Q3 2020 Southside Bancshares Inc Earnings Call

Good morning, ladies and gentlemen, and welcome to the South side Bancshares incorporated Assayed Pago 2020 earnings call at this.

This time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.

If anyone should be quite assistance during the conference. Please press Star then zero on your Touchtone telephone as a reminder, this conference is being recorded I would now like to try to conference how big your host today Ms. Lynn T. Bill Smith. Please go ahead.

Hmm good morning, everyone and welcome to sell stuff Southside Bancshares' third quarter 2020 earnings call.

A transcript of today's call will be posted on south I know come under Investor Relations.

During today's call and other disclosures in presentation I will remind you that any forward looking statements are subject to risk and uncertainty.

Factors that could materially change our current forward looking assumptions are described in our earnings release and our form 10-K G.

Joining me today are elite Gibson, President and CEO and Julie Shamburger CFO.

Firstly, you will share his comments on the quarter, then Julie will give an overview of our financial results I will now turn the call over to Lee.

Good morning, and welcome to Southside Bancshares' third quarter earnings call.

Going to provide an overview of the quarterly results current loan demand and how we're managing the bank in this economic environment.

During the quarter, we reported an annualized return on third quarter average tangible equity of 17.73% as earnings per share increased 41.4% to 82 cents and net income increased 36.8% to 27.1 million compared to the.

The same period in 2090 days.

These increases were largely driven by a decrease in provision for credit losses, and an increase in net interest income that were partially offset by the increase in non interest expense.

We recorded a partial reversal of the provision for credit losses of $4.7 million during the third quarter, largely driven by an improvement in the economic forecasts and the decrease in commercial real estate loans approach.

Approximately $650000 of the increase in non interest expense was related to branch closings and Brian <unk>.

Our asset quality metrics further improve during the quarter as nonperforming assets to total assets decreased 2.23%.

While COVID-19 modified loans decreased 76% to 76.5 million and represented 2.2% of total loans net of PPP ones.

As the pandemic intensified we knew this would be a true test of the strength of our consistent loan underwriting standards. We continue our aren't as focused on asset quality through ongoing monitoring of the loan portfolio and the most at risk categories.

In addition to our normal procedures were are revealing more detailed reports by industry within the loan portfolio and when appropriate on an individual loan basis.

Overall, we are encouraged by what we have learned and observe relative to asset quality and our underwriting standards.

Our net interest margin linked quarter was unchanged at 3.02% and the net interest spread increased two basis points to 2.84%.

The balance sheet moves we made during the first quarter purchasing approximately $500 million of highly rated largely Texas municipal securities along with certain funding decisions continue to perform well as expected during the third quarter.

Well potential loan growth during the fourth quarter remains uncertain due to anticipated loan pay offs.

Encouraged by our gradually increasing pipeline and the potential for loan growth in 2021, we are.

We are carefully considering loan growth projections for 2021.

Despite the impact of COVID-19, the Texas markets, we serve appear to be experiencing gradual increasing economic activity.

When the impact caused by cold in 19, subsides, we anticipate our markets will resume pre pandemic strain.

As a result, utilizing the strength of our balance sheet liquidity and capital position. We believe we are well positioned to successfully navigate these challenging times and resumed growing car, Texas franchise as.

As we continue operating the bank during this pandemic, we remain keenly focused on the safety of our team members and our customers again I want to thank all of the south side team members for their outstanding contributions and continued dedication to south side and our customers.

I will now turn the call over to Julie.

Thank you Lee good morning, everyone and welcome to our call. This morning.

I'm pleased to report net income of 27.1 million for the third quarter, an increase of 5.5 million or 25.6% on a linked quarter basis, and an increase of 7.3 million or 36.8% compared to the same period in 2019.

For the quarter ended September Thirtyth 2020, our diluted earnings per share were 82 cents, an increase of 17 cents, a 26.2% on a linked quarter basis, and an increase of 24 cents or 41.4% compared to the same period in 2019.

[noise] wins corner, our loan portfolio decreased 62.6 million or 1.6%.

The decrease occurred primarily in our wonderful residential and commercial real estate loan portfolios, partially offset by an increase in construction lines.

For the nine month period ended September Thirtyth, we reported an increase in loans and 221.8 million or 6.2% inclusive of approximately 302.8 million the P.P. loans net of deferred fees.

Excluding PPP loans total loans have decreased 81 million or 2.3% year to date.

Our pipeline is beginning to increase we do not anticipate loan growth during the fourth quarter.

Our credit quality remains strong with a slight decrease in nonperforming assets as a percentage of total assets to 23% at September thirtyth compared 2.24% at June Thirtyth.

The decrease in nonperforming assets, and the $778000 or 4.4% down to 16.8 million at the end of September.

Our allowance for loan losses decreased 4.8 million or 8% to 55.1 million at September 30 is largely driven by a partial reversal of provision of 4.4 million for the three months ended September Thirtyth 2020.

[laughter] the partial reversal in provision was a result of an improvement in the economic forecast and a decrease in our commercial real estate loan portfolio.

At September Thirtyth 2020, we reported our allowance as a percentage of total loans at 1.45 per cent and when excluding P. P. P line around 1.58%.

As of October 20, S. I could've been not seen deferrals had decreased to 76.5 million a decrease of approximately 76.5% since we reported 326 million on our second quarter earnings call.

The largest categories of remaining deferrals increased hotels at 41.5 million mortgages at 22.7 million self storage CRT property, and 7 million retail C. R E 2.1 million and food services and restaurants at 1.6 million.

[noise] at September Thirtyth, our loans would only gas industry exposure were 116.4 million or 3.1% of total loans.

As of October 20 S. There were no COVID-19 modifications with oil and gas industry exposure.

[laughter], our securities portfolio decreased 51.3 million or 1.8% for the quarter ended September thirtyth compared to June thirtyth.

We recognized approximately $78000 in net security gains on the sale of a if their securities during the quarter at September Thirtyth 2020, we had a net unrealized gain in the securities portfolio of 139.8 million and the duration in the portfolio was 4.6.

Years, an increase from 4.4 years at the end of 2019.

Our mix of loans and securities remain consistent on a linked quarter basis, with 56% loans, excluding PPP loans and 44% securities.

Our net interest margin remained consistent at three or two on a linked quarter basis in net interest spread increased to 284 as a result of lower deposit and funding cost.

For the three months ended September Thirtyth net interest income decreased by $685000 driven primarily by decreases in interest income on mortgage related securities and loans, partially offset by decreases in interest expense on deposits and FHLB borrowings gene.

Uhhuh continued lower cost funding into a lesser extent a decrease in average interest bearing liabilities for the quarter.

We recorded 602000 in purchase loan accretion this quarter, an increase of 251000 or 71.2% from the prior quarter and.

Additionally, we recorded approximately 1.27 million in net fees related to the P.P.P. program included in interest income this quarter.

Not including the potential for accelerated PPP fee income related to loan forgiveness, we expect to recognize an additional 1.3 million for the remainder in 2020.

For the three months ended September Thirtyth non interest income excluding net gain on sale of assets that securities increased 1.5 million or 16.1% for the linked quarter due to the increase in deposit services gain on sale of loans in other noninterest income.

Other non interest income increased due to an increase in swap fee income in increasing the fair value of written a loan commitments.

The decrease in the fair value write down on mortgage servicing rights.

Our non interest expense increased 1.8 million or 5.9% for the linked quarter due to an increase in salary and employee benefits FDIC insurance and other non interest expense.

The decrease in salaries and employee benefits occurred primarily as a result of an increase in retirement expense and payroll tax expense.

Other non interest expense increased due to losses recorded on the disposition of assets associated with the branch closure you're rightsizing.

For the fourth quarter and 2020, we are estimating non interest expense of approximately 31 million.

Oh, so you shouldn't see ratio increased to 50.7 compared to 48 point 29 on a linked quarter basis, primarily due to the increase in non interest expense.

Income tax expense increased $1 million or 34.7% compared to the three months ended June thirtyth driven by the increase in pre tax income.

Hi, effective tax rate increased to 12.3% for the third quarter from 11, and a half person in the previous quarter at this.

At this time, we estimate an effective tax rate of 12% for the remainder of the year.

Thank you for joining US today. This concludes our comments and we will open.

The line for questions.

Thank you ladies and gentlemen, if you have a question at this time. Please press the star and the number one on the telephone Touchtone keypad. If you. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.

First question comes from the line of Michael Young from Trust Securities. Your line is now open you may ask your question.

Hey, good morning, Thanks for taking the question I wanted to ask.

Well we.

I wanted to ask about just the construction pipeline you know how how large pipeline do you have remaining at this point do you think that might grow or do you think that'll continue to fund up and kind of shrink from here and then have you seen it.

Any any impacts in terms of construction timelines yeah since.

Since the pandemic smitti alleviated a bit.

Some of the the lending opportunities we have that are extremely good or are going to be in the construction space. So I'm not sure that we're going to see a decrease in in construction.

But.

You know to the let's see so the last part of your question was about.

About.

Hi, Michael.

I'm sorry, the last part was was just kind of what you're seeing in the market in terms of construction time valley, where an appetite for new projects.

You know what we're seeing in the market is a you know an increase in a building costs a lumber prices.

Framing framing package on homes has doubled in the last I think six months.

Construction seems to be going extremely well right now, especially in the the.

The single family homes space, the multifamily space and then mainly.

Namely the the warehouse type space on the construction side. So you know where and we're really not seen you know weather delays or anything like that it's more labor shortages and and material costs, you know moving up.

Gotcha, and then separately.

Separately sort of another topic, but just on the on the tax rate you know, we do have a change in political leadership here and there is a move toward the higher tax rate, you're moving it up to 28% or so what do you have an expectation of what that would do to your effective tax rate or anything we should be thinking about you know so we kind of.

Roll that into our models at some point potentially.

[noise] Oh, it's the the overall tax rate goes up 7% you know ours will probably go up five somewhere in that range, mainly because of the.

The amount of tax free income, we have not only in the loan portfolio, but also over in the securities portfolio. So.

So it's not going to go up the full impact that but obviously it would go up so.

Okay, Great. That's helpful. Thank you.

Thank you. Your next question comes from the line of Bill Jones from KBW. Your line is now open you may ask your question.

Hey, Thanks, good morning.

Good morning.

Hey, So just one quick question in a kind of one more headline items. This this quarter was the big provision reversal and it looks like it was mostly prompted by some loan pay downs and maybe a little bit better economic outlook.

With them they see all currently sitting at pretty healthy levels.

Are you guys viewing for provisioning and are you guys kind of getting comfortable with the the levels that they see all sitting at.

Well the the elephant in the room every quarter is what is the seasonal model going to say and the the Cecil models dependent on the economic forecasts.

This quarter the way, we follow the Moody's economic forecast and this quarter. They put it out a little earlier in September and put out some notes towards the end of September but they didn't change their model because.

Because they had anticipated a a stimulus package being passed by Congress, which obviously hasn't been passed so we did change our weightings. This this quarter.

And we basically threw out there were three forecast that we waited a baseline one is better than baseline of one that significantly worse than baseline.

So we basically throughout the the better the one that was better than baseline.

To 10%, but to baseline into 20% because it was it was way to 30% and put it to the the worse and so basically it was weighted 50% baseline 50%.

The worst economic forecasts.

[music].

You know, it's all going to depend on on where the economic forecasts.

Comes in.

Based on our credit metrics today and that the trends were saying.

I feel extremely good about our our reserve that we have in place.

Great now that's that's great color.

I mean, maybe just moving on thinking about the NIM you know and you know held fairly stable for the past few quarters runner on that 3% range. You know and this is kind of where you guys. My guidance all along this year as we move into 2021 do you think that 3% range still more of a permanent bottom or do you think it's more of a.

I'm sitting on the funding side or maybe potentially some future loan compression just some thoughts from the teacher NIM.

If we take out the you know.

You know any accelerated accretion on the PPP loans due to payoffs and look at the NIM that way.

Then I think going forward. The NIM is going to be you know for the fourth quarter going to be relatively stable.

May move a basis point or two maybe three at the most.

But.

In the future quarters in 2021, if we can achieve some loan growth.

And you know that quality loan growth is there then I think the margin can stay relatively.

Stable.

If we can't and the securities market remains like it is.

I will tell you, there's a little bit of additional lifting to do on the on the funding side in terms of reducing costs there, but over the next two quarters, we will have probably done everything on the the funding side that there is to do absent you know a few minor.

Who's a basis point here or there.

So it's really going to be dependent on on what type of loan growth, we have or if we can you know holds on stable but.

Right now we are encouraged by the the a gradual increase in the loan pipeline and Thats what were kind of studying right now but EPS.

A long answer, but it's really going to be dependent on on the asset mix.

Mix moving forward.

Yeah, no no I totally makes sense and any new loan that you guys are making where are those coming on the books that.

You know it depends whether they're a they're fixed or floating but a lot of them are coming on in the you know in the three to the 375 type range, depending on you know what type of loan. It is a there's a few that come on in the fours, but.

Most of them are coming on pretty close to where we're primed says and.

You know some of them a little over that some of them just little under that but you know they definitely are coming in.

On average in that probably three and a quarter to 350 somewhere in that range.

I got you I got you so yes, okay, it kind of feels like them.

The loan yields are stabilizing a bit then no maybe just last one from me shifting gears just add onto a deferral.

Great improvement since in the last study.

Since your last disclosure you guys gave are the majority of remaining deferrals on their second deferral or just what's kind of the content of those remain deferrals.

In terms of second versus first.

They do.

Julie mentioned, the hotels are right around 41.5 million and they're either on their second or third deferral.

The rest of 'em have to go and check because I don't know because 22.3 million is one to four family I don't know if some of those are on a second deferral or not.

They're telling me in the room, maybe a handful at most.

But the rest of them are hurt as far as I know on their first deferral and you know we were looking at.

We were looking at it this morning.

And whats already happened in the last two days and what we know is going to happen and probably over the next 30 to 45 days, we're going to see this deferral number drop another two.

$12 million to $15 million.

Hi, So that's great to hear well that's it for me guys. Thanks for taking my questions.

Lucky again soon.

All right. Thank you.

Thank you I am showing no further question at this time I would now like to turn the conference back to Myslinski meals.

Yeah. This is Lee Gibson.

Southside had an outstanding third quarter highlighted by continued sound asset quality, a 76% reduction in modified loans, a stable net interest margin and a 41.4% increase in earnings per share.

Thank you for joining us today, we look forward to reporting fourth quarter results in January. This concludes this mornings earnings call.

[noise], ladies and gentlemen. This concludes today's conference. Thank you for participation and have a wonderful day you may now disconnect.

[noise].