Southside Bancshares, Inc. — Q1 2014 Form 10-Q
Business context and reporting period. Southside Bancshares is a Texas bank holding company. This unaudited filing covers the three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2013, and income and cash-flow comparisons are with Q1 2013. Dollar figures below are in millions unless stated otherwise.
Financial results and position
- Earnings: Net income was $8.2 million, down 9.0% from $9.0 million. Diluted EPS was $0.44 versus $0.48. Pre-tax income fell to $9.4 million from $10.9 million; the effective tax rate declined to 12.4% from 17.0%, primarily because tax-exempt income was a larger share of taxable income.
- Interest income and margins: Reported net interest income was $27.9 million, up 30.0% from $21.5 million. Reported interest income rose 21.4% to $32.2 million, while interest expense fell 14.8% to $4.3 million. Management reported net interest margin of 3.93% versus 3.32%, and net interest spread of 3.80% versus 3.14%. The average-balance table presents taxable-equivalent net interest income of $31.8 million for 2014 and $24.6 million for 2013; these figures include tax-equivalent adjustments and differ from reported GAAP net interest income.
- Noninterest items and costs: Noninterest income declined 43.3% to $5.8 million, principally because securities-sale gains were only $11,000 versus $4.3 million in Q1 2013. Noninterest expense was essentially flat at $20.2 million, down 0.7%. Provision for loan losses rose to $4.1 million from $0.5 million.
- Cash flow: Operating activities provided $26.8 million; investing activities provided $6.1 million; financing activities used $29.9 million. Cash and cash equivalents increased $3.0 million to $57.4 million.
- Balance sheet and funding: Total assets were $3.434 billion, down from $3.446 billion at year-end. Deposits increased to $2.547 billion from $2.528 billion. Loans rose 1.4% to $1.370 billion; net loans were $1.352 billion. Total FHLB advances were $526.3 million, down from $572.8 million; long-term debt was $60.3 million. Shareholders’ equity increased to $271.4 million, or 7.9% of assets.
- Liquidity and capital: Cash, interest-earning deposits and short-term investments with maturities or repricing of one year or less equaled 15.1% of assets. The Bank reported $518.7 million of additional FHLB borrowing capacity against unpledged securities. At March 31, consolidated total risk-based capital was 22.12%, Tier 1 risk-based capital 20.88%, and Tier 1 leverage 9.34%; management said the Company and Bank met applicable capital requirements.
Material changes and credit quality
- Loan growth was 6.9% year over year; average loans increased 7.7%. Construction, residential and other real-estate lending contributed to growth. Securities remained a large part of the balance sheet: 53.3% of assets, versus 53.5% at year-end.
- Nonperforming assets declined 20.0% from year-end to $10.9 million. Nonaccrual loans decreased to $5.9 million from $8.1 million; restructured loans edged up to $4.1 million. Nonperforming assets were 0.32% of total assets.
- Net charge-offs rose to $4.2 million from $2.5 million, primarily reflecting higher consumer-portfolio charge-offs. The allowance was $18.8 million, 1.37% of loans, compared with $18.9 million and 1.40% at year-end. Management cited the higher charge-offs and low prior-year provision in explaining the increased provision.
- Accumulated other comprehensive loss improved to $14.2 million from $21.0 million, mainly reflecting a $6.8 million after-tax increase in other comprehensive income.
Outlook, risks, contingencies and unusual items
- No specific earnings or revenue guidance is provided. Management said competitive loan pricing could pressure loan yields and profitability. It expects to continue managing securities and wholesale funding in response to market economics, deposit and loan levels, interest rates, and liquidity needs.
- Interest-rate simulations estimated that an immediate 100- or 200-basis-point rate increase would reduce projected 12-month net interest income by 2.74% or 5.35%, respectively; an immediate 100- or 200-basis-point decrease would reduce it by 3.05% or 3.00%. These are model estimates, subject to assumptions about rates, prepayments, balance-sheet mix and customer behavior.
- On April 28, 2014, the Company agreed to acquire OmniAmerican Bancorp, which had $1.4 billion in assets at March 31. Each OmniAmerican share is to convert into 0.4459 Southside shares, subject to adjustment, plus $13.125 cash. Closing was expected in Q4 2014, subject to regulatory and shareholder approvals.
- The board declared a 5% stock dividend on March 20, paid May 1, 2014. The filing also reports no material litigation liability anticipated, but notes ordinary-course litigation and $170.1 million in unused credit commitments and $6.0 million in standby letters of credit.
- Control weakness: Management concluded disclosure controls were ineffective at March 31 because of a material weakness in accounting for premium amortization on callable municipal securities. Controls were enhanced, but their sustained effectiveness had not yet been established; management continued to test and monitor remediation.
- Other stated risks include loan and collateral deterioration, interest-rate and mortgage-prepayment exposure, securities valuation changes, liquidity and wholesale-funding costs, regulatory change, and acquisition execution and approval risks. The filing says there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the higher loan-loss provision and consumer charge-offs persist, and how credit quality and allowance coverage develop.
- Whether net interest margin remains improved as funding costs, loan pricing, interest rates and securities prepayments change.
- Whether the municipal-securities accounting controls operate effectively over time and the material weakness is remediated.
- Whether the OmniAmerican merger receives required approvals, closes on expected terms and timing, and delivers anticipated benefits.
- Whether liquidity, FHLB borrowing capacity and capital remain adequate given the securities-heavy balance sheet and outstanding commitments.