Q3 2022 Southside Bancshares Inc Earnings Call

October 25, 2022

Okay.

Yeah.

Good day, and thank you for standing by.

To Southside Bancshares, Inc. Third quarter 2022 earnings conference call.

At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask the question. During the session you will need to press star one one on your telephone.

I would now like to hand, the conference over to your speaker for today Sunny.

Davis Chief Risk Officer, you may begin.

Thank you just wanted to good morning, everyone and welcome to Southside Bancshares' third quarter 2022 earnings call. A transcript of today's call will be posted on <unk> 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.

Actors 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 over to Woody.

Good morning, everyone and welcome.

Outside Bancshares third quarter earnings call for 2022. This morning, we reported excellent financial results quarter.

<unk> for the quarter included an earnings per share of <unk> 84.

Our return on average tangible common equity of 19, 94% annualized linked quarter loan growth of 10, 1% net of PPP, a linked quarter increase of six basis points and our net interest margin and efficiency ratio of $47 four 2% and continued solid ASP.

Quality metrics.

The linked quarter increase in our net interest margin reflected a 48 basis point increase in the average yield on loans, a 10 basis point increase in the average yield.

On securities, partially offset by a 40 basis point increase in the average rate on our interest bearing liabilities I want to thank the entire south side team for their continued contributions and efforts, which made these results possible.

Extremely pleased with our continued strong loan growth during the third quarter 2022.

Our second quarter earnings call in July we discussed the possibility that $60 million of our second quarter loan growth could be short term and pay off prior to year end.

That potential payoff occurred during the third quarter. So it was actually only $35 million with a longer longer term refinance of the remaining $25 million.

Our loan pipeline remains solid and we're encouraged about the loan growth prospects for the fourth quarter and beginning 2023.

In addition, we are seeing advances in our construction portfolio, increasing as loans that closed several quarters ago are now beginning to fund.

Given the outlook for the markets. We serve we continue to estimate loan growth for 2022 net of PPP loans in the mid teens.

During the quarter as interest rates increase we hedged additional available for sale in municipal securities with a call date to reduce the overall fair value volatility.

Currently approximately two thirds of the par amount of RFS municipal securities are hedged to the call date.

The economic conditions in our markets remain solid bolstered by continued company relocations and existing company expansion combined with population growth. A result of continued migration from other states.

Rising mortgage rates and high costs have continued to take some of this team out of a highly robust single family market moving this market closer to pre pandemic levels. However housing shortages continue to exist in several Texas markets.

We continue to successfully execute on our business model and what we consider to be the best state in the country in which to operate.

Look forward to answering your questions. Following julie's remarks, and I will now turn the call over to Julie.

Thank you Lee good morning, everyone and welcome to our call today. We're pleased to report third quarter net income of $27 million, an increase of $1 5 million on a linked quarter basis and diluted earnings per common share of <unk> 84 a.

<unk> increased linked quarter.

Our loan portfolio increased $103 1 million to $4 6 billion linked quarter net of the $2 7 million decrease in PPP loans.

The increase was driven primarily by strong growth within our real estate loan portfolio.

Our CRE loans increased $67 2 million construction loans increased $33 9 million and we also experienced an increase in commercial loans of $7 2 million net of PPP on a linked quarter basis.

The weighted average rate of new loans funded during the quarter was approximately five 2%.

As of September 30, our PPP loans included in the commercial loan category totaled $306000 down from $3 million last quarter.

Average balance and PCP loans was approximately $2 5 million for the third quarter.

We continue to experience strong asset quality metrics with nonperforming assets of $11 7 million or one 6% of total assets at September 30th consistent with last quarter.

For the three months ended September 30, our allowance for loan loss increased due to the provision for credit losses on loans of $1 3 million recorded in the third quarter, partially offset by net charge offs of $237000.

As of September 30th our allowance for loan losses as a percentage of total loans was <unk>, 9%.

Our allowance for off balance sheet credit exposures increased to $2 1 million on a linked quarter basis due to a provision of $200000 compared to a reversal of provision expense of 521000 in the last quarter.

As of September 30th our loans with oil and gas industry exposure more $117 5 million or two 9% of total loans.

Our securities portfolio decreased $241 3 million or eight 6% on a linked quarter basis.

The decrease was driven by sales of securities principal payments and the increase in unrealized losses in the portfolio.

During the third quarter, we transferred additional available for sale securities with fair values of $72 million to held to maturity and subsequent to September 30, we transferred additional HFF securities to HTM with fair values of $175 8 million.

<unk>.

We recognized additional net losses and $99000 on the sale of <unk> securities during the quarter.

At quarter end, we had a net unrealized loss in the securities portfolio of $168 3 million compared to $83 million last quarter, an increase of $85 3 million.

As Lee mentioned in his remarks during the third quarter, we hedged additional municipal securities and as of September 30th.

Unrealized gain on the hedge securities was approximately $24 million, partially offsetting the additional unrealized losses in the ISS securities portfolio.

As of September 30, the duration of the entire securities portfolio was 10 eight years, an increase from $9 three years at June 30.

The duration of the portfolio at September 30th with nine six years.

Our mix of loans and Securities at September 30 was 61% and 39%, respectively compared to 58% and 42% on a linked quarter basis due to growth in the loan portfolio a decrease in the securities portfolio combined with the decrease in this summer.

Total loans and securities.

Our deposits decreased $67 3 million or one 1% on a linked quarter basis.

Linked quarter decrease in deposits consisted of a decrease in interest bearing deposits of $91 7 million, partially offset by an increase in non interest bearing deposits of $24 4 million.

Our tax equivalent net interest margin increased on a linked quarter basis to 336% from three 3%, while the tax equivalent net interest spread decreased for the same period to $3 eight from $3 14.

The increase in net interest margin was primarily driven by the increase in the average yield on loans at 48 basis points and 10 basis points on the securities portfolio.

Together this resulted in a $4 4 million or eight 7% increase in net interest income for the three months ended September 30, when compared to the linked quarter.

We recorded approximately $89000 in net fees related to PPP loans this quarter compared to 268000 last quarter. We also recorded 141000 in purchase loan accretion this quarter.

For the three months ended September 32020 to noninterest income excluding net loss on the sale of ASF securities decreased $906000 or 8% for the linked quarter.

The decrease was driven primarily by decreases in deposit services income and brokerage services income.

For the third quarter noninterest expense was $33 5 million, an increase of $1 4 million or four 2% on a linked quarter basis, due primarily to increases in salaries and employee benefits and professional fees.

For the remainder of 2022, we expect quarterly noninterest expense to be approximately $32 5 million.

Our fully taxable equivalent efficiency ratio decreased to 47, 14% from $47 74 for the previous quarter.

Income tax expense increased to $3 9 million compared to $3 3 million for the three months ended June 30th.

Our effective tax rate increased to 12, 6% for the third quarter from 11, 5% last quarter.

At this time, we estimate an annual effective tax rate of 11, 8% for 2022.

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

Thank you.

As a reminder to ask a question you will need to press star one on your telephone.

Thats Star one wanted to ask a question please.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Brad Milsap with Piper Sandler Your line is open.

Hey, good afternoon.

Hello.

Thanks for taking my questions.

We may have overestimated, maybe the size of the bond portfolio for the quarter.

Can you kind of help me understand.

Maybe where the averages were added I think they were closer to $2 9 billion for the quarter versus the period end.

With a little over $2 5 billion I know one presented at fair value and the other is presented.

At cost so just wanted to make sure you have.

A lot of movement in the quarter. So can you help me kind of get a feel for directionally kind of which way. The average bond portfolio is headed over the next several quarters in your mind.

I think Brad we indicated we weren't going to increase.

<unk> portfolio, So I would I would say that the average should stay somewhere close to that.

It may vary $50 million, one way or another but.

There's some good opportunities to reinvest a roll off at this point in time so.

Anticipate doing some of that but.

I don't really look for a major change as long as we can see you have the loan growth that we're having.

Got it.

Thank you for that and then.

I think this quarter.

When we talk about and rebrand when we talked about the average I'm looking at.

The average balance balances back on page 14 of the.

The earnings release.

Okay for the three months September 30, which is right at $29 million not 29 million $2 9 million $2 9 billion, Let me get let me get the.

The numbers are I am sorry.

Okay, Yes. So the difference you ended the quarter with just under $2 6 billion. So.

Some of that is obviously the loss, but it feels like it should average should come down from Q, because you feel like you sold some bonds as well but.

Just want to make sure on the same price.

Okay, and we did sell some bonds, but it was it was only maybe $15 million to $20 million in bonds.

Okay.

<unk> looking at me.

I think we can shlomo.

Okay.

Yes.

And it looked like.

Loan beta was kind of a mid <unk> for the quarter. It did sound like youre, putting on new loans around 520, if I heard correctly, which seems maybe a little low.

Maybe maybe relative to where rates are but just wanted to ask you expect loan yields to continue to kind of move up at a similar pace as you saw.

In the third quarter or does that kind of $5 20, new loan yield put.

Maybe a little bit of a governor on that.

Could have been something just with the mix this quarter, but just kind of.

Curious, how you're thinking about about loan betas.

Great.

I think I think we're looking at something similar for the fourth quarter and.

The average loan yield at the time. They went on may be skewed a little bit because for those that flow either overnight or every 30 days.

Those put on in July didn't take into consideration.

The lighter fare increases so.

Probably the.

If we look at the real average rate when we took the real floating rates it may be a little bit higher.

Got it got it okay.

Makes sense, yes, yes, yes, yes, so yes, obviously, yes kind of skewed by the mix won't yes totally understand.

Okay, Great I'll hop back in queue and thank you for answering my questions.

Okay.

Thank you please standby for our next question.

Our next question comes from the line of Brady Gailey with <unk>. Your line is open.

Hey, Thank you good morning, guys.

Good morning.

Alright.

So 10% linked quarter annualized loan growth this quarter.

If I put you at around 10% next quarter that'll that'll hit the mid teens guidance for this year.

So how are we thinking about next year I know the outlook is uncertain as far as what the economy is going to do but.

Is it right to think about maybe a step down.

One growth something in the high single digit level. How are you all thinking about loan growth in the next year.

We will have a better feel for that I would.

I'd be surprised if it what it was this year.

So I think.

They're high single digits, or maybe low double digits.

<unk> is probably where we will where it will land but.

Thats something really that as this quarter progresses, a little further we will have a better idea on.

Looking at the.

The pipeline that's out there and then getting a better feel for how these construction loans are going to fund.

Alright, and then the guidance for expenses for <unk> of 32 and a half.

That's about $1 million step down from Q.

Is that mostly on the compensation line and any color you can provide on that.

Hi, yes.

On salaries of course was the largest increase and employee benefits around two thirds of that increase of a $1 39 was in health expense.

I mean, obviously health expense can do anything we are self insured.

Under last year's year to date on health claims and and we're also under a budget I mean that more importantly, we're under last year's year to date. So.

Brady that could happen again, but that's not what's budgeted so.

That's part of the reason for me keeping it really where I had it for the third quarter.

And then we had some increase there in professional fees and at least that I think professional fees were up about $2 65, and at least 100 of that related specifically to a project that we worked on with.

Legal and.

So that will not occur again so.

Yes.

That is budget for that 32, five so that was my reason for that I was tempted to increase it but I don't really have a basis for doing so at the moment so.

Project with some we decided not to move forward on it.

A lot sooner or anything like that.

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

Alright, thank you.

I'm showing no further questions in the queue 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 we're excited about the prospects for the fourth quarter and look forward to reporting those results to you during our next earnings call in January This concludes the call.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

Okay.

The conference will begin shortly.

Raise your hand during Q&A, you can dial star one one.

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Good day and thank you for finally goodbye.

Welcome to Southside Bancshares, Inc. Third quarter 2022 earnings conference call.

At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone.

I would now like to hand, the conference over to your speaker for today.

Davis Chief Risk Officer, you may begin.

Thank you Wanda good morning, everyone and welcome to sell side Bancshares' third 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 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 over to Hawaii.

Good morning, everyone and welcome to Southside Bancshares' third quarter earnings call for 2022. This morning, we reported excellent financial results quarter.

<unk> for the quarter included an earnings per share of <unk> 84.

Asset quality metrics.

The linked quarter increase in our net interest margin reflected a 48 basis point increase in the average yield on loans, a 10 basis point increase in the average yield.

On securities, partially offset by a 40 basis point increase in the average rate on our interest bearing liabilities I want to thank the entire Southside team for their continued contributions and efforts, which made these results possible.

We're extremely pleased with our continued strong loan growth during the third quarter 2022 during our second quarter earnings call. In July we discussed the possibility that $60 million of our second quarter loan growth could be short term and pay off prior to year end.

That potential payoff occurred during the third quarter, there was actually only $35 million.

With a longer longer term refinance of the remaining $25 million.

Our loan pipeline remains solid and we're encouraged about the loan growth prospects for the fourth quarter and beginning 2023. In addition, we are seeing advances in our construction portfolio, increasing as loans that closed several quarters ago are now beginning to fund given.

Given the outlook for the markets. We serve we continue to estimate loan growth for 2022 net of PPP loans in the mid teens.

During the quarter as interest rates increase we hedged additional available per sale municipal securities with a call date to reduce the overall fair value volatility.

Currently approximately two thirds of the par amount of RFS municipal securities are hedged to the call date.

<unk> mortgage rates and high costs have continued to take some of this team out of a highly robust single family market moving this market closer to pre pandemic levels.

However housing shortages continue to exist in several Texas markets.

We continue to successfully execute on our business model and what we consider to be the best state in the country in which to operate.

I look forward to answering your questions. Following julie's remarks, and I will now turn the call over to Julie.

A 5% increase linked quarter.

Our loan portfolio increased $103 1 million to $4 6 billion linked quarter net of the $2 7 million decrease in PPP loans.

The increase was driven primarily by strong growth within our real estate loan portfolio.

<unk> loans increased $67 2 million construction loans increased $33 9 million and we also experienced an increase in commercial loans of $7 2 million net of PPP on a linked quarter basis.

The weighted average rate of new loans funded during the quarter was approximately five 2%.

As of September 30th our PPP loans included in the commercial loan category totaled $306000 down from $3 million last quarter the.

The average balance in PPP loans with approximately $2 5 million for the third quarter.

We continue to experience strong asset quality metrics with nonperforming assets of $11 7 million or one 6% of total assets at September 30th consistent with last quarter.

For the three months ended September 30th our allowance for loan loss increased due to the provision for credit losses on loans of $1 3 million recorded in the third quarter, partially offset by net charge offs of $237000.

As of September 30th our allowance for loan losses as a percentage of total loans was one <unk> percent.

As of September 30th our loans with oil and gas industry exposure more $117 5 million or two 9% of total loans.

Our securities portfolio decreased $241 3 million or eight 6% on a linked quarter basis.

The decrease was driven by sales of securities principal payments and the increase in unrealized losses in the portfolio.

During the third quarter, we transferred additional available for sale securities with fair values of $72 million to held to maturity and subsequent to September 30th.

<unk> for an additional <unk> securities to HTM with fair values of $175 8 million.

We recognized additional net losses of $99000 on the sale of ISS securities during the quarter.

At quarter end, we had a net unrealized loss in the securities portfolio of $168 3 million compared to $83 million last quarter, an increase of $85 3 million.

As Lee mentioned in his remarks during the third quarter, we hedged additional Iaff's municipal securities and as of September 30th the unrealized gain on the hedge securities with approximately $24 million, partially offsetting the additional unrealized losses in the ISS Securities Port.

Elio.

As of September 30, the duration of the entire securities portfolio was 10 eight years, an increase from $9 three years at June 30.

The duration of the portfolio at September 30th with nine six years.

Total loans and securities.

Our deposits decreased $67 3 million or one 1% on a linked quarter basis.

Linked quarter decrease in deposits consisted of a decrease in interest bearing deposits of $91 7 million, partially offset by an increase in non interest bearing deposits of $24 4 million.

Our tax equivalent net interest margin increased on a linked quarter basis to 336% from three 3%, while the tax equivalent net interest spread decreased for the same period to 38 from $3 14.

The increase in net interest margin was primarily driven by the increase in the average yield on loans at 48 basis points and 10 basis points on the securities portfolio.

Together this resulted in a four 4 million or eight 7% increase in net interest income for the three months ended September 30, when compared to the linked quarter.

We recorded approximately $89000 in net fees related to PPP loans this quarter compared to 268000 last quarter. We also recorded 141000 in purchase loan accretion this quarter.

For the three months ended September 32020 to noninterest income excluding net loss on the sale of ASF securities decreased $906000 or 8% for the linked quarter.

The decrease was driven primarily by decreases in deposit services income and brokerage services income.

For the third quarter noninterest expense was $33 5 million, an increase of one 4 million or four 2% on a linked quarter basis, due primarily to increases in salaries and employee benefits and professional fees.

For the remainder of 2022, we expect quarterly noninterest expense to be approximately $32 5 million.

Our fully taxable equivalent efficiency ratio decreased to 47, 14% from $47 74 for the previous quarter.

Income tax expense increased to $3 9 million compared to $3 3 million for the three months ended June 30th.

Effective tax rate increased to 12, 6% for the third quarter from 11, 5% last quarter.

At this time, we estimate an annual effective tax rate of 11, 8% for 2022.

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

Thank you.

As a reminder to ask a question you will need to press star one on your telephone.

At Star one wants to ask a question. Please.

Please standby, while we compile the Q&A roster.

Yeah.

Our first question comes from the line of Brad Milsap with Piper Sandler Your line is open.

Hey, good afternoon.

Hello.

Thanks for taking my questions.

We may have overestimated, maybe the size of the bond portfolio for the quarter can you kind of help me understand.

Maybe where the averages were added I think they were closer to $2 9 billion for the quarter versus the period end.

With a little over $2 5 billion no one's presented at fair value and the other is presented.

At cost so just wanted to make sure you had a lot of movement in the quarter. So can you help me kind of get a feel for directionally kind of which way. The average bond portfolio is headed over the next several quarters in your mind.

I think Brad we indicated we werent going to increase the securities portfolio. So I would I would say that the average should stay somewhere close to that.

It may vary.

<unk> million dollars, one way or another but.

There's some good opportunities to reinvest a roll off at this point in time so.

I anticipate doing some of that but I.

I don't really look for a major change as long as we can see you have the loan growth that we're having.

Got it.

Thank you for that and then.

I think in the end.

And when we talk about brand and we talked about the average I'm looking at.

The average balance balances back on page 14 of the <unk>.

The earnings release.

Okay.

September 30th purchased right at $29 million, not 29 million $2 9 million $2 9 billion, let me get let me get the.

The numbers right I am sorry.

Okay, Yes, so the difference I mean, you ended the quarter with just under $2 6 billion. So.

Some of that is obviously the loss, but it feels like it should the average should come down from Q, because you feel like you sold some bonds as well but.

Just want to make sure on the same price.

Okay.

Did sell some bonds, but it was it was only maybe $15 million to $20 million in bonds.

Okay. Thanks.

Please.

Looking at me.

I don't think we can follow up.

Okay.

Yes.

And it looked like.

Our loan beta was kind of a mid <unk> for the quarter. It did sound like you are putting on new loans around 520, if I heard correctly, which seemed maybe a little low.

Maybe maybe relative to where rates are but just wanted to ask you expect loan yields to continue to kind of move up at a similar pace as you saw.

In the third quarter or does that kind of 520, new loan yield put.

Maybe a little bit of a governor on that.

Could have been something just with the mix this quarter, but just kind of.

Curious, how you're thinking about about loan betas.

Great.

I think I think we're looking at something similar for the fourth quarter and.

The average loan yield at the time. They went on may be skewed a little bit because for those that flow either overnight or every 30 days.

Those put on in July didn't take into consideration.

Some of the lighter fare increases.

Probably the.

If we look at the real average rate when we took the real floating rates it may be a little bit higher.

Got it got it okay.

That makes sense, yes, yes, yes, yes, so yes, obviously, yes kind of skewed by the mix won't yes totally understand.

Okay, Great I'll hop back in queue and thank you for answering my questions.

Okay.

Thank you please standby for our next question.

Our next question comes from the line of Brady Gailey with <unk>. Your line is open.

Hey, Thank you good morning, guys.

Good morning.

Alright.

So 10% linked quarter annualized loan growth this quarter.

If I put you at around 10% next quarter that'll that'll hit the mid teens guidance for this year.

So how are we thinking about next year I know the outlook is uncertain as far as what the economy is going to do but is it right to think about maybe a step down.

One growth something in the high single digit level how are you.

About loan growth in the next year.

We will have a better feel for that I would.

And I'd be surprised if it is what it was this year.

So I think.

Either high single digits, or maybe low double digits.

Is probably where we will where it will land but.

Thats something really that as this quarter progresses, a little further we will have a better idea.

Looking at the.

The pipeline that's out there and then getting a better feel for how these construction loans are going to fund.

Okay.

Alright, and then the guidance for expenses for <unk> of 32 and a half.

That's about $1 million step down from Q.

Is that mostly on the compensation line and any color you can provide on that.

Hi, yes.

On salaries of tourists was the largest increase and employee benefits around two thirds of that increase of a $1 39 was in health expense.

I mean, obviously health expense can do anything we are self insured.

Under last year's year to date on health claims and that were also under budget, but more importantly, we're under last year's year to date. So.

Brady that could happen again, but that's not what's budgeted so.

That's part of the reason for me keeping it really where I had it for third quarter.

Legal and.

So that will not occur again, so yes.

That is budget for the 32 and a half so that was my reason for that I I was tempted to increase it but I don't really have a basis for doing so at the moment so.

Project with some we decided not to move forward on it.

Hey, a lawsuit or anything like that.

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

Alright, thank you.

I'm showing no further questions in the queue I would now like to turn the call back over to Lee Gibson for closing remarks.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

Q3 2022 Southside Bancshares Inc Earnings Call

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