Q1 2021 Southside Bancshares Inc Earnings Call
Yeah.
Good day and thank you for standing by welcome to the Southside Bancshares, Inc. First quarter 2021 earnings call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
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I would now like to turn the conference over to Lindsey Bailes. Please go ahead.
Thank you Ashley good morning, everyone and welcome to Southside Bancshares first quarter 2021 earnings call a transcript of today's call will be posted on Southside don't com under Investor Relations.
During today's call and in other disclosures and presentations I will remind you that any forward looking statements are subject to risks and uncertainty.
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.
Lee will share his comments on the quarter, then Gili will give an overview of our financial results I will now turn the call average Lee.
Good morning, and welcome to the Southside Bancshares first quarter earnings call for 2021. This morning, we reported that we had an excellent first quarter highlighted by record net income and earnings per share.
Beginning the year on a strong note. The first quarter results included a partial reversal of provision for credit losses of $10 1 million.
Our asset quality metrics remained strong as the ratio of non accruing loans to total loans linked quarter decreased to one 4% from point to 1% and nonperforming assets to total assets decreased to two 2% from 0.25%.
Linked quarter, we did see a decrease in net interest income.
Approximately half of this was due to a decrease in interest and accretion income related to PPP loans with the rest due to the $200 million decrease in average earning assets.
They give you a little more color about our first quarter average, earning assets. There are three things I want to point out first during the quarter during the first quarter annualized loan growth net of PPP loans and pay offs increased six 2%.
The large percentage of the payoffs occurred during the first half of the quarter and approximately $97 million because of the loan growth net of P. P. P occurred during March.
We are actively participating in the second round of PPP and as of April 21st we've originated a little over a 1000 loans totaling $105 million.
Approximately $70 million of these PPP originations occurred after mid February.
Third our net interest margin linked quarter was unchanged, while our net interest spread increased one basis point.
As for the rest of 2021 of our loan pipeline remains very healthy a trend. We currently anticipate will continue throughout the year.
Given the outlook for the high growth markets, we serve.
We continue to anticipate 7% loan growth for 2021 net of PPP loans.
During the first quarter, we added three experienced commercial lenders to in the DFW area and one in Austin that have hit the ground running originating loans and bringing new relationships to the south side.
In addition on April 12, we opened our Houston L. P O near the Galleria and this group of commercial lenders have been active originating loans and introducing new relationships to us as well.
We continued to see a very healthy increase in our non maturity deposits during the FERC first quarter due in part to the stimulus payments received by our customers combined with PPP loan funds being deposited into the south side of accounts. These deposits allowed us to further.
The reduce higher cost wholesale funding and time deposits.
We previously disclosed plans to close three branches two in east, Texas that were in close proximity to other Southside branches and one lease branch in North Texas.
The closures were completed in mid March during the second quarter, we will realize the full savings associated with these closures.
Economic conditions in our market areas continue to improve bolstered by company relocations and population growth due to the individuals moving the Texas from other states the DFW and Austin markets continue to be among the highest growth markets in the country.
I look forward to answering your questions. Following julie's presentation, and I will now turn the call over to Jay Lee.
Thank you Lee good morning, everyone and welcome to our call today we.
We are pleased with the solid start to 2021 with net income of $34 1 million, an increase of $4 5 million or 15, 3% on a linked quarter basis, and our diluted earnings per share increased 15% or 16, 9% two of $1 four per share on a linked.
The corner basis.
Linked quarter, our loan portfolio increased $58 8 million of one 6% tier 317 billion driven primarily by an increase in commercial real estate loans of $52 8 million and construction of lines of $23 7 million, partially offset by a decrease in one of <unk>.
Family residential loans and $19 5 million.
As Lee mentioned in his remarks earlier, we are encouraged by the activity in Ireland top line at this time.
As of March 31st our P. P. P loans included in the commercial loan category total of $220 9 million, including approximately 88 million net of fees and originated in connection with the second round of the program.
The imaginations net forgiveness payments resulted in the $6 million increase in PPP loans for the linked quarter.
Our quality metrics, our credit quality metrics remained strong with nonperforming assets as a percentage of total assets decreasing to point, 22% at March 31st compared to point of two 5% at December 31 2020.
On the linked quarter basis total nonperforming assets decreased $2 1 million of 12, 1% to $15 4 million.
Linked quarter, our allowance for loan loss decreased $7 6 million of 15, 4% to $41 5 million at March 31st due to a reversal of provision for credit losses on loans of $7 4 million in the first quarter. The result of an improvement in the economic.
On the forecast.
In addition, our allowance for off balance sheet credit exposures at March 31st 2021 was $3 6 million a decrease from six 4 million at December 31st 2021 day to a reversal of provision for credit losses on off balance sheet exposures.
Bind these provision reversals totaling $10 1 million.
At March 31st we reported in the allowance we reported our allowance for loan losses as a percentage of total loans at one <unk> percent and <unk>.
Screening P P P loans, 119%.
As of April 22nd our COVID-19 related deferrals have decreased of one 4 million consisting primarily of mortgages.
As of March 31st our loans with the oil and gas industry exposure or $104 8 million or $2 eight 2% of total loans. There are no COVID-19 modifications in this category.
Our securities portfolio decreased $51 2 million or one 9% on a linked quarter basis, we recognized approximately 2 million in net security gains on the sale of <unk> securities during the quarter, resulting from sales of municipal securities.
At quarter end, we had a net unrealized gain in the securities portfolio of 102 4 million and the duration of the portfolio was five three years, an increase from four seven years at the end of 2020.
Our mix of loans and securities at March 31st remain consistent with December 2020 at 58% loans and 42% in securities.
As of March 30, <unk> 2021, our treasury stock increased by 301000 shares.
Purchases of 427000 shares at our stock at an average price of $35.60 were partially offset by 126000 shares issued from Treasury shares in connection with equity award transactions during the quarter.
Year to day through April 22nd we have purchased 518000 shares at an average price of $36.10 approximately 420000 authorized shares remaining under our current stock repurchase plan.
Our net interest margin remained consistent at $3 20 kind of linked quarter basis, approximately 10 basis points of the net interest margin related to interest and fees earned on the PPP loans.
The net interest spread increased to three of <unk> three for the first quarter of 2021 compared to three O two in the previous quarter.
For the three months ended March 31st net interest income decreased $2 4 million or four 9%.
We recorded 415000 in purchase loan accretion this quarter the decrease of 38000 from the prior period.
Additionally, we recorded approximately $2 6 million in net fees related to the P. P. P loans included in interest income this quarter of which two and a half million was related to round one of the program.
As of March 31, 2021, we had net deferred fees of approximately 525 million remaining consisting of $1 75 million around one and $3 5 million on round two of the PPP loans.
As of April 21st and based on approximately $105 million originated on the second round, we expect to recognize approximately $5 1 million in total fees on round team as the yield adjustment over the terms of the loans.
For the three months in the March 31st non interest income excluding net gains on the seller available for sale securities increased $696000 or six 4% for the linked quarter.
Which was primarily driven by an increase in brokerage services and other non interest income.
These increases were partially offset with decreases in deposit services and gain on sale of loans.
Our other non interest income increased primarily due to an increase in swap the income of $588000 in increases in the fair value of mortgage servicing rights and mortgage rate locks.
The decrease in overdraft income was the primary driver of the decrease in deposit services income a result of stimulus check deposits during the quarter.
For the three months ended March 31st non interest expense was consistent with the fourth quarter of 2020 with the slight decrease of $81000.
For the second quarter of 2021, we expect noninterest expense to be consistent with this quarter and approximately $31 million.
Our fully taxable equivalent efficiency ratio increased to 54, 4% compared to 40, 736% on a linked quarter basis the.
The increase in the fully taxable equivalent of efficiency ratio was due to the decrease in net interest income as well as a decrease in non recurring branch closure expense compared to the prior quarter.
Income tax expense increased $485000 or 11, 4% compared to the three months ended December 31, driven by the increase in pretax income.
Our effective tax rate decreased slightly to 12, 2% for the first quarter from $12 six last quarter due to $134000 of discreet tax benefit recorded in connection with the equity award transactions during the first quarter.
At this time, we are estimating an annualized effective tax rate of 12, 6%.
Thank you for joining US today. This concludes our comments and we will open the line for questions.
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Yeah.
Your first question comes from the line of Brett Robinson.
The hub the group your line is now open.
Good morning, guys. This is actually has been going on for Brett.
Good morning.
I Wonder if we could just start with with loan growth overall I get that the guidance of <unk>.
The 7% core loan growth is pretty strong I know that the banking industry itself is kind of playing.
Playing in the second half of the year as you know.
So significantly more growth.
You guys are approaching of being that you're in Texas. There's a lot of people moving their line of business is moving there and then you also out of those two lenders in Dallas and one in Austin close of the Houston L. P. O I was curious.
How are you guys foresee the rest of this year going kind of.
Is it one of errors of back half weighted and then from there with the additional team members.
Do you think there'll be fully ramped up within 12 months or is it something that has much longer legs and the good work into the 22.
Basically in terms of the new lenders there are extremely experienced lenders.
I would say are pretty much fully ramped up today.
Some of them started earlier in the quarter.
And.
We had already anticipated when we forecast the 7% loan growth that they would be.
The a part of that so.
Do I expect additional in 2022, yes, simply because we will have a full 12 months in 2022, but I do anticipate that they're going to.
A nice part of our our loan growth this year.
As for the loan growth I think the assembly more linear.
Right now we are.
We're seeing a very good pipeline.
And a lot of that comes down to when loans actually close.
Especially on the commercial real estate loans.
When we get appraisals, all sorts of different things, but right now.
My guess would be that it would be.
Perfectly equally weighted.
Weighted between the three quarters, but.
That we would see nice growth in each of the remaining three quarters.
And as for the optimism that comes from being in the markets. We're in.
Two of the markets were in the month.
Debt among the highest growth markets and continue to be in the country.
And.
They are having problems finding of rooftops for people to live so.
It's a good problem to have.
Alright thats helpful color.
When you when you think about the.
The the different areas within Texas herself.
The multiple msas are experiencing a lot of different kinds of growth and whether that the business or technology or anything to that extent are there any areas that you feel like you might want to bolster up and in terms of potentially doing an M&A or add additional lenders or how are you thinking about pockets within the state.
You might not have the full capacity that you think you would want.
The.
The.
I'll say, the Houston, DFW and Austin are massive markets.
I don't know that we could hire enough lenders.
To fully.
Cover recover those markets. So I think those those free markets.
We will continue to.
Explore additional opportunities and then there was a lot of.
Good smaller markets throughout the state.
We're not in that we might.
Through M&A explore entering some of those markets.
Got you that's helpful and then.
So some of the expense guy of one of them.
Approximately 31.
Is it fair to assume that that's somewhat of a new core trend or do you think of it works higher off of below that two <unk> level as we work into the second half of the year I guess, there's a lot of puts and takes the branch closures.
Just thinking from the core perspective is it the fair to assume that 31 is a new good run rate or is it a little bit of a low before we start ramping higher again.
I think it is probably a pretty.
I don't expect us to at this point I don't expect us to get to 32.
So I think somewhere.
But we've seen these last couple of quarters should be indicative I mean, you know we may have some a few ups and downs. There's a couple of areas advertising travel, we think debt that was actually down two.
With fourth quarter, I think you know I think as well.
We get out more you know because we still haven't gotten out fully like we were accustomed to so I think as those things happened more will ramp up some of those areas.
The but I think yeah, I think 31 up to 31 and a half should.
It should be what we expect to see from the rest of the year, that's not my thought at the moment.
Okay, Great that's really helpful color.
Congrats on a great start to the year.
Thank you.
Your next question comes from Brady Gailey with Keybanc capital. Your line is now open.
Thank you good morning, guys.
Good morning.
But when you look at the bond portfolio.
If you looked at it over the last five quarters.
It has not been dramatic but you know the bond portfolio of just continues to tick down a little by little every quarter.
When do you make the decision to stabilize if not the kind of grow the <unk>.
Size of the bond book do you need a higher.
The long end of the curve to do that or.
Is this planned and youre really focusing on loan growth. So we should continue to expect the bond book the tick down in loans to tick up.
Okay.
We're expecting low to take out in terms of the decrease from the bond portfolio and the.
In the first half.
Probably 60% of it had to do with the sale of from municipal bonds.
That we were not anticipating selling and we sold simply because we were of uncertainty and they were related to.
The different cities.
Power.
Electric power.
So the areas that they had.
And with the.
Significant events that we had in the power grid.
Grid.
Crisis in February of associated with the weather.
We just made the decision that.
From the credit standpoint, yeah, they were down a couple of three points.
Thank you.
If things didn't go the way they might've thought I could've gone.
Our upside was maybe two to three points, our downside was pretty much unlimited so that accounts for about 60% of that Youre correct on rates.
As rates ticked up during the quarter and most of that occurred.
In the second half, we did become more active in purchasing and we've been more active in <unk>.
So.
It's not a planned thing, it's just kind of where where interest rates are and.
Is the risk reward appropriate for us to make those buys.
Yeah, Alright that makes sense and it was good to hear about the three lender hires Lee.
How active do you expect to be going forward on hiring lenders it sounds like.
Youre, making more and more of an investment of Houston.
It is great to hear about.
What should we expect continued L. P O slash branches in Houston and continued lender hires or are you going to kind of stick with what you got let that mature and kind of slow play out of Houston.
I would anticipate that.
We will begin to the.
The lenders that we have there we hire.
The first half of the <unk>.
2020, and obviously COVID-19 yet.
So we kind of.
Slow slug of it a little bit and it was really the second half of the year, where they where they got star from where they've got active.
I would anticipate that as things open up more of that we're going to begin to look for additional lenders in Houston the.
L. P. L. We opened has additional capacity.
Two of house additional people. So I don't anticipate an additional L. P O. There right now because they are pretty well centrally located.
But it is something that in future 'twenty two 'twenty three maybe it might be a real possibility.
But if we can find good.
Good solid experienced lenders.
They have been successful in other places.
Then we're going to try to pull them out of those those banks and the.
Get them to Southside.
No.
And sticking with Houston here I know you just started there so it's probably small but what what's your low base right now in Houston, and then Uh huh.
How big do you think you could get that every time with what's the goal as far as the Houston portfolio.
Let's see the Hana Mason numbers here.
Okay.
Yeah.
Okay, but that's less layers, but the.
He's asking about total <unk>.
I know, we started Brady was probably $250 million to $300 million in loans in Houston.
And Julie searching for the number.
So we will get it and get it to you here in just seconds I'm sorry.
In terms of what I think we can in terms of what I think we can get it to.
I think whatever it is today I think we can fairly easily over time, it's certainly not going to happen this year over time.
The double in size, if not triple simple because of the size of the market area.
Yep Yep.
Back on the M&A.
You know it.
Feels like things are picking up in Texas from the state is clearly.
The back open for business and we saw a big transaction with Bancorp south of the cadence and it feels like we're going to have more.
Later on this year.
How do you think southside fits in.
The fact that realistically.
You guys will be active on the M&A front, the buying some smaller banks in Texas.
Yes, those discussions have of definitely picked up.
And I.
I do anticipate the.
You know sometime within the next 12 months I would hope I would hope we're definitely active in that arena.
And we are beginning to see.
To have additional discussions along those lines so.
I think from the sales side the more people interested in talking.
About that and so we're definitely interested.
Our focus continues to be basically.
East of of <unk>, 35, going down to the state.
With maybe going out 40, or 50 miles to the west of the 35.
And Lee.
Can you just remind us from the size.
Point of view I mean, you guys are 7 billion so you're getting.
Somewhat close of the $10 billion Mark.
From a size point of view of what would the ideal target look like.
No the ideal target, we'd probably be at at least the billion dollars up to $2 billion.
Getting much above two and a half day in a week.
We could adjust our balance sheet.
By reducing securities of if we wanted to but if we get much above $2 5 billion.
We're right at $10 billion.
And.
While we're while we're preparing to get there.
I think it's probably going to be the end of the year before.
All of the ready to be able to go over that $10 billion Mark.
Yeah.
Thank you for the color guys.
Alright, thank you.
And we will get to the.
The number on Houston.
Thank you David.
Yeah.
Yes.
Yes.
Your next question comes from Brad Milsap with Piper Sandler Your line is now all of them.
Hey, guys good morning.
Good morning.
Hey, Lee just wanted to.
Follow up on the bond portfolio of discussion.
Maybe a different direction and the size, but it looks like the yield has actually stayed.
Fairly stable year over year.
Just kind of curious if you can kind of talk about that.
Anything sort of out of the ordinary affecting.
The yield of late or is that.
Just do you know.
Your typical working that the bond portfolio really hard like you've done over time, just the ticket is very impressive that that's been able to stay relatively stable yet we've seen obviously rates collapse around us just any additional color there would be helpful.
Sure.
Basically the stuff that's been rolling off.
We haven't had a lot of municipals roll off other than those that we sold.
Of the stuff has been rolling off is in the mortgage backed.
Arena.
And typically they've been pain.
Faster up in the third.
35 to 45 CPR range and the.
Tend to have some of the lower yields in the portfolio as a result of of those higher prepayment speeds and.
And we own those at a premium so I think we can largely attributed to the lower stuff rolling off and yes, we're not putting on it I'd love to tell you, we're putting on everything at 3% or higher but we're not but what we are putting on is higher than what's rolling off so I think thats what you are.
Sandy.
Okay. Thank you that's helpful and then.
Just on the other side of the equation.
You guys had a lot of run off in the time deposit category. This quarter I think averages were down almost.
$300 billion.
Just kind of curious how much more run off you think you have to go there or do you think that's getting close to a pretty steady state and then.
Without the same of the federal home loan Bank advances I think most of what you have left the swaps so.
That may preclude you from kind of taken out and the lower but just any color on those two categories would be helpful.
Sure.
Correct on the home loan bank advances, we're pretty close to where everything the swaps.
We do have one swap for I think the $20 million that rolls off in June debt.
Likely we won't replace.
On the time deposits most most of the time deposit roll off has been related to public funds customers.
And also in the brokerage CD arena.
And.
I don't know if we're at zero on brokered Cds, but we're getting we're down to $45 million on those.
Those we anticipate may continue to run off with the excess funding that we have.
And on the public fund side, we're getting down pretty close to what I'd call.
Core level.
Where the depository for the institution so.
I would anticipate that that is kind of slow quite a bit.
Over the next several quarters.
Great and then just a couple of final ones.
Curious, where new loan yields are coming on the books and then Julie not sure. If you have average PPP loans for the quarter and then the.
Contribution in dollars from the purchase accounting this quarter would also be helpful. Thank you guys.
Okay.
The lease the average yield on loans going on the books without the PPP loans for.
For the first quarter was of 332.
We do anticipate with the with rates having moved up some.
The we may see a little higher rate.
In future quarters, but.
That was the average rate.
Ex PPP loans with the PPP loans in there it was right around the $2 90.
And then of.
The average balance on the PPP loans is 215.061 million.
And the purchase of the purchase accretion was 415000. This is down about 38000 from last quarter.
Excellent. Thank you guys really appreciate it.
Alright, thank you.
There are no further questions at this time I will now turn the call back.
Please Gibson.
Sure.
Thanks for any closing remarks.
Okay.
As for Brady's question on total loans in Houston right now in.
In the Houston area, we have Brian around approximately $400 million in loans and.
Houston, our new loan group has provided new loans of about $70 million of.
That of the.
At $400 million.
Closing remarks, thank you for joining us today, given the positive outlook for our markets are strong balance sheet capital position asset quality and core earnings were very encouraged about 2021 and look forward to reporting results to you during our next earnings call in July.
Thank you for attending and this concludes the call.
This concludes today's conference call. Thank you for joining you may now disconnect.
Uh huh.
Yes.
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Okay.
Yeah.
This growth.
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Sure.
Okay.