Q3 2019 Earnings Call

Ladies and gentleman today's conference is scheduled to begin shortly.

Can you just standby thank you for your patience.

And gentlemen, thank you for standing by and welcome to the Southside Bancshares Inc. third quarter 2019 earnings Conference call.

At this time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone. Please be advised today's conference is being recorded.

If you require any further assistance. Please press star zero I would like to have the conference over to your speaker today Ms. Libby.

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The <unk> Vice President of Investor Relations Ma'am. Please go ahead.

Thank you Michelle good morning, everyone and welcome to Southside Bancshares' third quarter 2019 earnings call a transcript of today's call will be posted on south I don't come under Investor Relations.

During today's call and other disclosures in presentation I wouldn't mind you. The any forward looking statement are subject to risk and uncertainties factors that could materially change. Our current forward looking assumptions are described in our earnings release in our Form 10-K .

Joining me today, our lead Gibson, President and CEO , and Julie Shamburger Senior Executive Vice President and CFO . Our agenda today is a solid for sure hugely discuss an overview of our financial results. Then we will share his comments on the quarter in an update on our nonperforming assets I will now turn the call ever to Julie.

Thank you Wendy good morning, everyone and welcome to Southside Bancshares' third quarter 2019 earnings call.

We reported net income and 19.8 million for the third quarter, an increase of 1.2 million or 6.4% on a linked quarter basis in a decrease of 511000 or 2.5 per cent compared to the same period in 2018.

For the quarter ended September Thirtyth 2019, our diluted earnings per share were 58 cents, an increase of three cents on linked quarter basis and consistent with the same period in 2018.

We're pleased to report additional loan growth during the quarter with an increase of 39.8 million to 3.5 billion on a linked quarter basis. The additional loan growth during the quarter brings our year to date loan growth to 5.6%.

During the third quarter, we experience most of the loan growth in our construction portfolio into a lesser extent growth in both our one to four residential and municipal portfolios.

Our allowance for loan loss increased 424000, a 1.7% to 25.1 million from June Thirtyth 2019.

Our core our credit quality remained strong with a slight decrease in nonperforming assets as a percentage of total assets to point, 45% at September thirtyth compared to point, 46% as of June Thirtyth 2019, with only a slight increase in nonperforming assets at 380.

4000, or 1.3% to 29.7 million at the end of the third quarter.

[laughter], our securities portfolio increased 145.5 million or 6.5% for the quarter ended September Thirtyth 2019, due to purchases in our municipal and mortgage back securities portfolios.

At September Thirtyth 2019, we had a net unrealized gain in the securities portfolio of 62.8 million in a duration at 4.7 years, a decrease from 5.8 years at the end of June due to the increase in prepayments and mortgage backed securities during the quarter.

Our mix of loans and securities shifted slightly this quarter end with loans at 60% and securities at 40% compared to a mix of 61% loans and 39% securities at the end of the second quarter.

The slot shift was due to our growth in the securities portfolio outpacing our loan growth.

Our net interest margin for the third quarter in 2019 decreased 14 basis points to 3.3 from 317 in the previous quarter.

The net interest margin was compressed by lower interest rates, resulting in a lower yield on average assets of 14 basis points.

This decrease in the yield on average assets more than offset the one basis point decrease in the cost of interest bearing liabilities, resulting in the 13 basis point decrease in our net interest spread for the third quarter to to 68 compared with two anyone in the second corner and 19.

[laughter] linked quarter, our net interest income decreased $758000 or 1.8% or.

Our loan accretion this quarter decreased $395000 from the second quarter of 2019, resulting in 290000, the blown accretion recorded during the quarter.

The decrease in accretion reduced our NIM by three basis points as well as reducing net interest income.

During the third quarter, we recorded provision for loan loss expense of $1 million linked quarter decrease of one and a half million.

Linked quarter, our non interest income excluding net security gains increased 231000 or to put my per cent, primarily due to increases in deposit services income swap fee income in brokerage services.

For the three months ended September Thirtyth, 2019, or non interest expense decreased 674000, or 2.3%, primarily driven by the FDIC small bank assessment credit.

We have approximately 1.2 million remaining in credits to be applied at some point in the future to our FDIC insurance.

We experienced an improvement in our efficiency ratio down to 50.53 per cent compared to 51 point 44, Oh linked quarter basis, due primarily to the decrease in noninterest expense.

For the fourth quarter absent the FDIC assessment credit we estimate our noninterest expense will be consistent with the second quarter of 2019, approximately 29.7 million.

Income tax expense increased 19, 2000 compared to the last quarter, reflecting an effective tax rate is 15.6% for the third quarter. We expect to end the year with an effective tax rate consistent with the third quarter at 15.6%.

Thank you so much and I'll now turn the call to Lee.

Thank you Julie I would like to thank everyone for joining us on our call. This morning, we enjoyed a very good third quarter that was highlighted by.

4.6% linked quarter loan growth a return on average tangible equity or 14% and an efficiency ratio that approach improved to 50.5%.

We continue to experience solid third quarter loan growth in spite of the headwinds of several large loan prepayments that we experienced during the quarter.

Annualized loan growth during the first three quarters was 5.9%, which is consistent with the revised loan growth guidance of 6% that we provided during last quarters earnings call.

During the third quarter, we were successful in hiring additional lenders in the Austin and East Texas markets.

Aspects for our fourth quarter loan growth appear promising given our solid loan pipeline the hiring of additional lenders and few currently known fourth quarter loan prepayments.

As Julie explained we experienced a linked quarter 14 basis point decrease in our net interest margin.

Third quarter average loan and security growth was largely funded by higher cost FHLB advances.

In addition, during the third quarter prepayments on our mortgage backed securities increased as long term interest rates declined significantly.

Resulting an increase in amortization expense.

We anticipate our fourth quarter funding costs should benefit from the recent late third quarter and early fourth quarter decrease in short term interest rates since September Thirtyth long term treasury yields have increased slightly with a 10 year up approximately 10 basis points, while the short term try.

Measure yields have decreased with a three month treasury yield down approximately 15 basis points and overall shift in the yoker of 25 basis points, which should benefit our fourth quarter cost of funds more positively sloped yield curve during the fourth quarter combined.

Historically slower late fall and winter mortgage backed security prepayment speeds could also reduce or stabilize amortization expense.

As a result, we anticipate our NIM should be stable to higher during the fourth quarter.

Our credit quality remains solid and we're not currently seen additional areas of concern.

One of our two largest nonaccrual loans reflected significant improvement during the third quarter as the real estate associated with this loan that was significantly damaged by hurricane Harvey reopen for business last quarter. We will continue to monitor this line for possible consideration for upgrade.

Economic conditions in the Texas markets, we serve remains solid with our Austin and DFW markets performing well above average.

We anticipate continuing to add additional revenue producers during the coming quarters with a special focus in the higher growth, Texas markets. We look forward to opening our newest branch and Kingwood high growth area, just north of Houston next month, we continue to explore opportunities for.

Further growth opportunities, resulting from either an acquisition or through organic growth.

I will now conclude my comments and we will open the lines for questions.

Thank you again, ladies and gentlemen, if you have a question at this time.

To prevent any background.

<unk> place your line.

A question has been stated.

A question comes from the line of Brad Milsaps.

Your line is open. Please go ahead.

Hey, good morning.

Good morning, Brad.

Lee I was writing quickly during your your NIM commentary I'm I appreciate all the color, but wanted to make sure you're not going to hurt the final guidance, you kind of expected to be stable.

To slightly up I'm, just curious if you could quantify the amount of American.

<unk> expense you had in the quarter on the bond portfolio, maybe versus what it wasn't a second I'm sorry, if I missed that I wish I was trying to write everything down quickly.

We will have to get that number 40, a brad and.

We will.

Have that out.

Well, we'll send that out.

Okay I know, it's I know, it's up because I know the prepayments inquiries.

Our amortization expense was up in it impacted the NIM.

But.

We don't have that exact number right now.

Okay, Great and then.

Yeah, that'd be great. If we could follow up on that and then just in terms of repricing of the federal home loan Bank advances I know you'll have updated info in the Q.

But anything major rolling off in the fourth quarter.

We have a lot of we've kept all the home loan bank advances not all that we have we do have 200 and.

Steer 80 million hedge that we've had hedged for a long time, but all the rest we have kept a relatively short.

I don't know that we've gone out much past three months on anything most of its been.

Either overnight or 28 day advances so it will reprice fairly quickly.

Okay, Great and then and in terms of your commentary around loan growth, obviously, it sounds like the fourth quarter will be a little bit better from a a payoff perspective and it sounds like you hired some new lenders this quarter still feel comfortable kind of as you look out into next year or kind of it that mid single digit pace or.

Might we see some acceleration with some of the folks you brought over.

I think right now we're looking at 6% for 2020, but we don't expect to revise that down for 2020, if anything we might.

When we come in January we might have a slightly higher number, but it's not going to deviate from that very much.

Okay, great. Thank you guys really appreciate it.

All right. Thank you Brad.

Thank you and your next question.

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Piper Jaffray. Your line is open. Please go ahead.

Hey, good morning, everyone.

Morning, Brett.

One of them just to go back to a prepayments for a second could you quantify the the amount of far prepayments you had in a quarter and was that in commercial real estate and Im just thinking.

Thinking about any visibility you might have and prepayments from here I know that's been a bit of a challenge for you for growth.

Most of it was a fan.

And the let's see our portfolio.

Yes, it's credits that moved out of construction and then too.

Into a permanent and they sold properties and.

Things of that nature, a little bit and the come in the see an ice phase, but I think it was mostly centered in the end the CRT space.

And we see Mike we.

The magnitude it was it was probably close to.

50 million, maybe six as high as 60 million during the quarter.

Okay.

As we had very little in the second quarter.

Okay and then we as you look at your existing commercial real estate book premiered you kind of see you.

Life line that might be susceptible prepayments or can you give us any color on how you think about that going forward.

Well as you look at our construction book you know some of that and we you know we know that going in some of that.

Wants it.

Once they finished construction on the property and.

Lisa that first stabilize the property.

So some of our borrowers are going to hold it and some of our just simply going to sell it which as you know and we know the ones that typically sell the properties going in.

So you know I anticipate that we'll continue to see you know prepayments in future quarters.

As to some quarters is heavier than others.

Okay.

And then you mentioned buying municipals and buying securities during the quarter can you talk about what you bought average rate and then you know kind of how you're trying to insulate the securities portfolio from this environment.

We bought a lot of municipal Securities. We also bought some mortgage backed securities and we're we're kind of operating on both sides.

We were able to find some mortgage backed securities that were paying 60, 70% and biomet.

Reasonably nice yields and realizing that they probably will not continue to pay it 60, 70% for very long and our downsized very very small versus the upsides really good.

We have bought also some some longer duration.

Mortgage backed securities were the principal is locked out for a period of time.

So that the amortization expense associated with that should prepayments kick up will be be less on the municipal side. We just continue to buy good gig.

Quality credits and here in Texas and.

Our our municipal book had had decreased pretty significantly the first of the year. When we sold a lot of the really really short stuff that was going to have call you don't be called away pretty quickly.

And.

We're replacing that with.

With newer securities with eight to 10 year calls on.

Okay, and one last housekeeping issue it was supposed to discount accretion for the quarter.

It was two nani.

It was down about 395.

Okay that accounted for three three basis points of the 14 basis point decrease in the NIM.

Okay.

Great appreciate all the color.

All right.

Thank you.

Thank you and our next question comes on line.

KBW. Your line is open. Please go ahead.

Good morning, guys.

Good morning.

So it's nice to hear you think said.

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Couple of.

Thanks.

So another.

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Yes, I do.

And it's mainly because the slope of the yoker has.

Actually made in favor of.

Banking from the standpoint of it was it was heavily inverted pretty much all the way along the yield curve, except for the 30 year and now it's.

There is a positive sloped yield curve, it's still partially.

Inverted a few places, but not anything like it was at the end of August or even in early September .

Got it that's helpful.

And then touching on the discount accretion again.

Pretty good run rate going forward or do you think we could.

That number.

Thanks.

Hi, specs that number to pick up and it will you know it was significantly lower than what we have seen historically the last two quarters.

In most of that and.

How that spread out during the quarter is it was the very lowest.

The lowest month in the quarter was the first went into a corner in it did pick up so I do anticipate a pick up during that I believe it is well it would've been July we had several loans that paid off that had actually had premiums on them and so and it was really that was really more than offsetting factor.

Dan.

Necessarily having a decrease in accretion, but the result was a decrease so it picked up as the quarter went on so I you know I would think.

Closer to four four to 500 is what my expectation would be.

If I could you know if I can judge the last couple of months.

The quarter.

Got it but the again you never know for sure what's going to pay off so.

And then.

For me just looking at that.

Benefit.

Yes.

I was just wondering if you could quantify how much.

Quarter.

We received a created a fourth 13 in this for the second quarter or for the third quarter. It was basically you know which into its paid in a rare. So it is based on the prior quarters.

And reserve ratio, but it was 413000, so we would expect it to be about that much.

Each month that we are each quarter that we you know get to use the credit.

Got it right. That's all for me thanks, guys.

All right. Thank you.

Thank you and again, ladies and gentlemen, if you have a question at this time. Please press Star then one.

Next question comes in the line of Michael Young with Suntrust. Your line is open. Please go ahead.

Hey, Good morning. This is brand and can go on for Michael.

And one in very good.

Good morning.

And I wanted to touch expenses. So I know your prepared remarks expenses are expected to be relatively stable going forward, but with the hiring of additional lenders are you expecting to offset some of that high with coffees and other areas or just wanted to get a picture of what the magnitude.

We do expect to see some.

Cost saves first quarter.

But beyond that I don't know that we'll have a lot and so you know going going.

Into next year. The the quarterly expense you know may start to move up slightly but.

I hope would be that.

These revenue producers would produce additional on net interest income in fees that were more than offset that.

Thank you that's helpful.

And then going to share repurchase plan authorized in September .

So all you purchased 25000 shares so far for Q and they share prices up around like 2% since you announced the repurchase plan.

I want to know if you plan on.

Purchasing using all of that this quarter or what the pace is going forward into next year, if you're using some of that.

She out too far then 2020.

That really depends on what the stock does it in price.

It's.

Yes. The last time, we did one of these stock repurchases in late 2018.

He was very easy to find stock now it's much more difficult to find it so it I don't I.

I don't anticipate at this point that we would use it all up in the fourth quarter, but.

It's hard to it's hard to know.

We ended up and then other December like we did last year than who knows we could.

Gotcha.

Thank you very much that's all that for today are thank you.

Thank you and I'm showing no further questions and I would like to turn the conference back over to President and CEO Mr. Li.

Thank you for joining us today, we look forward to be with you in January to report yearend and fourth quarter results and this concludes our comments.

Ladies and gentlemen, thank you for participating in today's conference.

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