Southside Bancshares, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Southside Bancshares is a Texas bank holding company whose principal subsidiary is Southside Bank. Amounts are in U.S. dollars; financial figures below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Interest income | $86.9 | $57.1 | $167.7 | $111.0 |
| Interest expense | $33.0 | $6.0 | $60.5 | $11.0 |
| Net interest income | $53.9 | $51.1 | $107.3 | $100.0 |
| Net income | $24.9 | $25.4 | $50.9 | $50.4 |
| Diluted earnings per share | $0.81 | $0.79 | $1.64 | $1.56 |
| Net interest margin (GAAP) | 2.99% | 3.07% | 3.01% | 3.05% |
| Net interest margin (FTE, non-GAAP) | 3.17% | 3.30% | 3.19% | 3.26% |
- Q2 net income declined 2.0%; six-month net income increased 1.0%. Diluted EPS rose in both periods, alongside lower weighted-average shares.
- Q2 noninterest income was $10.5 million, including a $2.6 million gain on equity-security sales and a $3.5 million loss on AFS securities sales. Six-month noninterest income was $22.5 million, including respective gains and losses of $5.1 million and $5.6 million.
- Noninterest expense rose 9.0% in Q2 to $35.0 million and 10.3% in the first half to $69.8 million. Higher personnel, technology and FDIC insurance costs contributed.
- Six-month operating cash flow was $58.0 million, versus $128.0 million in 2022; investing activities used $219.1 million and financing activities provided $168.9 million. Cash and cash equivalents ended at $207.1 million.
Financial position, liquidity and credit
- Total assets were $7.81 billion at June 30, up 3.3% from year-end 2022. Loans grew 4.4% to $4.33 billion, led by commercial real estate and construction lending.
- Deposits fell 1.3% to $6.12 billion. Noninterest-bearing deposits were 24.0% of deposits; brokered deposits were $770 million, or 12.6%. Deposits without insurance or collateral were estimated at $1.31 billion, or 21.4% of total deposits.
- Deposit pricing rose materially: Q2 cost of interest-bearing deposits was 2.03%, versus 0.39% a year earlier; cost of total deposits was 1.50%, versus 0.28%.
- Other borrowings were $500.3 million and FHLB borrowings $183.0 million, compared with $221.2 million and $153.4 million at December 31, 2022. Borrowings included $296.2 million from the Federal Reserve’s BTFP and $100.0 million from the discount window.
- Management reported $2.45 billion of available future liquidity across FHLB, Federal Reserve and correspondent-bank facilities. Shareholders’ equity was $765.2 million, or 9.8% of assets. The company’s CET1, Tier 1 and total capital ratios were 12.32%, 13.37% and 15.68%; management said the company and bank met capital requirements.
- Nonperforming assets were $3.1 million, or 0.04% of assets, versus $10.9 million, or 0.14%, at year-end. The decline partly reflects the prospective adoption of ASU 2022-02, which changed troubled-debt-restructuring disclosures; it should not be read solely as a change in underlying credit performance. The allowance for loan losses was $36.3 million, or 0.84% of loans.
- At June 30, AFS securities had $70.8 million of gross unrealized losses; HTM securities had $167.2 million. HTM fair value was $1.149 billion against $1.308 billion amortized cost. AOCI remained negative at $115.7 million.
Changes, outlook and risks
- Management attributed higher net interest income mainly to improved asset yields and growth, but sharply higher funding costs compressed net interest margin and spread. Management noted the Federal Reserve had raised its target rate by 75 basis points in the first half and anticipated further increases during the remainder of 2023.
- Management described Texas market conditions as generally solid, while identifying inflation, elevated rates, potential recession and their effects on borrowers as concerns. The filing provides no formal earnings or revenue guidance.
- Interest-rate sensitivity modeling estimated next-12-month net interest income changes of +4.38% under a 100-basis-point rate increase and +9.11% under a 200-basis-point increase; modeled declines were 3.04% under a 50-basis-point decrease, 6.29% under a 100-basis-point decrease and 12.81% under a 200-basis-point decrease. These are model scenarios, not forecasts.
- Risks include deposit retention and funding costs, liquidity conditions, interest-rate and securities valuation exposure, CRE and other borrower credit risk, recession and inflation, cybersecurity, regulatory matters and litigation. Management said ordinary-course litigation was not expected to materially affect financial position, results or liquidity; no material risk-factor changes were reported.
- The company repurchased $34.5 million of stock in the first half. On July 20, 2023, the board authorized a new plan for up to 1.0 million shares; no shares had been repurchased under that plan as of July 27.
Important facts for investors to verify
- Whether deposit trends, uninsured balances and rising deposit costs affect future funding needs and net interest margin.
- How the company’s sizable unrealized securities losses and wholesale borrowings affect liquidity and capital under changing rate conditions.
- Whether loan growth—particularly in commercial real estate and construction—changes delinquency, nonaccrual or allowance trends; consider the comparability effect of the TDR accounting change.
- How much reported earnings depend on one-time equity-security gains, the BOLI death benefit, securities-sale losses and debt-repurchase gain.
- Whether modeled interest-rate sensitivity and available contingent borrowing capacity remain applicable as market conditions change.