Q1 2022 Southside Bancshares Inc Earnings Call
Thank you for standing by and welcome to the South side Bancshares, Inc. First quarter 2022 earnings conference call. At this time, all participants are in a listen only mode.
After the Speakers' presentation, there'll be a question and answer session.
I ask a question at that time. Please press Star then one on you touched on telephone.
As a reminder, today's conference call is being recorded.
I would now like turn the conference host Ms. Lindsey Bailes, Vice President of Investor Relations Ma'am. Please go ahead.
Yes.
Thank you Valerie good morning, everyone and welcome to Southside Bancshares' first quarter 2022 earnings call a transcript of today's call will be posted on Southside 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 uncertainties 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 first Lee will share his comments on the quarter and then Julie will give an overview of our financial results I will now turn the call originally.
Thank you good morning, everyone and welcome to downside Bancshares first quarter earnings call for 2022.
This morning, we reported strong financial results for the first quarter I wanted to start by recognizing and thanking the entire SaaS side.
For their continued contributions and efforts without which these results would not have been possible.
Lights for the quarter included an earnings per share of <unk> 77.
Our return on average tangible common equity of 15, 2%.
Annualized linked quarter loan growth net of PPP of 19%.
Continued strong asset quality metrics and an efficiency ratio of 48, 5%.
Linked quarter, our net interest margin decreased one basis point due to a $780000 decrease in PPP loan accretion, which resulted in a nine basis point decrease in the average yield on loans, partially offset by a two basis point increase due to the increase in <unk>.
First rates.
Linked quarter, the average yield on securities increased 30 basis points and the average rate on our interest bearing liabilities decreased two basis points.
During the quarter as interest rates increased we sold $168 million.
Securities and realized a loss of $1 5 million and.
In addition, during March and subsequent to quarter end on April one 2022.
We transferred longer duration securities with a fair value of $662 million from <unk> to HTM.
With the flattening of the yield curve reduced fed purchasing and higher current coupons agency mortgage backed securities are once again, beginning to look attractive from a risk reward perspective.
We were extremely pleased with our annualized linked quarter loan growth of 19%.
Our loan pipeline remains strong and we are encouraged about second quarter loan prospects. Despite a few expected loan payoffs.
This is especially encouraging is the pipeline in each of our regions is very strong.
Given the excellent outlook for the high growth markets, we serve as well as the growth occurring in our other markets. We anticipate solid loan demand will continue for most if not all of 2022.
For now we are maintaining our anticipated 2022 loan growth estimate net of PPP loans at 9% we plan to reconsider this estimate after the second quarter.
During the first quarter, we continued to benefit from the increase in our average non maturity deposits over the last 24 months at March 31, 85% of our $676 million of brokered deposits, where hedged with $575 million of fixed.
Rate swaps FHL b borrowings decreased to three nine.
$9 million during the quarter the.
The economic conditions in our markets remained strong bolstered by continued company relocations and existing company expansions combined with population growth, resulting from continued migration from other states the DFW and Austin markets that we serve continue to be among the highest.
Performing growth markets in the country.
I look forward to answering your questions. Following <unk> remarks, and I will now turn the call over to Jim.
Thank you Lee good morning, everyone and welcome to our call today. We're pleased to report a strong start to 2000 2010 with net income of 25 million in diluted earnings per common share is 77 for the first quarter net.
Net income decreased $3 7 million from the fourth quarter of 2021, driven by the provision of credit losses of $294000 compared to the three $4 million reversal of provision last quarter and a net loss on the sale of securities of $1 5 million.
The net gain of 463000.
Linked quarter net adds of $17 $1 million decrease in PPP loans, our loan portfolio increased $172 9 million to $3 79 billion driven by strong growth within our real estate portfolio.
Our CRE loans increased 124, 4 million construction loans increased $42 3 million and we also experienced an increase in municipal loans of $12 1 million on a linked quarter basis.
The weighted average rate and new loans funded during the fourth quarter was approximately.
During the first quarter was approximately three 6%.
As of March 31st our PPP loans included in the commercial loan category totaled $13 9 million down from 31 million at year end.
The average balance of PPP loans with approximately $20 9 million for the first quarter currently our remaining PPP loans or approximately $13 million.
We continue to experience very strong asset quality metrics with nonperforming assets of 11 5 million or 16% of total assets at March 31st consistent with year end.
Linked quarter, our allowance for loan loss increased $251000.
Our 7% due to the provision for credit losses on loans of 294000 recorded in the first quarter.
As of March 31st our allowance for loan losses as a percentage of total loans was nine 3% and 94% when excluding PPP lines.
Allowance for off balance sheet credit expenditures remained consistent on a linked quarter basis at $2 $4 million.
As of March 31, our loans with oil and gas industry exposure were $85 9 million or two 3% of total loans.
Our securities portfolio decreased $314 8 million or 11% on a linked quarter basis.
The decrease was driven by an increase in the unrealized loss in the portfolio sales of securities and principal payments and when combined exceeded purchased securities during the quarter.
This sales consisted of U S Treasury securities of $68 million and mortgage backed securities of approximately $99 million.
In March we transferred available for sale Securities with fair values at $385 8 million to held to maturity.
Subsequent to quarter end on April <unk>, we transferred ASF tax free municipal and U S Agency mortgage backed securities with fair values of $276 million to held to maturity.
We recognized $1 5 million in net security losses on the sale of ISS securities during the quarter a decrease from the net gains of 463000 reported last quarter.
At quarter end, we had a net unrealized loss in the securities portfolio of $103 $7 million compared to the unrealized gain of $111 7 million at the end of the year.
As of March 31st the duration in the entire securities portfolio was eight one years, an increase from $5 nine years on a linked quarter basis.
The duration in the portfolio at March 31st six nine years.
Our mix of loans and securities at March 31st was 60% and 40%, respectively shifting from 56% and 44% on a linked quarter basis due both to the increase in the loan portfolio and the decrease in the securities portfolio.
Our deposits increased $348 $1 million or six 1% compared to year end.
This increase was driven by an increase in brokered deposits of $388 million.
In order to obtain lower cost funding, we utilized an additional $310 million of broker deposits included in the $380 million for funding our cash flow hedge swaps and reduced <unk> advances.
During the first quarter, our board approved a new stock repurchase plan with an authorization to purchase up to 1 million shares.
As of March 31, we had purchased 82285 shares at an average price of $40.91 since.
Since quarter end and through April 22nd we have repurchased 139737 shares at an average price of $39 67 per share.
Our net interest margin decreased slightly on a linked quarter basis to 322% and net interest spread remained consistent at three 9%.
Approximately three basis points of the net interest margin related to fees earned on PPP loans compared to eight basis points last quarter.
For the three months ended March 31st net interest income decreased $495000 or 1% when compared to the linked quarter.
We recorded approximately $569000 in net fees related to the P. P. P loans included in interest income this quarter compared to $1 4 million last quarter.
As of March 31, 2020 team, we had net deferred fees of approximately 368000 remaining to be recognized as a yield adjustment over the terms of these loans.
Additionally, we recorded $345000 in purchase loan accretion this quarter.
For the three months ended March 31, 'twenty to noninterest income excluding net loss on a sale under U S securities increased $720000 or six 2% for the linked quarter, which was driven by a net gain recorded on other investments of 830 <unk>.
$7000 mortgage servicing fee income and swap fee income, partially offset by a decrease in deposit services and trustees.
For the first quarter noninterest expense was $31 2 million a slight decrease of $139000 on a linked quarter basis.
For the remainder of 2022, we expect quarterly noninterest expense to be approximately $32 5 million.
Our fully taxable equivalent efficiency ratio increased slightly to 40, 815% from 40, 761% for the previous quarter.
Income tax expense decreased $1 7 million or 34, 6% compared to the three months ended December 31 2021.
Our effective tax rate decreased to 11, 2% from $14 four for the fourth quarter.
At this time, we are estimating an annual effective tax rate of 11, 3% for 2022.
Thank you for joining US today. This concludes our comments and we will open the line for your questions.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press Star then one on your Touchstone telephone again to ask a question. Please press Star then one.
One moment for our first question.
Our first question comes from wildly Bally Junior.
<unk> Your line is open.
Yes. This is Brady gailey good morning, guys.
Good morning Brady.
I wanted to start just with.
What you did with bringing on broker clauses.
Hedges to reduce the FH Obi can you just talk more about the details there and how that's going to impact spread.
Spread income going forward, especially as the fed continues to push rates higher.
Sure.
The broker deposits, we just basically replace we have a cash flow hedge.
We just basically replaced borrowings short term borrowings at the home loan bank with short term borrowings.
From brokerage Cds, not brokerage Cds for brokered deposits.
We were offered a special deal.
By one of the brokered deposit groups.
At an extremely low rate that the guarantee for 90 days and so I think it was an all in rate of around three basis points.
Which was.
Yeah.
Probably eight to nine basis points below what the home loan bank was offering at that time and they werent guaranteeing it for 90 days.
So that's the whole reason we switched there.
Now going forward, we'll just have to determine whether it's home loan bank or whether it's some.
Or whether it's the brokered market.
It provides us the cheaper funding.
And then just thoughts on the bond book going forward.
The balances there we saw the average point of view have been fairly consistent for the last few quarters. We don't know reinvestment yields are headed to a lot higher. So you start growing the bond portfolio more from here or what's the outlook on balances in the bond book.
One of the things we did during the first quarter as these rates rose faster than I think most people anticipated and the curve.
Latin pretty quickly.
We sold a lot of.
Shorter.
Securities and we sold some longer security those primarily shorter securities.
We could get out of relatively flat I know, there was $1 million and $5 loss, but on the amount we sold it was percentage wise pretty small.
So that we could we could look for time to reinvest those funds moving forward.
So that's that's what we're planning on doing.
If we get more confidence that rates are pretty close too.
I don't want to say at the top but the longer term rates are.
Stop rising at the at the rate they are.
We may look to increase the securities portfolio.
Okay and then just finally for me that's good to see some activity with the buyback last quarter and then here in this month.
Do you think that you execute on the full 1 million share buyback this year or is it too too hard to know if you'll be able to do all of that this year.
Yeah, it's really too hard to know.
We hope we don't from the standpoint of we hope the price doesn't get to where we want to buy it back further.
It exceeds that but yes.
It's just really too early to know at this point in time.
Okay Alright.
Alright, great. Thanks for the color guys.
Alright, Thank you Barry.
Thank you. Our next question comes from Brett Robinson of Holiday Hope Your line is open.
Hey, good morning, everyone.
Good morning, good morning.
Wanted to first talk about the loan growth guidance of 9%. Obviously, the first quarter was exceptionally strong and you indicated you expect a few payoffs to possibly impact growth going forward can you can you talk maybe about the magnitude of those payoffs.
You have to pay off specifically are the reason why you're expecting growth to slow a little bit he originations continue to be at a high rate.
Thank.
Maybe you could give us a little color around the inputs and whatnot on the <unk>.
Loan growth outlook.
Sure.
Right now we have a couple of loans that we know are going to pay off.
The loans in the pipeline and things we have set for closing.
Well exceed those two and those anticipated payoffs at this point in time.
The only reason, we havent changed the 9% is.
It's just the first quarter and as you know.
While we can kind of look forward and get a pretty good gauge on the second quarter.
We don't want to be overly optimistic about the third and fourth quarter until we have a better feel for it.
If our loan growth continues like it has been.
Yes, we're going to we're going to take a look at it after the second quarter and readjust their it's not that we're anticipating slower growth. We just don't want to over promise at this point in time.
Based just on the first quarter loan growth, but right now.
The pipeline is probably as strong as we've seen it.
It looks good and.
We do have a couple of payoffs coming but they're not of the magnitude that it's.
It should impede loan growth at this point in time based on what we know today.
Okay.
And then on the securities portfolio wanted to make sure I understood the thoughts around that with the extension of the duration.
During the quarter.
Is there a essentially an implicit.
The statement that you think rates are.
Market rates have kind of popped out on the fed catches up as much as they can or whats the wolf well see how far they go in terms of raising rates, but.
And it sounds like Youre, essentially saying like you think the longer term, we think the rates have moved up enough that they are not going to move up much from here and so you can kind of make about that.
Topped out from a rate perspective, our reserves and some other pieces in play.
Alright. Thanks.
The extension in the bond portfolio is on the Muni side some of the lower coupon munis.
Extended.
And.
And basically they went from yield to call to yield of maturity not the yield portion, but the maturity did.
Because they now trade some of them now trades at a discount so that plus the fact that we sold some shorter duration securities knowing that they would quickly be underwater pretty significantly if we didn't get out of them and rates kept rising and we knew.
Had a pretty good idea of that short term rates are definitely going up with what the feds can do.
Combined to see that to show that extension out there.
Not saying rates are at the top by any means.
And that's why I said that.
If it looks like.
We are beginning to think that they are near the top are not going to be trending up quite as fast.
We plan to redeploy some of the money that.
We gathered as a result of selling securities.
Kind of help you.
Yes, that's great that's great color really I wasn't.
That helps explain it.
And then just lastly, I wanted to make sure I understood. The expense guidance going forward to $32 5 million was that specifically for <unk> I didn't quite catch that or was that for.
The average for the year, what was also $32 5 million.
And yes, Brett that was an average for <unk> for the year, while we expect for the next three quarters individually.
Yeah, we had guided towards that as well for the first quarter and then of course, we know we didn't get to that point in time.
And then looking over some of that guidance.
We basically just did not hit in some of the expense categories. The budgeted amounts we had hit the biggest.
It was in <unk>.
Personnel with relationship to health and insurance health insurance expense and.
We budgeted close with some inflation over last year's amount.
And we just we did not incur that but of course, that's a very volatile item and can change.
From quarter to quarter. So that was one of the biggest items and while we did not hit the $32 five.
And then just some other various items also we are putting several software platforms in place some new things.
Doing and so we do expect some expense there. So that's why on holding to that 32 five.
Okay does that help their Julie yeah, that's that's great color.
Thanks.
Thanks for all the color.
Sure sure.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press Star then one on your Touchtone telephone.
Our next question comes from Brad Milsap with Piper Sandler Your line is open.
Hey, good morning.
Good morning, Brad.
Thanks. Thanks for taking my question you guys have addressed most everything I did want to follow up on the.
Brokered money that you brought in it looks like per the release the cost of interest bearing demand accounts I assume that's where it might be house, just given the increase there it went up.
From about 20 basis points to 31.
I think you mentioned the cost of that funding was like three basis points. I was just trying to get a handle on kind of what it was that the key driver there or is there some kind of LIBOR linked money in that.
In that category just wanted to get a sense of kind of how that's going to reprice going forward.
Yes, it's because because we have that.
<unk>.
Swapped to fixed the action.
The funding side was three basis points, we receive LIBOR and.
Our overall cost from a fixed standpoint was 83 basis points on that money.
Okay. So that's showing up is that does that make sense.
Yes that is correct okay.
Yes, we have that we have that floating swap to fix and those are brokered money markets. Our non maturity. If you will as opposed to brokerage Cds. So.
We're actually getting some benefit in that we were getting.
Our rate.
Floating rate of LIBOR, receiving that greater than what we were paying for that.
That 90 day period.
Okay got it.
And then remind me I think you've mentioned before that maybe about half the loan portfolio would be considered floating repricing with fed funds and you have kind.
Minimal floors can you.
Maybe update us there and I think you mentioned new launch coming out around 360, you think do you think you've kind of hit a floor there in terms of.
Kind of where the loan yield is currently.
Yes, because.
As those floating rate loans that we put on in the first quarter.
As the fed raises those rates were going to see so for LIBOR and all of that increase as well.
Currently our portfolio stands at 53% fixed and 47% floating.
And two floors have a big impact Lee.
They really don't we didn't have any really high floors. Most of our floors were set to where they couldn't they couldn't go below zero and like Prime was usually set pretty close to prime and things of that nature. So.
We just.
The kind of customers we deal with there.
This is good enough that they're not going to let you put in.
A floor, that's very high at all.
Great I appreciate the color. Thank you.
Thank you. Our next question comes from Matt Olney of Stephens, Inc. Your line is open.
Yeah. Thanks for taking the question just a few follow ups here.
On the allowance ratio.
We're now at 93 basis points is there any more room to move this slow or should we anticipate this to flatten out.
That's a good question.
Cecil.
You never know exactly what is going to happen.
It really comes down to the economic forecast moving forward.
<unk>.
They start factoring and we use the Moody's economic forecast kind of a mix of their different forecast.
If they start forecasting in.
A more optimistic scenario then yes, there is a real possibility.
To go down.
If they start folks.
Factoring in a recession or something like that.
Certainly go the other way.
Youre going to see that among all the banks is really just kind of comes down to the economic forecast.
This time, we did.
Take a look at the forecast.
And decided to go kind of with a 50 50 most.
Their base case, and then there.
I think it was the S. Three K switches somewhat bearish.
In order to come up with a scenario that we felt comfortable with in terms of an economic forecast.
Okay, I don't know if that helps you or not but.
The asset quality is right now as strong as we've seen it.
And 93 basis points.
I can see where we get that simply because of our municipal portfolio is a very low.
Great seasonal reserve and then the mortgages have.
Our reserve.
The one to four family mortgages have reserve less than 93, so those two parts of the portfolio drag it down and.
Which is.
Certainly justified.
And then the rest of the portfolio is above that 1%.
Yeah. That's helpful. Okay. Thanks for that and then okay Julian on the impact of the NII in this quarter.
I wrote down the PPP fees, but I missed what you said around the accretion income can you go over that again please.
Okay, Yes, the increasingly recorded was 345000.
For the quarter.
And we are seeing that of course is starting to decline. It can vary obviously with early pay offs of those purchase loans, but you know we are typically seeing it start to decline for the most part.
And on the fees on PPP.
169000, and they had a three basis point impact on the NIM.
Did that answer your question Yeah. That's it. Thank you for that Okay. Sure and then just lastly, I guess for for Lee on the M&A front I'm curious what the updated thoughts are within the Texas landscape lots of volatility in some of these.
Valuations.
Curious kind of what the updated outlook is from here.
We're actively looking and there is different.
We're not we're not seeing a lot of of sellers at this point in time that are in geographic locations.
We would be interested in acquiring.
But we are.
We're hopeful that sometime this year.
We're going to find a partner.
For us to acquire.
Thank you. Our next question comes from Michael Young with <unk> Securities. Your line is open.
Hey, Thanks for taking the question just wanted to dig a little deeper into kind of commercial real estate and construction growth and just the outlook where are you guys seeing sort of the most demand.
You know maybe by food group.
The type of CRE demand that Youre seeing and then is there anything in the market that youre seeing in terms of underwriting or competition.
That you think could could pose a risk to growth maybe going forward at some point.
The biggest part of the increase in the construction portfolio.
It has to do with multifamily.
You were just a lot of a lot of the projects that we put on last year.
Just now beginning to fund.
And there is multifamily and a lot of these metropolitan areas.
Is still in short supply and badly needed, especially with the.
The affordability of housing.
Decreasing.
So that's the biggest part of the construction bucket and then the second part of your question was helped me out again.
Yes, just anything.
Anything in sort of the competitive landscape that you're seeing.
Got it.
Cause you guys to kind of.
You see a change in growth I E getting too competitive or pricing to skinny et cetera.
Yes.
I mean, what we're seeing on the competition.
Yes.
Front as well.
We're not really seeing people give on credit.
We're seeing where we're seeing competition is on pricing.
Especially the fixed rate pricing.
Some some folks or are just pricing things at levels. We don't believe is appropriate for our balance sheet.
But.
Yeah.
We're able to get our pricing on more deals than not but there are a few.
A few loans that we would've liked to make that we werent able to make simply because the rate was.
What we felt like considerably to skinny given the.
The fixed rate environment that we're in at this point in time.
Okay. Thank you appreciate it.
Thank you I'm showing no further questions at this time I'd like to turn the call back over to Lee Gibson, President and CEO for any 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. Our strong loan pipeline balance sheet core earnings and asset quality, we're excited about the prospects.
<unk> for the remainder of 2022 and look forward to reporting second quarter results to you during our next earnings call. In July . This concludes the call. Thank you again.
Thank you ladies and gentlemen, this does conclude today's conference. Thank you all participating you may now disconnect have a great day.
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