Q4 2022 Southside Bancshares Inc Earnings Call
Yeah.
Good day, and thank you for standing by and welcome to Southside Bancshares, Inc. Fourth quarter and year end 2022 earnings call. At this time all participants are in listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during this session.
You'll need to press star one on your telephone you will then hear an automated message advising your hand is raised to Joel. Your question. Please press star one again.
Be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, when the Bell Vice President Investor Relations. Please go ahead.
Thank you Justin good morning, everyone and welcome to Southside Bancshares' fourth quarter and year end 2022 earnings call a transcript of today's call will be posted on Southside dot com under Investor Relations.
During today's call and other disclosures and presentations I will remind you that any forward looking statements are subject to risks and uncertainties.
Factors that could materially change our current we're 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 I'll turn the call over to Lee.
Good morning, everyone and welcome to satisfy Bancshares' fourth quarter and year end earnings call for 2022.
This morning, we reported excellent fourth quarter and annual results for 2022.
<unk> for the quarter included earnings per share of <unk> 87 cents a return on average assets of 147% a return on average tangible common equity of $21 three 5% annualized.
Quarter loan growth of eight 2%.
Inc quarter four basis point increase in our net interest margin and efficiency ratio of 34, excuse me 46, 38% and continued strong asset quality metrics. During 2021 net of PPP loans increased 14, 8%.
$533 5 million and net interest.
<unk> margin increased 16 basis points and the efficiency ratio decreased to <unk>.
$47 three 9%.
I wanted to thank the entire south side team for their continued contributions and their efforts, which made these results possible. We're extremely pleased with our continued solid loan growth during the fourth quarter of 2022.
Our loan pipeline, while not currently as strong as it was this time last year remains solid and we are encouraged by the long growth prospects for 2023.
In addition, we are seeing advances in our construction portfolio, increasing as loans that closed several quarters ago are now beginning to plan.
Given the outlook for the markets. We serve we are budgeting for 9% loan growth during 2023.
As previously mentioned approximately $743 million of our available for sale in municipal Securities are hedged at the call date with fair value swaps designed to reduce the overall fair value volatility of the securities during the fourth quarter. This 700 <unk>.
$43 million of fair value swaps began producing net interest income as the overnight suffer right.
Received increased above the average fixed rate we pay.
This was largely responsible for the linked quarter 31 basis point increase in the average yield on our tax exempt municipal securities.
As of December we recorded approximately $645000 of net interest income.
To the swaps.
During January 2023, we expect the net interest income associated with these swaps will increase to reflect the full effect of the mid December increase in overnight sulfur sulfur, resulting from the increase in the federal funds rate.
Should the federal reserve further increase the fed funds rate, we wouldn't anticipate a further increase in net interest income from these fair value swaps. Conversely should the federal reserve at some point decrease the federal funds rate net interest income associated with these fair value swaps would decline.
At which time, we would likely unwind some or all of these fair value swaps.
The economic conditions in our markets remain solid bolstered by continued company relocations and existing.
Accompany expansions combined with population growth a result of continued migration from other states.
The combination of increased mortgage rates and high building costs. As a result resulted in reduced housing starts and decreased margins moving this market closer to pre pandemic levels.
We look forward to successfully executing 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 up for <unk>.
Okay.
Thank you Lee good morning, everyone and welcome to our call today, we're pleased to report a solid fourth quarter to end a strong year with 22 net income of $105 million and diluted earnings per common share of $3.26 for.
For the fourth quarter, we reported net income of $27 7 million an increase of 717000 on a linked quarter basis and diluted earnings per common share at 87 cents at the recent increase linked quarter.
For 2022, we reported organic record organic loan growth of $533 million, excluding PPP loans or 14, 8% increase from 2021.
This is driven by our real estate portfolio with increases of $389 5 million in CRE $111 8 million in construction and 12 4 million in one to four family residential.
Additionally, we had a $24 million increase in commercial lines excluding PPP.
Our loan portfolio increased $84 2 million to 41 5 billion linked quarter.
The increase was driven primarily by strong growth within our commercial real estate loan portfolio with an increase of $85 8 million a linked quarter basis.
The weighted average rate of new loans funded during the quarter was approximately six 4%.
We continue to experience strong asset quality metrics with nonperforming assets of $10 9 million or one 4% of total assets at December 31st a decrease of $855000 linked quarter.
As of December 31, our allowance for loan losses as a percentage of total loans was eight 8% compared to nine 1% at September 30th.
Our allowance for off balance sheet credit exposure increased to $3 7 million on a linked quarter basis due to a provision of $1 6 million compared to $200000 in the last quarter.
As of December 31st our loans with oil and gas industry exposure or $111 3 million or two 7%.
Assets.
And total lines excuse me.
Our securities portfolio increased $50 million or one 9% on a linked quarter basis.
The increase was driven by a decrease in unrealized losses in the portfolio into a lesser extent purchases of securities.
During the fourth quarter, we transferred additional available for sale Securities with fair values of $175 8 million to held to maturity.
At December 31, we had a net unrealized loss in the ISS securities portfolio of $88 9 million compared to $168 3 million last quarter, a decrease of $79 5 million.
As of December 31st the unrealized gain on the hedge securities was approximately $21 6 million, partially offsetting the additional unrealized losses in the a M best Securities portfolio.
As of December 31st the duration in the entire securities portfolio was $10 7 million years, and the duration and D. E. F. S portfolio with $9 three years, our mix of loans and securities remained consistent on a linked quarter basis at 61% and 39% respectively.
<unk>.
Our deposits increased $16 9 million up 3% on a linked quarter basis.
The linked quarter increase in deposits was due primarily to an increase in our public fund deposits, partially offset by a decrease in broker deposits.
During the fourth quarter, we increased our stock repurchase plan authorization by 1 million shares.
When purchased 608.
976 shares during the fourth quarter at an average price per share of $35 three.
<unk>.
Sure and in through January 24th at 'twenty, three we have purchased 141053 shares at an average price of $35 73.
Our tax equivalent net interest margin increased on a linked quarter basis to three 4% from 336% driven by the increase in the average yield on loans at 54 basis points and 21 basis points on the securities portfolio, partially offset by an increase in.
The average yield on interest bearing liabilities at 56 basis points.
The tax equivalent net interest spread decreased for the same period to 295 from three <unk> percent.
For the three months ended December 31, net interest income increased $1 3 million or two 4% compared to the linked quarter.
We also recorded $55000 in purchase loan accretion this quarter.
For the three months ended December 31, 22, noninterest income excluding net loss on the sale of the AFL securities increased $398000 or three 8% for the linked quarter.
The increase was driven primarily by increases in deposit services income Trust income and swap fee income included in other non interest income.
For the same three month period noninterest expense was $33 $6 million, a slight increase from the prior quarter.
For 2023, we have budgeted approximately 35 5 million and noninterest expense each quarter.
The increase in the budgeted expense is primarily due to increases in salary expense software expense and the non service component of our frozen retirement and restoration plan expense.
Our fully taxable equivalent efficiency ratio at December 31st decreased to 40, 638% from 47, 42% as of September 30th driven by the increase in net interest income.
Income tax expense increased to $4 3 million compared to $3 9 million for the three months ended September 30th.
Our effective tax rate increased to 13, 4% for the fourth quarter from 12, 6% in the previous quarter.
At this time, we estimate an annual effective tax rate of 12, 8% for 2023.
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. Please press star one one on your telephone and wait for your name to be announced to Joel. Your question. Please press Star one again, please stand by while we compile the Q&A roster.
And one moment for our first question.
And our first question comes from will Jones from <unk>. Your line is now open.
Hey, great. Thanks, good afternoon.
Good afternoon, how are you doing.
Doing well doing well.
I just wanted to unpack this swap contracts you guys have that's coming on.
Benefiting you guys.
Youre, receiving variable, but paying fixed what does the fixed rate that you guys are paying or I guess the better question is what is like the net pickup in yield.
That you received from this favorable swap contracts.
When you say the favorable yield increase.
Yes.
Okay, I'm not sure I understand that part of the question but.
Basically we have probably somewhere between 20 and 30 of these swaps and they have.
Anthony.
Oh, sorry, we have 84 so.
And they have different we started putting these on I think back in April of 2022, and the last one we put on was in early October so each one of them have.
Fixed rates that we're paying that are different.
Obviously, the last once we put on had the highest.
The highest fixed rate and at this point in time.
Almost all of them.
We're in a positive position on <unk>.
And that's the reason basically during December .
November was the first time, we saw it turn positive where we actually had net interest income and then jump to that 645000 in December .
And.
There was a 50 basis point increase in sulfur.
Corresponded with the increase in fed funds, but that was mid December so we anticipate the rest of that.
Kris and that net interest income.
Her in January and then.
Should the fed increase 25 basis points.
Or whatever the amount is in February .
Then we will continue to see increases so at this point.
That amount of our tax free municipal securities are almost acting like a floating rate security at this point in time.
And for the quarter.
It.
It had a 31 basis point increase are reflected a 31 basis point increase in our yield on our R&R tax.
Taxable municipals excuse me tax free municipal securities.
How does that.
Yes.
Very helpful. Yeah.
Okay. Thank you for walking through that and then.
I would imagine just with whats the majority of those being in a positive position that you would have a relatively sizeable gain if you were to sell to swaps.
We do have we do have an overall gain and the swaps right now.
I don't.
It was 21 million at year end.
And it changes based on the.
What happens with the longer term.
Rates.
Because these are these are swapped to the call today and the municipal securities.
And I can give you the right handed me the average fixed rate of our coupon that will pay less.
Pain is a $3 21.
Okay, Great that's perfect that's what I.
Looking for really.
Great that's very helpful.
As we think about that.
The story of the margin as we move into 2023, there's still saw a little bit of expansion this quarter.
Deposit deposit costs are taking up a little bit.
Alright, you saw leverage on the asset pricing side, maybe you did.
Some of this.
Accelerated continuing deposit pressure.
So maybe we see the margins flatten out and just hold the line for the remainder of the <unk> expansion last do you feel like this quarter was a peak just as any commentary around the margin will be great.
Sure.
On loans.
We do have a fair amount of floating rate loans, 46% something like that of our loans float.
The new fixed rate loans that we are putting on her.
For the most part I would say in the fixes somewhere.
Robley.
Closer to six five.
And then with the.
This almost three quarters of a billion in tax exempt investment securities that float.
That's going to help offset some of that.
But we are seeing pressure on the deposit side all of the funding side and so we feel like the beta there is probably going to be somewhere between 30 and 35% going forward.
Margin.
Sure.
I think I think we stay.
Where we are.
Plus or minus 5% to six basis points somewhere in that range.
And simply because if the.
Future fed funds increases are in.
And 75 basis point increments.
And I think there isn't going to be as much pressure moving forward to.
Those rates are significantly it was when it was when it was 75 basis points, but I do I do think that we're going to continue to see a lot of pressure pricing for.
Our deposits is extremely competitive and I'm sure that and come as any surprise and so there is no exception.
Exception here SaaS side of that.
Yes definitely.
Definitely not alone there just to clarify that.
30% to 35% deposit beta is that interest bearing deposits our total deposits.
That would be.
I'm thinking it's interest bearing deposits.
Is what we're what we're looking at at this point in time.
Awesome, Great and my last one if I could just sneak one last one just what's the messaging on the buyback once the ordinance.
Notable for you guys this past quarter.
Just whats your further appetite here.
At this point, we'll just we'll see how we how we work through the current allocation and.
If the price is at such a point that we think it's appropriate for us to expand the buyback we will at that time.
Okay very helpful. Thank you so much.
Alright.
Thank you.
And one moment our next question.
And our next question comes from Brad Millsaps from Piper Sandler Your line is now open.
Hey, good afternoon.
Clean.
Hey, how are you Brian .
Hi, Lee how are you doing.
Good good.
Good good thanks for taking thanks for taking my questions.
We're just curious.
Some other banks it looked like the period end balance of federal home loan bank advances were up.
Double or so of the average just are those mostly overnight and.
Overnight advances would that be something you might likely lean into.
To the extent deposit funding doesn't come through just kind of trying to think about how you want to fund your your 9% loan growth targets does.
Do you plan to stay Levered and keep the bond book, where it is or.
Hopefully you can grow deposits to do both but just any color there would be helpful.
Sure.
Last year in 2022.
We were able to get some some favorable pricing in the broker.
Broker deposits money market.
Environment.
And we replaced for our cash flow.
Swaps.
And we replaced a lot of the home loan Bank in fact, I think at one point, we had all of it replace.
With the home loan bank now that has flipped and so at this point in time, a more favorable funding as at the home loan bank. So what youre, saying there is mostly.
Flip from brokered deposits to cover those those.
Cash flow swaps into the home loan bank advances at this point in time.
We did have 30 million that rolled off in the first quarter of cash flow swaps and im looking at our funding person make sure okay.
95% excuse me $25 million, so were down too.
About $350 million and those cash flow swaps. So when you take a look excuse me $550 million and those cash flow swaps. So when you look at our our brokered deposits and you when you look at our home loan bank advances.
It's important to know that $550 million of that is.
Is basically fixed pricing on that.
But we do have some overnight.
Lending at home will make at this point in time simply because it's.
One of the cheaper places to go to get additional wholesale funding.
So if there is an umbrella.
Yes, yes.
I have those numbers in the Q like you are paying like 113 basis points on those.
On those on the $575 million of debt is that correct.
930 at September 30, yes, Okay, yes.
Okay got it.
Okay.
So the one that one that rolled off I think was at 140 something or somewhere in that range.
We'll find it much.
Okay, Okay great.
Okay, Great and then.
Just on your loan growth I mean.
9%, maybe maybe that was a touch higher than maybe I expected, giving given kind of what's going on in the market, but it sounds like.
You've got a number of construction projects that you plan to.
Plan on funding up anything else in there is kind of a big driver.
And any new lenders.
Just trying to kind of get a better sense of what's kind of driving your your loan growth target.
We do have some new lenders and some of the lenders that came on in 'twenty one.
<unk> 2020 one are really.
Hitting their own.
Are in Houston three.
300, approximately $300 million of our loan growth.
This year was in Houston, and as you know we opened.
Opened an LBO down there.
In early 2020.
And they weren't able to do much with the pandemic.
<unk>.
It really come into their own in 2022, and then one of the other lenders are two of the other lenders that we hired.
<unk> had relationships in Houston as well so.
We're anticipating.
That's going to continue at this point in time, we're not.
We're not expecting that 14, 8% loan growth.
But at this point in time, we feel like 9% is achievable.
And.
If that changes, we will update that on future quarterly calls.
Got it and then just to follow up on that first question, we kind of got bogged down there in the mid <unk>.
Bob talked about.
The 9% loan growth target.
Do you think you can fund that fluid deposits or.
Assad, how what's going on with swapping back and forth between brokered.
There'll be but do you anticipate bringing the bond book down or just kind of want to think about the size of the balance sheet and.
Kind of how you plan to fund it.
We could bring the bond portfolio down some there's probably depending on what happens to long term rates.
<unk> on what we'd be willing to do there, but we could probably fairly easily fund.
Order of that loan growth, while reducing the bond portfolio.
We are anticipating some deposit growth.
Not going to be.
Cheap if it's interest bearing deposits, but.
We are looking at some other opportunities to be able to fund.
And then let's see.
I'm sorry.
Yeah.
Oh, the January maturity, okay, but.
Whatever the balances that we don't.
We don't have.
Would look to the brokered market or to the home loan bank.
<unk> market whichever.
Was the better of course for us to pay for that additional funding.
Okay perfect Alright, Thanks, Lee I really appreciate it.
Alright.
Thank you.
And if you would like to ask a question that is star one one again, if you would like to ask a question that is star 111 moment, while we compile the Q&A roster.
And one moment our next question.
And our next question comes from Brett <unk> from <unk> Group. Your line is now open.
Hey, guys. This is Brian calling in for Bret How's it going.
Good how are you doing.
Brian .
Okay. Thanks.
Could you just provide a little color on the remaining maturity profile of the Securities book There what do you have a maturity in short term.
Gosh maturing in the short term.
We have monthly amounts that come off the mortgage portfolio theyre not theyre not huge I think we've got about <unk>.
11, or $12 million MBS pool that.
That matures in March.
And it's at a fairly low rate.
Other than that and then we have we would have probably about eight.
2000, $18 million to $20 million of municipals that while they are not going to mature.
They will come up on their call dates and that have 4% or higher coupons and.
If they don't mature, we're going to see a nice pickup in yield on that.
In terms of what's coming off on the MBS portfolio, it's probably.
And that two $2 million to $3 million a months somewhere in that range.
Great. That's really helpful. And then one more if I could just wanted to get your thoughts on <unk>.
Sorry.
On doing any sort of credit review on that book and then also I wanted to get your thoughts on office space as well.
Okay.
In terms of credit reviews on CRE really what we do.
Gosh, probably every six months or so.
And we just did one in the fall.
So we will have one coming up probably here in the spring early spring.
Go through and we take a look at all the credits above a certain dollar amount and I believe that dollar amount $5 million. So we get an update from the officer on just about everything.
And take a look at it.
But they are the average rents are the vacancy rates things of that nature to see if there been any any changes.
And then any changes in the financial condition of the borrower. So that's something we do at least twice a year.
And it's not it's not just limited to CRE, but it's all of our credits.
In terms of office, we're extremely careful on office.
I'm, not saying, we don't make office loans, but.
We look at the quality of the tenants that are in there we look at how long they are tied up for when that when those.
As leases come due.
And those typically require a fair amount of equity going in.
And we look for really solid debt service coverage ratios. So.
Office is not not.
Not probably at the top of our list right now, but there are.
Sure.
There are some good good office loans out there to May <unk>.
Have to be very selective and make sure that the.
Borrower.
As somebody that.
Has a lot of familiarity and experience in that in that area in that.
The tenant roll is such that you feel like.
For the life of the loan you are in pretty good shape. So.
Those we look at extra hard.
Great. Thanks, that's good color I appreciate the questions.
Alright, thank you.
Thank you and I'm showing no further questions I would now like to turn the call back over to Lee Gibson, President and CEO for closing remarks.
Alright, Thank you very much to everyone for joining us today, we appreciate the opportunity to answer your questions along with your interest in Southside Bancshares in closing we're excited about our prospects for 2023 and look forward to report reporting first quarter results to you during our.
Next earnings call in April . This concludes the call. Thank you again. This concludes today's conference call. Thank you for participating you may now disconnect.
Goodbye.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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