Business context and reporting period
Southside Bancshares, Inc. is a Texas bank holding company headquartered in Tyler. This Form 10-K covers the fiscal year ended December 31, 2015, with comparisons primarily to 2014. The company operated 60 banking centers and served East Texas, Fort Worth and Austin. Results include a full year of Omni operations in 2015; Omni was acquired on December 17, 2014, so 2014 included only a short post-acquisition period.
Key financial and operating metrics
- Profitability: Net income was $44.0 million, up 111.2% from $20.8 million; diluted EPS was $1.73 versus $1.04. Return on average assets was 0.90% and return on average equity was 10.04%.
- Revenue and margins: Net interest income under GAAP was $134.7 million, up 26.1%. The tax-equivalent net interest margin declined to 3.40% from 3.77%, and the tax-equivalent spread fell to 3.31% from 3.63%. Noninterest income was $37.9 million versus $24.5 million. The filing reports taxable-equivalent net interest income of $151.4 million, a non-GAAP measure.
- Expenses and credit costs: Noninterest expense rose 15.6% to $113.0 million. Provision for loan losses declined to $8.3 million from $14.9 million. Net charge-offs fell to $1.9 million from $20.5 million; the prior-year amount included losses associated with SFG subprime auto loans.
- Balance sheet: Total assets were $5.16 billion, up 7.4%; loans were $2.43 billion, up 11.5%; deposits were $3.46 billion, up 2.4%; and shareholders’ equity was $444.1 million. The loan portfolio was concentrated in real estate, with approximately 71.1% of loans having real estate as a primary or secondary collateral component.
- Asset quality: Nonperforming assets increased to $32.5 million, or 0.63% of assets, from $12.3 million, or 0.26%. Nonaccrual loans rose to $20.5 million (0.84% of loans) from $4.1 million (0.19%). The allowance for loan losses was $19.7 million, 0.81% of loans, versus $13.3 million, 0.61%.
- Funding, debt and liquidity: Total FHLB advances were approximately $1.15 billion, up $250.3 million; short-term FHLB advances increased to $645.4 million. Long-term debt, consisting primarily of junior subordinated debentures, was $60.3 million. Cash and cash equivalents were $81.0 million, down from $84.7 million. The bank reported approximately $606.9 million of additional potential FHLB funding against unpledged securities and $52.5 million of unsecured overnight federal-funds lines.
- Cash flow: Operating activities provided $73.0 million; investing activities used $384.4 million; financing activities provided $307.7 million. Cash and cash equivalents decreased $3.7 million during the year.
- Capital and shareholder returns: The company’s CET1, Tier 1, total risk-based capital and leverage ratios were 12.71%, 14.56%, 15.27% and 8.61%, respectively; management said the company and bank met capital requirements and were well capitalized. Cash dividends were $1.00 per share, up from $0.96, and a 5% stock dividend was also paid.
Material changes versus the prior comparable period
- Profit improved substantially as net interest income and noninterest income increased and loan-loss provision declined. These comparisons are materially affected by Omni’s inclusion for all of 2015 versus only December 17–31 in 2014.
- Average interest-earning assets increased 36.6%, while their average yield fell to 3.84% from 4.29%. Loan growth and acquired balances increased interest income, but lower loan and securities yields compressed margins.
- Loan balances grew 11.5%, particularly in construction and commercial real estate. Securities increased, and the combined investment-securities and mortgage-backed-securities portfolio was approximately $2.24 billion at year-end.
- Credit performance was mixed: net charge-offs declined sharply after the SFG portfolio sale, but nonperforming assets rose substantially, primarily following the downgrade of a large commercial relationship and restructuring of a large purchased credit-impaired commercial loan.
- Wholesale funding increased: FHLB advances rose, brokered CDs increased to $85.3 million from $23.4 million, and wholesale funding as a share of deposits excluding brokered deposits rose to 36.6% from 27.5%.
- Noninterest expense increased, reflecting Omni-related operating scale and higher salaries, occupancy, ATM/debit-card and other costs; acquisition-related professional fees were lower than in 2014.
Outlook, commentary, risks and unusual items
- Management described its markets as generally performing better than many other areas but cited economic headwinds, notably falling oil prices. It identified slow-to-modest economic growth as an expectation in its discussion, not formal earnings guidance; the filing provides no quantified forward guidance.
- Management’s balance-sheet strategy uses FHLB and, when appropriate, brokered funding to support investment in agency mortgage-backed securities and municipal securities. It acknowledged lower spreads versus peers, funding and liquidity risks, interest-rate sensitivity and uncertainty in mortgage prepayments.
- Key risks include Texas economic concentration, lower oil prices, real-estate and medical-sector credit exposure, rising nonperforming loans, interest-rate and securities valuation risk, deposit competition, regulatory change, and cybersecurity and operational risks. Energy loans were 1.34% of loans, although management noted broader indirect exposure to the Texas energy economy.
- A commercial borrower had an $8.7 million loan balance at year-end and was publicly reported to be under SEC and law-enforcement investigation. After approximately $2.4 million of subsequent payments, the balance was $6.3 million at filing. Management considered it accruing and not impaired, based on repayment performance and collateral; verify subsequent developments and collectability.
- During 2015, the company recorded a $3.7 million net gain on securities sales and transferred $57.7 million of commercial mortgage-backed securities from available-for-sale to held-to-maturity. Management stated there were no securities with other-than-temporary impairment at year-end. The 2014 results included a $2.8 million SFG investment impairment and significant Omni merger-related expenses.
- The company dissolved SFG in April 2015 and closed three branches during the year. An early-retirement offer was made to 24 employees; 16 accepted. The company expected to contribute $3.0 million to its defined-benefit plan in 2016.
- On January 28, 2016, the board authorized repurchases of up to 5% of outstanding shares. Through March 2, 2016, 424,701 shares had been repurchased at an average price of $22.89; the plan is discretionary and may be suspended or discontinued.
- Management reported effective disclosure controls and internal control over financial reporting; Ernst & Young issued unqualified opinions on the financial statements and internal controls. Management considered ordinary-course litigation immaterial.
Important facts for investors to verify
- Whether the increase in earnings and revenue is sustainable after separating Omni’s full-year contribution from organic growth and one-time items.
- The status, collateral coverage and repayment progress of the disclosed commercial borrower, and trends in nonperforming assets, restructurings and allowance adequacy.
- Funding costs, deposit stability and dependence on FHLB advances, public funds and brokered CDs, particularly if rates or market conditions change.
- Net interest margin sensitivity, mortgage-backed-securities prepayment behavior and the effect of rate changes on securities values and capital.
- Future capital, dividend and share-repurchase capacity, including regulatory limits and the parent company’s reliance on bank dividends.