Southside Bancshares, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Southside Bancshares is a Texas bank holding company operating through Southside Bank. Financial statements are unaudited.
Key financial metrics
| Metric | Q2 2021 | Six months 2021 | Comparison |
|---|---|---|---|
| Net income | $21.3 million | $55.4 million | Q2 down 1.1% from $21.6 million; six-month income up 117.2% from $25.5 million |
| Diluted EPS | $0.65 | $1.69 | Q2 unchanged; six-month EPS was $0.76 in 2020 |
| Net interest income (GAAP) | $45.6 million | $92.0 million | Q2 down 3.4%; six-month amount essentially flat |
| Net interest margin (FTE, non-GAAP) | 3.06% | 3.13% | Compared with 3.02% for both 2020 periods |
| Provision for credit losses | $1.7 million expense | $8.5 million reversal | Compared with $5.2 million expense in Q2 2020 and $30.5 million expense for first-half 2020 |
| Noninterest income | $10.9 million | $24.6 million | Down 10.3% and 11.3%, respectively |
| Noninterest expense | $30.7 million | $61.9 million | Up 2.8% and 2.6%, respectively |
| Cash flow from operations | $80.2 million for first half | Compared with $17.5 million in first-half 2020 |
At June 30, 2021, total assets were $7.18 billion, loans were $3.64 billion, deposits were $5.16 billion, and shareholders’ equity was $894.4 million (12.5% of assets). Cash and cash equivalents totaled $128.5 million. First-half net cash used in investing was $139.8 million; financing provided $79.7 million. Dividends paid were $0.33 per share in Q2 and $0.65 per share for the first half.
Material changes versus comparable periods
- Q2 net income was nearly unchanged year over year: lower interest income and noninterest income, and higher operating expense, largely offset by lower interest expense and provision expense.
- First-half net income more than doubled, principally because the company recorded an $8.5 million provision reversal versus a $30.5 million provision expense in 2020. Management attributed the change mainly to a more favorable economic forecast used in its CECL estimates.
- Loans declined 0.4% from year-end to $3.64 billion. Commercial real estate loans rose $135.2 million, while commercial loans fell $59.6 million and construction loans fell $53.8 million. PPP loans declined $82.7 million to $132.1 million.
- Deposits increased 4.5% to $5.16 billion, while FHLB borrowings decreased 13.4% to $721.4 million. The company said deposit growth reflected PPP disbursements and stimulus payments.
- The securities portfolio increased 6.1% to $2.86 billion, with municipal and other investment securities rising as mortgage-backed securities declined.
- Nonperforming assets decreased 12.6% from year-end to $15.3 million, or 0.21% of assets. Nonaccrual loans were $5.2 million; troubled debt restructurings were $9.5 million.
Outlook, risks, and unusual items
The filing provides no quantified earnings or revenue guidance. Management said the economic outlook had improved but remained uncertain: Texas businesses had largely reopened, though activity had not returned to pre-pandemic levels, and the Delta variant created risk of renewed disruption. Management described the allowance forecast as generally reflecting improving economic conditions, while noting that CECL estimates depend on judgment and could require future adjustment.
Key risks include COVID-19 and related borrower stress, commercial real estate and oil-and-gas exposures, interest-rate and yield-curve changes, mortgage-backed security prepayments, liquidity, and cyber, regulatory, and operational risks. Oil-and-gas loans totaled $94.3 million, or 2.59% of gross loans. Loans in sectors identified as particularly vulnerable to pandemic disruption totaled $510.1 million, or 14.01% of gross loans. Management said available liquidity was adequate; additional secured borrowing capacity was approximately $487.7 million at the Federal Reserve discount window and $1.23 billion from FHLB.
Regulatory capital ratios remained above well-capitalized thresholds: consolidated CET1 was 14.38%, and the Bank’s CET1 was 18.34%. The company expects to redeem its $100 million, 5.50% subordinated notes on September 30, 2021, subject to regulatory approval. It repurchased $18.7 million of stock in the first half and bought an additional 22,406 shares through July 27. The filing reports various ordinary-course litigation, which management does not expect to materially affect financial position, results, or liquidity. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the sharp year-over-year improvement in first-half earnings is sustainable apart from the favorable provision reversal, and how future CECL assumptions affect reserves.
- Credit quality trends, including commercial real estate and oil-and-gas exposures, restructured loans, and the performance of loans previously receiving COVID-related deferrals.
- Net interest margin sensitivity to rates, deposit pricing, securities prepayments, and the company’s wholesale funding and hedging strategy.
- The planned September 2021 subordinated-note redemption, related regulatory approval, and its effect on funding and capital.
- Growth and utilization of the $922.2 million in commitments to extend credit and $10.8 million in standby letters of credit, which may create future funding and credit exposure.