Q2 2021 Southside Bancshares Inc Earnings Call
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Good day, and thank you for standing by and welcome to the South side Bancshares, Inc. Second quarter 'twenty 'twenty 1 earnings call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded.
If you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Ms. Lindsey Bailes, Vice President of Investor Relations. Please go ahead.
Thank you Rick Shane good morning, everyone and welcome to Southside Bancshares second quarter 2021 earnings call a transcript of today's call will be posted on Southside Dot 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 risk and uncertainty.
Factors that could materially change our current forward looking assumptions are described in our earnings release and our form 10-K.
Me today are Lee Gibson, President and CEO and Julie Shamburger CFO.
Firstly, we 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 second quarter earnings call for 2021. This morning I am pleased to report we had another solid quarter with net income of $21.3 million earnings per share of <unk> 65.
And on an annualized ROA of 1.2% and an annualized return on average tangible common equity of 13, 1.3% or.
Our quarterly results included continued linked quarter deposit and loan growth net of PPP loans and continued strong asset quality metrics. The second quarter results included a provision for credit losses of $1.7 million due to a decline in the downside component of the <unk>.
Economic forecast and its effects on macroeconomic factors used in the seasonal model.
Our strong asset quality metrics included non accruing loans to total loans of.
1, 4% and nonperforming assets to total assets of 2.1%.
Our linked quarter loan growth net of PPP loans of $14.5 million was partially offset by earlier than anticipated loan pay offs to recently completed construction projects selling prior to stabilization at very low cap rates.
Year ago, we were seeing construction projects typically so post stabilization.
Annualized loan growth as of June 32021 was 4%.
We continue to believe 7% loan growth for 2021 net of PPP loans is achievable as our loan pipeline remains very healthy.
And we anticipate will continue throughout the year given the outlook for the high growth markets we serve.
$656000 decrease in our net interest income linked quarter was due entirely to the decrease.
And PPP loan accretion during the quarter linked.
Linked quarter, our net interest margin and spread decreased 14 basis points, primarily due to an 18 basis point decrease in the yield on earning assets the.
The average yield on loans decreased 16 basis points half of which was due to the decrease in the combined PPP and purchase on accretion.
The average yield on securities decreased 18 basis points linked quarter, largely due to a 42 basis point decrease in the yield on mortgage backed securities primarily result of higher Prepays.
And a 23 basis point decrease in the yield on taxable securities primarily due to an increase in the average balance of a treasury position during the second quarter.
The mortgage backed securities position continues to decrease as a percentage of the overall securities portfolio. In addition during July we have sold approximately $57 million of our lower yielding mortgage backed securities on September 30th we anticipate the redemption of our 5.5% coupon.
On $100 million sub debt issue pending regulatory approval.
Which will have a positive impact on both net interest income and the net interest margin beginning in the fourth quarter.
For the 6 months ended June 32021, our net interest margin has increased 11 basis points when compared to the prior year.
During the second quarter, we continue to see a nice increase in non maturity deposits, which represents our lowest cost interest bearing liabilities.
Over the past 15 months, we have experienced significant growth in non maturity deposits, which has allowed us to strategically lower our higher cost funding sources Cds and <unk> borrowings.
Economic conditions in our market areas remained strong bolstered by company relocations or expansions combined with population growth.
As the Texas economy continues to benefit from individuals and companies migrating from other states.
The DSW on Austin markets that we serve 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 Jim.
Thank you Lee good morning, everyone and welcome to our call today.
We reported net income of $21.3 million linked quarter, a decrease of $12.8 million on any 7.5% due primarily to an increase in provision expense of $11.8 million and a decrease in net securities gains and $10 million net.
Net income decreased 237000 on 1.1% compared to the same period in 2020.
For the quarter ended June 32021 diluted earnings per share were <unk> 65 cents.
And change when compared to the same period in 2020, and a decrease of 39.30.
That 37, 5% on on a linked quarter basis.
Linked quarter net of the decrease in PPP loans of $88.8 million on our loan portfolio increased $14.5 million to 364 billion.
Our commercial real estate loans increased $82.3 million, partially offset by a decrease in construction loans and 77.5 million.
Construction loans decreased due to several large unexpected early pay offs in the second quarter and commercial loans, excluding the PPP forgiveness increased approximately $21 million during the second quarter.
As of June 30, our PPP loans included in the commercial loan category totaled $132.1 million down from $10.20.9 million at March 31.2021.
The average balance of our PPP loans for the 3 months ended June 32021 was approximately $206 million.
Our asset quality remains strong as nonperforming assets decreased slightly by $98000 down to 2.1% of total assets compared to 2.2% at March 31.2021.
Yeah.
Linked quarter, our allowance for loan loss increased approximately $1.5 million or 3.5% to $42.9 million at June 30th day.
Due to recording a provision for credit losses on loans of $1 million on a half in the second quarter of 2021, an increase of $8.9 million compared to the reversal of provision in the first quarter.
The increase in the provision for the second quarter was primarily due to a decline in the S..3 downside scenario in the Moody's economic forecast at June 32021, and its effect on macroeconomic factors used in the seasonal model.
On June 30, our allowance for loan losses as a percentage of total loans was 1.8% and when excluding PPP loans, 122%.
Our allowance for off balance sheet credit exposures at June 30 increased slightly to $3.8 million when compared to March 31, 2021, due entirely to provision expense of $157000 again compared to a reversal of provision of $2.8 million.
In the previous quarter.
Combined with the provision expense for credit losses on loans the provision for credit losses totaled $1.7 million for the 3 months ended June 32021.
Our COVID-19 related deferrals had decreased to 1 remaining mortgage loans with an approximate balance of $158000.
As of June 30th our loans with oil and gas industry exposure were $94.3 million or 2.7% of total loans.
Our securities portfolio increased $215.8 million or 8.2% on a linked quarter basis.
We recognized $15000 in net security gains on on the sale of <unk> securities during the quarter, a decrease of $2 million from the net gains reported last quarter.
As of June 32021, we had a net unrealized gain in the securities portfolio of $136.4 million and the duration in the portfolio increased slightly to 5.4 years from 5.3 years at the end of the first quarter.
On a mix of loans and securities at June 30 is shifted to 56% loans and 44% securities from 58% and 42% respectively. At March 31, due to the purchases in the securities portfolio.
Our net interest margin and spread were $3.6 into any non respectively with the linked quarter decrease in both a 14 basis points. A result of the decrease in yield on interest earning assets.
Consistent with last quarter, approximately 10 basis points in the net interest margin related to interest and fees earned on the PPP loans.
For the 3 months ended June 30th net interest income decreased $656000 or 1.4%.
We recorded approximately $1.7 million in net fees related to the PPP loans included in interest income this quarter compared to $2.6 million linked quarter.
As of June 32021, we had net deferred fees of approximately $5.3 million remaining to be recognized as a yield adjustment over the terms of the loans.
Additionally, we recorded $649000 in purchase loan accretion this quarter, an increase of $234000 from the prior period.
For the 3 months ended June 32021, noninterest income excluding net gains on the sale of <unk> Securities decreased 702000, or 6% for the linked quarter, which was primarily driven by a decrease in other non interest income partially offset by an increase.
<unk> in deposit services income.
Our other noninterest income decreased primarily due to a decrease in swap fee income and a decrease in the fair value of mortgage servicing rights.
An increase in debit card income was the primary driver of the increase in deposits services income.
Additionally, we have experienced consistent increases in our trust fees and brokerage services income over each of the following quarters since June 32020.
Resulting in increases of 51% and brokerage services income and 14% interest fees for the 6 months ended June 32021, when compared to the same period in 2020.
Linked quarter noninterest expense decreased $535000 or 1.7% to $30.7 million.
For the third quarter of 2021, we expect noninterest expense to be approximately $31 million.
Our fully taxable equivalent efficiency ratio decreased to 53, 1% compared to 54, 4% linked quarter.
The decrease in our fully taxable equivalent efficiency ratio was due to the decrease in non interest expense for the quarter.
Income tax expense decreased $1.9 million on 39, 2% compared to the 3 months ended March 31, 2021, as a result of the decrease in pretax income.
Our effective tax rate decreased slightly to 11, 9% for the second quarter from 12, 2% last quarter due to an increase in tax exempt income as a percentage of pretax income.
Additionally, we recorded $115000 a discrete tax benefit in connection with equity award transactions during the second quarter.
At this time, we are estimating an annualized effective tax rate of 12, 5%.
Thank you for joining US today. This concludes our comments and we will open the lines for questions.
As a reminder to ask a question you need to press star 1 on your telephone to withdraw your question press. The pound key your first question quite of Brad Milsap from Piper Sandler.
Hey, good morning, guys.
Good morning.
Maybe start with the bond portfolio.
I was kind of writing quickly it looks like the average bond portfolio.
<unk> was around $2.6 billion during the quarter you are closer to.
Sure not at period end.
I think you mentioned you sold and stuff that just kind of curious.
What categories you did buy into it sounds like you continue to let MBS run off.
Did you go to buy more tax exempt door that becomes a tangible book.
And then kind of what does that mean for your for your margin going forward.
Right.
Primarily what we bought were municipals.
Some some taxable.
A lot of tax free municipal.
We bought a few sub debt deals banks sub debt deals but.
Primarily it was it was in the municipal arena.
We're just not finding any value in the in the mortgage arena at this point in time.
In terms of the margin going forward.
I think the.
On the taxable side.
Treasury.
<unk>.
Wade.
On the on.
On that.
Debt yield.
We're not increasing net treasury position at this point in time, so I don't see that being a.
On issue.
As for the other tactical purchases they've typically been in the in the $2.50 to $2.70 range on.
On the tax free side, it really just depends what maturity you're buying and what the call is but.
For the really high quality stuff.
Honestly, whatever we put on is going to be.
<unk> reduction on the right there.
Okay.
Okay great.
Like you were more optimistic on loan growth.
Picking back up in the back half debt.
Total DDA believe that maybe debt.
The NIM can maybe stabilized here above 3 or do you think there is.
More significant compression coming.
I think we will face.
We will see a 14 basis point decrease in the NIM.
Going forward.
Specially in the third quarter, but I do see some slight NIM compression.
We just had a number of factors that caused it to be lower.
<unk>.
We'll begin to see some of the round 2 of PPP loans.
We began to be forgiven.
In the next 6 months 9 months for sure. So we will be bringing net income in and then of course.
Pending regulatory approval.
We.
When we call the sub debt deal that that's going to take a lot of pressure off.
Them and it'll go the other direction.
Great. Thank you and just 1 housekeeping question Julien that the average number of <unk>.
PPP loans in the quarter.
You want to average number on the average balance on that.
Balance I apologize, okay, that's what I thought you meant.
Yes, it's $200.6 million.
Okay, you said that great. Thank you.
Your next question on line of Brett Robertson with <unk> group.
Okay.
Hi, good morning.
Good morning, Brett.
Good afternoon classification conversation all day.
Group.
Wanted to ask just curious question a different way maybe Lee how much do you guys have in cash flow coming that Jeff reimbursement might be in the next few quarters on what would be the average rate I guess I'm just trying to get to what you have to replace Walter to the current portfolio going forward.
Yeah.
The cash flow that comes in as is almost exclusively related to.
So the mortgage backed securities portfolio.
And.
It's probably averaging somewhere around $40 million.
At this point in time with the.
The sale of some of those.
<unk> backed securities that might decrease a little bit, but I would I would anticipate that we're looking at close to $90 million.
For this third quarter.
Redemptions there.
The net.
<unk> has an average yield of.
2.2% and whats prepaying is typically the lower rate stuff. So.
For the most part we should be able to put put on securities that are closed, but it may cause a little bit of additional price.
Pressure in the overall.
Yield on the securities portfolio.
Okay. That's good color.
And then just on the pay offs you had on the construction portfolio.
Sounds like those are on X factor.
Essentially projects were.
But even before the.
Quarter of occupation was was file thank her got refinanced away from you or what maybe.
Drove the decline that you weren't expecting on construction.
Yes, we were expecting these to sell but typically what we've seen as debt.
Project, let's say, it's a multifamily it'll reach stabilization which means.
Maybe 90% 95% occupied.
Look we were starting to see in the second quarter was.
They were able to sell these projects price.
Fear to stabilization so they werent they werent leased up.
Stabilization and so they were prepaying anywhere from 3 to 9 months faster than than we originally anticipated that they would pay offs.
Okay.
And then.
Last question for me on iPad.
Some contacts on this day told me that the talks are picking up and I know you've been thinking about doing M&A.
Was just curiously to get your Kiwi free at on M&A for you and if you were seeing in opportunities.
You were hearing.
We're having conversations with folks these days.
We are we are hearing.
More opportunities out there and having additional conversations.
And.
Some of the opportunities that are out there.
One's that we may not be interested in.
Yes, we are definitely seeing an uptick in.
And opportunities to have conversations surrounding M&A.
Okay.
Great. Thanks for all the color.
Again, if you would like to ask a question. Please press Star then the number 1 on your telephone keypad again that starting on number 1 to ask a question. Your next question. The line of will Jones with <unk>.
Hey, good morning, how are you guys.
Great how are you doing well.
Doing good.
I just wanted to pivot back loans and loan growth or just.
Unfortunate debt.
Net pay downs, the earning growth this.
This quarter, especially coming off the strong momentum in <unk>.
But it does sound like you guys are still optimistic in the back half of the year.
But what are you seeing in your markets today.
What are you kind of anticipating most of that growth come from you on as you guys are on the process of building on the Houston presence on many of them.
On some lenders in the Dallas market. So just curious on the commentary around loan growth.
We're starting to see not starting we've been seeing a number of opportunities in our current pipeline. There are a number of full thunders.
We're looking at at this point in time, which.
It gives us.
Some encouragement about that 7% loan growth.
And then some of our construction projects that we put on last year.
Those are starting to fund up.
And so.
<unk>.
We're just anticipating that.
These early pay offs, we may see a few more early pay offs, but.
Those were ones, where we're really anticipating in the back half of this year.
Not early next year.
So with with what we're seeing on our pipeline and the types of loans, we're seeing in.
The fact that a number of them are full thunders gives us confidence that.
We.
Barring unexpected pay offs at a large large volume.
We anticipate being able to.
To get to that 7% of real close to it.
Gotcha.
Good to hear and then just on the hiring front.
Are you guys still active in seeking new lenders you guys still active on building out on a different markets or maybe I hope it on.
There's some lending talent within certain portfolio segments.
Just curious on the commentary around your hiring efforts on what you guys are seeing out there.
Okay.
We are definitely interested in.
Additional revenue producers, especially in our in our higher growth markets.
And.
We are actively looking for some.
We did bring on.
3 in the first quarter.
That has worked out extremely well.
We're just being very selective on what we do but yes, we are continuing to look for.
Additional revenue producers in those market areas.
Right just for my reference what would you consider are your highest growth markets.
Yeah.
The Dallas Fort worth area.
The Austin market and.
On.
Houston is while it may not be as high growth as the other 2 it's still a growing market.
And for US we're just.
Scratching the surface there so.
There seems to be a lot of opportunity there for us.
Even with maybe a little slower growth than we're seeing in the.
Other markets.
Awesome, that's great and just lastly for me in our new debt.
Just looking at it looks like.
Period shares were roughly flat quarter over quarter, but on that you guys are more active on the buyback.
Last quarter did you guys buy back any shares this quarter and how is your appetite for the buyback.
As you go into this upcoming quarter.
Kind of pulled back a little bit.
Is it possible to see you guys.
Engage for the elderly.
In terms of.
The future, yes, we're definitely.
Looking to.
To repurchase shares.
Moving forward, especially at these prices.
And in terms of what we purchased them on a.
During the quarter on the let Julie answer that yes, we purchased right at 91000 shares in the first quarter. It was very early on in April.
At an average price of $38 and putting on.
In.
Slightly so we do plan to Phoebe.
Feedback on here.
Okay, great. Thanks, that's it for me.
Alright, thank you.
Your next question on line of Michael Young with true security.
Hey, Thanks for taking the question.
Good morning, Michael.
Wanted to ask just about interest rate sensitivity you guys have historically been a little bit liability sensitive but just.
Just wanted to kind of get your thoughts or any proactive measures that you may be taking too.
Maybe be a little more neutral if we think we're moving towards the higher rate environment or extending duration or shrinking duration on the case maybe.
Yeah.
Great question. Thanks.
1 of the things that we've been able to day over the last 15 months.
Utilize these this large growth in non maturity deposits on while we may see some runoff in that it appears that the vast majority of it is going to remain fairly sticky.
Those tend to be much longer duration.
Liabilities, then the liabilities that we.
We let run off which were the Cds <unk> borrowings. So we feel like our overall liabilities have lengthened.
Pretty nicely and duration on the.
As a result of the growth in the non maturity deposits. So.
That combined with we have a lot of floating rate loans on the loan side.
Sure.
As we mentioned, we're getting a lot of cash flow on the mortgage side.
At this point I feel like we're pretty close to neutral because of that growth in the non maturity deposits.
Okay. That's helpful.
Just maybe a bigger picture question on sort of the the expense infrastructure for the bank you guys have done a good job on kind of pruning expenses to keep the efficiency ratio at an attractive level, but just curious now kind of looking back on the pandemic and the impacts and having a test or on it.
Maybe branches being closed for a small period of time in sales activity through that period or are you more confident in continuing to rationalize the branch network or pivoting the branch network to higher growth Metros, just any kind of thoughts there would be helpful.
Yes.
We have we did in the last 12 months I think we've closed.
6 branches I know in the last 9 months, we've closed 6 branches on trying to remember what we closed in the third quarter of last year if any.
And we have we have opened a branch in well 2 branches.
1 was in <unk>.
Now.
Full service branch and then we've opened a branch in Houston.
1 in the DFW area. So yes, we're looking at.
More branches in the higher growth markets.
But still providing.
Sufficient number of branches in our other markets because.
For those clotted.
Low cost deposits and so it's important that we make sure that those.
Those areas for coverage sufficiently with branches.
Okay.
Helpful. Thank you.
I will now turn the call back over to Mr. Gibson.
Alright, Thank you for joining us today, we appreciate the opportunity to answer your questions and your interest in south side Bancshares.
In closing given the positive economic conditions in our markets, our strong balance sheet capital position asset quality and core earnings were very encouraged and look forward to reporting results to you. During our next earnings call in October This concludes the call.
This concludes today's conference call. Thank you for participating you may now disconnect.
Goodbye.
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