SBSI - Southside Bancshares Inc. Announces Financial Results for the Third Quarter Ended September 30 2019

• Third quarter net income was $19.8 million and earnings per diluted common share were $0.58

• Linked quarter loans increased $39.8 million, or 1.1%, to $3.50 billion from $3.46 billion

• Third quarter annualized return on average shareholders’ equity of 9.78% and return on average tangible common equity of 13.96% ⁽¹⁾

• Third quarter annualized return on average assets of 1.23%

• Linked quarter nonperforming assets as a percent of total assets decreased from 0.46% to 0.45%

TYLER, Texas, Oct. 25, 2019 (GLOBE NEWSWIRE) -- Southside Bancshares, Inc. (“Southside” or the “Company”) (NASDAQ:SBSI) today reported its financial results for the quarter ended September 30, 2019. Southside reported net income of $19.8 million for the three months ended September 30, 2019, a decrease of $0.5 million, or 2.5%, compared to $20.3 million for the same period in 2018. Earnings per diluted common share of $0.58 for the three months ended September 30, 2019 remained unchanged when compared to the same period in 2018. The annualized return on average shareholders’ equity for the three months ended September 30, 2019 was 9.78%, compared to 10.61% for the same period in 2018. The annualized return on average assets was 1.23% for the three months ended September 30, 2019, compared to 1.30% for the same period in 2018.

“I am extremely pleased to report that Southside had an excellent third quarter highlighted by a linked quarter increase in loans of $39.8 million, a 6.4% increase in linked quarter net income and a 5.5% increase in linked quarter diluted earnings per share of $0.03 per share,” stated Lee R. Gibson, President and Chief Executive Officer of Southside. “The loan growth in the third quarter was partially offset by several large prepayments.”

“The increase in our linked quarter net income during the third quarter was largely due to a decrease in provision for loan losses of $1.5 million from the prior quarter. Our net interest margin decreased on a linked quarter basis from 3.17% for the second quarter to 3.03% for the third quarter. Most of the growth in average loans and securities was funded by higher cost FHLB advances. In addition, prepayments on mortgage backed securities increased, resulting in an increase in amortization expense.”

“Economic conditions in our East Texas markets remain solid while economic conditions in our DFW and Austin markets continue to be strong. During the third quarter, we received regulatory approval to open our retail in-store branch in Kingwood, Texas. We look forward to opening this branch during the fourth quarter in this high growth market.”

“On September 5, 2019, the Company’s Board of Directors approved a Stock Repurchase Plan, authorizing the repurchase, from time to time, of up to 1 million shares of the Company’s outstanding common stock. During the third quarter we did not purchase any shares of our common stock. During the fourth quarter through October 23rd, we have purchased 25,615 shares at an average price of $33.47.”

Operating Results for the Three Months Ended September 30, 2019

Net income was $19.8 million for the three months ended September 30, 2019 compared with $20.3 million for the same period in 2018, a decrease of $0.5 million, or 2.5%. Earnings per diluted common share of $0.58 for the three months ended September 30, 2019 remained unchanged when compared to the same period in 2018. The decrease in net income was largely driven by the increase in income tax expense, partially offset by an increase in noninterest income. Annualized returns on average assets and average shareholders’ equity for the three months ended September 30, 2019 were 1.23% and 9.78%, respectively. Our efficiency ratio (FTE) was 50.53% ⁽¹⁾ for the three months ended September 30, 2019, an improvement from 51.44% for the three months ended June 30, 2019.

Net interest income for each of the three months ended September 30, 2019 and 2018 was $42.4 million. Linked quarter, net interest income decreased $0.8 million, or 1.8%, compared with $43.1 million during the three months ended June 30, 2019. The decrease in net interest income for the linked quarter was due to the increase in interest expense on our interest bearing liabilities, a result of an increase in average interest bearing liabilities during the three months ended September 30, 2019.

Our tax equivalent net interest margin was 3.03% for the three months ended September 30, 2019 compared with 3.14% for the same period in 2018. The decrease was due to a 24 basis point increase in the average cost on interest bearing liabilities which more than offset the 10 basis point increase in the yield on interest earning assets. Our tax equivalent net interest margin decreased 14 basis points compared to 3.17% for the three months ended June 30, 2019. This decrease was due to a decrease in average yield on interest earning assets of 14 basis points and the increase in average interest bearing liabilities.

Noninterest income was $11.1 million for the three months ended September 30, 2019, an increase of 10.9%, compared with $10.0 million for the same period in 2018. The increase was primarily due to an increase in net gain on sale of securities and deposit services income. On a linked quarter basis, noninterest income decreased $0.1 million, or 1.3%, primarily due to the decrease in net gain on sale of securities.

Noninterest expense was $29.0 million for each of the three months ended September 30, 2019 and 2018. On a linked quarter basis, noninterest expense decreased $0.7 million, or 2.3%, compared to the three months ended June 30, 2019, primarily due to decreases in other noninterest expense and FDIC insurance, partially offset by an increase in salaries and employee benefits.

Income tax expense increased $1.5 million for the three months ended September 30, 2019 compared to the same period in 2018. On a linked quarter basis, income tax expense increased $0.1 million. Our effective tax rate (“ETR”) increased to 15.6% for the three months ended September 30, 2019 compared to 9.7% for the three months ended September 30, 2018 and decreased compared to 16.1% for the three months ended June 30, 2019. The higher ETR for the three months ended September 30, 2019, as compared to the same period in 2018, was primarily due to a discrete tax benefit of approximately $800,000 recorded in 2018 associated with the remeasurement of our net deferred tax asset and a decrease in tax-exempt income as a percentage of pre-tax income for the three months ended September 30, 2019.

Operating Results for the Nine Months Ended September 30, 2019

Net income was $57.2 million for the nine months ended September 30, 2019 compared with $56.8 million for the same period in 2018, an increase of $0.5 million, or 0.8%. Net income per diluted common share was $1.69 for the nine months ended September 30, 2019 compared with $1.61 for the same period in 2018, an increase of 5.0%. The increase in net income was largely driven by increases in interest income and noninterest income, as well as the decrease in provision for loan losses and noninterest expense, partially offset by an increase in interest expense and income tax expense. Annualized returns on average assets and average shareholders’ equity for the nine months ended September 30, 2019 were 1.21% and 9.93%, respectively. Our efficiency ratio (FTE) was 51.85% ⁽¹⁾ for the nine months ended September 30, 2019.

Net interest income for the nine months ended September 30, 2019 was $126.6 million compared to $129.7 million during the same period in 2018, a decrease of $3.0 million, or 2.3%. The decrease in net interest income was due to an increase in interest expense, a result of the higher funding costs of our interest bearing liabilities. The increase in interest expense was partially offset by the increase in interest income on our interest earning assets, a result of higher rates and a shift in the mix of earning assets.

Our tax equivalent net interest margin was 3.09% for the nine months ended September 30, 2019 compared with 3.17% for the same period in 2018. The decrease was primarily due to the higher rates paid on interest bearing liabilities.

Noninterest income was $31.9 million for the nine months ended September 30, 2019, an increase of 4.1%, compared with $30.6 million for the same period in 2018. The increase was primarily due to an increase in net gain on sale of securities and deposit services income, partially offset by decreases in trust fees, bank owned life insurance, other noninterest income and gain on sale of loans.

Noninterest expense was $88.4 million for the nine months ended September 30, 2019 compared with $89.9 million for the same period in 2018, a decrease of $1.6 million, or 1.7%. The decrease was primarily due to a decrease in acquisition expense, amortization of intangibles and FDIC insurance, partially offset by increases in salaries and employee benefits, professional fees and software and data processing expense.

Income tax expense increased $2.7 million for the nine months ended September 30, 2019 compared to the same period in 2018. Our ETR was approximately 15.3% and 11.9% for the nine months ended September 30, 2019 and 2018, respectively. The higher ETR for the nine months ended September 30, 2019, as compared to the same period in 2018, was primarily due to a discrete tax benefit of approximately $800,000 recorded in 2018 associated with the remeasurement of our net deferred tax asset and a decrease in tax-exempt income as a percentage of pre-tax income for the nine months ended September 30, 2019.

Balance Sheet Data

At September 30, 2019, we had $6.54 billion in total assets compared with $6.12 billion at December 31, 2018 and $6.37 billion at June 30, 2019.

Loans at September 30, 2019 were $3.50 billion, an increase of $187.1 million, or 5.6%, compared with $3.31 billion at December 31, 2018. Linked quarter loans increased $39.8 million, or 1.1%, from $3.46 billion at June 30, 2019. The linked quarter net increase in our loans consisted of increases of $41.5 million of construction loans, $10.6 million of 1-4 family residential loans, $9.9 million of municipal loans and $0.2 million of loans to individuals, partially offset by decreases of $14.9 million of commercial real estate loans and $7.4 million of commercial loans.

Securities at September 30, 2019 were $2.38 billion, an increase of $229.0 million, or 10.6%, compared with $2.15 billion at December 31, 2018. Linked quarter securities increased $145.5 million, or 6.5%, from $2.24 billion at June 30, 2019.

Deposits at September 30, 2019 were $4.49 billion, an increase of $65.7 million, or 1.5%, compared with $4.43 billion at December 31, 2018. Linked quarter deposits increased $11.5 million, or 0.3%, from $4.48 billion at June 30, 2019 primarily due to an increase in brokered deposits, partially offset by decreases in public fund deposits.

Asset Quality

Nonperforming assets at September 30, 2019 were $29.7 million, or 0.45% of total assets, a decrease of $13.2 million, or 30.7%, compared to $42.9 million, or 0.70% of total assets, at December 31, 2018, and an increase of $0.4 million, or 1.3%, from $29.4 million, or 0.46% of total assets, at June 30, 2019. During the three months ended September 30, 2019, our nonaccrual loans increased $0.8 million, or 4.7%.

The allowance for loan losses decreased to $25.1 million, or 0.72% of total loans at September 30, 2019 compared to $27.0 million, or 0.82% of total loans at December 31, 2018 due to a partial reversal of provision after $1.2 million in charge-offs associated with three large nonaccrual commercial real estate loans sold during the first quarter of 2019. The allowance for loan losses at June 30, 2019 was $24.7 million, or 0.71% of total loans.

For each of the three months ended September 30, 2019 and 2018, we recorded provision for loan losses of $1.0 million compared with $2.5 million for the three months ended June 30, 2019. The provision for loan losses for the nine months ended September 30, 2019 was $2.6 million compared with $6.0 million for the nine months ended September 30, 2018.

Net charge-offs were $0.6 million for the three months ended September 30, 2019 compared with a net recovery of $45,000 for the three months ended September 30, 2018 and $2.0 million net charge-offs for the three months ended June 30, 2019. Net charge-offs were $4.5 million for the nine months ended September 30, 2019 compared with $0.7 million for the nine months ended September 30, 2018.

Dividend

Southside Bancshares, Inc. declared a third quarter cash dividend of $0.31 per share on August 8, 2019, which was paid on September 5, 2019, to all shareholders of record as of August 22, 2019.

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(1) Refer to the “Non-GAAP Reconciliation” at the end of the financial statement tables in this Earnings Release for a reconciliation of this non-GAAP  financial measure to the nearest GAAP financial measure.

Conference Call

Southside's management team will host a conference call to discuss its third quarter ended September 30, 2019 financial results on Friday, October 25, 2019 at 9:00 a.m. CDT. The call can be accessed by dialing 844-775-2540 and by identifying the conference ID number 6568586 or by identifying “Southside Bancshares, Inc., Third Quarter 2019 Earnings Call.” To listen to the call via webcast, register at http://investors.southside.com.

For those unable to listen to the conference call live, a recording will be available from approximately 12:00 p.m. CDT October 25, 2019 through November 6, 2019 by accessing the company website, http://investors.southside.com.

Non-GAAP Financial Measures

Our accounting and reporting policies conform to generally accepted accounting principles (“GAAP”) in the United States and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of our performance. These include the following fully taxable-equivalent measures (“FTE”): (i) Net interest income (FTE), (ii) Net interest margin (FTE), (iii) Net interest spread (FTE), and (iv) Efficiency ratio (FTE), which include the effects of taxable-equivalent adjustments using a federal income tax rate of 21% for the nine months ended September 30, 2019 and 2018 to increase tax-exempt interest income to a tax-equivalent basis. Interest income earned on certain assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments.

Net interest income (FTE), Net interest margin (FTE) and Net interest spread (FTE). Net interest income (FTE) is a non-GAAP measure that adjusts for the tax-favored status of net interest income from certain loans and investments. We believe this measure to be the preferred industry measurement of net interest income and it enhances comparability of net interest income arising from taxable and tax-exempt sources. The most directly comparable financial measure calculated in accordance with GAAP is our net interest income. Net interest margin (FTE) is the ratio of net interest income (FTE) to average earning assets. The most directly comparable financial measure calculated in accordance with GAAP is our net interest margin. Net interest spread (FTE) is the difference in the average yield on average earning assets on a tax-equivalent basis and the average rate paid on average interest bearing liabilities. The most directly comparable financial measure calculated in accordance with GAAP is our net interest spread.

Efficiency ratio (FTE). The efficiency ratio (FTE) is a non-GAAP measure that provides a measure of productivity in the banking industry. This ratio is calculated to measure the cost of generating one dollar of revenue. The ratio is designed to reflect the percentage of one dollar which must be expended to generate that dollar of revenue. We calculate this ratio by dividing noninterest expense, excluding amortization expense on intangibles and certain nonrecurring expense by the sum of net interest income (FTE) and noninterest income, excluding net gain (loss) on sale of securities available for sale and certain nonrecurring impairments. The most directly comparable financial measure calculated in accordance with GAAP is our efficiency ratio.

These non-GAAP financial measures should not be considered alternatives to GAAP-basis financial statements and other bank holding companies may define or calculate these non-GAAP measures or similar measures differently. Whenever we present a non-GAAP financial measure in an SEC filing, we are also required to present the most directly comparable financial measure calculated and presented in accordance with GAAP and reconcile the differences between the non-GAAP financial measure and such comparable GAAP measure.

Management believes adjusting net interest income, net interest margin and net interest spread to a fully taxable-equivalent basis is a standard practice in the banking industry as these measures provide useful information to make peer comparisons. Tax-equivalent adjustments are reflected in the respective earning asset categories as listed in the “Average Balances with Average Yields and Rates” tables.

A reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures is included at the end of the financial statement tables.

About Southside Bancshares, Inc.

Southside Bancshares, Inc. is a bank holding company with approximately $6.54 billion in assets as of September 30, 2019, that owns 100% of Southside Bank. Southside Bank currently has 59 branches in Texas and operates a network of 81 ATMs/ITMs.

To learn more about Southside Bancshares, Inc., please visit our investor relations website at www.southside.com/about/investor-relations. Our investor relations site provides a detailed overview of our activities, financial information and historical stock price data. To receive e-mail notification of company news, events and stock activity, please register on the E-mail Notification portion of the website. Questions or comments may be directed to Lindsey Bibby at (903) 630-7965, or lindsey.bibby@southside.com.

Forward-Looking Statements

Certain statements of other than historical fact that are contained in this press release and in other written material, documents and oral statements issued by or on behalf of the Company may be considered to be “forward-looking statements” within the meaning of and subject to the safe harbor protections of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date. These statements may include words such as “expect,” “estimate,” “project,” “anticipate,” “appear,” “believe,” “could,” “should,” “may,” “likely,” “intend,” “probability,” “risk,” “target,” “objective,” “plans,” “potential,” and similar expressions. Forward-looking statements are statements with respect to the Company’s beliefs, plans, expectations, objectives, goals, anticipations, assumptions and estimates about the Company's future performance and are subject to significant known and unknown risks and uncertainties, which could cause the Company's actual results to differ materially from the results discussed in the forward-looking statements. For example, discussions about trends in asset quality, capital, liquidity, the pace of loan and revenue growth, the Company's ability to sell nonperforming assets, expense reductions, planned operational efficiencies, earnings, successful integration of completed acquisitions and certain market risk disclosures, including the impact of interest rates, tax reform and other economic factors, are based upon information presently available to management and are dependent on choices about key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future.

Additional information concerning the Company and its business, including additional factors that could materially affect the Company’s financial results, is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, under “Part I - Item 1. Forward Looking Information” and "Part I - Item 1A. Risk Factors" and in the Company’s other filings with the Securities and Exchange Commission. The Company disclaims any obligation to update any factors or to announce publicly the result of revisions to any of the forward-looking statements included herein to reflect future events or developments.

Southside Bancshares, Inc.
Consolidated Financial Summary (Unaudited)
(Dollars in thousands)

Southside Bancshares, Inc.
Consolidated Financial Highlights (Unaudited)
(Dollars and shares in thousands, except per share data)

1. Refer to the “Non-GAAP Reconciliation” at the end of the financial statement tables in this Earnings Release for a reconciliation of this non-GAAP financial measure to the nearest GAAP financial measure.

Southside Bancshares, Inc.
Consolidated Financial Highlights (Unaudited)
(Dollars in thousands)

1. Excludes purchased credit impaired ("PCI") loans measured at fair value at acquisition if the timing and amount of cash flows expected to be collected from those sales can be reasonably estimated.
2. Includes $0.8 million, $0.8 million, $0.7 million, $3.1 million and $3.2 million in PCI loans restructured as of September 30, 2019, June 30, 2019, March 31, 2019, December 31, 2018 and September 30, 2018, respectively.
3. Refer to the “Non-GAAP Reconciliation” at the end of the financial statement tables in this Earnings Release for a reconciliation of this non-GAAP financial measure to the nearest GAAP financial measure.

Loan Portfolio Composition

The following table sets forth loan totals by category for the periods presented (in thousands):

Southside Bancshares, Inc.
Consolidated Financial Highlights (Unaudited)
(Dollars and shares in thousands, except per share data)

1. Refer to the “Non-GAAP Reconciliation” at the end of the financial statement tables in this Earnings Release for a reconciliation of this non-GAAP financial measure to the nearest GAAP financial measure.

Southside Bancshares, Inc.
Consolidated Financial Highlights (Unaudited)
(Dollars in thousands)

1. Excludes PCI loans measured at fair value at acquisition if the timing and amount of cash flows expected to be collected from those sales can be reasonably estimated.
2. Includes $0.8 million and $3.2 million in PCI loans restructured as of September 30, 2019 and September 30, 2018, respectively.
3. Refer to the “Non-GAAP Reconciliation” at the end of the financial statement tables in this Earnings Release for a reconciliation of this non-GAAP financial measure to the nearest GAAP financial measure.

The tables that follow show average earning assets and interest bearing liabilities together with the average yield on the earning assets and the average rate of the interest bearing liabilities for the periods presented. The interest and related yields presented are on a fully taxable-equivalent basis and are therefore non-GAAP measures. See “Non-GAAP Financial Measures” and “Non-GAAP Reconciliation” for more information.

Southside Bancshares, Inc.
Average Balances and Average Yields and Rates (Annualized) (Unaudited)
(Dollars in thousands)

1. Interest on loans includes net fees on loans that are not material in amount.
2. For the purpose of calculating the average yield, the average balance of securities is presented at historical cost.

Note: As of September 30, 2019 and June 30, 2019, loans totaling $17.1 million and $16.4 million, respectively, were on nonaccrual status. Our policy is to reverse previously accrued but unpaid interest on nonaccrual loans; thereafter, interest income is recorded to the extent received when appropriate.

Southside Bancshares, Inc.
Average Balances and Average Yields and Rates (Annualized) (Unaudited)
(Dollars in thousands)

1. Interest on loans includes net fees on loans that are not material in amount.
2. For the purpose of calculating the average yield, the average balance of securities is presented at historical cost.

Note: As of March 31, 2019 and December 31, 2018, loans totaling $17.7 million and $35.8 million, respectively, were on nonaccrual status. Our policy is to reverse previously accrued but unpaid interest on nonaccrual loans; thereafter, interest income is recorded to the extent received when appropriate.

Southside Bancshares, Inc.
Average Balances and Average Yields and Rates (Annualized) (Unaudited)
(Dollars in thousands)

1. Interest on loans includes net fees on loans that are not material in amount.
2. For the purpose of calculating the average yield, the average balance of securities is presented at historical cost.

Note: As of September 30, 2018, loans totaling $32.5 million were on nonaccrual status. Our policy is to reverse previously accrued but unpaid interest on nonaccrual loans; thereafter, interest income is recorded to the extent received when appropriate.

Southside Bancshares, Inc.
Average Balances and Average Yields and Rates (Annualized) (Unaudited)
(Dollars in thousands)