Southside Bancshares, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Balance-sheet comparisons are to December 31, 2016. Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context and financial results
Southside Bancshares is a Texas bank holding company. For the third quarter, net income was $14.5 million, up 12.8% year over year; diluted earnings per share were $0.49 versus $0.48. For the first nine months, net income was $44.0 million, up 16.4%, and diluted EPS was $1.49 versus $1.39.
- Revenue and margin: Q3 net interest income was $35.0 million, up 3.0%; nine-month net interest income was $105.7 million, up 0.7%. Tax-equivalent net interest margin declined to 3.02% in Q3 from 3.19% and to 3.06% for nine months from 3.35%, as funding costs rose.
- Noninterest income: $9.4 million in Q3, down 19.8%; $28.4 million for nine months, down 13.2%. Lower securities and loan-sale gains were principal factors.
- Expenses and credit costs: Noninterest expense fell 12.0% to $25.0 million in Q3 and 8.7% to $76.4 million for nine months. Provision for loan losses was $1.0 million in Q3 and $3.4 million for nine months, versus $1.6 million and $7.7 million in 2016.
- Cash flow: Nine-month operating cash flow was $77.4 million; investing activities provided $91.4 million and financing activities used $153.9 million. Cash and cash equivalents increased $14.9 million to $184.5 million.
Financial position, liquidity, and capital
- Total assets were $5.48 billion, down 1.4% from year-end 2016. Loans rose 4.9% to $2.68 billion, led by $127.7 million growth in commercial real estate loans; commercial real estate represented $1.07 billion of loans.
- Deposits increased 0.9% to $3.56 billion. Noninterest-bearing deposits rose $77.7 million, while interest-bearing deposits declined $46.6 million.
- Total FHLB advances were $1.14 billion, down $167.1 million. Short-term advances increased $124.0 million to $990.5 million, while long-term advances fell $291.1 million to $152.1 million. Subordinated notes were $98.2 million and other long-term debt was $60.2 million.
- Cash and cash equivalents were $184.5 million. Management reported approximately $621.6 million of additional FHLB borrowing capacity, net of required stock purchases, and no federal funds purchased outstanding.
- Shareholders’ equity rose 7.3% to $556.0 million, or 10.1% of assets. The company reported consolidated CET1 of 14.87%, total risk-based capital of 20.28%, and a Tier 1 leverage ratio of 9.90%; management said capital requirements were met.
- Cash dividends were $0.28 per share in Q3 and $0.81 per share for nine months. The company declared and paid a 2.5% stock dividend in June 2017.
Material changes and asset quality
- Nonperforming assets fell to $9.1 million, or 0.17% of assets, from $15.1 million at year-end. Nonaccrual loans declined to $3.1 million; restructured loans were $5.7 million.
- The allowance for loan losses was $19.9 million, equal to 0.74% of loans, versus $17.9 million and 0.70% at year-end. Nine-month net charge-offs were approximately $1.4 million.
- The securities portfolio declined $215.2 million, or 8.9%, to $2.20 billion. Management said it sold longer-duration and lower-yielding securities to address a flattening yield curve and margin pressure; Q3 AFS sales generated a $0.6 million gain.
- Q3 noninterest expense benefited in part from the absence of $1.8 million of lease termination and leasehold write-off costs recorded in Q3 2016. Nine-month expense reductions also reflected lower retirement costs, including the effect of early retirements in 2016.
Outlook, risks, and contingencies
- No numerical earnings or revenue guidance was provided. Management described its balance-sheet strategy as subject to ongoing reassessment based on loan and deposit growth, funding costs, interest rates, yield curves, and securities economics.
- The proposed acquisition of Diboll State Bancshares, with $1.01 billion in assets and $908.7 million in deposits at September 30, was expected to close in Q4 2017, subject to Federal Reserve approval and other customary conditions. Consideration included 5.535 million Southside shares and up to $25 million cash, subject to adjustment. Diboll shareholders approved the merger October 17; FDIC and Texas banking approvals had been received.
- Key risks include rising funding costs and net interest margin pressure, interest-rate and securities valuation exposure, mortgage-backed securities prepayment uncertainty, credit and real-estate collateral risk, Texas economic and energy-market conditions, liquidity and wholesale funding dependence, and execution of the pending acquisition. Management noted Hurricane Harvey caused damage and flooding in parts of Texas; its initial borrower and collateral surveys found mostly little-to-no business interruption or minor damage reportedly covered by insurance, and review continued.
- Unused credit commitments and standby letters of credit totaled $720.1 million. The company was involved in ordinary-course litigation; management believed resulting liabilities would not materially affect financial position, results, or liquidity. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Diboll merger closed as expected, its final consideration, and the realized integration costs and benefits.
- Whether loan growth—particularly commercial real estate growth—and credit quality remain consistent with underwriting and allowance assumptions.
- Whether deposit and wholesale funding costs continue to rise and further compress net interest margin.
- How securities portfolio changes, interest-rate movements, and mortgage prepayments affect earnings, liquidity, and equity.
- Whether Hurricane Harvey or broader Texas economic and energy conditions create material borrower losses beyond management’s initial assessment.