Q1 2023 Southside Bancshares Inc Earnings Call

Okay.

Yeah.

Good day, ladies and gentlemen, and thank you for standing by welcome to the Southside Bancshares incorporated first quarter 2023 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.

Telephone keypad at.

At this time I would like to turn the conference over to MS. Lindsey Bailes, Vice President of Investor Relations Ms barrels. Please begin.

Thank you Howard and good morning, everyone and welcome to Southside Bancshares' first quarter 2020 388.

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.

Or is that could materially change our current forward looking assumptions are described in our earnings release.

Our Form 10-K.

Joining me today are Lee Gibson, President and CEO and Julie Shamburger CFO . Firstly, you 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 Lee.

Good morning, everyone and welcome to Southside Bancshares first quarter earnings call for 2023.

This morning, we reported net income of $26 million earnings per share of <unk> 83.

Our return on average assets of 1.38%.

Return on average tangible common equity of 19.36%.

And continued strong asset quality metrics.

On a linked quarter basis, our loan growth was less than originally anticipated. This was due to anticipated first quarter alone closing delays now expected to close in the second quarter and a few payoffs during the quarter. We also lost loan opportunities due to our underwriting requiring.

Lower leverage than our competitors that said, we have no plans to change our time tested credit underwriting standards.

Because of our healthy pipeline loans, we anticipate funding during the second quarter projected construction loan advances and the markets. We serve we are still budgeting for overall loan growth for 2023, and the high single digits.

Increased competition for deposits largely accounted for the 19 basis point decrease in our net interest margin.

Pricing competition from both financial institutions and U S Treasury bills required us to adjust our pricing more than originally anticipated. Additionally.

Additionally, as uncertainty in the banking industry unfolded, we implemented measures to further enhance our already very solid liquidity position by maintaining additional cash at the fed at a very small spread and pledging additional securities that fed increasing availability there.

The only to enhance our interest rate risk profile, we utilized the fed's New bank term funding program and as of yesterday had obtained $287 million.

One year term funding at an average rate of 447%.

At our discretion can be re priced or repaid at any time without penalty.

We anticipate the net interest margin will continue to be pressure as competition for deposits remains high.

Our interest rate swaps and fair value swaps continues to provide a hedge to offset a portion of the potential margin compression.

Linked quarter deposits net of brokered and public fund deposits decreased three 4% during the quarter, 78% of which occurred prior to the banking industry event in early March over half of the decline in our total deposits linked quarter was at <unk>.

Salt chain.

Changing a portion of our swap funding from broker deposits to lower cost fed borrowings, resulting in $192 million reduction in broker deposits.

Given the recent banking events I think it's important to point out that as at March 31, 2023, 73, 5% of our deposits are FDIC insured.

Our fully collateralized. In addition, the average balance of our granular deposit account base is only $30000.

While we are keeping a watchful eye on the economy is more economists forecast increasing chances of a recession. We're glad to report that the markets. We serve remain healthy and continue to grow.

I look forward to answering your questions. Following <unk> 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 a solid start to 2023 with first quarter net income of $26 million and diluted earnings per common share at <unk> 83, a decrease of four cents or four 6% linked quarter.

Net income decreased by one 6 million or five 9% driven by a decrease in net interest income partially offset by a decrease in provision for credit losses.

In light of the mismatch occurring in the banking industry. Since March we included several additional disclosures in our earnings release, which showed the granularity of our deposit base with an overall balanced with an overall average balance of $30000 well below FDIC insurance levels.

We estimate an insured deposits of 26, 5% as of March 31st with the equation of public funds, which are fully collateralized and SaaS side on deposits.

Deposits decreased $359 8 million or five 8% on a linked quarter basis.

Over half of the decrease with data or broker deposits $191 8 million as we transition some of our funding of cash flow hedge slots to more advantageous funding sources.

The remaining decrease in deposits was related primarily to customer non maturity deposits with a large percentage of the outflow occurring prior to March as mentioned in our earnings release.

Our loan portfolio remained consistent at 4.15 billion linked quarter and the weighted average rate of new loans funded during the quarter was approximately 697%.

We reported strong asset quality metrics this quarter with nonperforming assets of $3 2 million or eight 4% of total assets at March 31, a decrease of $7 7 million linked quarter, primarily related to the adoption of an accounting.

Pronouncement around the recognition and measurement of troubled debt restructures.

At March 31, our allowance for loan losses, as a percentage of total loans with eight 7%.

A slight decrease compared to eight 8% on December 31st.

Our allowance for credit losses decreased $311000 for the linked quarter.

As of March 31st our loans with oil and gas industry exposure or $109 2 million or two 6% of total loans.

Our securities portfolio increased $119 9 million or four 6% on a linked quarter basis.

The first quarter increase was driven by purchases of three months Treasury bills, partially offset by sales of <unk> securities.

Sales of the ASF Securities resulted in a net realized loss of $2 $1 million, which was more than offset by the sale of equity securities that resulted in a net gain of $2 4 million.

There were no transfers and Asf's securities during the first quarter.

At March 31st we had a net unrealized loss in the securities portfolio of $61 9 million compared to $88 9 million last quarter and decrease of $27 million.

As of March 31st the unrealized gain on the hedge securities with approximately $9 8 million, partially offsetting the unrealized losses in the securities portfolio.

As of March 31, the duration in the entire securities portfolio with eight nine years and the duration of the <unk> portfolio was six six years.

Our mix of loans and securities slightly shifted to 60% and 40%, respectively compared to 61% and 39% at December 31.

Our capital ratios remained strong with all capital ratios, well above the capital adequacy and well capitalized thresholds.

Liquidity resources remains solid with $1 9 billion in liquidity lines available as of March 31.

During the first quarter, we purchased 457394 shares of our common stock at an average price per share of $34.89 since.

Since quarter end and through April 20th we have purchased 177406 shares at an average price of $33 <unk>.

Our tax equivalent net interest margin decreased on a linked quarter basis to $3 21 from $3 40, driven by the average yield and the average balance on interest bearing liabilities, partially offset by an increase in the average yield on earning assets.

The tax equivalent net spread decreased for the same period by 33 basis points to 262 down from $2 95.

For the three months ended March 31st net interest income decreased $3 5 million or six 1% compared to the linked quarter.

We also recorded $88000 in purchase loan accretion this quarter.

Noninterest income excluding the net gain on the sales and the U S Securities and equity securities increased $997000 or nine 3% for the linked quarter.

The increase was driven by Boeing income related to death benefits and $951000 realized in the first quarter.

For the same three month period noninterest expense was $34 8 million an increase from the prior quarter of $1 3 million or three 8% primarily related to an increase in salaries and employee benefits.

For 2023, we have budgeted approximately 35 and a half million dollars in noninterest expense each quarter.

Our fully taxable equivalent efficiency ratio increased to 59, 9% as of March 31.

<unk> from $46, 38% as of December 31, driven by the decrease in net interest income and increase in noninterest expense.

Income tax expense increased to $4 5 million compared with $4 3 million for the three months ended December 31.

Our effective tax rate increased to 14, 9% for the first quarter from 13 four in the previous quarter.

At this time, we estimate an annual effective tax rate of $14 nine for 2023.

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

Ladies and gentlemen, again, if you have a question or comment at this time. Please press star one one on your telephone keypad.

If your question has been answered or you wish to remove yourself from the queue simply press star one again.

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

Our first question or comment comes from the line of Brett <unk> from <unk>.

The group Mr. Rabat and your line is open.

Hey, good morning, everyone.

Good morning.

Wanted to first ask you, obviously reduce the duration on the securities portfolio linked quarter with the movements.

Can you just talk can we go back over just the.

What you bought and sold.

During the quarter and then just does that yield on that portfolio, what the matriculation of on the on the securities book might be from here from a yield perspective.

Okay.

We sell primarily munis.

Municipal Securities and some mortgage backed securities.

And then.

In terms of purchases it was it was largely the.

The T bills that we purchase.

When we look at the duration. We also take a look at the duration of our fair value swaps and we didn't include that in that duration calculation that Julie mentioned, but.

If we were to include that and take a look at the real duration risk that we have with fair value swaps in place.

It drops it to just under 4%.

Our main four years not 4% four years so.

Going forward.

Obviously, the T bills will roll off this quarter so thats.

Thats approximately $300 million.

And then we will have some additional things roll off but that's.

Thats not going to be substantial in nature, what what is going to roll off.

Okay.

One thing that one.

And then I want to point out that the fair value swaps also right now are adding.

A little over $1 million and net interest and interest income.

To the.

<unk>.

Overall securities income.

Okay.

And then maybe just any any outlook for the margin from here.

Curious, how you're thinking about the deposit betas.

<unk> from current levels the funding costs have been managed pretty well.

Some folks are expecting an uptick just curious how you feel about the margin from from <unk> levels.

I think as I said I think it's going to.

Continuing to be pressured comp.

Competition for deposits.

I was already.

Pretty intense.

In the first quarter and then with the events that occurred in early March.

With the closures of a couple of banks.

That intensified even further so we don't expect that to change anytime soon.

We expect competition for deposits to remain.

Very intense and.

Growing deposits would be an expensive proposition at this point in time.

Okay.

Then the other question I had Lee was you mentioned.

High single digit.

Loan growth from here.

Maybe thats for the full year I wasn't quite sure what that guidance was so I apologize.

I have missed I misunderstood that but just want to make sure I understood that and then.

That's a function of.

Talk about how you're missing some deals through to your credit trends and stringent nature.

Nature and maybe.

That might have an impact on what you get versus what you down but just wanted to maybe get a little better color on the guidance. If that entails you think the market comes back to you in terms of.

Loan underwriting standards are if you just feel like there's stuff out there that you'll be able to get us as others pull back on credit.

We're still.

Winning loan deals.

It's just that this quarter was a little a little unusual in that we really hadn't seen.

Leverage requirements.

Come into play and usually it was it was rate driven.

This quarter, we did see some deals that.

We required a lower leverage than competition did.

We're never concerned when we lose loans based on leverage.

But.

The guidance I gave was for the entire year of 'twenty three we're still anticipating when you look at the end of 'twenty, two and you look at the end of 'twenty three.

At Bay.

Based on what we know today in our pipeline.

That we're still anticipating high single digit loan growth for the entire year 2003.

Okay, Great appreciate all the color.

Thank you.

Our next question or comment comes from the line of Brady Gailey from <unk> W. Standby Mr. <unk>. Your line is open.

Hey, Thank you good morning, guys.

Good morning, Greg.

So high single digit loan growth.

About deposit growth.

First quarter was a unique quarter, but do you think that.

You could see deposit growth is there more downside to deposits how you all think.

About that I know your loan to deposit ratios.

Fairly.

Low at about 71%. So you definitely have room, there, but how are you thinking about deposits.

My personal opinion is I think deposit growth is going to be.

Challenging we do anticipate.

I mean, we don't anticipate we are expecting in the second quarter.

The one of the public fund depository is that we have under contract is going to be receiving bond proceeds of about $173 million.

So we will.

We received those deposits during the quarter, but in terms of deposits net of public funds and net of broker deposits.

Remaining static is going to be a win right now based on the competition for deposits out there.

Unless were just willing to pay even more than.

What we're paying now in terms of deposit betas. So.

I'm not looking for.

Substantial growth in <unk>.

Kind of looking at.

Making sure that we're able to retain the deposits that we currently have.

Okay.

Alright, and then south side remains pretty active in the share repurchase program is there any way we've seen other companies.

Pause the buyback for now.

I know you guys have a very safe balance sheet and plenty of capital, but should we expect the buyback to continue.

To be active I know it has been so far in April but should we expect that continue into the future.

Julia handmade shares do we have left.

Thanks.

Chile is checking on the number of shares.

I think.

Thank you, it's safe to say that.

Based on where the price of the shares or that.

We have about daily so we have around 400000 shares left that we could purchase.

I don't anticipate any changes in what we're doing now whether we will authorize additional repurchase after that.

Not ready to talk.

Upon on that.

And that 400000, that's left in the authorization is that as of the end of March or does that incorporate the shares that have been repurchased so far in April .

That incorporates the parts.

Shares that had been repurchased so far in April .

Okay.

Alright, great. Thank you for the color.

Alright, thank you.

Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press star one one on your telephone keypad.

Our next question or comment comes from the line of Mr. Matt Olney from Stephens. Mr. <unk>. Your line is now open.

Good morning.

Just looking for some additional commentary.

Morning.

On some of the loan growth just what youre seeing as far as some of the average.

Yields that you're putting on the balance sheet.

Yes.

<unk> stated.

And that the average yield in the first quarter was 697, so I would assume.

With the slight fed increases we've seen that.

Likely we'll be right around 7%, maybe somewhere between 7% and 7% quarter percent for the second quarter.

Okay.

And then.

I didn't see in the press release, and maybe I just missed it do you have what the.

<unk>.

Unrealized.

Our position is or the Aoc acquisition as of March 31.

Yes.

Yes, julie's grabbing them.

Okay.

Sure.

It was $133 3 million.

Yes, I think I believe equity is just stated as a total in the earnings release.

Okay and that number you provided that was which one was that the Aoc acquisition as of March 31.

Yes, $133 three.

Million.

Got it okay.

Okay, great. Thanks, everybody.

Alright, thank you.

Thank you I'm showing no additional questions in the queue at this time I would like to turn the conference back over to Mr. Lee Gibson, President and CEO .

Thank you everyone for joining us today, we appreciate the opportunity to answer your questions along with your interest in SaaS side Bancshares in closing we remain excited about our prospects for the remainder of 2023 and look forward to reporting second quarter results to you during our <unk>.

Next earnings call in July Thank you.

You again.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the presentation. You may now disconnect everyone have a wonderful day.

Okay.

[music].

Okay.