A few days ago, I found myself at Dividend Mantra’s blog reading about stocks on his watch list and became very enthralled at his attention to the financial institution industry and a stock within there that he is observing. The financial institution industry has been ever-so changing over the last 5-6 years, with the financial crisis, increased transparency, regulation, increases of capital, consolidation of companies/institutions and the dramatic line of – “Acquire or become Acquired” mindset over the last 2 years – it has been a very exciting time for smaller community banks. I’m going to perform an evaluation of Southside Bancshares (SBSI) and OmniAmerican Bancorp (OABC), as SBSI is acquiring OABC. See below:
Balance Sheet/Asset Quality/Regulatory Capital
To begin, I will review the asset quality of the loan portfolios of each institution – as that is the main “guts” of a bank, for lack of better words. Banks make money off of their loans in interest income. This economy has found it extremely difficult for banks to grow organically in the loan area, as obvious as it is stated – loans are difficult to come by from a bank’s perspective over the last 2 years, especially after the re-financing boom has slowed down. I will trend out the Impaired Loans (Loans that are deemed to not be collectible and have been evaluated for a specific reserve) as well as substandard loans (the worst risk graded loans that could either be impaired or not impaired) amount for each bank from 2010-Q12014. Then I will review the total asset, capital and cash trend, as well as loans, to see which direction they are headed.
Impaired Loans: The trend is down tremendously for SBSI, from 18,985 in impaired loans down to 10,897 (2010 – March 2014). Cutting it almost in half and only representing 0.80% of the total overall portfolio – heavily improved. The % of impaired loans to net loans was 1.80% in 2010. This means a combo of two things: Loans have grown and impaired loans have decreased – both a plus when reviewing a financial institution. For OABC, these have gone from 33,325 to 13,337 = another huge decrease. The trend has gone from 5% of net loans to 1.67% of net loans, becoming much cleaner each year. Conclusion: Impaired loans appears to be in check and trending with what I’ve seen in financial institutions, less problematic loans leads to less provision needed and less of an allowance needed.
Substandard Loans: SBSI has decreased from 3% in 2010 to 1.78%. OABC has decreased from 5.9% to 1.70%. Substandard loans are loans that are highly classified by the bank and is a very troubled risk-graded loan due to the following: Calculated debt service coverage not adequate to satisfy debts, potential/signs of delinquency etc. These loans may be impaired or not impaired. Conclusion: Asset quality, like above, shows a drastic improvement for both entities.
Total Assets: Just by looking at the chart below – SBSI has grown from $3B to $3.4B in 3.25 years and OABC has grown from $1.1B to $1.4B in 3.25 years – almost similar growth. Conclusion: Total assets have grown – something that an investor wants to see and needs to see in the FI realm – as it’s eat or be eaten in this game.
Total Cash: Has declined for both entities over the course – due to smaller acquisitions or purchases of investment securities to catch some yield, as well as growth of loans. Conclusion on this: Both have large amounts of cash at Q1 2014 – $57M for SBSI and $13M for OABC.
Regulatory Capital: Has dramatically increased for both and are both more than sufficiently capitalized than the required amount by the regulators. Both have passed my review/analysis in this realm.
Conclusion On above: Both have shown trends of Asset Quality, Total Assets, Net Loans, Regulatory Capital improvements that equip a bank to succeed into the future.
Next we will look at operating cash flow, net interest income and earnings per share. We will also look at it’s price history, P/E, payout and yield potential. I always like to see a bank have positive and steady operating cash flow, as that is what is providing the bank it’s true source of earnings to use, and for a bank to survive, this needs to be positive. Net Interest Income After Provision is difficult these days due to increased pressure in the interest market environment, which is pushing more institutions to have non-interest income generating activities such as loan sales, security sales, REOs being sold etc. However, Net Interest Income is what a bank stands for as that is a “continued” cash flow and is not a 1 time hitter such as a sale of an asset.
Operating Cash Flow: After annualizing Q1 in the far right column, SBSI was set to outpace every prior year and appears equipped to continue this trend. OABC appears to be consistent with the long term average of operating cash flow after Q1 results. Both are positive, which is a trend I like to see.
Net Interest Income After Provision: Both appear to be trending in a favorable direction based on 2012 and forward, especially when annualizing the Q1 results of 2014. If the acquisition goes down between the two – this should be a great benefit to SBSI.
EPS: It is not annualized below, but it appears that both entities are seeing more pressure on earnings going forward. This is due to a few items in the FI world: Decrease in service charges/fees seen across the board in Q1 2014, as well as a SLOW down of non-interest income from primarily gain on loan sales. Why the slow down? Customers go to the bank to re-finance their loan. The bank will sometimes sell that loan on the secondary market (fannie/freddie) and will either service the loan or also sell the servicing of the loan in the whole deal. These types of transactions has slowed down due to the slight increase of interest rates and the market for re-financing being “dried” up. This caused net income to be lower for the quarter ending 3/31/14. Payout ratios are still in line with being under 60% for both entities, and the cash and capital are equipped, however, to continue to pay and increase.
Conclusion here: As Mantra stated, SBSI has decreased quite a bit since Q1 – down 13.62% and showing a P/E that is under the market on average with a yield above average. You pair that up with an increase in Asset Quality going forward, a bank that raises dividends, provides stock dividends at 5% per year and is also ACQUIRING banks and not being acquired – you are looking towards a stronger future going forward. Given that it is on his watch list, and not making a direct recommendation – it appears that SBSI is a sound bank, a sound investment, has more that sufficient regulatory capital to handle any bumps along the way, as well as sufficient cash/equivalents to protect itself – seems as a good investment for a dividend portfolio that may be looking for a seat with a bank’s name on it. The acquisition should provide back-office synergies, therefore, income should be up more than a simple pro-forma of the two. I hope this research and analysis helps and provides more of an investigation into the two companies. SBSI is in process of closing on the acquisition/merger of OABC and is set to close towards the end of the year. All of the information above stems from SEC reporting of 10Ks and 10Qs (annual and quarterly reports).
Thoughts on the analysis described above (as I know it was “quick and dirty”)? Any questions? Any concerns? Let me know if there is anything I can assist to answer. Thanks again for stopping by!