 billion at year-end 2013. Loans were $1.39 billion, up 3.0%; deposits were $2.60 billion, up 2.9%.
- Cash and cash equivalents were $154.4 million, versus $54.4 million at year-end. First-half cash provided by operations was $37.3 million; investing activities provided $53.6 million and financing activities provided $9.1 million. Cash increased $100.0 million.
- Total FHLB advances were approximately $514.1 million, down from $572.8 million at year-end; long-term debt, consisting of trust-preferred obligations, was $60.3 million. Long-term FHLB advances had a 1.44% weighted-average cost and maturities from 2015 to 2028.
- Shareholders’ equity was $284.0 million, or 8.1% of assets. Bank-only capital ratios were 21.87% total risk-based, 20.68% Tier 1 risk-based and 9.57% Tier 1 leverage; each exceeded the disclosed well-capitalized thresholds. Management said the company and bank met applicable capital requirements.
- Available liquidity included cash and short-term investments equal to 15.7% of assets, plus estimated additional FHLB borrowing capacity of $503.1 million using unpledged securities.
Asset quality and material changes
- Nonperforming assets were $14.5 million, up 6.8% from year-end and 18.5% from June 2013. Nonaccrual loans rose to $9.6 million; restructured loans were $4.0 million. Nonperforming assets were 0.42% of assets.
- The allowance for loan losses was $18.4 million, or 1.32% of loans, down from $18.9 million and 1.40% at year-end. Allowance coverage was 191% of nonaccrual loans.
- Construction loans increased 31.5% from year-end to $164.7 million, reflecting activity in Austin and Dallas–Fort Worth. SFG held approximately $89.2 million of purchased subprime automobile loans; management identified medical-sector lending as an industry concentration.
- Accumulated other comprehensive loss improved to $8.8 million from $21.0 million at year-end, largely reflecting improved unrealized values on available-for-sale securities.
Outlook, risks and unusual items
- No quantified earnings or financial guidance was provided. Management said competitive loan pricing could continue to pressure loan yields. It may allow securities to run off or sell them if returns are unattractive, while retaining flexibility to increase the portfolio if economics improve.
- Management expected the OmniAmerican Bancorp merger to close in Q4 2014, subject to regulatory and shareholder approvals. OmniAmerican had $1.4 billion in assets; consideration was 0.4459 Southside shares plus $13.125 cash per OmniAmerican share, subject to agreement terms. A purported OmniAmerican shareholder lawsuit seeks, among other relief, to enjoin the merger; Southside said it considers the claims without merit and intends to defend them.
- Interest-rate simulations projected net interest income decreases versus the base case over the next 12 months under all modeled immediate rate shocks: down 3.51% and 6.15% for +100 and +200 basis points, and down 2.33% and 2.29% for −100 and −200 basis points. Results depend on assumptions, including MBS prepayments and deposit repricing.
- Management said it remediated a previously identified material weakness involving premium amortization on callable municipal securities and had implemented enhanced controls; the Audit Committee directed continued monitoring and testing.
- Other disclosed exposures include real-estate collateral values, consumer-credit losses, securities valuation and prepayment risk, wholesale-funding costs, regulatory changes and litigation. Management said ordinary-course litigation was not expected to materially affect financial position, results or liquidity.
Important facts for investors to verify
- Whether the OmniAmerican merger received required approvals and closed on the anticipated terms and timetable, and the outcome of the shareholder lawsuit.
- Whether elevated consumer charge-offs and nonperforming assets persist, and whether the allowance remains adequate as loans grow.
- Whether net interest margin and earnings can withstand competitive loan pricing, rate changes and MBS prepayment variability.
- Whether the remediated callable-municipal-securities controls continued to operate effectively.
- How much available liquidity and capital remain after merger funding needs, dividends and future lending or securities activity.