Q2 2022 Southside Bancshares Inc Earnings Call

July 25, 2022

Yeah.

Good day, and thank you for standing by and welcome to the South side Bancshares, Inc. Second quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one.

One one on your telephone please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today Lindsay miles Vice President of Investor Relations. Please go ahead.

Thank you Jess and good morning, everyone and welcome to Southside Bancshares' second quarter 2022 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 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 <unk>.

Julie Shamburger CFO .

Lee will share his comments on the quarter and then Julie will give an overview of our financial results I will now I will turn the call over to Lee.

Good morning, everyone and welcome to the SaaS side Bancshares second quarter earnings call for 2022. This morning, we reported strong financial results for the second quarter highlights for the quarter included earnings per share of <unk> 79, our return on average tangible common equity of $18.

Six 2% annualized linked quarter loan growth of 18, 3% net of PPP.

Linked quarter eight basis point increase in the net interest margin and efficiency ratio of 47, 74% and continued strong asset quality metrics.

The linked quarter increase in our net interest margin reflected a 17 basis point increase in the average yield on loans and nine basis point increase in the average yield on securities, partially offset by eight basis point increase in the average rate on our interest bearing liabilities.

We're extremely pleased with our continued strong loan loan growth during the second quarter of 2022.

Our loan pipeline remains strong and we are encouraged about the loan growth prospects for the second half of 2018. However.

However, I do want to point out that approximately $60 million of the second quarter loan growth may be short term and pay off prior to year end given.

Given the solid outlook for the high growth markets, we serve as well as the growth occurring in our other markets. We are increasing our anticipated full year 2022 loan growth estimate net of PPP from 9% to the mid teens during.

During the quarter as interest rates increased.

So lower coupon mortgage backed securities and purchased primarily higher coupon mortgage backed securities. In addition, we purchased municipal securities over half of which had 5% coupons, we hedged approximately 72%.

Both securities purchased during the quarter. So the call day to reduce the overall duration of these securities. We have also hedged additional iff's municipal securities.

Currently approximately 30% of the par amount of RFS municipal securities are hedged to the call date.

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.

Rising mortgage rates and higher costs have taken some of the steam out of the highly robust single family market moving risk market closer to the very solid pre pandemic levels.

And there continues to be a housing shortage and several Texas markets.

We continue to successfully execute our business model and what we consider to be the best state in which to operate in the country. We recently hired two additional seasoned lenders one in Austin and one in Houston that should enhance overall loan growth.

I want to recognize and thank the entire south side team for their continued contributions and efforts without which base results would not have been possible I'll look forward to answering your questions. Following julie's remarks, I will now turn the call over to Julie.

Thank you Lee and good morning, everyone and welcome to our call today. We're pleased to report second quarter net income of $25 4 million, an increase of $409000 on a linked quarter basis and diluted earnings per common share of <unk> 79 for the second quarter. The two cent increase linked quarter.

Linked quarter net of a $10 9 million decrease in PPP loans, our loan portfolio increased $173 million to $3 nine 6 billion driven primarily by strong growth within our real estate loan portfolio.

Our CRE loans increased $112 2 million construction loans increased $30 3 million and we also experienced an increase in commercial loans of $38 $7 million net of PPP on a linked quarter basis.

The weighted average rate and new loans funded during the second quarter with approximately four 3% as of June 30th our PPP loans included in the commercial loan category totaled 3 million.

Down from $13 9 million last quarter.

The average balance of PPP loans is approximately $9 4 million for the second quarter.

We continue to experience strong asset quality metrics with nonperforming assets of $11 8 million or 16, 16% of total assets at June 30, consistent with the first quarter.

For the three months ended June 30th our allowance for loan loss decreased slightly due to the reversal of provision for credit losses on loans of $112000 recorded in the second quarter, partially offset by net recoveries of $37000.

As of June 30, our allowance for loan losses as a percentage of total loans was eight 9%.

Our allowance for off balance sheet credit exposure decreased to $1 9 million on a linked quarter basis due to a reversal of provision.

$521000 compared to provision expense of 28000 in the prior quarter.

As of June 30, our loans with oil and gas industry exposure for $154 5 million or three 9% of total loans.

Our securities portfolio increased $276 7 million or 10, 9% on a linked quarter basis.

The increase was driven by purchases in the securities portfolio that more than offset the sales of securities principal payments and the increase in unrealized losses in the portfolio.

The purchases consisted of approximately $320 million on mortgage backed securities $195 million in municipal bonds and $54 million combined of U S treasuries and corporate bonds.

During the second quarter, we transferred additional available for sale securities with fair values of $612 $7 million to held to maturity.

We recognized additional net losses of $2 2 million on the sale of <unk> securities during the quarter.

At quarter end, we had a net unrealized loss in the securities portfolio of $288 3 million compared to $103 7 million at the end of the first quarter.

As of June 30, the duration of the entire securities portfolio was $9 three years, an increase from eight one years at March 31.

The duration of NDA at this portfolio at June 30 was seven four years.

Our mix of loans and securities at June 30 shifted closer to 58% and 42%, respectively from 60% and 40% on a linked quarter basis, David the purchases in the securities portfolio portfolio more than offsetting the growth in the loan portfolio.

Our deposits increased $178 million or two 9% on a linked quarter basis, which includes an increase in our noninterest bearing deposits of $105 4 million or six 5%.

In the first quarter, our board approved a new stock repurchase plan with an authorization to purchase up to 1 million shares during the second quarter, we purchased 223 out.

901 shares at an average processed $39.49.

Since quarter end and through July 22nd we purchased we repurchased 8613 shares at an average price of $35 93 per share.

Our net interest margin increased on a linked quarter basis to three <unk> from $3 20 team and net interest spread increase for the same period to $3 14 from 309.

The increase in net interest margin was primarily driven by the increase in the average yield on loans of 17 basis points and nine basis points on the securities portfolio.

Together this resulted in a $2 1 million or four 4% increase in net interest income for the three months ended June 30th when compared to the linked quarter.

We recorded approximately 268000 in net fees related to PPP loans included in interest income this quarter compared to 569000.

Last quarter.

As of June 32022, we had net deferred fees of $99000 remaining to be recognized as a yield adjustment over the remaining terms of these loans.

Additionally, we recorded $372000 in purchase loan accretion this quarter.

For the three months ended June 32020 team noninterest income excluding net loss on the sale of the <unk> securities decreased $994000 or eight 1% for the linked quarter.

The decrease was driven by a nonrecurring net gain recorded on other investments of $837000 in the prior quarter and decreases in deposit services income mortgage servicing fee income and swap fee income, partially offset by an increase in brokerage services income.

For the second quarter noninterest expense was $32 1 million, an increase of $911000 or two 9% on a linked quarter basis, due primarily to increases in salaries and employee benefits professional fees and software expense.

For the remainder of 2020, we expect quarterly noninterest expense to be approximately 32 5 million.

Our fully taxable equivalent efficiency ratio decreased to 40, 774% from $48 15 for the previous quarter in.

Income tax expense increased to $3 3 million compared to 31.

$3 1 million for the three months ended March 31, alright.

Our effective tax rate increased to 11, 5% from 11, 2% for the second quarter. At this time, we estimate an annual effective tax rate of 11, 5% for 2022.

Thank you for joining US today. This concludes our comments and we will open the line for your questions.

And thank you as a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.

One moment for questions.

And our next question comes from Brad Gailey.

Your line is now open.

Yes, thanks, good morning, with Brady good morning, guys.

All right Brian .

Good morning.

Good morning for sell side has enjoyed.

Nice healthy level of service charges for a while I was just wondering can you update us on where you are as far as any changes to overdraft NSF.

Do you think that.

That revenue kind of bigger picture is at risk over the next couple of years or do you think that we should think of it more stable.

We made some adjustments earlier in the year, we're probably going to make a few more adjustments.

Effective I think September one.

Yes.

<unk>.

Right now it's tough to tell Brady it just depends on what the what the regulatory actions aren't out there.

I can see that on the overdraft side that we're going to slowly see that.

<unk>.

Reduce over time, but I'm not expecting it to go away by any means.

But I can see it reducing a little bit over the next couple of years.

We anticipate approximately 10% this year.

Actually were a little above what we budgeted so far.

And so we're and take additional action and expect.

Some of that revenue to come down, but not substantially between now and year.

And the change that Lee mentioned that we did make already was effective April 1st so and.

That explains some of the impact that you see in that line quarter to quarter. It was an April one effective date.

Change.

Alright.

Then if you look at the average balance sheet bonds with your bond portfolio has been stable.

It was down a little bit this quarter, but how should we think about.

The size of the bond portfolio for the rest of the year and into next year.

My thought would be that.

Assuming that loan growth continues.

Yes.

We may gradually begin to believe some of that off through the mortgage backed securities prepayments.

Let it become less and less a part of the organization.

But thats dependent on the loan growth, which right now looks very good and in fact continues like I say, we will we will.

The bond portfolio is probably as high as you're going to see it.

Okay and then finally for me just on your reserve.

<unk> has been coming down the last year or so now at roughly 90 basis points do you think thats at least in.

Terms of a percentage do you think thats kind of hit a floor here at around 90 basis points, which think of that is stable or do you think there is.

So more of it is yes.

I would think it's pretty stable.

One of the things that brings that down some as.

Little over 10% of our loans are in municipal loans and those loans have for the most part of AD valorem tax pledges and the reserves on those are very very small.

Since we've not ever experienced any losses on those so.

I am thinking that the reserves.

From a percentage standpoint.

Where it really needs to be and should be fairly stable moving forward absent any changes in.

And economic conditions.

The economic forecast worsens, and you'll see that ratio move up.

Okay, alright, great. Thanks for the color guys.

Alright, Thank you Brady.

And one moment our next question.

And our next question comes from Brett <unk> from Hovde Group. Your line is now open.

Hey, good morning.

Good morning area.

Great. Thanks.

The first asked.

You guys kind of bucked the trend a little bit with deposits this quarter being being up.

And just wanted to kind of get a sense on the deposit flows in the quarter.

Was that new account opening was that new or existing customers and kind of how you think about your balances from here then the deposit beta and how that affects the margin.

Yes.

<unk>.

Some of it was new account openings some of it was existing customers.

A portion of the interest bearing.

As a little bit of a seasonal increase that will likely go away in the third quarter.

But as Julie mentioned.

I think it was around $105 million of that positive increase was in noninterest bearing.

That's new accounts.

<unk> customers.

In terms of the deposit beta moving forward.

For.

Likely next week going to be into the.

Well above 200 into that next.

100 basis points here that third one.

We're thinking the deposit beta is going to be somewhere in the 30, 30% range.

And it just really is difficult to say exactly where it's going to be but and.

That's on all deposits.

So.

Because we do have <unk>.

Approximately $5 $575 million of those deposits are hedged.

At this point and so we really don't anticipate any.

Any movement in those and then of course, we've got the noninterest bearing deposits.

Okay. That's helpful and then.

Wanted just to talk about the loan growth, obviously really strong loan growth.

<unk>.

Any of that Lee you think kind of loans that were on our rate sheet that might've been a little older or was that all production.

It's fairly high rates on it can you talk maybe about that.

<unk> got on that production in <unk>.

Some of it was loan.

Loans that we had.

Set for closing in the first quarter that.

Basically ended up closing in the second quarter, but for the most part.

They were they were new loan closings for the second quarter and then of course, we have some now that are set to close in the third quarter.

In terms of the rates.

The combined great that they went on.

Approximately.

<unk> half of those are probably floating rate loans.

So those floating rate loans are moving up and.

We anticipate that average rates to move up here in the third quarter pretty nicely, especially with what's likely going to happen next week.

Okay.

And then maybe just last one back on the on the margin.

Would it be fair to assume that the margin continues.

Tweak up here, but maybe a slightly lower pace than the second quarter.

Yes, if the loan growth.

<unk> continues at the pace, we've seen that.

I would think it would tweak up a little bit.

It's certainly not going to be at the pace. We saw in the second quarter simply because I think the deposit beta is going to be higher than what we saw in the first and second quarters.

Okay, Great appreciate all the color.

Alright.

Thank you.

And one moment for our next question.

And our next question comes from Brad Millsaps from Piper Sandler Your line is now open.

Hey, good morning.

Good morning, Brad.

You guys have done a good job addressing most everything I did want to maybe fall back up on that on the bond portfolio, which is kind of maybe the timing of some of the purchases that look like.

The average.

Was it a good bit below period adds I'm, assuming a lot of those moves.

Kind of came late in the quarter, particularly maybe around some of the MBS is it safe to say that the MBS category should be up.

On average quite a bit from the.

TG level I'm, just curious if you guys could kind of talk about.

Some of the some of the timing of the move and then maybe also to kind of what that would mean for kind of the rates on those three.

Three individual buckets that you guys have taxable and tax exempt and Mds as we think about the third quarter.

Okay, Yes.

A lot of the MBS was purchased.

And in June .

And.

Basically we purchase for the most part.

Mortgage pools that were $4 <unk> and fives.

Five said very little.

Premium on them.

Meaning 1%, maybe one 5% premium and the Florida has were purchased pretty close to par, maybe maybe just slightly above par.

But yes, I would think the definitely the average balance for the MBS will be up in the third quarter.

And in terms of.

Okay. So the yields on the.

The municipal side.

We purchased a lot of a lot of.

Fives, and we also purchased some fours and four five coupons.

Most of those were purchased some were purchased in May when rates got really high but a lot of them were purchased in June .

Basically the spreads widen considerably on the.

Municipal Securities.

But we did we took into consideration and we and we pretty much shortened.

Final maturity on a lot of the securities we purchased.

And that's why when we hedged some of the call.

That we've taken a lot of the duration risk out of those securities. So.

The basically.

So as overnight sofa rises the cost of our hedge goes down.

Based on what happens next week the cost of the hedge will be very low.

Starting in August .

And I don't know if that helps you gives you any color on that.

Yes.

It does help that I would think based on kind of the timing and such you should see another nice lift kind of across the three buckets.

In terms of the yield that youre going to report in the third quarter.

That kind of bretts question that would seem like that yes, yes, you are correct.

You are correct yes.

The securities portfolio as a whole we will see.

A nice lift in overall yield.

So it should be larger on average than it should be higher yielding on average correct.

That is correct.

Okay Alright perfect.

I appreciate all the color. Thank you guys nice quarter.

Alright, thank you.

Thank you.

And one moment for our next question.

And our next question comes from Matt Olney from Stephens, Inc. Your line is now open.

Yes, good morning, and thanks for taking the question.

Wanted to circle.

Circle back on the loan growth I think you gave some good color by by loan type.

Any more color you can give as far as the <unk> loan growth.

By by market and then also would love to hear about the loan pipeline as it stands today as compared to three months ago. Thanks.

Okay.

A lot of the loan well the loan growth occurred I guess primarily in.

And for the markets.

I was in Austin.

In East, Texas, and Southeast, Texas, and then in Houston.

The DFW market is where we saw some payoffs occur and so that that was pretty much flat. There. So those are the four markets that.

We saw in terms of the pipeline it's still.

Strong it may not be as strong as it was when we had the last earnings call.

But it's still well above what we would have anticipated at the beginning of the year.

Okay.

It's helpful and then.

I guess, you kind of gave us an outlook for deposit betas, but I guess just.

Taking a step back we'd love to hear how you would characterize.

Overall level of competition on both sides of the balance sheet on both.

Deposits and loans here in July I would love to maybe I. Appreciate you know how do you think it compares to what your expectations would have been.

A few months ago.

The <unk>.

Competition on deposits is as fierce which I would have anticipated with the rates up.

And.

Customers, having opportunities for return and in other areas.

The competition for loans remains extremely competitive.

But I think the thing that surprised us is the amount of really quality loans that are available in the marketplace.

So while the competition there is fierce the amount and the total volume of those is much larger than we would've anticipated.

The latter part of last year.

And just to follow up on that last point I know the banks done a lot of <unk>.

Commercial loan hirings over last year or two that's producing a portion of that growth.

How much of the opportunity that you mentioned or maybe from some of the new hires versus just a really robust market.

Quite a bit.

I don't know I don't know that I can quantify in dollars and numbers, but my guess would be that.

At least a third of the overall loan growth has come from.

The new hires.

In the last 18 months so they.

They've been they've been very successful and they've been been great new hires.

We're looking forward to the two new hires we've just added.

And what's the potential there is.

Okay, great. Thanks for taking the questions.

And thank you.

And I am showing no further questions I would now like to turn the call back over to Lee Gibson for closing remarks.

Okay.

Thank you for joining us today, we appreciate the opportunity to answer your questions and your interest in the South side Bancshares in closing given the continued positive economic conditions in our markets. Our strong loan pipeline balance sheet core earnings and asset quality. We are excited about the.

<unk> for the second half of 2022 and look forward to reporting third quarter results to you. During our next earnings call. In October . This concludes the call. Thank you again for joining.

This concludes today's conference call. Thank you for participating you may now disconnect.

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

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Good day, and thank you for standing by and welcome to the Southside Bancshares, Inc. Second quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one one on your telephone.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to your.

Speaker today, Lindsey <unk>, Vice President of Investor Relations. Please go ahead.

Thank you Justin good morning, everyone and welcome to Southside Bancshares' second quarter 2022 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 risks and uncertainties.

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 and then Julie will give an overview of our financial results I will now I'll turn the call over to Lee.

Good morning, everyone and welcome to SaaS side Bancshares second quarter earnings call for 2022. This morning, we reported strong financial results for the second quarter highlights for the quarter included earnings per share of <unk> 79, our return on average tangible common equity of $18.

Six 2% annualized linked quarter loan growth of 18, 3% net of PPP, a late quarter eight basis point increase in the net interest margin and efficiency ratio of 47, 74% and continued strong asset quality metrics.

Please.

We're extremely pleased with our continued strong loan growth during the second quarter of 2022.

Our loan pipeline remains strong and we are encouraged about the loan growth prospects for the second half of 'twenty two.

Ever I do want to point out that approximately $60 million of the second quarter loan growth may be short term and pay off prior to year end.

During the quarter as interest rates increase we saw.

<unk> Securities purchased during the quarter. So the call day to reduce the overall duration of the securities. We have also hedged additional iff's municipal securities.

Currently approximately 30% of the par amount of our ISS municipal securities are hedged to the call date.

The DFW and Austin markets that we serve continue to be among the highest performing growth markets in the country.

Rising mortgage rates and higher costs have taken some of the steam out of the highly robust single family market moving risk market closer to the very solid pre pandemic levels.

And there continues to be a housing shortage and several Texas markets.

I want to recognize and thank the entire south side team for their continued contributions and efforts without which these results would not have been possible I'll look forward to answering your questions. Following julie's remarks, I will now turn the call over to Julie.

The increase linked quarter.

Linked quarter net of a $10 9 million decrease in PPP loans, our loan portfolio increased $173 million to $3 nine 6 billion driven primarily by strong growth within our real estate loan portfolio.

Our CRE loans increased $112 2 million construction loans increased $30 3 million and we also experienced an increase in commercial loans of $38 $7 million net of PPP on linked quarter basis.

The weighted average rate and new loans funded during the second quarter was approximately four 3%.

As of June 30th our PPP loans included in the commercial loan category totaled $3 million down from $13 9 million last quarter.

The average balance of PPP loans was approximately nine 4 million for the second quarter.

We continue to experience strong asset quality metrics with nonperforming assets of $11 8 million or 16, 16% of total assets at June 30th consistent with the first quarter.

As of June 30, our allowance for loan losses as a percentage of total loans was eight 9%.

Our allowance for off balance sheet credit exposure decreased to $1 9 million on linked quarter basis.

To a reversal of coordination.

$521000 compared to provision expense of 28000 in the prior quarter.

As of June 30, our loans with oil and gas industry exposure for $154 5 million or three 9% of total loans.

Our securities portfolio increased $276 7 million or 10, 9% on a linked quarter basis.

The increase was driven by purchases in the securities portfolio that more than offset the sales of securities principal payments and the increase in unrealized losses in the portfolio.

The purchases consisted of approximately $320 million on mortgage backed securities $195 million in municipal bonds and $54 million combined of U S treasuries and corporate bonds.

During the second quarter, we transferred additional available for sale Securities with fair values of $612 7 million to held to maturity.

We recognize additional net losses of $2 2 million on the sale of <unk> security during the quarter.

At quarter end, we had a net unrealized loss in the securities portfolio of $288 3 million compared to $103 7 million at the end of the first quarter.

As of June 30, the duration of the entire securities portfolio was $9 three years, an increase from eight one years at March 31.

The duration of NDA at this portfolio at June 30 was seven four years.

Our mix of loans and securities at June 30 shifted closer to 58% and 42%, respectively from 60% and 40% on a linked quarter basis due to the purchases in the securities.

Portfolio more than offsetting the growth in the loan portfolio.

Our deposits increased $178 million or two 9% on a linked quarter basis, which includes an increase in our noninterest bearing deposits of $105 4 million or six 5%.

In the first quarter, our board approved a new stock repurchase plan with an authorization to purchase up to 1 million shares during the second quarter, we purchased 223 out.

901 shares at an average processed $39.49.

Since quarter end and through July 22nd we purchased we repurchased 8613 shares at an average price of $35 93 per share.

Our net interest margin increased on a linked quarter basis to $3 30 from $3 22, and net interest spread increased from the same period to $3 14 from 309.

The increase in net interest margin was primarily driven by the increase in the average yield on loans of 17 basis points and nine basis points on the securities portfolio.

Together this resulted in a $2 $1 million or four 4% increase in net interest income for the three months ended June 30th when compared to the linked quarter.

We recorded approximately 268000 in net fees related to PPP loans included in interest income this quarter compared to $569000 last quarter.

As of June 32022, we had net deferred fees of $99000 remaining to be recognized as a yield adjustment over the remaining terms of these loans.

Additionally, we recorded $372000 in purchase loan accretion this quarter.

For the three months ended June 32020 team noninterest income excluding net loss on the sale of the <unk> security decreased $994000 or eight 1% for the linked quarter.

The decrease was driven by a nonrecurring net gain recorded on other investments of $837000 in the prior quarter end and decreases in deposit services income mortgage servicing fee income and swap fee income, partially offset by an increase in brokerage services income.

For the remainder of 2020, we expect quarterly noninterest expense to be approximately $32 5 million.

Our fully taxable equivalent efficiency ratio decreased to 40, 774% from $48 15 for the previous quarter in.

Income tax expense increased to $3 3 million compared to 31.

$3 1 million for the three months ended March 31, alright.

Alright effective tax rate increased to 11, 5% from 11, 2% for the second quarter. At this time, we estimate an annual effective tax rate of 11, 5% for 2022.

Thank you for joining US today. This concludes our comments and we will open the line for your questions.

And thank you as a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.

One moment for questions.

And our next question comes from Brad Gailey.

Your line is now open.

Yes. Thanks, good morning, it's Brady good morning, guys.

Good morning, Brian .

Okay.

Good morning.

Good morning, So south side has enjoyed.

It's nice healthy level of service charges for a while I was just wondering can you update us on where you are as far as any changes to overdraft NSF.

Do you think that.

That revenue kind of bigger picture is at risk over the next couple of years or do you think that we should think of it more stable.

We made some adjustments earlier in the year, we're probably going to make a few more adjustments.

Effective I think September one.

Yes.

Right now it's tough to tell Brady it just depends on what the what.

But the regulatory actions are out there, but I can see that on the overdraft side that we're going to slowly see that.

Reduce over time, but.

I'm not expecting it to go away by any means.

I can see it reducing a little bit over the next couple of years.

We anticipate approximately 10% this year.

Actually were a little above what we budgeted so far.

And so we're in.

Take additional action and expect.

Some of that revenue to come down, but not substantially between now and year end.

And the change that Lee mentioned that we did make already was effective April 1st so and.

That explains some of the impact that you see in that line quarter to quarter. It was an April one effective date.

Change.

Alright.

Then if you look at the average balance sheet Barnes your bond portfolio has been stable.

It was down a little bit this quarter, but how should we think about.

The size of the bond portfolio for the rest of the year and into next year.

My thought would be that.

Assuming that loan growth continues.

And we may gradually begin to believe some of that off through the mortgage back securities prepayments.

And let it become less and less a part of the organization.

But thats dependent on the loan growth, which right now looks very good and if that continues like I say we will.

The bond portfolio is probably as high as you're going to see it.

Okay.

And then finally for me just on your reserve.

The reserve has been coming down the last year or so now at roughly 90 basis points do you think that.

So at least in terms of a percentage do you think thats kind of hit a floor here at around 90 basis points, which think of that is stable or do you think there is.

More of it thank you.

Yes, I would.

It's pretty stable.

One of the things that brings that down some as well.

A little over 10% of our loans are in municipal loans and those loans have for the most part have AD valorem tax pledges and the reserves on those are very very small.

Since we've not ever experienced any losses on those so.

I am thinking that the reserves are.

From a percentage standpoint.

Where it really needs to be and should be fairly stable moving forward absent any changes in.

Economic conditions.

The economic forecast worsens, then youll see that ratio move up.

Okay, alright, great. Thanks for the color guys.

Alright, Thank you Brady.

And one moment for our next question.

And our next question comes from Brett for Batten from Hovde Group. Your line is now open.

Hey, good morning.

Good morning, how are you.

Great. Thanks wanted to first ask.

You guys kind of bucked the trend a little bit with deposits this quarter being being up.

Just wanted to kind of get a sense of the deposit flows in the quarter.

Was that new account opening was that new or existing customers and kind of how you think about your balances from here then the deposit beta thal FX the margin.

Yes.

Some of it was new account openings some of it was existing customers.

A portion of the interest bearing.

As a little bit of a seasonal increase that will likely go away in the third quarter.

But as Julie mentioned.

I think it was around $105 million of that positive increase was in noninterest bearing.

That's.

New accounts.

And customers.

In terms of the deposit beta moving forward since for.

Likely next week going to be into the.

Well above 200 into that next.

100 basis points here that third one.

We're thinking the deposit beta is going to be somewhere in the 30, 30% range.

And it just really is difficult to say exactly where it's going to be but.

And that's on all deposits.

So.

Because we do have <unk>.

Approximately $5 $575 million of those deposits are hedged.

At this point and so we really don't anticipate any.

Any movement in those and then of course, we've got the noninterest bearing deposits.

Okay. That's helpful and then.

Wanted just to talk about the loan growth, obviously, a really strong loan growth.

<unk>.

Is any of that Lee you think kind of loans that were on our rate sheet that might've been a little older or was that all production.

It's fairly high rates on Ed can you talk maybe about the <unk>.

<unk> got on that production in <unk>.

Some of it was volume.

Loans that we had.

Set for closing in the first quarter that.

Basically ended up closing in the second quarter, but for the most part.

They were they were new loan closings for the second quarter and then of course, we have some now that are set to close in the third quarter.

In terms of the rates.

The combined great that they went on.

Approximately.

Totally half of those are probably floating rate loans.

So those floating rate loans are moving up and.

We anticipate that that average rates to move up here in the third quarter.

Nicely, especially with what's likely going to happen next week.

Okay.

And then maybe just last one back on the on the margin.

Would it be fair to assume that the margin continues to.

Wake up here, but maybe a slightly lower pace than the second quarter.

Yes, if the loan growth.

<unk> continues at the pace we've seen then.

Thanks.

Tweak up a little bit.

It's certainly not going to be at the pace. We saw in the second quarter simply because I think the deposit beta is going to be higher.

And then what we saw in the first and second quarters.

Okay, Great appreciate all the color.

Alright.

Thank you.

And one moment for our next question.

And our next question comes from Brad Millsaps from Piper Sandler Your line is now open.

Hey, good morning.

Good morning, Brad.

Okay.

You guys have done a good job addressing most everything I did want to maybe fall back up on that on the bond portfolio, just kind of maybe the timing of some of the purchases it looked like the.

The average.

Was a good bit below period adds I'm, assuming a lot of those moves.

Kind of came late in the quarter, particularly maybe around some of the MBS is it safe to say that the MBS category should be up.

On average quite a bit from the TQ level I'm just curious if you guys could kind of talk about <unk>.

Some of the some of the timing of the move and then maybe also to kind of what that would mean for kind of the rates on those three.

<unk> three individual buckets that you guys have taxable and tax exempt and Mds as we think about the third quarter.

Okay, Yes.

A lot of the MBS was purchased.

And in June .

And.

Basically we purchased for the most part.

Mortgage pools that were $4 <unk> fives.

<unk> said very level.

Premium on them.

Meaning 1%, maybe one 5% premium and the Florida has were purchased pretty close to par, maybe maybe just slightly above par.

But yes, I would think the definitely the average balance for the MBS will be up in the third quarter.

And in terms of.

Okay. So the yields on the.

The municipal side.

We purchased a lot of a lot of.

Fives, and we also purchased some fours and four five coupons.

Most of those were purchased some were purchased in May when rates got really high level.

Lot of them were purchased in June .

When basically the spreads widen.

<unk> on the.

Municipal Securities.

But we did we took into consideration and we and we pretty much shortened.

Final maturity on a lot of the securities we purchased.

And that's why when we hedged items of the call.

That we've taken a lot of the duration risk out of those securities. So.

The basically.

So as overnight sofa rises the cost of our hedge goes down.

And based on what happens next week the cost of the hedge would be very low.

Starting in August .

And I don't know if that helps you gives you any color on that.

I'll tell you that that does help but I would think based on kind of the timing and such you should see another nice lift kind of across the three buckets.

In terms of the yield that youre going to report in third quarter.

That kind of Brad's question, it would seem like that yes, yes.

You are correct.

You are correct, yes, I think the securities portfolio as a whole we will see.

A nice lift in overall yield.

So it should be larger on average than it should be higher yielding on average correct.

That is correct.

Okay, Alright, perfect I appreciate all the color. Thank you guys nice quarter.

Alright, thank you.

Thank you.

And one moment our next question.

And our next question comes from Matt Olney from Stephens, Inc. Your line is now open.

Yes, good morning, and thanks for taking the question.

Wanted to circle.

Circle back on the loan growth I think you gave some good color by by loan type.

Any more color you can give as far as the <unk> loan growth.

By by market and then also would love to hear about the loan pipeline as it stands today as compared to three months ago. Thanks.

Okay.

A lot of the well the loan growth occurred I guess primarily in.

And for the markets.

It was in Austin.

In East, Texas, and Southeast, Texas, and then in Houston.

The DFW market is where we saw some payoffs occur and so.

That was pretty much flat there. So those are the four markets that.

We saw in terms of the pipeline is.

It's still strong it may not be as strong as it was when we had the last earnings call.

But it's still well above what we would have anticipated at the beginning of the year.

Okay.

That's helpful and then.

I guess, you kind of gave us an outlook for deposit betas, but I guess just.

Taking a step back we'd love to.

Or how you would characterize the overall level of competition on both sides of the balance sheet on both.

Positive and loans here in July would love to maybe appreciate kind of how you think it compares to what your expectations would have been a.

A few months ago.

Yeah.

The competition on deposits is as fierce which I would have anticipated with the rates up and.

Customers, having opportunities for return and in other areas.

The competition for loans remains extremely competitive.

But I think the thing that surprised us the amount of really quality loans that are available in the marketplace.

So while the competition there is fierce the amount.

And the total volume of those is much larger than we would've anticipated.

The latter part of last year.

And just to follow up on that last point I know the thanks a lot.

Commercial loan hirings over last year or two that's producing a portion of that growth.

How much of the opportunity that you mentioned or maybe from some of the new hires versus just a really robust market.

Quite a bit.

I don't know I don't.

Don't know that I can quantify and in numbers, but my guess would be that at least a third of the overall loan growth has come from.

The new hires.

In the last 18 months so it's.

They've been they've been very successful and they've been bringing great new hires.

And we're looking forward to the two new hires we've just added and what's the potential there is.

Okay, great. Thanks for taking the questions.

And thank you and I'm showing no further questions I would now like to turn the call back over to Lee Gibson for closing remarks.

Thank you for joining us today, we appreciate the opportunity to answer your questions and your interest in the South side Bancshares in closing given the continued positive economic conditions in our markets, our strong loan pipeline balance sheet core earnings and asset quality.

We're excited about the prospects for the second half of 2022 and look forward to reporting third quarter results to you during our next earnings call in October .

This concludes the call. Thank you again for joining.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q2 2022 Southside Bancshares Inc Earnings Call

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