Southside Bancshares, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. Southside Bancshares is a Texas bank holding company. This unaudited report covers the three months ended March 31, 2020; balance-sheet comparisons are against December 31, 2019, and income comparisons against Q1 2019. The quarter included the initial economic and market disruption from COVID-19.
Financial performance and condition
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $44.7 million | $41.1 million, Q1 2019 |
| Net interest margin | 2.88% GAAP; 3.03% fully taxable-equivalent (FTE) | 2.91% GAAP; 3.07% FTE, Q1 2019 |
| Provision for credit losses | $25.2 million expense | $0.9 million reversal, Q1 2019 |
| Noninterest income | $15.5 million | $9.5 million, Q1 2019 |
| Noninterest expense | $30.5 million | $29.6 million, Q1 2019 |
| Net income; diluted EPS | $4.0 million; $0.12 | $18.8 million; $0.56, Q1 2019 |
| Cash flows | Operating: $(1.9) million; investing: $(509.1) million; financing: $512.5 million | Operating: $20.5 million; investing: $108.9 million; financing: $19.9 million, Q1 2019 |
| Total assets | $7.27 billion | $6.75 billion at December 31, 2019 |
| Loans; deposits | $3.60 billion; $4.74 billion | $3.57 billion; $4.70 billion at December 31, 2019 |
| Cash and cash equivalents | $112.2 million | $110.7 million at December 31, 2019 |
| Shareholders’ equity | $795.8 million, or 10.9% of assets | $804.6 million, or 11.9% of assets, at December 31, 2019 |
Material changes and key developments
- Net income declined 79% year over year, primarily reflecting the sharp increase in credit-loss provision following adoption of CECL and updated economic assumptions related to COVID-19. The allowance for loan losses rose to $53.6 million, or 1.49% of loans, from $24.8 million, or 0.69%, at year-end. The company also recorded a $7.8 million after-tax opening retained-earnings reduction on CECL adoption.
- Net interest income increased 8.7% as lower funding costs and higher average earning assets outweighed lower asset yields. FTE net interest margin nevertheless eased to 3.03% from 3.07%.
- Noninterest income rose 62.5%, largely due to a $5.5 million net gain on sales of available-for-sale securities. Noninterest expense increased 3.0%, mainly from salaries and benefits.
- Total securities increased $454.1 million to $2.95 billion, while loans grew 0.9%. Management described purchases of municipal securities during March as part of its balance-sheet strategy amid market dislocation and uncertainty about loan growth.
- FHLB borrowings increased $301.6 million to $1.27 billion; other borrowings rose to $217.9 million, including $189.5 million borrowed from the Federal Reserve discount window. Deposits increased $36.4 million. Total wholesale funding as a percentage of deposits excluding brokered deposits rose to 41.2% from 31.0%.
- Nonperforming assets were $17.4 million, or 0.24% of assets, broadly unchanged from year-end. Nonaccrual loans were $5.2 million; troubled debt restructurings were $11.4 million.
- The company repurchased 869,723 shares for $25.8 million during the quarter. Cash dividends were $0.31 per share, and the basic and diluted dividend payout ratios were 258%.
Outlook, risks and contingencies
- No numerical earnings or revenue guidance is provided. Management said the duration and full financial impact of COVID-19 could not be reasonably estimated and warned that the pandemic could lead to further credit reserves, liquidity pressure, loan modifications, limited dividend payouts, or personnel shortages.
- Management expected prolonged low interest rates to pressure net interest income, margins, borrowing costs and profitability for the remainder of 2020. It also cited possible borrower stress, rising delinquencies and defaults, falling collateral values, lower loan demand and deposit declines. The bank’s Texas exposure includes $102.9 million of oil-and-gas loans and $520.6 million of loans in sectors identified as vulnerable to pandemic disruption.
- Through April 30, 2020, Southside had processed more than $300 million of approved Paycheck Protection Program loans and granted payment deferrals, generally for up to three months, on $176.7 million of outstanding loans. These are post-quarter figures.
- Management reported $936.2 million of additional FHLB borrowing capacity and approximately $306 million of additional discount-window capacity at quarter-end, and said liquidity was adequate. It cautioned that a prolonged pandemic could constrain funding availability or securities sales.
- Consolidated CET1 capital was 12.81%; the bank’s CET1 ratio was 15.73%. Management said the company and bank met applicable capital requirements. The company elected regulatory relief to defer the CECL impact on regulatory capital, a 32-basis-point CET1 benefit at quarter-end.
- Unfunded commitments to extend credit and standby letters of credit totaled $891.8 million; the related off-balance-sheet credit-loss allowance was $7.6 million. Management said ordinary-course litigation was not expected to materially affect financial position, results or liquidity.
Important facts for investors to verify
- How much of the elevated credit-loss provision reflects CECL adoption and COVID-19 forecasts, and whether subsequent delinquencies, deferrals or charge-offs validate those assumptions.
- Loan performance in commercial real estate, hotels, retail, food services and oil and gas, including outcomes for loans granted payment deferrals.
- Whether funding costs, wholesale funding reliance and liquidity capacity remain manageable as securities and borrowing balances change.
- Whether net interest margin, earnings and capital can support the dividend and repurchases; the quarter’s payout ratio exceeded reported earnings.
- How the securities portfolio’s unrealized gains, market values and future sales affect equity and reported earnings. The filing attributes unrealized loss positions principally to market rates, spreads and COVID-19 conditions and reports no securities credit-loss allowance at quarter-end.