Southside Bancshares, Inc. — Q2 2016 Form 10-Q
Business context and period: Southside Bancshares is a Texas-based bank holding company. This unaudited report covers the three and six months ended June 30, 2016; balance-sheet comparisons are to December 31, 2015. Amounts are in U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 2016 / June 30, 2016 | Comparable period / prior date |
|---|---|---|
| Net income | $11.4 million; diluted EPS $0.43 | Q2 2015: $11.2 million; $0.42 |
| Six-month net income | $24.9 million; diluted EPS $0.94 | First half 2015: $20.5 million; $0.77 |
| Net interest income | Q2: $34.4 million; first half: $71.0 million | Q2 2015: $32.9 million; first half 2015: $66.7 million |
| Net interest margin and spread | Q2: 3.35% and 3.24%; first half: 3.43% and 3.32% | Q2 2015: 3.39% and 3.30%; first half 2015: 3.44% and 3.36% |
| Noninterest income / expense | Q2: $9.4 million / $25.8 million; first half: $21.0 million / $55.2 million | Q2 2015: $8.9 million / $28.4 million; first half 2015: $19.7 million / $57.9 million |
| Total assets / shareholders’ equity | $5.04 billion / $472.3 million | December 31, 2015: $5.16 billion / $444.1 million |
| Loans / deposits | $2.38 billion / $3.57 billion | December 31, 2015: $2.43 billion / $3.46 billion |
| Cash and cash equivalents | $64.1 million | December 31, 2015: $81.0 million |
| Allowance for loan losses | $14.9 million, or 0.63% of loans | December 31, 2015: $19.7 million, or 0.81% |
| Nonperforming assets | $24.5 million, or 0.49% of assets | December 31, 2015: $32.5 million, or 0.63% |
| Debt and borrowings | FHLB advances: $873.5 million; long-term debt: $60.3 million | December 31, 2015: FHLB advances $1.15 billion; long-term debt $60.3 million |
For the six months, operating cash flow was $35.6 million, investing cash flow was positive $118.8 million, and financing cash flow was negative $171.2 million. Cash and cash equivalents decreased $16.9 million. Management reported a 12.58% consolidated Common Equity Tier 1 ratio and an 8.60% Tier 1 leverage ratio at June 30, 2016; it stated the company and bank met applicable capital requirements.
Material changes versus comparable periods
- Q2 net income increased 2.1% year over year; first-half net income increased 21.3%. Growth in interest income and lower noninterest expense supported results, partly offset by higher funding costs, provision expense, and taxes.
- Net interest income rose 4.5% in Q2 and 6.4% for the first half, while reported net interest margins edged lower year over year. Interest expense increased 38.5% in Q2 and 35.6% for the first half.
- Q2 provision for loan losses was $3.8 million versus $268,000 a year earlier; first-half provision was $6.1 million versus $4.1 million. The increase reflected partial charge-offs on two large commercial borrowing relationships. Q2 charge-offs totaled $11.3 million, including approximately $10.6 million on those relationships.
- Total loans fell 2.0% from year-end, as commercial real estate and municipal lending growth was outweighed by declines in commercial, consumer, residential, and construction loans. Average loans were up 11.0% year over year for the first half. Commercial real estate loans grew 9.3% from year-end.
- Deposits rose $114.8 million from year-end, primarily from public funds, while total FHLB advances declined $274.2 million. Shareholders’ equity increased $28.2 million, including a $23.7 million increase in accumulated other comprehensive income; share repurchases and cash dividends partly offset the increase.
- Nonaccrual loans declined to $11.8 million from $20.5 million at year-end, while restructured loans increased to $12.5 million from $11.1 million. Net charge-offs to average loans were 0.90% for the first half, versus 0.05% in the first half of 2015.
Outlook, commentary, risks, and unusual items
- No specific earnings or financial guidance was provided. Management said it planned to open a loan production office in Frisco, Texas, in Q3 2016, and described its balance-sheet and funding strategy as subject to ongoing reassessment as market conditions change.
- Management cited competitive loan pricing as a potential pressure on loan yields and profitability. Key stated risks include interest-rate and yield-curve changes, mortgage-backed-security prepayments and fair values, credit losses and collateral values, liquidity, competition, regulation, cybersecurity, and economic conditions in Texas. Oil-and-gas exposure was 1.19% of loans; management noted prolonged low oil prices could weigh on Texas and energy-related borrowers.
- Interest-rate simulations projected that an immediate 100- or 200-basis-point increase would raise 12-month net interest income by 1.61% or 3.37% relative to the base case; a 100- or 200-basis-point decrease was projected to reduce it by 1.41% or 1.14%. These are model estimates dependent on assumptions, not forecasts.
- The company sold securities and recognized $728,000 of net gains in Q2 and $3.2 million in the first half. Management said selected long-term securities were sold to modestly reduce portfolio duration amid falling long-term rates. A $148,000 fee was incurred after prepaying $63 million of FHLB advances in June.
- Noninterest expense included a $1.7 million first-quarter charge related to early-retirement packages accepted by 16 employees. The company also declared and paid a 5% stock dividend in June; per-share data reflects the stock dividend.
- Unused commitments to extend credit and standby letters of credit totaled $608.2 million. The company reported ordinary-course litigation but did not expect resulting liabilities to materially affect its financial position, operations, or liquidity. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Review the two large commercial relationships behind approximately $10.6 million of Q2 charge-offs, related collateral and borrower developments, and whether further losses or provisions may arise.
- Track credit trends, including the allowance decline, nonaccrual loans, the increase in restructured loans, and commercial real estate and construction exposure.
- Assess whether deposit growth can sustainably replace wholesale funding and how deposit pricing, FHLB borrowing costs, and interest-rate changes affect margins.
- Monitor securities-portfolio duration, unrealized gains and losses, mortgage-backed-security prepayments, and the effect of market-rate changes on equity and income.
- Confirm the sustainability of earnings excluding securities-sale gains and the effects of the unusual charge-offs, retirement costs, and FHLB prepayment fee.
- Review the full filing for regulatory capital details, off-balance-sheet commitments, and the assumptions and limitations underlying interest-rate simulations.