Q3 2021 Southside Bancshares Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to this outside Bancshares incorporated third quarter 2021 earnings conference call.
At this time, all participants are in listen only mode.
After the speaker's presentation, there will be a question and answer session.
I ask a question. During this time, you will need to press star one on your telephone keypad.
Also please be advised the city's conference is being recorded if.
If you require any further assistance please press star zero.
I'd now like to hand, the conference over to your speaker today Ms. Lindsey Bailes. Thank you. Please go ahead.
Thank you Jess good morning, everyone and welcome to Southside Bancshares' third 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 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, joining me today are Lee Gibson, President and CEO and Julie.
She hamburgers C S M.
We will share his comments on the quarter, then Julie will give an overview of our financial results I will now I'll turn the call eventually.
Good morning, and welcome to Southside Bancshares' third quarter earnings call for 2021. This morning, we reported outstanding quarterly results I want to thank the entire south side team for their tremendous contributions and efforts without which these results would not have been possible.
Highlights for the quarter included earnings per share of 90 cents, an ROA of 161% annualized linked quarter loan growth net of P. P. P of seven 9% annualized linked quarter.
Deposit growth of 13, 5% an increase in the net interest margin to 3.16% and continued strong asset quality with nonperforming assets decreasing 2.1.
One 7% of total assets. The third quarter results also included a reversal of provision for credit losses of $5 1 million.
Linked quarter, our net interest margin increased 10 basis points and our net interest spread increased 11 basis points, primarily due to a 10 basis point increase in the yield on earning assets.
The average yield on loans increased 15 basis points largely due to the increase in PPP loan accretion.
The average yield on securities increased five basis points and our cost of funds decreased one basis point.
On September 30th 2021, we redeemed our five 5% coupon $100 million subordinated notes, which will further positively impact the net interest margin in the fourth quarter.
During the quarter, we expensed $1 1 million.
In connection with this redemption.
Annualized loan growth as of September 30th.
2021 was five 3%.
Our loan pipeline and all of our markets is strong we anticipate this will continue well into 2022, given the strong outlook for the high growth markets we serve.
Fourth quarter payoffs are anticipated to generate headwinds as the anticipation of potential tax law changes as accelerated sales of customer projects.
We now believe loan growth for 2021 net of PPP loans will be closer to 5%.
We are currently budgeting for and projecting 2022 loan growth net of PPP loans of 9%.
During the third quarter, we continued to experience an increase in our average non maturity deposits, which represent our lowest cost interest bearing liabilities.
Over the past 18 months non maturity deposits have increased significantly which has allowed us to strategically transform our funding base by lowering our dependence on higher cost and shorter duration Cds and Unswathe FH L. D borrowings we had.
Swapped FHL b borrowings at September 30th of $605 million.
The economic conditions in our markets remain strong.
Bolstered by continued company relocations and existing company expansions combined with population growth.
The DFW and 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 remarks, 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 $29 $3 million linked quarter increase of $8 million or 37, 5% due primarily to the reversal of provision of $5 $1 million and a net gain on sale of assets. The journey of one 4 million.
Net income increased $2 2 million or eight 2% compared to the same period in 2020.
For the quarter ended September 32021, and diluted earnings per share were 90 cents an increase of eight.
Our nine 8% compared to the same period in 2020, and an increase of 25 cents or 38, 5% on a linked quarter basis.
When each corner net of the decrease in PPP loans at $64 6 million, our loan portfolio increased $69 9 million to $3 six 5 billion our COO.
Commercial real estate loans increased 170, 419 million, partially offset by a decrease in construction loans of $106 1 million.
The decrease in the construction loans is primarily the result of payoffs and completed projects converting to permanent financing.
Commercial loans, excluding the P. P. P for goodness increased approximately $10 8 million during the third quarter.
We also experienced an increase in municipal loans and $9 9 million on a linked quarter basis.
Average rate and new loans.
And during third quarter with three 6%.
As of September 30th arm P. P. P loans included in the commercial loan category totaled $67 5 million down from $132 1 million at June 30th 2021.
The average balance of our PPP loans for the three months ended September 32021, that's approximately $103 $9 million.
Our asset quality remains strong nonperforming assets decreased by $2 $8 million or 18, 6% down to one 7% of total assets compared to 21% at June 30th 2021.
Linked quarter, our allowance for loan loss decreased $4 9 million or 11, 4% to $38 million at September 30th.
Due to recording a reversal of provision for credit losses on loans of $4 4 million in the third quarter of 2021 and.
A decrease of $5 9 million compared to the second quarter provision.
The decrease in the provision for the third quarter was primarily due to an improvement in the Moody's economic forecast as of September 30th 2021.
As of September 30th our allowance for loan losses as a percentage of total loans was 1.4% and one 6% when excluding P. P. P lands.
Our allowance for off balance sheet credit exposures at September 30th decreased to 31 million when compared to $3 8 million at June 30th 2021 due to a reversal of provision of $683000 compared to provision expense of 157000.
In the previous quarter.
Combined with the reversal of provision for credit losses on loans, the reversal of provision for credit losses totaled $5 1 million for the three months ended September 30th 2021.
Okay.
As of September 30, yes, our loans with oil and gas industry exposure decreased to $77 million or one 9% of total loans compared with $94 3 million at the prior quarter end driven by Paydowns on several oil and gas loans during the quarter.
We currently have no remaining COVID-19 related deferrals.
Our securities portfolio decreased $15 3 million or one half a percent on a linked quarter basis, we recognized $1 4 million in the security gains on the sale of securities during the quarter, an increase from the net gains of 15000 reported last quarter.
As of September 30 of 2020, one we had a net unrealized gains in our securities portfolio of one O 627 million and the duration of the portfolio increased to five eight years from five four years at the end of the second quarter.
Our makes up loans and securities at September 30th remained consistent on a linked quarter basis at 56% loans and 44% of securities.
During the corner in the September 30th we repurchased the remaining authorized shares under our stock repurchase plan. A total of 420204 shares purchased at an average price of $36.74.
Our net interest margin increased 10 basis points on a linked quarter basis to 3.16% and net interest spread increased by 11 basis points.
The increase in yield on interest, earning assets and fees on P. P. P loans forgiven.
Approximately 18 basis points and the net interest margin related to fees earned on the P. P. P loans.
For the three months ended September 30th net interest income increased $2 6 million or five 6% when compared to the linked quarter.
We recorded approximately $3 1 million in net fees related to the P. P. P lines included in interest income this quarter compared to 1.7 million at June 30, yes.
As of September 30th 2021 we had net debt.
First phase adds approximately $2 3 million remaining to be recognized as a yield adjustment over the terms of the lungs.
Additionally, we recorded $196000 in purchase loan accretion this quarter a decrease of 453000 from the prior quarter.
So in the three months ended September 32021, non interest income excluding net gains on the celebrate their securities increased 470000, or four 3% for the linked quarter, which was primarily driven by an increase in deposit services income and other non interest in.
Ken.
An increase in overdraft charges was the driver in the increase in deposit services income and other non interest income increased primarily due to an increase in mortgage servicing fee income.
On September 30th.
We redeemed our 5.5% subordinated notes, resulting in a 1.1 million dollar loss on redemption reported in noninterest expense.
Excluding the loss on the redemption noninterest expense remained consistent on a linked quarter basis for the fourth quarter of 2021, we expect non insured noninterest expense to be approximately $31 million.
Our fully taxable equivalent efficiency ratio decreased to 47.92% compared to 53, 1% in the previous quarter.
The increase in the fully taxable equivalent efficiency ratio was due to the increase in net interest income for the quarter.
Income tax expense increased $2 1 million or 72, 4% compared to the three months ended June 30th 2021 driven by the increase in pretax income.
Our effective tax rate increased to 14, 5% for the third quarter up from 11, 9% last quarter, primarily due to a decrease in tax exempt income as a percentage of pretax income.
At this time, we are estimating an increase in our annualized effective tax rate to 13, 2%.
Thank you for joining US today. This concludes our comments and we will open the line for questions.
Yeah.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Again, that's star one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Yeah.
Your first question comes from the line of Brad Gailey from K B W. Your line is open.
Yeah, It's Brady good morning, guys.
Good morning, Brian Good morning.
I wanted to start with loan growth and 9%.
PPP loan growth next year.
It is a fairly healthy.
Level, but maybe just a comment.
You know relative to this year do you expect it to be.
More production, that's driving that higher rate or is it a lesser amount of pay offs and then just within your geographies where are you seeing the best growth.
I think it's you know it's going to be a common combination of both of those but more additional.
Production next year some of the people we hired this year, we only had.
For about <unk>.
70% of the year.
Are producing well.
And most of the production the big dollar production is probably going to come in the metropolitan areas is what we're anticipating.
You know the DFW, the Austin and Houston markets.
And that's that's where we're seeing the largest dollar amount now the largest number of loans are being made in east, Texas markets, but in terms of the dollars, it's going to be the the metropolitan areas.
And as far as the payoffs go you know where a lot of people are you know.
Concerned about tax changes.
This year and so that's you know that generated some additional payoffs in the third quarter, but we're seeing that.
Accelerate even more in the fourth quarter.
Alright.
And then next on the buyback you know if I look at the first three quarters of the year, you've repurchased about 3% of the company.
So a fairly healthy level, but you know you don't have anything authorized beyond that should we think about the buyback.
You mean for here from here or does that pause.
I think at some point, we'll discuss with the board on an additional authorization to have available.
If if not this quarter early next quarter, but you know I would anticipate we're going to have additional authorization. So that we have availability.
Alright, and then last for me you guys have done a good job of holding expenses flat around this $31 million level. It sounds like it's going to be the same.
To close out the year and next quarter.
You look towards 2022.
What sort of expense creep when should we expect.
Okay.
You know we haven't we haven't completed the budget for 2022, I know, we're going to have some additional technology spend.
In all likelihood there'll be some increased compensation spend.
Exactly what that's going to amount to I don't know from a percentage standpoint Brady but.
I would anticipate somewhere in the neighborhood of.
Maybe a million a million and a half a quarter.
I'm looking at Julie to see.
Two things that came to my mind, where compensation and technology.
Because we were looking at a team.
Things right now so that I think.
I mean, I would like to see it around 1 million, one and a half at the most.
Well, we'll have a better idea of that.
Obviously with the January call and unfortunately, but if.
Five <unk>.
Based on what we're seeing now and what we're projecting.
That would be my initial stab at it.
Okay, great. Thank you guys.
Alright.
Okay.
Your next question comes from the line of Michael Young from <unk> Securities. Your line is open.
Yeah.
Hey, Thanks for taking the question just wanted to ask.
I have a follow up on the loan growth, obviously, 9% for 2022.
Healthy very good it sounds like some larger loans, maybe kind of driving that but just generally you know I think when when we've been surprised at times its been related to payoffs or Paydowns do you have better visibility into.
Payoffs and Paydowns into 2022, then you have in prior years or anything like that or just kind of help us with the confidence around that 9% number.
Yes.
And our best visibility is for the fourth quarter, but we you know we know when construction projects are slated to be finished and that's that's typically you know not too long after that.
Some of those that are begin to lease up depending on how fast they lease up.
That's when they become the most vulnerable for payoffs.
And.
We know what what's coming up but we also have a good idea of.
What our pipeline.
How strong it is right now and we anticipate that's going to continue on into 2022 because.
Things are just continuing to.
Explode in a lot of the markets that we're in.
Company relocations.
Companies are expanding.
Existing relationships that they have in the state.
And then overall just population growth.
They can't build the houses are fast enough multifamily is is needed and a lot of these areas.
Warehouse space, there's just all sorts of needs as as we see the end migration from the other studies.
Thanks, That's helpful. And then just on maybe the securities book with that.
Strong loan growth outlook, you know do you expect to kind of hold the size of the securities book relative to the loan book or do you expect to kind of continue to push some excess liquidity into that just any outlook there for on our balance sheet size as we move through next year.
Our plan is not necessarily to expand the securities portfolio. The hope would be that the loan growth would be such that.
Be able to.
You know at a bare minimum hold it hold it where it is and maybe actually see it decrease a little bit.
Some of that is going to depend on continued deposit growth. If we continue to see deposits grow with the <unk>.
Right we've seen this year.
And it's possible that the securities book.
Hold steady and might even be up just a little bit is as we deploy some of that excess liquidity.
Okay. That's helpful. And then maybe just lastly, just on asset sensitivity could you just remind us how much of the loan book now is variable versus fixed in any kind of early thoughts around you know impact of maybe a quarter point hike or more.
It is one portfolio is right at 50 50.
It varies from $49 51 to 50 50, but it stayed in that range.
All year and.
That's essentially what what we see moving forward.
On our fixed rate loans, we typically don't don't fix them.
Other than on the wonderful on the one to four family.
Home loans.
They don't fix in past five years, so even those.
Probably have an average duration of two and a half to three years somewhere in that range.
So you know.
With a quarter pointed out.
I would anticipate.
It will get to enjoy most.
Almost all of that.
The loan book and then since.
Been able to transform the liability side and into a significant amount of non maturity deposits.
I would anticipate that you know, we're not going to see.
Maybe 10, 20% of that at 25 basis points migrate up on the deposit side. So it will be very small.
Yeah.
Okay. Thanks I appreciate it.
Okay.
Your next question comes from the line of Brad Millsaps from Piper Sandler Your line is open.
Hey, good morning, guys.
Good morning, Brad.
Lee you've got you've got to have addressed most of my questions I did want to ask around loan yields it looks like there may be only down you know.
Two or three basis points excluding.
Accretion and the impact of the P. P. P. I think you're going to hear you talking about you know new loans coming on you know kind of $3 15, if my memory serves now.
Sounds like it's closer to $3 60 is that obviously driven by mix or are you just getting better pricing out there more fees.
Just kind of curious if you could help me.
I kind of understand the kind of the key drivers there around kind of new the new yields on.
New originations.
Yeah in the first quarter.
The average was.
And that lower three range I think in the second quarter it was closer to three.
350, and then you hit it right on the nose.
<unk> 60 for the new loans that went on the books in the third quarter.
So it's it's a combination of some better pricing and you know folks are.
Are you concerned about rates moving up and and you know, we're just able to get a little better pricing.
Okay, that's great and then just.
Just as you think about you know.
Your provisioning and reserving you know last quarter, you took a provision this quarter you reverse that out and then do you think.
You're kind of mostly through that at this point and.
Start provisioning again to support some of the loan growth you've got coming down the Pike all else equal.
I think I think that's that's a correct statement.
We looked at.
We look at the seasonal reserve, obviously every quarter and kind of saw an upper and a.
Lower band.
And we were right at the top of the upper band, where the reserve buses. This time, but there's it's that has that.
That band has narrowed dramatically and its down.
<unk> down to a fairly small number at this point in time so.
Absent.
You know our mix in the loan portfolio I would anticipate further loan growth is kind of.
Come at the cost of some additional reserves, which is fine I mean nuts.
So what you ultimately want.
Sure No that's helpful. Liam and then final question.
I know you guys typically pay out a special dividend in the fourth quarter, where your payout ratio tip.
Typically at least.
Since I've covered you guys, you know kind of a bit into the mid fifties.
You guys are tracking to you know record earnings this year I know a part of that is because of reserve release, but even then if you guys are going to get back to that mid fifties payout would imply.
Special dividend.
A pretty large one just kind of curious how I know, it's a board decision but.
Should we think about that type of pay out or because it is coming from the reserve maybe you scaled back that a little bit just kind of curious how to think about that based on your history.
We haven't made any decisions but.
To think about a payout in the mid fifties is probably a little aggressive.
Yes.
But that's something we're certainly going to be taking up with the board here early next month and.
I guess more to come on that.
And I'm, sorry that I can provide you a lot of but if I.
I don't I don't see it being in the mid fifties this year.
Simply because a lot of it has been that reversal of provision expense.
Yeah no. It makes it makes total sense I really appreciate the color. Thanks Lee.
Your next question comes from line of breath Rebutting from hub. The group your line is open.
Hey, good morning, everyone.
Hey, Brad How're you doing.
Great. Thanks.
Wanted to I guess first I missed I heard that there was $2 3 million remaining on the PPP fees Julien I didn't I didn't catch what was the amount recognized in the third quarter, if you decided that Andy.
Oh, yes, the fees recognized during the third quarter were $3 1 million.
Compared to $1 7 million in second quarter.
Okay.
And then you talked about the margin and the potential for upside when rates go higher.
Do you think about the remaining opportunities to improve.
To improve the funding mix versus the loan yields.
And new originations on the Securities book does the margin creep.
From here, a little bit lower unless you have a mix shift change in the earning asset base or maybe give a little bit.
Yes.
A stronger outlook on the margin and how you see that playing out until rates move higher.
On the fourth quarter I think the fact that.
We took $100 million.
At five 5% of the.
The funding side is going to have a real positive impact in the fourth quarter.
If if they do start raising.
Short term.
I think it'll be positive and the reason I say that is if you looked at our average home loan bank borrowings approximately 90% of them are fixed with swaps.
At this point in time.
And then we have reduced.
Defunding dramatically over the course of the last year and a half.
And it's mostly in non maturity deposits right now so.
I would anticipate that.
If they do start raising the short term interest rates.
It's going to have a positive impact on our overall net interest margin and even if they don't I still think it's.
<unk>.
It's going to improve in the fourth quarter and then.
Worst case would hold flat.
Next year.
Okay. Appreciate the color on early.
And then just thinking about if I heard it right and you're expecting 5% core growth for the year.
Ex PPP, so the fourth quarter.
Got the numbers right here means a little bit of state of the atrophy relative to <unk>.
Is that right and then just.
Back on the 9% expectations for 'twenty two.
You know, there's a lot of that construction in C&I and as that pipeline building just wanted to get.
Maybe a little more color on the <unk>.
Things that are growing in terms of the pipeline.
Right.
Some of it is construction, but there was a period of time in two.
2020 were.
We werent, putting on a lot of construction loans for about four to six month period simply because.
People put their projects on hold until they figure it out what was going to happen with the pandemic.
And then correspondingly.
Make a construction loan on the equity goes in upfront and so.
We're just now seeing in the last quarter or so.
On a lot of those funds that were made in 'twenty.
And we're anticipating that.
Loans with made in 'twenty, one we will start funding up from 22.
That combined with.
Theres a lot of whole thunders that.
We're taking a look at on the CRE side, some on the commercial side.
And then on municipal lending, we think it's going to be.
Continue to be have a nice increase.
A number of the larger banks.
Are not allowed or not going to be able to make in municipal loans.
Texas.
Originate them because of their.
Our position on guns.
Related to what the state legislature did in their legislative session. This time. So there's just a number of factors that come in that we believe we're going to buy.
Well for us in terms of loan growth next year.
Okay, and then I guess that was a two part question, but the first part was just around the fourth quarter and the stated balances decline a little bit linked quarter.
I'm, sorry, and then what declines Oh, just with a with a 5% core guidance just want to make sure I have it correct.
Yeah, I mean, basically where we're right at 4% for the year.
If we didn't have any more loan growth I think we're at 4% through three quarters.
The five 3% as is annualized so we are anticipating.
Little bit of loan growth in the fourth quarter, but not anything like what we experienced in the third quarter simply because of the headwinds with the payoffs.
Okay I appreciate that.
Maybe lastly, Lee I was I'm curious.
It seems like I've had some diverging conversations around M&A and the possibility of.
Julian transaction here in the near term and I think you had been or optimistic at one point about potential.
Dealmaking, what's your current view on M&A and do you expect to be active in.
How big of a priority is that for you at this point.
We expect to be active.
<unk>.
It goes back to banks are sold they're not bought and.
You've got to have have willing sellers and at this point, we're just not seeing a lot of.
Of willing sellers that we would have interest in.
And then some of them that we've talked to that may be.
It's not something that is going to be actionable here in the near future.
Okay, that's great color I appreciate it.
Okay.
There are no more questions at this time, turning the call back to Mr. Lee Gibson for closing remarks.
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 are strong pipeline capital position core earnings and asset quality, we look forward to reporting fourth quarter.
Order and annual results to you during our next earnings call in January This concludes the call.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Goodbye.
[music].
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Southside Bancshares incorporated third quarter 2021 earnings conference call.
At this time all participants are in listen only mode. After the speaker presentation, there will be a question and answer session.
To ask a question. During this time, you will need to press star one on your telephone keypad.
Also please be advised that today's conference is being recorded.
If you require any further assistance please press star zero.
I'd now like to hand, the conference over to your speaker today Mr. <unk>.
Lindsey Bailes. Thank you. Please go ahead.
Thank you Jess good morning, everyone and welcome to Southside Bancshares' third quarter 2021 call 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 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, Firstly will share his comments on the quarter, then Julie will give an overview of our financial results.
I will now turn the call virtually.
Good morning, and welcome to the South side Bancshares third quarter earnings call for 2021.
This morning, we reported outstanding quarterly results I want to thank the entire south side team for their tremendous contributions and efforts without which these results would not have been possible.
Highlights for the quarter included earnings per share of <unk> 90 cents, an ROA of 161% annualized linked quarter loan growth net of PPP of seven 9% annualized linked quarter.
Deposit growth of 13, 5% an increase in the net interest margin to 316% and continued strong asset quality with nonperforming assets decreasing two point.
One 7% of total assets.
Third quarter results also included a reversal of provision for credit losses of $5 1 million.
This quarter, our net interest margin increased 10 basis points and our net interest spread increased 11 basis points, primarily due to a 10 basis point increase in the yield on earning assets.
The average yield on loans increased 15 basis points largely due to the increase in PPP loan accretion.
The average yield on securities increased five basis points and our cost of funds decreased one basis point.
On September 32021, we redeemed our five 5% coupon $100 million subordinated notes, which will further positively impact the net interest margin in the fourth quarter.
During the quarter, we expensed $1 1 million.
In connection with this redemption.
Annualized loan growth as of September 30th.
2021 was five 3%.
Our loan pipeline and all of our markets is strong.
Anticipate this will continue well into 2022, given the strong outlook for the high growth markets we serve.
Fourth quarter payoffs are anticipated to generate headwinds as the anticipation of potential tax law changes as accelerated sales of customer projects. We now believe loan growth for 2021 net of PPP loans will be closer to 5%.
We are currently budgeting for and projecting 2022 loan growth net of PPP loans of 9%.
During the third quarter, we continued to experience an increase in our average non maturity deposits, which represent our lowest cost <unk>.
Interest bearing liabilities.
Over the past 18 months non maturity deposits have increased significantly which has allowed us.
Strategically transform our funding base by lowering our dependence on higher cost and shorter duration Cds and swap FHL D borrowings.
We have swapped FHL b borrowings at September 30 of $605 million.
The economic conditions in our markets remain strong.
Bolstered by continued company relocations and existing company expansions combined with population growth the.
The DFW and 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 remarks, 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 $29 $3 million linked quarter increase of $8 million or 37, 5% due primarily to the reversal of provision of $5 $1 million and a net gain on sale of assets securities of $1 4 million.
Net income increased $2 2 million or eight 2% compared to the same period in 2020.
For the quarter ended September 32021, and diluted earnings per share were 90 cents an increase of eight.
Our nine 8% compared to the same period in 2020.
And an increase of 25 and.
38, 5% on a linked quarter basis.
Linked quarter net of the decrease in PPP loans of $64 6 million, our loan portfolio increased $69 9 million to 365 billion commercial real estate loans increased $174 2 million, partially offset by a decrease in construct.
So loans of $106 1 million.
The decrease in the construction loans is primarily the result of payoffs and completed projects converting to permanent financing.
Commercial loans, excluding the PPP forgiveness increased approximately $10 8 million during the third quarter.
We also experienced an increase in municipal loans and $9 9 million on a linked quarter basis.
Average rate and new loans.
During the third quarter was three 6%.
As of September 30th on PPP loans included in the commercial loan category totaled $67 5 million down from $132 1 million at June 32021.
The average balance of our PPP loans for the three months ended September 32021, so that's approximately $103 $9 million.
Our asset quality remains strong nonperforming assets decreased by $2 $8 million or 18, 6% down to one 7% of total assets compared to 21% at June 32021.
Linked quarter, our allowance for loan loss decreased $4 9 million or 11, 4% to $38 million at September 30th due to recording a reversal of provision for credit losses on loans of $4 4 million in the third quarter of 2021 and.
A decrease of $5 9 million compared to the second quarter provision.
The decrease in the provision for the third quarter was primarily due to an improvement in the Moody's economic forecast at September 30th 2021.
As of September 30th our allowance for loan losses as a percentage of total loans was one 4% and one 6% when excluding PPP loans.
Our allowance for off balance sheet credit exposures at September 30th decreased to $30 1 million when compared to $3 8 million at June 30th 2021, due to a reversal of provision of $683000 compared to provision expense of 157000.
In the previous quarter.
Combined with the reversal of provision for credit losses on loans.
Provision for credit losses totaled $5 1 million for the three months ended September 32021.
Okay.
As of September 30, our loans with oil and gas industry exposure decreased to $70 7 million or one 9% of total loans compared with $94 3 million at the prior quarter end driven by Paydowns on several oil and gas loans during the quarter.
We currently have no remaining COVID-19 related deferrals.
Our securities portfolio decreased $15 3 million.
One half a percent on a linked quarter basis, we recognized $1 4 million in the security gains on the sale of securities during the quarter, an increase from the net gains of 15000 reported last quarter.
As of September 32021, we had a net unrealized gain in the securities portfolio of $106 7 million and the duration of the portfolio increased to five eight years from five four years at the end of the second quarter.
Our mix of loans and securities at September 30th remained consistent on a linked quarter basis at 56% loans and 44% of securities.
During the quarter ended September 30, we repurchased the remaining authorized shares under our stock repurchase plan. A total of 420204 shares purchased at an average price of $36.74.
Our net interest margin increased 10 basis points on a linked quarter basis to three 6% and net interest spread increased by 11 basis points. A result of the increase in yield on interest, earning assets and fees on PPP loans forgiven.
Approximately 18 basis points and the net interest margin related to fees earned on the PPP loans.
For the three months ended September 30th net interest income increased $2 6 million or five 6% when compared to the linked quarter.
We recorded approximately $3 1 million in net fees related to the PPP loans included in interest income this quarter compared to $1 7 million at June 30.
As of September 32021, we had net deferred fees and approximately $2 3 million remaining to be recognized as a yield adjustment over the terms of the loans.
Additionally, we recorded $196000 in purchase loan accretion this quarter a decrease of 453000 from the prior quarter.
For the three months ended September 32021, non interest income excluding net gains on the celebrated a securities increased 470000 or four 3% for the linked quarter, which was primarily driven by an increase in deposit services income and other non interest income.
Pam.
An increase in overdraft charges was the driver in the increase in deposit services income and other non interest income increased primarily due to an increase in mortgage servicing fee income.
On September 30th.
We redeemed our five 5% subordinated notes, resulting in a $1 1 million dollar loss on redemption reported in noninterest expense.
Excluding the loss on the redemption noninterest expense remained consistent on a linked quarter basis for the fourth quarter of 2021, we expect non issue noninterest expense to be approximately $31 million.
Our fully taxable equivalent efficiency ratio decreased to 40, 792% compared to 53, 1% in the previous quarter. The decrease in the fully taxable equivalent efficiency ratio was due to the increase in net interest income for the quarter.
Income tax expense increased $2 1 million or 72, 4% compared to the three months ended June 32021, driven by the increase in pre tax income.
Alright effective tax rate increased to 14, 5% for the third quarter up from 11, 9% last quarter, primarily due to a decrease in tax exempt income as a percentage of pretax income.
At this time, we are estimating an increase in our annualized effective tax rate to 13, 2%.
Thank you for joining US today. This concludes our comments and we will open the line for questions.
Okay.
At this time I would like to remind everyone in order to ask your questions Press Star then the number one on your telephone keypad.
Again, Thats star one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Yeah.
Your first question comes from the line of Brad Gailey from K B W. Your line is open.
Yeah, It's Brady good morning, guys.
Good morning, Brian Good morning.
I wanted to start with loan growth and 9%.
PPP loan growth next year.
It is a fairly healthy.
Level, but maybe just a comment.
Relative to this year do you expect it to be more production, that's driving the higher rate or is it a lesser amount of pay offs and then just within your geographies where are you seeing the best growth.
Thank you.
It's going to be a common combination of both of those but more additional.
Production next year some of the people we hired this year, we only had.
For about <unk> <unk>.
70% of the year.
Producing well.
And most of the production the big dollar production is probably going to come in the metropolitan areas is what we're anticipating.
The DFW, the Austin and Houston markets.
And that's where we're seeing the largest dollar amount now the largest number of loans are being made in the east Texas markets, but.
In terms of the dollars, it's going to be met.
A metropolitan areas.
And as far as the payoffs go.
A lot of people are.
Concerned about tax changes.
This year and so that's that generated some additional payoffs in the third quarter, but we're seeing that.
Accelerate even more in the fourth quarter.
Alright.
And then next on the buyback if I look at the first three quarters of the year, you've repurchased about 3% of the company.
So a fairly healthy level, but you know.
You don't have anything authorized beyond that should we think about the buyback.
You mean for <unk> from here or does that pause.
Yes.
I think.
At some point.
<unk> discussed with the board on an additional authorization to have available.
If if not this quarter early next quarter, but.
Would anticipate we're going to have additional authorization so that we have availability.
Alright, and then last for me.
Guys have done a good job of holding it.
Hence as flat around this $31 million level it sounds like it's going to be the same.
To close out the year and next quarter as you look towards 2022, what sort of expense creep when should we expect.
Sure.
We haven't we haven't completed the budget for 2022, I know, we're going to have some additional technology spend.
All likelihood.
Some increased compensation spend.
Exactly what that's going to amount to I don't know from a percentage standpoint Brady but.
I would anticipate somewhere in the neighborhood of.
Maybe a million million and a half a quarter.
Im looking at Chili's.
There's two things that came to my mind, where compensation and technology.
Because we're looking at a few.
<unk> right now so but I think.
I mean, I would like to see it around 1 million more than a half of it the most.
Well have a better idea of that obviously.
Obviously with the January call Unfortunately, but.
Based on what we're seeing now and what we're projecting.
That would be my initial well.
<unk>.
Okay, great. Thank you guys.
Alright.
Okay.
Your next question comes from the line of Michael Young from <unk> Securities. Your line is open.
Yeah.
Hey, Thanks for taking the question just wanted to ask.
I have a follow up on the loan growth, obviously, 9% for 2022.
Very healthy very good it sounds like some larger loans, maybe kind of driving that but just generally I think when when we've been surprised at times its been related to payoffs or Paydowns do you have better visibility into.
Payoffs and Paydowns into 2022, then you have in prior years or anything like that or just kind of help us with the confidence around that 9% number.
Yes.
And our best visibility is for the fourth quarter, but we know when construction projects are slated to be finished and that's that's typically not too long after that.
Some of those that begin to lease up depending on how fast they lease up.
That's when they become the most vulnerable for payoffs.
And we.
We know what's coming up but we also have a good idea.
You know what our pipeline.
How strong it is right now and we anticipate that's going to continue on into 2022 because.
Things are just continuing to.
To explode and a lot of the markets that we're in.
Company relocations.
The companies are expanding.
Existing relationships that they have in the state and then overall just population growth.
They can't build the houses fast enough multifamily as.
As needed and a lot of these areas.
Warehouse space, there's just all sorts of needs.
As we see the in migration from the other studies.
Thanks, That's helpful. And then just on maybe the Securities book.
With that strong loan growth outlook do you expect to kind of hold the size of the securities book relative to the loan book or do you expect to kind of continue to push some excess liquidity into that just any outlook there for on our balance sheet size as we move through next year.
Okay.
Our plan is not necessarily to expand the securities portfolio. The hope would be that the loan growth would be such that we'd be able to.
Okay.
Bare minimum hold it hold it where it is and maybe actually see it decrease a little bit.
Thats going to depend on continued deposit growth. If we continue to see deposits grow with the right. We've seen this year.
Then it is possible that the securities book would hold steady and might even be up just a little bit is as we deploy some of that excess liquidity.
Okay. That's helpful. And then maybe just lastly, just on asset sensitivity.
Can you just remind us how much of the loan book now is variable versus fixed in any kind of early thoughts around impact of maybe a quarter point hike or more.
It is our loan portfolio is right at 50 50.
Varies from $49 51 to 50 50, but it stayed in that range.
All year and.
That's essentially what what we see moving forward.
On our fixed rate loans, we typically don't fix them.
And then on the one on the one to four family.
Home loans.
You don't fix in past five years, so even modems.
Probably have an average duration of two and a half to three years somewhere in that range.
So.
With a quarter point out.
I would anticipate.
We will get to enjoy most.
Almost all of that.
Loan book and then since.
Been able to transform the liability side and into a significant amount of non maturity deposits.
I would anticipate that we're not going to see.
Maybe 10, 20% of that at 25 basis points migrate up on the deposit side. So it will be very small.
Yeah.
Okay. Thanks I appreciate it.
Okay.
Your next question comes from the line of Brad Millsaps from Piper Sandler Your line is open.
Yeah.
Hey, good morning, guys.
Good morning, Brad.
Lee you've got you guys have addressed most of my questions I did want to ask around loan yields it looks like there may be only down.
Two or three basis points excluding.
Accretion and the impact of PPP, I think youre going to Youre talking about new ones coming on kind of $3 15, if my memory serves now.
Sounds like it's closer to $3 60.
That obviously driven by mix or are you just getting better pricing out there more fees.
Just kind of curious if you could help me.
Kind of understand the kind of the key drivers there around kind of new the new yields on.
The originations.
Yeah in the first quarter.
The average was.
And that lower three range I think in the second quarter it was closer to three.
$3 50, and then you hit it right on the nose.
<unk> 60 for the new loans that went on the books in the third quarter.
So it's a combination of some better pricing.
Folks are.
Our.
Concerned about rates moving up and we're just able to get a little better pricing.
Okay, that's great and then.
Just just as you'd think about.
Youre provisioning reserving you know last quarter, you took a provision in this quarter you reverse that out and then do you think.
You're kind of mostly through that at this point and.
You'd start provisioning again to support some of the loan growth you've got coming down the Pike all else equal.
I think I think that's a correct statement.
We looked at.
We look at the seasonal reserve, obviously every quarter.
Kind of saw in upper end.
And the lower band.
And we were right at the top of the upper band, where the reserve question. This time, but there is.
That has been that.
That band has narrowed dramatically and it's.
Down to a fairly small number at this point in time so.
Absent.
Our mix in the loan portfolio I would anticipate further loan growth is going to.
Come at the cost of some additional reserves, which is fine I mean nuts.
What you ultimately want.
Sure No that's helpful. Liam and then final question.
I know you guys typically pay out a special dividend in the fourth quarter, where your payout ratio.
Typically.
Since I've covered you guys kind of bit into <unk>.
You guys are tracking to record earnings this year I know a part of Thats because of reserve release, but even then it for you guys you're going to get back to that mid fifties payout would imply.
Special dividend.
A pretty large one just kind of curious how I know, it's a board decision but.
Should we think about that type of pay out or because it is coming from the reserve maybe you scaled back that a little bit just kind of curious how to think about that based on your history.
Yeah.
We haven't made any decisions, but to think about a payout in the mid <unk> is probably a little aggressive.
Yes.
But that's something we're certainly going to be taking up with the board here early next month.
I guess more to come on that.
Yeah.
And I'm, sorry that I can provide you a lot of it.
I don't I don't see it being in the mid fifties this year.
Because a lot of it has been that reversal of provision expense.
Yeah, no that makes it makes total sense I really appreciate the color. Thanks Lee.
Your next question comes from the line of breath Rabat in from hub. The group your line is open.
Hey, good morning, everyone.
Hey, Brian.
Great. Thanks.
Wanted to I guess.
First I missed I heard that there was $2 3 million remaining on the PPP fees Joe.
But I didn't I didn't catch what was the amount recognized in the third quarter. If you just have that handy.
Oh, yes, the fees recognized during the third quarter were $3 1 million.
Compared to $1 7 million second quarter.
Okay.
And then you talked about the margin and the potential for upside when rates go higher.
As you think about the remaining opportunities to improve.
To improve the funding mix versus the loan yields.
And new originations on the Securities book does the margin.
From here, a little bit lower unless you have a mix shift change in the earning asset base or maybe give a little bit.
Yes.
A stronger outlook on the margin and how you see that playing out until rates move higher.
While in the fourth quarter I think the fact that.
We took $100 million.
At five 5% off.
The funding side is going to have a real positive impact in the fourth quarter.
If if they do start raising <unk>.
Short term rates I think it will be positive and the reason I say that is if you looked at our average home loan bank borrowings approximately 90% of them are fixed with swaps at this point in time.
And then we have reduced.
CD funding dramatically over the course of the last year and a half.
And it's mostly in non maturity deposits right now so.
I would anticipate that.
If they do start raising the short term interest rates.
That's going to have a positive impact on our overall net interest margin and even if they don't I still think it's.
It's going to improve in the fourth quarter and then.
Worst case would hold flat.
Next year.
Okay. Appreciate the color on early.
And then just thinking about the if I heard it right and you are expecting 5% core growth for the year.
Ex PPP, so the fourth quarter.
If I got the numbers right here means a little bit of state of the atrophy relative to <unk>.
Is that right and then.
Just back on the 9% expectations for 'twenty two.
There's a lot of that construction in C&I and as that pipeline building just wanted to get.
Maybe a little more color on the things that are growing in terms of the pipeline.
Right.
Some of it is construction, but there was a period of time in two.
2020 were.
We werent, putting on a lot of construction loans for about four to six month period simply because.
People put their projects on hold until they figured out what was going to happen with the pandemic.
And then of course when the.
Make a construction loan the equity goes in upfront and so.
We're just now seeing in the last quarter or so.
On a lot of those funds that were made in 'twenty.
And we're anticipating that.
We have made in 'twenty, one will start funding up to 'twenty two.
That combined with.
There is a lot of whole thunders that.
We're taking a look at on the CRE side, some on the commercial side.
And then on municipal lending, we think it's going to be.
Continuing to be a nice increase.
A number of the larger banks.
Are not allowed or not going to be able to make some municipal loans instead of Texas.
Originate them because of their.
Our position on guns.
Related to what the state legislature did in their legislative session. This time so.
A number of factors that come in that we believe are going to bode well for us in terms of loan growth next year.
Okay, and then I guess I was hoping for a question about the first part was just around the fourth quarter and the stated balances decline a little bit linked quarter.
I'm, sorry, and then what declines.
With a 5% core guidance just want to make sure I have it correct.
Yes, I mean, basically where we're right at 4% for the year.
If we didn't have any more loan growth I think we're at 4% through three quarters.
The five 3% as <unk> annualized so we are anticipating.
A little bit of loan growth in the fourth quarter, but not anything like what we experienced in the third quarter simply because of the headwinds with the payoffs.
Okay I appreciate that.
And then just maybe lastly, Lee I was I'm curious.
It seems like I've had some diverging conversations around M&A and the possibility of.
Of doing transactions here in the near term and I think you had been or optimistic at one point about potential.
Dealmaking, what's your current view on M&A and do you expect to be active in.
How big of a priority is that for you at this point.
We expect to be active.
<unk>.
It goes back to banks are sold they're not bought and.
You've got to have have willing sellers and at this point, we're just not seeing a lot of that.
Willing sellers that we would have interest in.
And then some of them that we've talked to that may be.
It's not something that is.
Is going to be actionable here in the near future.
Okay, that's great color I appreciate it.
There are no more questions at this time, turning the call back to Mr. Lee Gibson for closing remarks.
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 are strong pipeline capital position core earnings and asset quality, we look forward to reporting fourth quarter.
Order and annual results to you during our next earnings call in January This concludes the call.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.