Business context and reporting period
Southside Bancshares, Inc. (NASDAQ: SBSI), a Texas bank holding company, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. Comparisons below are with the same 2018 period unless otherwise noted; balance-sheet comparisons are with December 31, 2018. Dollar figures are in millions unless stated.
Financial performance and condition
| Metric | Q2 2019 | Six months 2019 |
|---|---|---|
| Interest income | $60.7 | $119.7 |
| Net interest income | $43.1 | $84.3 |
| Net interest margin, FTE | 3.17% | 3.12% |
| Provision for loan losses | $2.5 | $1.6 |
| Noninterest income | $11.3 | $20.8 |
| Noninterest expense | $29.7 | $59.3 |
| Net income | $18.6 | $37.4 |
| Diluted earnings per share | $0.55 | $1.11 |
| Operating cash flow | $34.8 for six months |
- At June 30, assets were $6.37 billion; loans $3.46 billion; deposits $4.48 billion; and shareholders’ equity $787.8 million, or 12.4% of assets.
- Cash and cash equivalents totaled $132.5 million. Management reported additional FHLB borrowing capacity of approximately $1.26 billion, subject to collateral and required stock purchases.
- FHLB borrowings were $823.8 million, up $104.7 million from year-end. Long-term debt, including subordinated notes and trust preferred debentures, was $158.7 million.
- Allowance for loan losses was $24.7 million, 0.71% of loans, versus $27.0 million, or 0.82%, at year-end.
- Regulatory capital ratios were above stated minimums; consolidated CET1 was 14.02% and total capital was 18.52%.
Material changes versus comparable periods
- Q2 net income declined 7.9% to $18.6 million; diluted EPS was $0.55 versus $0.57. For the first half, net income rose 2.7% to $37.4 million and diluted EPS increased to $1.11 from $1.04.
- First-half net interest income fell 3.4%, despite 5.0% higher interest income, as interest expense rose 32.5%. FTE margin decreased to 3.12% from 3.19%.
- Q2 provision expense increased to $2.5 million from $1.3 million; first-half provision fell to $1.6 million from $5.0 million, mainly reflecting the sale of three large commercial real estate nonaccrual loans.
- Loans grew 4.4% from year-end, led by construction, commercial real estate and commercial lending. Securities rose 3.9%; the company purchased $817.1 million and sold about $713 million of securities during the first half as it repositioned the portfolio.
- Nonperforming assets declined to $29.4 million, or 0.46% of assets, from $42.9 million, or 0.70%, at year-end. Nonaccrual loans fell to $16.4 million, primarily following the sale of three commercial real estate loans; restructured loans increased to $11.9 million from $5.9 million.
- First-half operating cash flow was $34.8 million versus $70.5 million in 2018; investing used $165.3 million, while financing provided $142.3 million. Net cash increased $11.8 million.
- Equity rose $56.5 million, substantially supported by $55.2 million of after-tax other comprehensive income, including improved unrealized securities values. Adoption of securities-premium guidance reduced opening retained earnings by $16.5 million before tax.
Outlook, commentary, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said balance-sheet and securities strategy will be reassessed as interest rates, yield curves, prepayments, funding costs, and loan and deposit trends change. A new in-store branch in Kingwood, Texas was planned for November 2019, subject to regulatory approval.
- Management cited margin pressure from funding-cost increases and the flattening yield curve. The strategy relies partly on FHLB funding and brokered CDs; brokered CDs reached $340.4 million, with weighted average cost of 2.45% and maturities under 12 months. Management noted their potential higher expense and weaker customer loyalty.
- Interest-rate simulations projected 12-month net interest income changes versus the base case of +3.07% for an immediate 100-basis-point increase, +1.66% for +200 basis points, -1.40% for -100 basis points and -5.01% for -200 basis points. These are model estimates dependent on assumptions, not guidance.
- Key risks include Texas and broader economic conditions, commercial and real-estate credit quality, interest rates and MBS prepayments, liquidity and wholesale funding, cyber threats, regulatory changes, and the accuracy of allowance and valuation estimates. Management stated litigation was not expected to materially affect financial position, results or liquidity; no material changes to previously disclosed risk factors were reported.
- The company planned to adopt CECL on January 1, 2020 and was in the parallel-model phase; the potential financial impact was still under evaluation. Lease accounting added about $10.1 million of liabilities and $9.8 million of right-of-use assets at adoption, with no material earnings or cash-flow impact.
Important facts for investors to verify
- Whether loan growth and the reduction in nonaccrual loans persist, and whether higher restructured balances or charge-offs signal renewed credit stress.
- Whether deposit pricing, brokered-CD reliance and higher FHLB borrowings continue to pressure net interest margin.
- The sustainability of earnings excluding securities-sale gains and other unusual or timing-related items, including prior-year acquisition costs and BOLI death benefits.
- The effect of CECL adoption, interest-rate and securities valuation movements, and the company’s modeled rate sensitivity on future earnings and capital.
- Liquidity and funding capacity under stress, including collateral availability and the large volume of unused credit commitments ($1.02 billion).