Q2 2020 Southside Bancshares Inc Earnings Call
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<unk> earnings call.
All participants are you know listen only mode. Later, we will conduct a question answer session and instructions will be given at that site.
I would I like it turned the corner of the decided baby's Q3 officer.
Hi, George.
Thank you Bobby good morning, everyone and welcome to Southside Bancshares' second quarter 2020 earnings call a transcript of today's call will be posted on south <unk> Dot com under Investor Relations.
During today's call and other disclosures in presentation I will remind you that any forward looking statements are subject to risks and uncertainties factors that could materially change. Our current order booking assumptions are described in our earnings release and our form 10-K.
Joining me today, our lead Gibson, President and CEO and Jewish Shamburger CFO.
Third we will share his comment on the quarter, including the code would not be pandemic, then Julie will give an overview of our financial results.
Now I'll turn the call over Chile.
Good morning, and welcome to Southside Bancshares' second quarter earnings call I'm going to provide an overview of the quarterly results and how we're dealing with pandemic in managing the bank in this current economic environment.
Starting with our second quarter results. We reported net income of 21 point Sixmillion earnings per share of 65 cents at an annualized return on average tangible equity of 15.24%.
Vision for credit loss expense during the quarter was 5.2 million.
Linked quarter, the allowance for loan losses increased 6.2 million to 59.9 million, increasing the allowance as a percentage of total.
Total loans net of PPP launch 20 basis points to 1.69%.
Nonperforming assets as a percent of total assets linked quarter remained unchanged at <unk>, 0.24% and the tax the tax equivalent net interest margin decreased one basis point to 3.2% due to the PPP loans booked during the second quarter.
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Consistent loan underwriting standards and strong asset quality.
Long been a cornerstone of south sides business.
Principally pandemic began in earnest we have further intensified our focus on asset quality by significantly increasing the frequency and level of monitoring the loan portfolio.
In addition to our normal procedures were reviewing more detailed reports by industry and we're conducting numerous designed meeting deep dives with the respective loan officers by industry within the loan portfolio on an individual loan basis.
Overall, we're encouraged by what we have learned and observe relative to asset quality.
We recently completed a deep dive to discuss which modified loans customers have indicated they will resign, making so normal normally scheduled payments once the initial 90 day modification period.
Modified loan total as of yesterday was approximately 326 million.
This total has been trending downward and we anticipate that trend should continue during the third quarter as many of the modified loans are expected to resume their normal payments Joe will provide a more detailed review modified loans by industry during her presentation.
The balance sheet news, we made during the first quarter purchasing highly rated largely Texas municipal securities along with certain funding decisions performed as expected during the second quarter all of the second quarter loan growth, resulting from PPP loans booked during the quarter and.
All of the 331 million dollar increase in deposits occurred in our noninterest bearing deposit categories.
Well potential loan growth during 2020 remains uncertain, we're encouraged by our pipeline and the opportunity to grow quality ones in future quarters.
In June we decided to freeze all future benefit accruals in our defined benefit retirement plan for remaining active employees. This required remeasurement of the retirement liability at June Thirtyth 2020.
This resulted in the recording of a curtailment expense of $163000. In addition, due primarily to the decrease in the discount rate to 2.78% at June Thirtyth from 3.41% at December 31st 2019 there.
As a decrease to accumulated other comprehensive income included in shareholders equity over approximately $6 million.
As of the re measurement, we anticipate retirement expense during the last half of 2020, well increase $450000.
During 2021, we anticipate overall retirement expense.
We will decrease approximately $2 million when compared to 2020.
As we continue operating the bank during this pandemic our primary focus and concern remains the safety of our team members and customers again I want to thank all the south side team members for their outstanding attitudes and continued dedication to south side and our customers. During this challenging time.
Despite the impact of covered 90.
The underpinnings of the Texas markets, we serve appear sale and should recover once this economic downturn caused by cover 19 subsides.
As a result, utilizing the strength of our balance sheet liquidity in capital position. We believe we're well positioned to successfully navigate these challenging times and grow our Texas French.
I will now turn the call over to Julie.
Thank you laid good morning, everyone and welcome to our call. This morning.
We reported net income of 21.6 million for the second quarter, an increase of 17.6 million or 445.3% on a linked quarter basis, and an increase of 2.9 million or 15.8 per cent compared to the same period in 2019.
For the quarter ended June Thirtyth 2020, our diluted earnings per share were 65 cents, an increase of 53 cents on a linked quarter basis, and an increase of 10 cents compared to the same period in 2019.
During the second quarter, we originated loans to qualified small businesses to the payroll protection program or PPP under the provisions and the cares to act.
As of June Thirtyth, our loan portfolio included approximately 308 million in P.P.P. loans to approximately 2100 far worse.
We expect to recognize approximately 10 million in P.P.P. volume related fees as a yield adjustment over the terms of these funds.
During the second quarter, we recorded approximately 1 million and these fees and interest income.
As a result of our participation in the Paycheck protection program, we reported an increase in loans of 251.6 million or 7% during the second quarter. However, excluding the P.P. loans included in our commercial loan portfolio at June Thirtyth Lee.
Experienced a decrease on a linked quarter basis at 56.8 million or 1.6%.
[laughter] did decrease occurred primarily in our construction loans wonderful family residential portfolio in the commercial portfolio, excluding those PPP lines, partially offset by an increase in the commercial real estate loan portfolio.
For the six months ended June 30 year 2020, PPP loans.
Excluded our loan portfolio decreased 24 million <unk>, 0.7%.
As we mentioned in his remarks made in the uncertainty that remains around the full economic impact. It's Kevin 19 loan growth is uncertain for 2020.
Our allowance for loan loss increased 6.2 million or 11.6% Oh linked quarter basis, primarily driven by the economic uncertainty surrounding commit 19.
Our nonperforming assets were 17.6 million, an increase of $197000 or 1.9% linked quarter.
The nonperforming assets to total assets remained unchanged at 0.24% linked quarter and two basis points lower when compared to 0.26% at year end.
Beginning in March in through most of the second quarter, we insisted on bar worse that we're experiencing financial hardship did it could be 19 related challenges with payment deferrals.
Generally these deferrals for up to three months.
On July 20, Oh, we have just barrels totaling approximately $326 million.
The largest categories and deferrals include commercial retail centers of approximately 127.3 million, owing gas 57.1 million hotels 43.1 million wonderful residential 41.6 million.
In foodservice in restaurants 3.7 million.
Okay.
At June Thirtyth, 2020 airlines with oil and gas industry exposure were 118.5 million are we going away per cent of total loans.
[laughter], our securities portfolio decreased 147.6 million or five per cent for the quarter ended June Thirtyth 2020.
We recognized approximately 2.7 million.
The Mets securities gains on sale or they assess securities during the second quarter.
[laughter] ski season.
At June Thirtyth 2020, we had a net unrealized gain in the securities portfolio of 137.9 million <unk>.
At June Thirtyth, the duration of the portfolio was 4.7 years, an increase from 4.4 years. After the end of 2019 in our mix of loans and securities shifted slightly to 56% loans, excluding P.P.P. lands and 44% securities compared.
The mix.
A 55% ones in 45% Securities at March 31st 2020.
Our net interest margin decreased by one basis point to three M. chain from 3.3 for the corner ended March 31st 2020 [noise].
The margin continued to benefit from lower deposit in funding cost, which lie, but largely offset negative impacts on the when rates on interest earning assets.
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[laughter], we have a six basis point increase in net interest spread linked quarter deteriorating chain as a result at the lower deposit in funding cost.
Net interest income increased 19.6 million driven by lower interest expense directly related to the decrease in interest rates on interest bearing liabilities.
We recorded 350000 in loan accretion this quarter, a decrease of 85000 or not gene and a half percent from the prior quarter.
Also as mentioned earlier, we recorded approximately 1 million in fees related to the P.P.P. program in interest income this quarter.
He is doing right in the June during his 2020 non interest income excluding net gain on sale. They felt a securities decreased $426000 or 4.3% for the linked quarter due to the decrease in deposit services interest fee.
Partially offset by the gain on sale loved ones.
During April and May we experienced decreases in overdraft income Yankees stimulus cheggs and reduced commercial consumer spending. However in June we did see an increase when compared to may.
Our non interest expense decreased [noise].
Kinda in $64000 or 10.2% or the linked quarter due to a decrease in salaries and employee benefits, partially offset by an increase in net occupancy stance.
The decrease in salaries and employee benefit that's occurred primarily as a result of lower health claims expense during the second quarter.
For the third quarter, a 2020, we are estimating noninterest expense of approximately $31 million.
We were pleased to report our efficiency ratio decreased to 48.29% compared to 51 point, 91% on a linked quarter basis, primarily due to the increase in net interest income.
Income tax expense increased 2.3 million or 486.4% linked quarter driven by the increase in pre tax income.
Our effective tax rate increased to 11.5% from 10.8% in the first order it 2020.
Last quarter was effective tax rate was positively impacted by discrete tax benefit recorded.
$52000, or 1.2%, which had a significant impact more than normal due to the lower pre tax income reported in the first quarter.
Ladies and gentlemen, if you have any questions at this time, we spread star then the number one I guess, that's selling telephone if your question has entered English.
Thank you, Steve I sit down.
Well first of all Michigan barbecue and they watch them.
[noise] [noise]. Your first question comes on the line, it's Michael Young from Suntrust. Your line is open.
Hey, good morning.
Good morning, Michael.
[laughter] I was wondering if we could you know maybe follow up on the categories. Julie that you provided a little additional detail on a with the forbearance could you guys. Maybe just talk a little bit about you know what's your thoughts are going forward on those specific categories in terms of.
How much you know do you expect to add an additional maybe 90 days of forbearance and you know how much do you expect to return back to kind of just normal paying as agreed.
Yeah, we did a we did them a meeting not too long ago, where we went over all of them. A we were very encouraged by the a high percentage that are not anticipated to ER or the customers are not gonna be asking for a second or not.
Any day modification.
Probably the the category, where we're we're seeing some additional modification requests right or is a in the hotel.
Industry. That's that's the one that we have this probably done.
The hardest.
And you know there.
The problem I think about a third of our hotel portfolios in one one where we have a very good loan to London value and it's extremely well located in and you know an excellent why and they have they have lot of cash flow at this point in time.
And to a carry him through but.
Their occupancy is obviously down and so you know we understand why they're asking for the modification at this point in time, but you know pass that weve, they're they're really it's kind of spotty in terms of who's going to ask for a second a modification, but we anticipate a large percentage will not.
And at this point in time, we think that and you know that number is it's trending down and we expected to continue to trend down through the third quarter.
And I guess, maybe even in light of that and you know kind of what's built into the the model now for the loan loss Reserve do you guys. Do you expect kind of the reserved a return to more normal levels going forward from here and be able to sustain that you know maybe even with the.
Increasing cases in Texas et cetera.
[laughter] well as you as I'm sure you're aware the.
The main thing that drives the seasonal model is the economic forecasts.
And it's difficult to know what the economic forecast at the end of September is gonna be.
If it if it improves then yeah I think we've returned to more of a normalized reserve.
If it doesn't you know we may.
Continue to see some additions to the to the reserve right. Now you know we when we look at a after all these deep dives and we're continuing to do and once we finish we start over at the beginning you know we feel good about where we are relative to the amount of reserve we have at this point in time.
So, but it's really you know, it's all driven on the model and the biggest thing is the economic forecasts. So.
If if things.
And things are opening up have opened up considerably in Texas, and and you are saying or you know other than the bars and restaurants or 50%, but you're saying you know activity in commerce occur and people are pretty much learning you know how to ER to operate in this in this coburn environments.
So certainly the traffic levels are up considerably.
From where they were even you know even a month and half ago. So.
You know it that that's a difficult question, Dan I'm sorry.
No. That's okay I know, it's a a challenging question, but was interested to get that at least your thoughts and then I guess you know maybe lastly, just kind of trying to think about capital going forward you know as it pertains to maybe the dividends special dividend and or.
Any share repurchase in the future I mean this is more of a medium term thought process, but you know what what are you guys thinking is in terms of you know when you would look to return to maybe either share buyback or or continuous special dividend on a go forward basis are there certain things you're kind of watching for.
I think we're you know main thing we're watching for is or what the no reserve requirements are gonna be.
Relative to the Cecil model.
You know if we continue to to have quarters like this will.
You know things will be back to a you know.
So to normal in terms of what we'll do with in terms of share repurchases.
We certainly don't anticipate at this point in time any any impact to the dividend.
But you know we feel good about our capital position, we just need to make sure that we have the earnings to be able to.
We continue those things and to continue to.
Our two or to make any any stock repurchases at that point in time, but I think if you look at our balance sheet.
And consider the risk based capital you know I'd much rather have our capital position with our balance sheet and some that have larger percentages of capital.
Okay. Thank you.
Mhm.
Your next question comes on the line up Brad Milsaps from five I Sadler. Your line is open <unk>.
Hey, good morning, guys.
Good morning, Brad.
Julie I was curious if you had the.
Average amount of P.P.P. loans during the quarter I'm, just just the average balance.
Yes, the average balance for the quarter was around 240 million.
Okay, and I think I heard you say that you recognize a million in fees is that that's just the fee portion correct. Yes. All in we recorded about a million six for the quarter on the P.P.P. lines in about a million if that was the net scenes.
Okay, and you said you have about 2 million left to recognize that seems maybe a little less than that well with estimated some of that coming through operating expenses. It did up to a you know with Fas 91, or did I hear the 2 million in correctly.
Yes, that's what I had what I had intended to saying was then we have said last quarter, we expect to to get 10 million from these lands in <unk>, we did it in more emerging exceeding it over the yield and we only have created a million we still have around 9 million last.
Okay, not night left okay, yes, sorry about that Andrew no, probably there's really no impact on the expense line.
No I mean, we paid send over time, but it was you know minimal compared certainly to the million dollar some things.
Got it got it okay, alright appreciate that and then.
Lee you made a obviously a lot of moves or you know in the bond book in the first quarter.
How are you thinking about that going forward you would you be more likely to use liquidity to maybe.
Hey, down borrowings or let some some Cds run off just trying to get a sense. It's kinda, how you're thinking about the balance sheet you know the rate environment, you know as it pertains to the margin.
Just kind of what what you're thinking there and you know this very low interest rate environment.
Yes.
You know right now there's there's just not a lot to Ah to do and securities.
We do occasionally and add a little bit.
But net net I don't know that a the securities portfolios are growing at this point in time or our will grow unless there's another you know liquidity crisis and the bond market like we saw in March.
And in terms of funding, yes were letting you know where we're not paying up and.
You know if Cds come due and they they can find something somewhere else for letting them go.
And we're continuing to decrease the overall a funding costs associated with the bank. So yeah, we're getting a fair amount of mortgage prepayments at this point in time, and it's very difficult to to reinvest that you know at a margin or Oh, yeah margin that are acceptable.
So.
I'm, not saying the balance sheets kinda shrink significantly, but if you know it's it may gradually shrank unless you know something happens there and basically will pay off the higher funding and move forward.
Great. That's help I think your average CD cost in the quarter around 163 basis points, where where our renewal rates. Yeah for you guys. At this at this point in time and you do you have some bigger pieces that are you got will be coming off the books kind of in the back half.
I don't know that we're paying anything higher than you know 35 basis points and a lot of lot of the Cds were doing our you know well below 25 basis points at this point in time.
In the brokered market rambled issue. The all in cost is 15 basis points, but the the cost to the.
Through the end you are the the interest income to the end user is only five basis points. So.
You know, we expect to drive drive that CV write down pretty significantly, especially as a lot of the public funds Cds roll off and things that nature.
So kind of all that but against that backdrop is that kind of you know obviously loan growth will help you out, but that's a bit of an unknown, but do you think you can hold.
The NIM relatively stable you know kind of given those things you talked about.
I think so you know obviously, though we'll have a little more impact of the PPP loans in the third quarter.
But yeah I think it's I think it'll hold relatively stable because of the the assets it pretty much all reprice down and we still have additional liabilities that but you know we're going to reprice down and most of our liabilities are relatively short term you know there.
Rarely do we see people go out much past year on C.D.. So we should continue to see that for the next six to eight months.
Got it and final question just a follow up on Michael's question regarding some of those categories that you did list out there.
We would would it kind of be order in terms of you know your area biggest concern what it would you start with CRT retail and its wear to work your way down in size in terms of the area that you know you're you're watching or most worried about or to be one specific you know a sector within that the portfolio that you're most concern.
But at this point.
[noise] retail represents the largest dollar amount from but from what we're saying.
Many of those are that they were modified in terms of retail or planning on resuming Uh huh their patent or a normalized payments after their initial.
Modification.
I think I go back to you know probably the area. If if I were going to be concerned about an area would be the the hotel loans simply because of yeah. The uncertainty surrounding occupancy and a win win business travels kind of picked up and things of that nature.
Great. Thank you guys appreciate the color.
You bet.
Again, if you would like to ask question Press Star then the number one on your telephone keypad.
We have one more question from the Q from would you like from KBW. Your line is open.
Hey, good morning, guys.
Good morning.
I'm said it seems like you're a little bit more optimistic towards the one pipeline it better than you might have thought it was gonna be at this point do you think you know grown winds in the back half the year in the low single digit range could be achievable. If you exclude any impact from PPP balances.
[noise] or if it's possible. We you know our pipeline right now we're looking at some some good.
Good solid loans and and industries, it really haven't been impacted that at all.
By covered 19.
And just you know just really depend to some of them may not close this year. Some of my close early next year.
It's just it's kind of uncertain at this point in time because.
Most of our extremely good borrowers kinda sat on the sidelines for the first three or four months to determine okay. What's what's happening what what's going to happen now that they began to see a what what sectors had been impacted which ones having.
Some of them are starting to make some news in those areas that have not been impact in some of them have actually some sectors of actually benefited from a from covert as your onshore aware so.
It's possible, where do you know where do I think uncertain about loan growth is is the term we were using right now its possible.
That's helpful color and then last for me I know pre coded you were pointing to open in L.P. and Houston, along with hiring some additional winder support for that market.
Do you still in tend to go forward with this point in 2020 or is it sort of been put on hold for the time being.
We do have 'em, we have hired a three lenders down and in the Houston area.
They are actively a you know working they were active in the PPP process with us and brought US a lot of good PPP loans, we're looking at a different loans for them down in that area and we did put on hold hiring additional lenders in that market until we see.
I'll have this you know what's going to impact different different portions of the Texas economy, especially different market areas.
But you know we definitely are her in Houston at this point in time and intend to stay there.
And once is saying you know begins to subside. So we will once again the activity looking for additional lenders down there.
Alright, thanks, guys.
Again, we have a question for Mr., Michael Young from Suntrust. Your line is open.
Hey, Thanks for the follow up just wanted to ask I don't know if you have the number but could you help us like understand the geographic break up of the loan portfolio. Today, you know maybe how much is in Tyler, Texas or other you know more rural areas versus how much is in Dallas Fort worth.
Awesome.
Yes hold one second.
And then maybe one.
Oh go go ahead sorry.
Okay, that's fine and in for all the loan portfolio, we had close to add billion for in the DFW market and then about 900 million in East, Texas market.
And then around 700 750 in Austin market those are the three largest categories.
Okay, perfect and I guess, just big picture and have you noticed a differentiation and performance or risk factors from you know maybe different markets, maybe that the east, Texas market being relatively less impacted.
Ben Metro areas or is that not necessarily true.
No I don't think we've seen a concentration of problems in one specific market. We're just.
It it's really been more by by industry, you know in our hotel portfolio I think we have 11 hotels and.
They're in a bunch of different markets and you know.
Almost all of them, but we have one hotel that happens to be located next to a government facility. This that they continue to occupy pretty heavily but the others. You know they saw pretty much the same downturn in occupancy rates and are all pretty much seamless.
Same gradual increases in occupancy rates. So I don't know that weve seen a specific markets, it's really been hit harder than another.
Okay.
Maybe just one last one just given that you're highlighting kind of the hotel portfolio any other kind of risk mitigant for that portfolio, maybe the loan to values of the properties themselves Rico bid or.
Any other sort of mitigating factors that we should be thinking about as we think about loss rates, whether there's already a high loss reserve et cetera.
We're not big hotel lenders and so we're always very cautious when you look at that and you know we go with BP, We try to go with extremely good flags.
Extremely good operators and we require a fair amount of equity and those deals.
Because we don't want to be operating hotel. So were you know we have conservative underwriting standards to begin with but when we look at hotels you know we look at that even more conservatively than we do some other categories.
Okay. Thank you guys appreciate it.
[noise] third all my questions from Big epicenter see Megan thing.
Right.
Thank you Southside had an excellent second quarter highlighted by continued sound asset quality solid core deposit growth a stable net interest margin a 20 basis point increase in the allowance for loan losses to total loans net of PPP loans to 1.69% and an 18.2 per.
An increase in earnings per share.
Thank you for joining us today, and we look forward to reporting third quarter results in October.
This concludes our comments.
This concludes today's conference call. Thank everyone for joining you may now disconnect have a great thing.
Good bye.
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