Southside Bancshares, Inc. Announces Financial Results for the Three and Six Months Ended June 30, 2018

TYLER, Texas, July 27, 2018 (GLOBE NEWSWIRE) -- Southside Bancshares, Inc. ("Southside" or the "Company") SBSI today reported its financial results for the three and six months ended June 30, 2018.

Southside reported net income of $20.2 million for the three months ended June 30, 2018, an increase of $5.7 million, or 39.5%, compared to $14.5 million for the same period in 2017.  Southside reported net income of $36.5 million for the six months ended June 30, 2018, an increase of $7.0 million, or 23.7%, compared to $29.5 million for the same period in 2017.

Earnings per diluted common share increased $0.08, or 16.3%, to $0.57 for the three months ended June 30, 2018, from $0.49 for the same period in 2017.  Earnings per diluted common share increased $0.04, or 4.0%, to $1.04 for the six months ended June 30, 2018, from $1.00 for the same period in 2017.

The return on average shareholders' equity for the six months ended June 30, 2018 was 9.77%, compared to 11.13% for the same period in 2017.  The return on average assets was 1.16% for the six months ended June 30, 2018, compared to 1.06% for the same period in 2017.

"Southside experienced an excellent second quarter highlighted by our financial results and the completion of the Diboll Bancshares, Inc. integration," stated Lee R. Gibson, President and Chief Executive Officer of Southside.  "We reported record net income during the second quarter of $20.2 million, an efficiency ratio below 50% and maintained the net interest margin on a linked quarter basis at 3.19%, notwithstanding a slight reduction in average loans.  During the quarter we recorded acquisition costs related to the Diboll transaction of $1.0 million, a $332,000 loss on the sale of available for sale securities and a death benefit of $636,000 in bank owned life insurance income.  We expect to realize substantially all of the efficiencies and the associated cost savings of the Diboll integration during the third quarter."

"During the second quarter loan payoffs exceeded loans funded by $39 million.  Our loan pipeline looks promising for the remainder of the year as a number of loans are expected to fund; however, we expect additional payoffs that will offset a portion of the new funding's.  Economic conditions in East Texas remain solid and the Austin and DFW economies, fueled by company relocations and overall population growth, continue to be robust."

Loans and Deposits

For the six months ended June 30, 2018, total loans decreased by $23.5 million, or 0.7%, to $3.27 billion, compared to December 31, 2017.  The net decrease in our loans was comprised primarily of decreases of $19.2 million of commercial real estate loans, $17.8 million of loans to individuals, and $14.0 million of 1-4 family residential loans, partially offset by increases of $16.3 million of commercial loans and $11.4 million of construction loans.  Energy loans totaled 1.55% of the loan portfolio at June 30, 2018, compared to 1.50% at December 31, 2017.

Nonperforming assets increased during the six months ended June 30, 2018 by $32.0 million, or 305.1%, to $42.4 million, or 0.68% of total assets, compared to $10.5 million, or 0.16% of total assets at December 31, 2017, primarily due to the addition of two commercial real estate relationships consisting of three loans to nonaccrual status during the first quarter.

During the six months ended June 30, 2018, the allowance for loan losses increased by $4.3 million, or 20.6%, to $25.1 million, or 0.77% of total loans, compared to 0.63% of total loans at December 31, 2017.  The increase in the allowance was primarily the result of additional provision recorded on the commercial real estate loans placed on nonaccrual status in the first quarter.

During the six months ended June 30, 2018, deposits, net of brokered deposits, decreased $58.3 million, or 1.3%, compared to December 31, 2017, due primarily to the decrease in public fund deposits of $42.8 million during the six months ended June 30, 2018, compared to December 31, 2017.

Net Interest Income for the Three Months Ended June 30, 2018

Net interest income increased $7.7 million, or 21.7%, to $43.1 million for the three months ended June 30, 2018, compared to $35.4 million for the same period in 2017.  The increase in net interest income was the result of a $10.8 million increase in interest income from our loan portfolio, partially offset by an increase in interest expense of $3.1 million associated with interest expense on our deposits, compared to the same period in 2017.

For the three months ended June 30, 2018, our net interest margin (FTE) increased to 3.19%, compared to 3.07% for the same period in 2017.  The increase in net interest margin (FTE) was due primarily to an increase in the average balances and mix of earning assets as a direct result of the acquisition of Diboll and an increase in the average yields on earning assets, partially offset by higher average rates paid on interest bearing liabilities.  The increase in average rates paid on interest bearing liabilities was primarily due to rising interest rates during 2017 and 2018.  For the three months ended June 30, 2018, our net interest spread (FTE) increased slightly to 2.90%, compared to 2.89% for the same period in 2017.  The net interest spread (FTE) on a linked quarter basis decreased from 2.95% for the three months ended March 31, 2018, to 2.90% for the three months ended June 30, 2018.  The net interest margin (FTE) remained at 3.19% on a linked quarter basis.

Net Interest Income for the Six Months Ended June 30, 2018

Net interest income increased $16.5 million, or 23.4%, to $87.2 million for the six months ended June 30, 2018, compared to $70.7 million for the same period in 2017.  The increase in net interest income was the result of a $23.1 million increase in interest income primarily from our loan portfolio, partially offset by an increase in interest expense of $6.6 million associated with interest expense on our deposits, compared to the same period in 2017.

For the six months ended June 30, 2018, our net interest margin (FTE) increased to 3.19%, compared to 3.07% for the same period in 2017.  The increase in net interest margin (FTE) was due primarily to an increase in the average balances and mix of earning assets as a direct result of the acquisition of Diboll and an increase in the average yields on earning assets, partially offset by higher average rates paid on interest bearing liabilities.  The increase in average rates paid on interest bearing liabilities was primarily due to rising interest rates during 2017 and 2018.  For the six months ended June 30, 2018, our net interest spread (FTE) increased slightly to 2.92%, compared to 2.91% for the same period in 2017.

Net Income for the Three Months Ended June 30, 2018

Net income increased $5.7 million, or 39.5%, for the three months ended June 30, 2018, to $20.2 million compared to the same period in 2017.  The increase was primarily the result of a $10.8 million increase in interest income and a $1.7 million increase in noninterest income, partially offset by a $3.7 million increase in noninterest expense and a $3.1 million increase in interest expense.

Trust income, deposit services and bank owned life insurance income increased and were partially offset by an increase in net loss on sale of securities and a decrease in gain on sale of loans.  The increase in both trust income and deposit services income was largely related to the acquisition of Diboll.  The increase in our bank owned life insurance income was due to death benefits recorded for a retired covered officer.  In connection with the adoption of Accounting Standards Update 2014-09 ("ASU 2014-09") revenue recognition guidance effective January 1, 2018, debit card expense and brokerage service expense for the three months ended June 30, 2018, previously reported in ATM and debit card expense and other noninterest expense are now netted with deposit services income and brokerage services income, respectively.  Due to the guidance under the modified retrospective method, prior periods have not been adjusted and therefore, are not comparable.

Noninterest expense increased $3.7 million, or 14.6%, for the three months ended June 30, 2018, compared to the same period in 2017.  The increase in most of our noninterest expense categories is directly attributable to the integration of Diboll into our operations.

Income tax expense for the three months ended June 30, 2018 remained relatively unchanged although net income increased.  This was attributable to the reduced tax rate under the Tax Cuts and Jobs Act resulting in a lower effective tax rate of 14.3% compared to 18.8% for the same period in 2017.

Net Income for the Six Months Ended June 30, 2018

Net income increased $7.0 million, or 23.7%, for the six months ended June 30, 2018, to $36.5 million compared to the same period in 2017.  The increase was primarily the result of a $23.1 million increase in interest income, a $1.7 million increase in noninterest income and a $0.9 million decrease in income tax expense, partially offset by a $9.5 million increase in noninterest expense, a $6.6 million increase in interest expense and a $2.6 million increase in provision for loan losses.

Excluding net (loss) gain on sale of securities, noninterest income increased $3.1 million, or 16.3%, for the six months ended June 30, 2018 compared to the same period in 2017.  Deposit services and trust income increased and were partially offset by a decrease in gain on sale of loans.  The increase in both deposit services income and trust income was largely related to the acquisition of Diboll.  With the adoption of ASU 2014-09, debit card expense and brokerage service expense for the six months ended June 30, 2018, previously reported in ATM and debit card expense and other noninterest expense, are now netted with deposit services income and brokerage services income, respectively.  Due to the guidance under the modified retrospective method, prior periods have not been adjusted and therefore, are not comparable.

Noninterest expense increased $9.5 million, or 18.6%, for the six months ended June 30, 2018, to $60.9 million, compared to the same period in 2017.  The increase in most of our noninterest expense categories was directly attributable to the integration of Diboll into our operations.

The decrease in income tax expense for the six months ended June 30, 2018  was attributable to the reduced tax rate under the Tax Cuts and Jobs Act resulting in a lower effective tax rate of 13.0% compared to 17.8% for the same period in 2017.

Conference Call

Southside's management team will host a conference call to discuss its second quarter 2018 financial results on Friday, July 27, 2018 at 9:00 a.m. CDT.  The call can be accessed by dialing 844-775-2540 and by identifying the conference ID number 7518659 or by identifying "Southside Bancshares, Inc., Second Quarter 2018 Earnings Call."  To listen to the call via webcast, register at www.southside.com/about/investor-relations.

For those unable to listen to the conference call live, a recording will be available from approximately 3:00 p.m. CDT July 27, 2018 through August 7, 2018 by accessing the company website, www.southside.com/about/investor-relations.

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% and 35% for the three and six months ended June 30, 2018 and 2017, respectively, 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 of intangibles and certain nonrecurring expense by the sum of net interest income (FTE) and noninterest income, excluding gains (losses) on sales of available for sale securities 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.

In the following table we present, for the five quarterly periods ended June 30, 2018 and for the six months ended June 30, 2018 and 2017, the reconciliation of net interest income to net interest income adjusted to a fully taxable-equivalent basis assuming a 21% marginal tax rate for the 2018 quarterly and six month periods and a 35% marginal tax rate for the 2017 quarterly and six month periods for interest earned on tax-exempt assets such as municipal loans and investment securities (dollars in thousands), along with the calculation of total revenue, adjusted noninterest expense, efficiency ratio (FTE), net interest margin (FTE) and net interest spread (FTE).

(1)   These amounts are presented on a fully taxable-equivalent basis and are non-GAAP measures.
(2)   Includes net gains and losses on sale of available for sale securities, impairment of investments, other-than-temporary impairment charges and additional bank owned life insurance income realized as a result of the death benefits for a retired covered officer.
(3)   Includes acquisition expenses and foreclosure expenses.

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 reported in the respective earning asset categories as listed in the  "Average Balances with Average Yields and Rates" tables under Results of Operations.

About Southside Bancshares, Inc.

Southside Bancshares, Inc. is a bank holding company with approximately $6.25 billion in assets as of June 30, 2018, that owns 100% of Southside Bank.  Southside Bank currently has 59 branches in Texas and operates a network of 84 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 Julie Shamburger at (903) 531-7134, or julie.shamburger@southside.com.

Forward-Looking Statements

Certain statements of other than historical fact that are contained in this document and in other written material, press releases 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, 2017, 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.

(1) These amounts are presented on a fully taxable-equivalent basis and are non-GAAP measures.  See "Non-GAAP Financial Measures" for more information, including a reconciliation to GAAP.

(1) These amounts are presented on a fully taxable-equivalent basis and are non-GAAP measures.  See "Non-GAAP Financial Measures" for more information, including a reconciliation to GAAP.

(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 $2.9 million, $2.9 million, $2.9 million, $3.0 million, and $3.0 million in PCI loans restructured as of June 30, 2018, March 31, 2018, December 31, 2017, September 30, 2017, and June 30, 2017, respectively.

Loan Portfolio Composition

The following table sets forth loan totals by category for the periods presented:

The "Average Balances with Average Yields and Rates" 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 (dollars in thousands) 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" for more information.

(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 June 30, 2018 and March 31, 2018, loans totaling $35.4 million and $34.5 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.

(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 December 31, 2017 and September 30, 2017, loans totaling $2.9 million and $3.1 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.

(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 June 30, 2017, loans totaling $3.0 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.

(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 June 30, 2018 and 2017, loans totaling $35.4 million and $3.0 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.