SOUTHSIDE BANCSHARES INC quarterly report, Q1 FY2021

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Southside Bancshares, Inc. — Q1 2021 Form 10-Q

Reporting period: Three months ended March 31, 2021. Southside Bancshares is a Texas bank holding company whose principal subsidiary is Southside Bank. Unless noted otherwise, dollar amounts below are in millions.

Financial performance and position

  • Earnings: Net income was $34.1 million, or $1.04 per diluted share, versus $4.0 million, or $0.12 per diluted share, in Q1 2020. Return on average assets was 1.99% (0.23% in Q1 2020); return on average equity was 15.82% (1.93%).
  • Interest income and margins: Net interest income rose 3.6% to $46.3 million. Interest income fell 11.8% to $53.6 million, while interest expense fell 54.8% to $7.3 million. Net interest margin on a fully taxable-equivalent basis was 3.20%, up from 3.03%; the comparable GAAP margin was 3.01% versus 2.88%.
  • Credit provision and asset quality: The income statement recorded a $10.1 million reversal of provision for credit losses, compared with a $25.2 million provision in Q1 2020. The loan allowance declined to $41.5 million, or 1.12% of loans, from $49.0 million, or 1.34%, at year-end. Nonperforming assets were $15.4 million, 0.22% of assets, compared with $17.5 million, 0.25%, at year-end; nonaccrual loans were $5.3 million.
  • Fees and expenses: Noninterest income was $13.6 million, down 12.1%, including a $2.0 million securities-sale gain (versus $5.5 million in Q1 2020). Noninterest expense rose 2.3% to $31.2 million. The effective tax rate was 12.2%, compared with 10.8%.
  • Balance sheet: Total assets were $7.00 billion, down $9.3 million from December 31, 2020. Loans increased 1.6% to $3.72 billion; deposits rose 3.3% to $5.09 billion. Cash and cash equivalents were $107.6 million. Securities totaled approximately $2.65 billion.
  • Funding, debt, and capital: FHLB borrowings declined $167.0 million to $665.5 million. Long-term debt was $257.5 million, comprising subordinated notes and trust-preferred debentures; other borrowings were $22.3 million. Shareholders’ equity was $858.6 million, or 12.3% of assets. At quarter-end, consolidated CET1, Tier 1, total capital, and Tier 1 leverage ratios were 14.71%, 16.09%, 21.52%, and 10.29%, respectively; management said the Company and Bank met applicable capital requirements.
  • Cash flow: Operating activities provided $62.4 million, investing activities used $34.7 million, and financing activities used $28.5 million. Cash and cash equivalents decreased $0.8 million during the quarter.

Material changes versus comparable periods

  • Net income increased by $30.1 million year over year, primarily because the credit-loss provision shifted from a $25.2 million expense in Q1 2020 to a $10.1 million reversal in Q1 2021. Management attributed the reversal mainly to an improved economic forecast used in the CECL estimate; this was a major driver of the earnings comparison.
  • Lower deposit and borrowing costs supported net interest income despite lower earning-asset yields. Average earning-asset yield fell to 3.67% from 4.06%, while the average rate on interest-bearing liabilities fell to 0.64% from 1.30%.
  • Compared with year-end 2020, deposits increased and FHLB borrowings and brokered CDs decreased. Management attributed deposit growth largely to PPP disbursements and stimulus deposits.
  • Shareholders’ equity declined $16.7 million from year-end. Net income was more than offset by a $29.5 million after-tax other comprehensive loss, $15.2 million of share repurchases, and $10.5 million of dividends. The securities-related unrealized loss reflected market-value changes, which management associated largely with rates and spreads.

Outlook, management commentary, and risks

  • The filing provides no specific numerical earnings or revenue guidance. Management said commercial activity in Texas had improved but remained below pre-pandemic levels, and cited economists’ expectation of stronger growth in the second half of 2021.
  • At March 31, outstanding PPP loans were $220.9 million, including $91.2 million originated under the renewed program. Loans with payment deferrals had fallen to $1.7 million from $47.2 million at year-end; management said the decline reflected borrowers resuming payments. The company continued monitoring pandemic-sensitive borrowers and sectors.
  • Liquidity sources included approximately $618.1 million of additional Federal Reserve discount-window capacity and $1.25 billion of additional FHLB capacity, subject to collateral and other requirements. Management considered funding adequate. Customer commitments to extend credit were $811.6 million; standby letters of credit were $10.8 million.
  • Management highlighted risks from COVID-19 and economic conditions, borrower repayment capacity, real-estate collateral values, oil and gas exposure, interest-rate and yield-curve movements, mortgage-security prepayments, liquidity, cybersecurity, and the assumptions underlying credit-loss estimates. Oil and gas loans were $104.8 million, or 2.82% of loans; loans in listed pandemic-sensitive sectors totaled $525.8 million, or 14.15% of loans.
  • Interest-rate simulations estimated next-12-month net interest income increases of 3.15% and 6.85% under immediate +100 and +200 basis-point scenarios, respectively, and a 2.15% decrease under a −50 basis-point scenario. These are model estimates dependent on assumptions, not guidance.
  • There were no material changes to risk factors reported in the 2020 Form 10-K. Management stated that routine litigation was not expected to materially affect financial position, results, or liquidity. The company opened a Houston loan production office in April and reported branch closures during March.

Most important facts for investors to verify

  • How much of the sharp year-over-year earnings increase is attributable to the credit-loss reversal, and how the allowance may change as economic forecasts and borrower performance evolve.
  • Whether improving payment performance persists, especially among pandemic-sensitive borrowers, and the status of the remaining deferred loans and PPP balances.
  • The effect of interest rates and market spreads on the large securities portfolio, accumulated other comprehensive income, and reported equity.
  • Deposit stability, wholesale-funding needs, collateral availability, and the use of available liquidity facilities as loans and deposits change.
  • Trends in commercial real-estate, oil and gas, and other concentrated or vulnerable loan exposures, as well as charge-offs and nonperforming assets.