Southside Bancshares, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016 unless noted. Southside is a Texas bank holding company operating Southside Bank, with lending primarily in Texas. Dollar amounts below are U.S. dollars.
Financial performance
- Net income: $15.0 million, up 10.9% from $13.5 million in Q1 2016. Diluted EPS was $0.52, versus $0.51; dividends were $0.25 per share, versus $0.23.
- Interest income and margin: Interest income rose 4.4% to $44.9 million, but interest expense increased 50.2% to $9.6 million. Net interest income consequently fell 3.6% to $35.3 million. Tax-equivalent net interest margin was 3.08%, down from 3.51%; net interest spread was 2.93%, down from 3.40%.
- Credit provision: Provision for loan losses was $1.1 million, down from $2.3 million. Net interest income after provision was $34.2 million, compared with $34.3 million.
- Noninterest results: Noninterest income declined 16.6% to $9.7 million, mainly because securities-sale gains fell to $0.3 million from $2.4 million. Noninterest expense decreased 12.1% to $25.9 million, including lower retirement, occupancy, professional-fee and other costs.
- Profitability: Return on average assets was 1.08% (1.07% in Q1 2016); return on average equity was 11.57% (11.96%). The effective tax rate was 16.7%, versus 18.0%; adoption of a stock-compensation accounting standard reduced Q1 tax expense by $126,000.
Financial position, cash flow and capital
- Assets and lending: Total assets were $5.66 billion, up 1.7%. Loans were $2.54 billion, down 0.7% from year-end but up 3.9% from March 2016. Commercial real estate loans rose 3.0% from year-end to $974.3 million; construction loans fell 4.7% to $362.4 million. Average loans were up 4.7% year over year.
- Securities: The investment and mortgage-backed securities portfolio totaled approximately $2.37 billion, down $43.3 million from year-end. Securities were 42.0% of assets, versus 43.4% at year-end.
- Deposits and funding: Deposits increased 4.9% to $3.71 billion. FHLB advances totaled $1.21 billion, down $103.8 million; short-term advances rose $86.4 million while long-term advances fell $190.2 million. Brokered CDs increased to $120.5 million from $35.5 million at year-end.
- Liquidity and cash flow: Cash and cash equivalents were $247.0 million, up $77.3 million during the quarter. Operating cash flow was $32.7 million, investing cash flow $12.9 million and financing cash flow $31.7 million. Management reported approximately $753.7 million of additional FHLB borrowing capacity, net of required FHLB stock purchases.
- Equity and regulatory capital: Shareholders’ equity was $531.5 million, or 9.4% of assets. Consolidated CET1, Tier 1 and total risk-based capital ratios were 14.58%, 16.34% and 20.01%, respectively; the Tier 1 leverage ratio was 9.51%. Management said the company and bank met applicable capital requirements.
Asset quality and material changes
- Nonperforming assets were $14.1 million, or 0.25% of assets, down from $15.1 million and 0.27% at year-end, and down from $34.0 million in March 2016. Nonaccrual loans declined to $7.3 million from $8.3 million at year-end.
- The allowance for loan losses was $18.5 million, equal to 0.73% of loans, versus $17.9 million and 0.70% at year-end. Q1 charge-offs were $1.1 million and recoveries $0.5 million. Substandard loans were $56.5 million, compared with $51.3 million at year-end.
- Management attributed the year-over-year earnings increase mainly to lower loan-loss provision and noninterest expense, partly offset by higher funding costs and lower securities gains. Lower 2016 retirement expense reflected early-retirement packages accepted by 16 employees in Q1 2016.
Outlook, risks and contingencies
- The filing provides no specific earnings or growth guidance. Management said it would continue adjusting securities and wholesale funding to market conditions and ALCO objectives, with a stated goal of enhancing profitability while managing risk.
- Management highlighted pressure on margins from funding costs, yield-curve changes, interest-rate movements and mortgage-security prepayments. Its rate simulations estimated that an immediate +100/+200 basis-point shock would change 12-month net interest income by +1.03%/+0.27%; a −100/−200 basis-point shock by +3.28%/+1.53%. These are model estimates, not forecasts.
- Other stated risks include credit deterioration, real-estate collateral values, Texas economic conditions and oil prices, reliance on FHLB and brokered-CD funding, securities valuation and prepayment risk, competition, regulation, cyber incidents and litigation. Energy loans were 1.14% of the portfolio.
- Off-balance-sheet commitments to extend credit were $666.2 million and standby letters of credit $8.6 million. Management said ordinary-course litigation was not expected to materially affect financial position, results or liquidity. No material change to previously disclosed risk factors was reported.
- Two cash-flow hedge swaps with $40 million total notional were terminated in Q1; management said the hedged transactions remained probable and related gains would be recognized over time. No securities were transferred from available-for-sale to held-to-maturity in the quarter.
Investor verification priorities
- Track net interest margin and funding costs, particularly the impact of FHLB advances and the sharp increase in brokered CDs.
- Assess commercial real-estate exposure, classified loans and the allowance relative to subsequent credit performance.
- Monitor whether commercial real-estate growth offsets declines in construction, residential and consumer lending without weakening underwriting.
- Review securities valuation, unrealized losses, prepayment assumptions and the sensitivity of equity and earnings to interest-rate changes.
- Confirm that reported capital and liquidity remain adequate as funding mix, deposits and lending needs evolve.