Q4 2020 Southside Bancshares Inc Earnings Call
Yeah.
Good morning, ladies and gentlemen, and welcome to be Southside Bancshares, Inc. Fourth quarter earnings fourth quarter, and your <unk> and 'twenty and 'twenty earnings call.
At this time all participants are in a listen only mode Lee.
Later, we will conduct a question and answer session and <unk>.
<unk> will follow at that time.
If anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone.
As a reminder, this conference call is being recorded I would now like to turn the conference over to your host Mr. Lindsey Bailes, Vice President Investor Relations. Please go ahead.
Thank you Tiffany and good morning, everyone and welcome to Southside Bancshares fourth quarter, and you're in 'twenty and 'twenty and.
A transcript of today's call will be posted on Southside dot com under Investor Relations.
During today's call and other disclosures and presentations I will remind you that any forward looking statements are subject to risks and uncertainties and factors that could materially change. Our current forward looking assumptions are described in our earnings release and our form 10-K.
Joining me today are Lee Gibson, President and CEO and Julie Shamburger CFO.
Firstly, we will share his comments on the quarter and Julie will give an overview of our financial results I will now turn the call over to Lee.
Good morning, and welcome to the South side Bancshares fourth quarter and year end earnings call for 'twenty and 'twenty.
This morning, we reported record annual and fourth quarter net income and earnings per share clause.
Closing the year on a strong note the fourth quarter results were largely driven by an increase and net interest income and a partial reversal of provision for credit losses.
Additionally, during the quarter, we expense to approximately $1 million related to three branch closings and.
March we will close to in store branches and East, Texas and are in close proximity to other Southside branches and one lease branch in North Texas.
During the fourth quarter, our net interest margin increased 18 basis points of which 14 basis points were attributable to additional accretion income on loans forgiven by the SBA.
Overall during 2020 on net interest margin increased one basis point to three point O, 7%, while our net interest spread increased 15 basis points.
Increasing on them during 2020, given the relatively flat and historically low interest rate environment was a big contributor to the success we enjoyed during 2020.
The decision to purchase $500 million of high quality and municipal bonds and extremely attractive yields during their short term bond market liquidity crisis and March combined with funding decisions for big contributors to maintaining the net.
For the year ended December 31, 2020, net income increased 10, 2% to a record $82 $2 million compared to $74 $6 million and 2019 and.
The increase was due to an increase and net interest income and non interest income that was partially offset by a $15 million increase and the provision for credit losses.
Lee due to the implementation during the same time when heightened economic uncertainties related to COVID-19 surfaced.
At year, and our asset quality metrics improved slightly when compared to 2019 as nonperforming assets to total assets decreased from <unk>, two 6% 2.25 per cent.
The 19 modified loans have decreased to 35 million as on Monday of this total $32 million representing two loans on three hotels are expected to resume payments within the next two weeks, which will further reduce modified loans to $3 million we.
Continue to diligently focus on asset quality.
Through ongoing monitoring of the loan portfolio and the most at risk categories. We just completed and completed the latest deep dive into our loan portfolio. This week.
In addition to our normal procedures, we are reviewing more detailed reports by industry within the loan portfolio and as needed on an individual loan basis.
For all we are encouraged and optimistic by what we've learned and observed as a result for this heightened scrutiny.
Our long established consistent credit underwriting standards for stress tests stress tested well by the pandemic and reaffirmed our belief that they are sound.
Our loan pipeline has increased during 2021 and <unk>.
And we anticipate will continue throughout the year given the outlook for the high growth markets we serve.
After carefully considering potential loan growth for 2021, we are currently and budgeting for 7% loan growth net of any PPP loans forgiven are originated.
During the fourth quarter, we successfully issued a $100 million sub debt offering.
This low cost capital provides further optionality to grow through acquisitions or organically.
We believe during the next few years bank consolidation and Texas will accelerate as a result, utilizing the strength of our balance sheet liquidity and capital position. We believe we are well positioned to actively pursue attractive bank acquisitions, while at the same time organically.
Growing and expanding our Texas franchise and the coming years.
The Texas markets, we serve continue to experience growth and increased economic activity due to the and migration from other states and corporate relocations, Tyler, where we our headquarter and will soon be home to a new medical school that is projected to significantly enhance X.
And I'll make activity much of which is slated to occur within a block from our main campus.
After what seemed like a very difficult and challenging start to the year 2020, and my opinion ultimately turned out to be the best year, and a 60 year history of Southside.
During 2020, we all became better bankers and embrace technology and a new level.
During 2021, we will invest and additional revenue producers many of which had been and identified and we will make continued investments in technology to enhance the customer experience and produce additional efficiencies.
In closing a few weeks ago, we were honored to be recognized by Bank Director magazine as one of the top 10 banking powerhouses in America as measured over the last 20 years.
Further confirming our commitment to our long term business model and growth strategy.
And to thank all of our team members for their significant contributions and making this recognition and our record results for 2020, a reality I will now turn the call over to Julie.
Thank you Lee good morning, everyone and welcome to our call. This morning. When you moved on your strong with record fourth quarter net income and $29 6 million and increase of two and a half million or nine 2% on a linked quarter basis as well as record annual net income and $82 2 million for 2012.
And increase of $7 6 million for 10, 2% compared to 2019.
For the year ended December 31st 2020, and diluted earnings per share increased 27 cents on a 12, 3% to $2.47 per share.
For the quarter ended December 31st 'twenty, and 'twenty and diluted earnings per share increased seven eight.
And eight 5% to 89 cents per share compared to 82 cents per share on a linked quarter basis.
Linked quarter, our loan portfolio decreased $132 2 million or three and 5% tier.
And 366 billion driven largely by a decrease of 88 million of P. P. P loans.
For the year ended 2020, we reported an increase in loans and $99 6 million or 2.5% increase and there's approximately $214 8 million as P. P. P loans net of deferred fees.
Excluding P. P P loans, our total loans decreased 123.
And my three 5% in 'twenty and 'twenty.
Although our pipeline is beginning to increase we believe loan growth may be challenged during the first quarter.
Our call and our credit quality metrics remained strong with nonperforming assets as a percentage of total assets and two 5% at year end compared to 26% at December 31, 2019 on them.
A linked quarter basis, total nonperforming assets increased three 9% or $658000.
Linked quarter <unk>.
<unk> for loan loss decreased $6 1 million or 11, 1%.
$49 million eight year and day to a partial reversal of provision and $5 9 million and the fourth quarter, largely the result, and an improvement and the economic forecasts and to a lesser extent the decrease and the loan portfolio at year end.
And at December 31st 2020, we reported on our allowance as a percentage of total loans at 134 per cent and when excluding the P. P P loans, 114%.
As of January 25th our Covid, 19, deferrals and decreased to $35 million, a decrease and approximately $291 million or 89%.
Since we reported 326 million on our second quarter earnings call.
The largest category remaining deferrals, our hotels at $32 1 million followed on mortgages at $2 9 million.
At December 31st our loans with oil and gas industry exposure or 100 for 5 million or $2, 86% of total loans.
There are no COVID-19 modifications with oil and gas industry exposure.
Our securities portfolio decreased $52 3 million or one 9% for the quarter ended December 31st compared to September 30th.
We recognized approximately $24000 and net security losses on the cell a day at the securities during the quarter.
And at year end, we had a net unrealized gain and the securities portfolio of $156 million and the duration on the portfolio was for seven years and increase from four point for years at the end of 2019.
And our mix of loans and securities at year, and shifted slightly to 58% and 42 per cent compared to 59% and 41% at 2019, primarily data and municipal bond purchases and the first quarter.
And the mix remained consistent on a linked quarter basis.
We are also pleased to mention that in November and we issued 100 million or 387, and 5% fixed to floating rate subordinated notes due in 2013.
This debt initially bears interest at a fixed rate and $3 eight and seven 5% through November 14, 2025, and thereafter adjust quarterly and a floating rate equal to three months, so for close to 366 basis points.
We believe the issuance and the subordinated notes strengthens our capital position as well as provides funding for general corporate purposes, and loan and franchise growth opportunities.
Since the end of September we have purchased 175118 shares of our stock and an average price and $30.97.
Approximately 930000 authorized shares remain under our stock repurchase plan.
Our net interest margin increased to 320 and increase of 19 basis points from three O T on a linked quarter basis.
Approximately 14 basis points and this increase is due to increased accretion recorded at $2 2 million related to P. P. P loans forgiven during the quarter and our net interest spread and increase to three oh tier for the fourth quarter and increased from two any for linked quarter.
On an annual basis, the net interest margin increased slightly to three and seven for three and six at December 31, 2019 and.
And the result of lower and deposit and funding costs offsetting decreases in our average yield on earning assets.
For the three months ended December 31st net interest income increased $2 1 million or for 6% driven primarily by the increase and accretion during the quarter.
We recorded 453000 and purchase loan accretion this quarter and increase of 150000 or 25% from the prior quarter.
Additionally, we recorded approximately three 5 million and net fees related to the P. P. P program included in interest income this quarter.
As of December 31st 2020, we had net deferred fees of approximately $4 3 million remaining and we are estimating approximately 75% will be recorded to income and by the end of June 'twenty and 'twenty one.
For the three months ended December 31st non interest income, excluding net gains and losses on celebrate that securities decreased 139000 on one 3% and for the linked quarter.
For the year ended December 31st non interest expense increased $4 million or three 4% and for.
For the linked quarter decreased 301000 or 1%.
For the first quarter of 2021, we are estimating noninterest expense and approximately $31 million.
Our fully taxable equivalent efficiency ratio decreased to 40, 736%.
Impaired to 50.07% on on a linked quarter basis and for the year ended December 31st 2020, we reported $49 three six per cent compared to $52 three six per cent for the comparable period in 2019.
The decrease in net fully taxable equivalent and efficiency ratio for both periods was primarily due to the increase in net interest income for both periods.
Income tax expense increased 482000, or 12, 7% compared to the three months ended September 30th.
Driven by the increase and pretax pre tax income.
<unk> tax rate increased slightly to 12, 6% for the fourth quarter from.
12, 3% in the previous quarter.
For the year ended December 31, 2020, our effective tax rate was 12, 1%.
At this time, we are estimating an effective tax rate of 11% for the first quarter.
Thank you for joining US today. This concludes our comments and we will open the line for questions.
Okay.
Ladies and gentlemen at this time, if you wish to ask a question. Please press star and that number one on your telephone keypad again that is star one we'll pause for a moment to compile the Q&A roster.
Your first question comes from the line of Brett Robertson withheld for crews.
Hey, good morning, everyone.
Good morning, Brett.
Wanted to first ask just I appreciate all the color around the core versus the stated margin.
Just kind of give on that you guys have a billion of Cds still to reprice for the Cds of 1 billion and have a 91 basis point costs. It would seem like the core margin to continue to.
Progress a little higher could you talk about.
Maybe your thoughts on the core margin from here and then.
And with P. P. P. I appreciate your color on the fees there on.
How active do you think you might be with this next round of that program.
On the <unk>, we do anticipate that we will be able to re price those down.
Some of those and in the quarter were on brokerage Cds, which for the.
And tire.
Quarter were down linked quarter basis, we're down about $200 million.
So yes, we do have some additional room there on the PPP loans.
We are taking applications right now we expect to be active.
We initiated $315 million and.
And the first.
Brown back in April and May of 2020.
And different restrictions this time and less less money available. So we're we're we're.
Meeting somewhere in the $50 million range that will originate but.
We have a lot of activity at this point in time, but it's just difficult to pinpoint a number and so we're estimating about $50 million.
Okay.
That's helpful and then.
On the guidance around the expense base going forward 31 million and the first quarter Youre closing some branches just as <unk> as at 31 million and what would that be inclusive.
Any nonrecurring expenses and you know this.
How do we think about the trajectory, you've obviously manage expense as well the past year and in two years really.
Do you have on E Tech investments you need to make and I'm just thinking about maybe.
On the full year versus the first quarter as you guys are doing your plans for the year.
And we don't expect we took and as Lee mentioned about $1 million and.
No losses, and rent related and nonrecurring items in the fourth quarter. So we don't expect and and the first quarter any nonrecurring items associated with those branch closures. Obviously, we will see some decline in rent compared to you know for those branches compared to.
Q1, and 'twenty then.
And we do not expect any and large expenses related to those closures. We took those once we made the announcement that we were doing it we.
We book it in the 2020 year, because that's when we announce debt.
We do anticipate that there'll be some.
Personnel costs.
Savings there.
But we also are.
We're looking at.
Bringing on some additional revenue producers so I believe that will help offset there.
But.
Long term I think that that's going to be a real benefit for us as they'll be producing additional revenue well above what any revenue those and those branches.
May have produced and and the two branches and east, Texas, we expect to retain virtually.
And I'm not going to say all but at least 80 per cent of the deposits because of the close proximity to other branches and obviously, we will retain all of the loans from the three branches.
Okay.
And that's helpful. And then if I can sneak in one last one you know I'm just curious on the on the buyback and capital you've got a little higher levels now and it's Lee it sounds like you're.
A little more optimistic on M&A happening I'm, just curious on what Youre hearing in terms of.
Conversations and then on the on the buyback if you intend to continue to be.
And our.
And tend to be active with the for purchasing plan sure.
We do expect to.
Purchase additional shares and the coming months.
We will be evaluating.
<unk> that we will be purchasing.
On the acquisition front.
We're hearing from a number of parties that theirs.
It's going to be increased interest.
Sellers.
I think the new administration and potential additional regulation.
On the opportunity to adopt Cecil and.
And a couple of years and a few things like that combined with.
Some of the aging.
And boards and ownership.
Groups among the.
Large number of private banks and and the state of Texas are all going to.
To act.
<unk> two.
Basically produce more acquisition opportunities.
Okay. Thanks appreciate all the color.
Alright.
Your next question comes from the line of Michael.
What is the truest securities.
Hey, good morning, Lee and How's it going good morning, Mike.
I wanted to just kind of follow up on the loan growth outlook, 7% organic.
Ex the PPP impacts so.
But kind of a soft first quarter. So should we expect it to be fairly backend loaded and the year may be more related to construction kind of resuming and funding up or is this more.
Related to kind of the new hires.
Right.
I think it's kind of all all three and then a little uncertainty about some loans that are.
We have and the pipeline as to whether they'll close and the first quarter or the second quarter.
But yes, I think for the most part I would I would anticipate most of the.
The loan growth would occur second through fourth quarter of this year.
As Julie mentioned first quarter.
It may be a little challenge certainly we're going on we're going to be seen a lot of additional PPP forgiveness.
During the first and second quarter.
But overall I think youre correct in assuming second through fourth quarters, where we're going to see the majority of the increase.
And maybe really quickly just on loan pricing could you talk about kind of the dynamics youre seeing is their stability there or is it actually better maybe than the 2020 and any kind of commentary given kind of a rise and the long end of the curve.
Yeah.
You know for the for the high quality loans that are.
And most banks go after the competition is pretty fierce.
You can give on credit quality, you can give on structure or you can give on on pricing we're not.
And big on giving on on credit quality at all structure is something we think is pretty important.
We will give on that a little bit sometimes.
So pricing is where it comes in and pricing is like all of the credit markets is.
Is pretty tight right now so.
We could probably get higher pricing and if we went after a different level of credit, but that's that's not what we historically have done.
Okay and last one for me just on the reserve you still got over like six times coverage of non performers, which is very high but should we expect that level to still trend down with positive macro assumptions and kind of some of these hotel loans returning to normal or any other.
Impacts are factors, we should think about there.
And assuming the vaccine.
You know it gets out to a large number of people and large number of people take it and we get what they call herd immunity going.
I think the markets. We're in are continuing to grow and they'll do nothing but probably grow faster and.
The.
Ohmic activity will be stronger in those markets.
So it's all dependent on when we when we kind of see Covid and the rearview mirror, but.
It's.
It's.
And the outlook looks good for at this point and time.
Okay. Thanks.
Your next question comes from the line of Graham Dick with Piper Sandler.
Hey, guys good morning.
Good morning Graham.
So just a few quick ones here for me.
Yes, I'll start on.
On the Securities portfolio can you talk a little round and more.
<unk> backed securities book, and and and what kind of drove those yields higher this quarter and relative to what we saw on <unk>.
Oh and as yearly mentioned, we did sell some some securities and the fourth quarter, we went through and analyzed.
Some of the.
The premium mortgage backed securities that have continuing to prepay and look like they're not and I know probably stop anytime in the near future are those.
And those where obviously it has the lowest yields and so we did.
Cell.
Al.
No those securities that we didn't think there was really any significant hope of of them recovering back to yields we'd be happy with so I think that net partially drove it certainly wasn't a slowdown in prepayments on the prepayments continued to come in.
And at a fairly fast rate.
And we have we did have some prepayment penalties on some of our C and B S.
And it helped and then we're also getting down to the point, where we have a lot of what I'd call locked out cmo's that probably won't pay regardless of what the Prepays are for the next year to 18 months and then.
And most of the C C M B S.
Or.
Either either they can't prepay or they have yield maintenance on them. So.
And that's kind of where we are at this point.
Okay, Great that's awesome color.
And then I guess kind of going back to loan growth. What are you guys seeing from from borrowers and and your economies.
And you this.
And the confidence behind the 7% growth for 'twenty one.
And you've seen a lot of pent up demand or is this just kind of like you talked about on relocations for taxes from and general positive trends surrounding reopening and your economies.
Yeah, and when you look at the DFW area and.
And especially the Austin area and even to some extent.
Houston area.
And you just look at the major Corporation corporate relocations that are taking place and had been announced even and the last few months.
They're just bursting at the seams and theirs.
The growth is occurring theres and end user for it.
And with that the more more and.
More people that move into those areas the more and.
Amazon facilities and all the other types of facilities and warehouses are required to be able to continue commerce and the way that debt.
Sure.
Experiencing commerce being done today, so it's just kind of a self perpetuating engine and.
And.
And Fortunately.
Texas is benefiting and we happen to be and the markets that are benefiting the most and Texas.
Okay, Great and then just one last housekeeping item for me here do you all happen to have the the average PPP balance this quarter.
Okay.
And you're talking about for the fourth quarter.
Average loan balances and PPP for the fourth quarter.
Yes.
Average was around $272 million.
Okay, great. Thank you guys and congrats on a great quarter.
Thank you.
Your next question comes from the line of Woody Lee with K B W.
Hey, good morning, guys.
Good morning Woody.
Just wanted to go back to the core NIM and <unk>.
Given the loan growth outlook do you think as we progressed through 2021, we could see the core NIM remained stable or even possibly expanded slightly.
Okay.
And you know I think for the first couple of quarters.
And I expect to see it stay.
And the general range, where it is.
And given the types of loans, we're looking at.
And I'm not sure that the nims.
And then going to have any any significant growth in 'twenty and 'twenty one.
And.
And.
Most of the heavy lifting and the on the funding side has been done but there still is some to.
And to do there so overall I think.
We're looking at a NIM that's fairly stable for most of our.
2021.
Okay. That's helpful.
And then last from me on the M&A side I was just curious if there are.
Any any geographies within Texas that would be most attractive to acquire and for you all.
And basically where we look.
For attractive acquisitions is along Interstate 35 to the East will go. We you know we look west of 35, which if you know, Texas 35 goes down through Fort worth down through Austin.
And then to San Antonio.
We will look west maybe 30 40 miles but.
After you get past that.
It's.
It's a long way too.
The centers of population and in West, Texas, So that's kind of our geography, but that covers over 80% of the population and the state of Texas.
Okay.
That's it for me thanks, guys.
Mhm.
At this time and currently showing no further questions and the queue I would now like to turn the conference back over to Mr. Lee Gibson, President and CEO.
Well, thank you for joining us today.
Given the outlook for our markets are strong balance sheet.
<unk> capital position and core earnings we are very encouraged about 2021 and look forward to reporting results for you.
Throughout the year and we look forward to the next earnings call and April of this year. Thank you for attending.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation and have a wonderful day you may all disconnect.
And.
And.
Yeah.
Yeah.
And the growth.
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