Southside Bancshares, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. Southside Bancshares is a Texas bank holding company whose principal subsidiary is Southside Bank. This filing covers the quarter and nine months ended September 30, 2022; balance-sheet comparisons are to December 31, 2021. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2022 / Sep. 30, 2022 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $55.5; up 15.2% year over year | $48.2 in Q3 2021 |
| Net interest margin | 3.15% GAAP; 3.36% fully taxable-equivalent (FTE) | 2.96% GAAP; 3.16% FTE in Q3 2021 |
| Net income and diluted EPS | $27.0; $0.84 | $29.3; $0.90 in Q3 2021 |
| Nine-month net income and diluted EPS | $77.4; $2.39 | $84.7; $2.59 in 2021 |
| Total assets | $7,453.7 | $7,259.6 at Dec. 31, 2021 |
| Total loans / deposits | $4,063.5 / $6,181.2 | $3,645.2 / $5,722.3 at Dec. 31, 2021 |
| Shareholders’ equity | $707.6; 9.5% of assets | $912.2; 12.6% at Dec. 31, 2021 |
| Cash and cash equivalents | $195.1 | $201.8 at Dec. 31, 2021 |
For the nine months, operating cash flow was $208.4, investing cash outflow was $552.4, financing cash inflow was $337.4, and cash declined $6.6. The company paid $32.8 in cash dividends during the period; the quarterly dividend was $0.34 per share.
At September 30, 2022, the allowance for loan losses was $36.5, or 0.90% of loans. Q3 provision for credit losses was $1.5, versus a $5.1 reversal in Q3 2021; nine-month provision was $1.2, versus a $13.5 reversal in 2021. Nonperforming assets were $11.7, or 0.16% of assets; nonaccrual loans were $3.0, and TDR loans were $8.5.
Borrowings included $243.5 of FHLB advances, $74.7 of other borrowings, $98.6 of subordinated notes and $60.3 of trust preferred debentures. The bank reported $505.8 of additional discount-window borrowing capacity and $1.62 billion of additional FHLB capacity, subject to collateral availability. Regulatory capital ratios remained above stated requirements: consolidated CET1 was 12.98%, and the bank’s was 15.71%.
Material changes versus comparable periods
- Q3 net interest income grew $7.3 year over year, reflecting higher earning-asset balances and yields. Interest expense also rose, particularly on deposits, as rates increased.
- Q3 net income fell 8.0%; nine-month net income fell 8.7%. The filing attributes the declines principally to higher credit-loss provision, lower noninterest income and higher operating expenses, partly offset by stronger net interest income and lower income tax expense.
- Nine-month noninterest income declined 19.4% to $30.1, including a $3.8 net loss on AFS securities sales, compared with a $3.4 gain in 2021. Noninterest expense increased 3.3% to $96.8.
- Loans rose 11.5% from year-end, led by commercial real estate and construction lending. Deposits rose 8.0%; management cited increased brokered deposits and replacement of some FHLB funding.
- Shareholders’ equity decreased $204.5, primarily because of $240.4 of nine-month after-tax other comprehensive loss related mainly to unrealized securities losses as interest rates rose. AFS securities were carried at $1,424.6 versus $1,592.9 amortized cost; HTM securities were carried at $1,151.2 with estimated fair value of $943.3.
Outlook, management commentary, risks and unusual items
- Management described Texas economic activity as broadly solid, while identifying inflation, rising rates, recession concerns, worker shortages, supply disruptions and a slowdown in single-family housing as headwinds. No earnings or revenue guidance was provided.
- Management’s 12-month net-interest-income simulation estimated increases of 4.26% and 7.19% under immediate rate increases of 100 and 200 basis points, respectively; modeled decreases were 2.13%, 4.54% and 10.28% under rate declines of 50, 100 and 200 basis points. These are model estimates based on assumptions, not forecasts.
- The securities portfolio was repositioned: management transferred long-duration AFS securities to HTM, citing balance-sheet strategy and intent and ability to hold them to maturity. The transfers do not remove existing unrealized losses from AOCI, but reduce future AOCI volatility from those transferred securities. Fair-value hedges were also entered into for certain callable municipal securities.
- Management identified brokered funding costs and customer loyalty, interest-rate and yield-curve changes, securities valuations and mortgage prepayments, liquidity, credit quality, commercial real estate, and economic deterioration as risks. Oil-and-gas loans totaled $117.5, or 2.89% of loans; management said it was monitoring the exposure.
- The company announced a planned Lufkin branch closure effective January 6, 2023. It repurchased $12.5 of stock during the first nine months and bought an additional 21,935 shares after quarter-end. Management said ordinary-course litigation is not expected to materially affect financial position, results or liquidity. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How rising deposit costs and further rate changes affect net interest margin, earnings and the company’s reliance on brokered deposits.
- The extent and potential consequences of unrealized securities losses, including AFS/HTM classification, future liquidity needs and the company’s ability to hold HTM securities to maturity.
- Whether rapid commercial real estate and construction loan growth changes portfolio risk, and how asset quality, charge-offs and the allowance develop as economic conditions change.
- Liquidity and capital resilience under stress, including funding availability, collateral requirements, and the difference between reported GAAP equity and regulatory capital treatment of AOCI.
- That management’s rate-sensitivity results are scenario analyses and actual outcomes may differ; the filing provides no formal earnings guidance.