Q2 2023 Southside Bancshares Inc Earnings Call
Good day, and thank you for standing by and welcome to the South side Bancshares, Inc. Second quarter 2023 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.
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Please be advised that today's conference is being recorded I would now like to introduce your host for today's call Lindsay Bell Vice President of Investor Relations. Please go ahead.
Thank you Justin good morning, everyone and welcome to Southside Bancshares' second quarter 2023 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'll remind you that any forward looking statements are subject to risks and uncertainties factors that could materially change our credit spreads 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, we will share his comments on the quarter and then Julie will give an overview of our financial results I will now turn the call virtually.
Thank you Lindsey and good morning, everyone and welcome to SaaS side Bancshares 2023 second quarter earnings call. This morning, we reported net income of $24 9 million earnings per share of 81 cents a return on average assets of $1 two 9% a return on average.
Tangible common equity of $18, five 9% and continued strong asset quality metrics.
During the quarter, we experienced strong loan growth, 80% of which occurred during June in fact, approximately 52% in the second quarter loan growth occurred in the last two weeks of June .
Our loan pipeline remains strong and we are projecting healthy construction loan advances or the remainder of the year.
We are continuing to budget for overall loan growth for 2023, and the high single digits. Our net interest margin held in well during the quarter contracting only four basis points light second quarter loan growth along with our interest rate swaps fair value hedges and fed.
Term funding should help mitigate most if not all any further net interest margin compression during the third quarter.
Linked quarter deposits net of brokered and public fund deposits increased $73 million or one 6%.
In July we began offering intra fi two deposit customers with deposit insurance concerns. We anticipate this will assist with deposit growth in the coming quarters. We are glad to report that the markets. We serve remain healthy and continue to grow and perform well I look forward to <unk>.
Answering your questions following <unk> remarks, and I will now turn the call over to you.
Thank you Lee and good morning, everyone welcome to our call. Today. We are pleased to report second quarter net income of $24 9 million a decrease of $1 1 million on a linked quarter basis and diluted earnings per common share of <unk> 81.
A decrease of two cents or two 4% linked quarter.
We had strong loan growth in our loan portfolio. This quarter with an increase of 176 $4 million or four 2% linked quarter driven by our real estate portfolio with an increase in CRE at $105 million and a 65 $5 million <unk>.
<unk> and construction loans.
The interest rate of loans funded during the quarter was on average approximately seven 5%.
Asset quality metrics remained strong with nonperforming assets of $3 1 million or point out 4% of total assets at June 30, yes.
At June 30th our allowance for loan losses, as a percentage of total loans with 84% a slight decrease compared to <unk>, 87% on March 31, due to the second quarter loan growth.
The allowance for credit losses decreased $381000 from the linked quarter to $39 5 million.
As of June 30th our loans with oil and gas industry exposure or $108 5 million or two 5% of total loans.
Our securities portfolio decreased 97, 4 million or three 5% on a linked quarter basis.
The second quarter decrease was driven primarily by sales of <unk> securities.
Sales in the U S securities, resulting in a net realized loss of $3 5 million.
Additionally, in the second quarter, we recognized a net gain of $2 6 million on the sale of correspondent Bank stock.
There were no transfers of Iff's securities during the second quarter.
At June 30th we had a net unrealized loss in the securities portfolio of 69, 7 million compared to $61 9 million last quarter, an increase of $7 8 million.
As of June 30th the unrealized gain on the fair value hedges municipal Securities was approximately $27 9 million compared to $9 8 million linked quarter, which partially offset the unrealized losses in the <unk> securities portfolio.
As of June 30, the duration in the entire securities portfolio was nine years and the duration of the portfolio was six seven years.
Our mix of loans and securities shifted to 62% and 38%, respectively compared to 60% and 40% on March 31.
Deposits increased 279, 5 million or four 8% on a linked quarter basis, driven by an increase in brokered deposits.
Our capital ratios remained strong with our capital ratios well above the capital adequacy and well capitalized thresholds.
Liquidity resources remains solid with two and a half.
In liquidity line available as of June 30th.
During the second quarter, we completed the purchase of all of the remaining authorized shares of our common stock and our stock repurchase plan. A total of 618831 shares at an average price is $30 in 2007 cents.
In our earnings release. This morning, we reported that our board of directors approved a stock repurchase plan on July 20th authorizing the repurchase of up to 1 million shares and the company's outstanding common stock as of today No shares have been purchased under this recently approved stock repurchase plan.
Our tax equivalent net interest margin decreased four basis points on a linked quarter basis to $3 17 from $3 21, primarily due to larger average rate imbalanced increases on our interest bearing liabilities when compared to the interest earning assets.
The tax equivalent net interest spread decreased for the same period by seven basis points to 255 down from $2 62.
For the three months ended June 30th net interest income increased 563000, or one 1% compared to the linked quarter.
We also recorded $81000 in purchase loan accretion this quarter.
Noninterest income excluding the net loss on the sales of the ISS Securities and equity securities decreased $486000 or four 9% for the linked quarter.
The result of Boeing income related to death benefits of 950000.
Realized in the first quarter, partially offset by increases in brokerage services and other noninterest income.
Noninterest expense increased $144000 on a linked quarter basis to $35 million.
For 2023, we have budgeted approximately $35 5 million in noninterest expense each quarter.
Our fully taxable equivalent efficiency ratio increased to 51 six as of June 30 from 59 nine as of March 31.
Income tax expense increased slightly to $4 6 million.
Our effective tax rate increased to 15, 5% for the second quarter from 14, 9% in the previous quarter.
At this time, we estimate an annual effective tax rate of 15, 5% for 2023.
Thank you for joining US today. This concludes our comments and we will open the line for your questions.
Thank you al.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster at one moment for our first question.
And our first question comes from Brady Gailey from <unk>. Your line is now open.
Hey, Thanks, good morning, guys.
Okay.
So it was great to see the margin Holden so well it was only down four basis points linked quarter. It was a lot better than some of your peers.
Sounds like you expect the margin to be stable going forward is that the right way to think about the margin and can you just talk about any sort of impact that you have some hedges any sort of impact from those hedges over time on the margin.
Sure.
I agree that we're thinking that the margin hold steady.
Especially in the third quarter.
With the interest rate hedges.
Sure.
Right now are around $760 million and I don't think we have any of that roll off the remainder of this year.
There is an average rate there of $3 19, and then with our fed term funding from the fed term window.
296 million at quarter end, and our average rate of 446 that gives us a little over $1 billion of money thats locked and combine that with the.
The noninterest bearing deposits that we have and the capital that gives us pretty good solid funding base.
This locked in and so.
We feel good about about being able to hold the margin where it is especially with the loans that we put on.
Alright.
I heard the expectation for high single digit loan growth this year.
So if you look at deposits.
And then kind of flat if not down a smidge of year to date.
How do you think about deposit growth.
Going forward.
Youre alone.
To deposit ratio was 71%, which is pretty low.
Would you be willing to allow that to go.
If our loan to deposit ratio got up to.
As long as it stayed below 90, I think I think we'd be comfortable.
A long way from that.
In terms of.
Deposit growth for the rest of the year, we feel like it's not going to be robust because raising deposits right now is an expensive proposition, but we feel like.
We can increase deposits.
We find it almost $100 million of our loan growth during the quarter by reducing securities. So that is something that we.
We can do in the coming quarters as well so.
Overall, if we can continue to have loan growth that we think we're going to have then.
Shifting some of those.
Assets from the lower investment category up into the higher loan category and then with.
Some deposit growth, we should be able to easily fund those loans.
Alright, and then finally for me it was good to see the new buyback authorization and the completion of the prior one.
I know you guys have been pretty consistently buying back your stock at least the last three quarters is there any reason to think that that would slow in the back half of this year.
Okay.
We'll just have to see what price the stocks at an.
We're going to buy as we feel like it makes sense.
Just on the prices and.
Component test phase it'll slow it just really is going to depend on market conditions.
Okay.
Okay, alright, great. Thanks for the color guys.
Alright, Thank you Marty.
Thank you.
And one moment our next question.
And our next question comes from Graham <expletive> from Piper Sandler Your line is now open.
Hey, good morning, everybody.
Good morning Graham.
So I just wanted to kind of touch a little bit more on the deposit side of things as it pertains to the mix going forward.
I know you said you think you can grow deposits a little bit I'm, just trying to trying to get a sense for what you guys are seeing on the noninterest bearing side.
And then also where you guys think you might be able to grow because it looks like the majority of this growth this quarter was from brokered.
So just trying to get a sense of where you think or when you might think noninterest bearing kind of slows down on the outflows.
And then core deposit growth can resume and kind of take the baton from brokered.
Right now.
Core deposits, we feel like grew about $73 million during the quarter.
The increase in broker deposits I think you can.
See kind of a corresponding decrease in.
And fed borrowings and home loan bank borrowings.
Basically we were able to we have to fund our interest rate swaps at $760 million with some type of wholesale funding and so.
We were able to get cheaper funding to fund those swaps through the brokered CD market than we were through the fed discount window and so basically move from one place to another and it was just where the cheapest funding is but.
That funding is basically locked in at a fixed term rate.
We're hoping to be able to continue to have that core deposit increase.
Some of it.
Likely band that noninterest bearing deposit as we.
Bringing on new loan relationships.
Warner bring on deposit relationships as well with some of those loan relationships. So.
We hope to basically grow those core deposits and all the different categories.
Okay.
Okay.
Alright would it be would it be safe to assume then that we're getting closer to the bottom of noninterest bearing kind of remixing into some higher cost stuff I mean, it sounds like you bring on a lot of relationships right now so I figure.
Could you bring on the full relationship with the non inch bearing piece it.
It could help.
Slow things down on that Brian .
Is that fair to assume.
That is correct.
Some of the non interest bearing on.
On the commercial side are tied to.
Analysis and some of that decrease you've seen is the fact that they don't need to carry as many balances in order to pay their analysis phase so.
And higher interest rate environments, you'd typically see.
Some deterioration.
In the noninterest bearing deposits on the commercial side.
Right Okay. Thanks.
And then I guess, just shifting bigger picture.
As we look at the balance sheet as a whole I know you said there is obviously a shift towards.
The loan book out of the Securities book This quarter do you guys have any like near term or medium term targets for the percentage of assets you would like in loans.
And our target for a long time has been to get to 70% asset.
At 70% loans and 30% Securities.
I think we move to 62.
38, this quarter, so I think.
We've moved the needle about 2% in each direction towards getting there.
That would be our goal and I think for us to do that in an orderly fashion. It would probably take another year and a half to two years to do that assuming we continue to have loan growth we've had.
Okay, and then just just you kind of gave a good segue there, but on the loan growth front I.
I just had a lot of that came in at the very end of the quarter was that like one or two of larger relationships or is that is that a pretty granular amount of growth that came in there. During the last two weeks just trying to get a sense for I guess <unk> versus <unk> 23 loan growth outlook.
There were some larger realized to some larger loans that came in but it was just.
Everything seemed to kind of.
Saddle and close and that in June for some reason.
And we did have some closings.
The first two months they were holdovers from the first quarter and then.
Even some of the stuff that closed in June was a holdover from the first quarter. So it was just kind of one of those.
Things that a lot of the loan closings just happened to fall in June , but a few of them were larger.
Loans closed.
Okay. That's helpful. Thank you guys I appreciate it.
Thank you.
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, Thanks for the question wanted to.
Guess first start with with the taxable portfolio.
The 45 basis point increase.
And that linked quarter. Another some hedges I don't know if that flows through that line item.
Can you talk maybe about the improvement in that piece of our Securities book.
Sure.
The tax exempt debt went from $3 95 to $4 15 is that what youre talking about on a linked quarter basis.
Well I guess.
Youre talking about going back to you Tom.
Right right right.
That has to do with the.
The.
The $300 million and.
T bills that we have.
And so you can see the increase there and those those.
Basically we were in T bills that were yielding a little over 5%.
Okay.
And then with <unk> was hoping you could talk about the construction portfolio.
What.
What's the makeup of the construction book.
What you were funding here this quarter.
And that piece of the loan portfolio.
Probably the largest part is is multifamily.
We do have some.
Industrial that we funded and then.
We continue.
I would say the home homebuilder construction portfolio probably remained.
Similar to what we had in the first quarter. So the largest portion of it would be multifamily in the next would be industrial.
Okay.
And then wanted to make sure I understood the.
Reconciliation of non-GAAP last page of the press release, you've got the.
Net of the nonrecurring income at 226000.
But it would seem like you had the securities losses of <unk>.
$34 55.
The gain of $26 42, I don't know if theres a right.
<unk> tax rate on one of those things, but it would seem like that would have netted to a bigger number any any color on that Lee.
Brett.
Some color on that.
Okay. During the quarter, we had an opportunity to purchase a piece of our sub debt $5 million piece and we did so at a discount of about $187000 and so the purpose of the efficiency ratio. We did exclude it from nonrecurring income so that was.
Missing piece that you don't have the 587.
Okay. That's helpful and then.
When I look at the linked quarter improvement and the FHFA.
Funding costs is that just due to the duration of those being short term and you've re upped them or any color around.
That line item.
Okay.
Alright, so linked quarter went from.
Okay.
Yes.
That has to do with the hedges.
We basically werent borrowing overnight.
As much from the.
From the home loan bank and we were borrowing overnight.
From the fed discount window.
Okay, so none of it.
I'm Sorry go ahead go ahead. No go ahead I was just I was going to ask Lee So none of the if I have it right. The duration of all of the borrowings is now less than six months you don't have any longer dated borrowings at this point on the balance sheet.
We don't we we have longer David funding through the swaps.
The funding we have to renew every 30.
To 90 days, depending on what swap side too.
Rob.
We're paying a fixed rate.
Receiving a floating rate harmless swap and then we're paying out the floating rate.
On the on the borrowings so.
Nets out there's a few basis points in there, but it basically nets out to our cost is the fix that we're paying on the swaps.
Okay. That's helpful. And then those swaps have about a two and a half year duration.
Okay.
Great. That's what I was looking for thanks, so much for the color.
Alright, okay.
Thank you.
And one moment our next question.
And our next question comes from Matt Olney from Stephens. Your line is now open.
Hey, good morning, everybody.
I want to go back to good morning, Matt.
Good morning.
The loan growth commentary and you mentioned that the closing rates were particularly strong just the.
Last few weeks of the quarter any other themes or takeaways for us within the loan growth.
It relates to borrowers is there anymore.
Optimism would you say.
Or is it just more about the closing timelines and then.
I guess related to that any with any of the growth in the second quarter from taking market share from other banks may have stepped back in recent months.
The answer to the last question I would think so because there are.
Some less banks out there pursuing loan growth at this point in time.
And.
In terms of the.
The borrowers there seems to be optimism.
It's requiring a lot more equity.
Going into these projects, 50% equity is not uncommon.
And in some cases, we have as much as 60%, 62% equity going into some of these deals so.
My My guess is that they are extremely optimistic if they're willing to put that much equity into a project at this point in time.
Okay.
What about on sticking with loan growth what about the back end of that thinking about.
Loan Paydowns.
Any notable trend youre observing there as some of these construction loans.
Our completed.
We have.
Probably every three or four construction projects that should finish some time later in the year I think most of them are slated to be late third quarter or sometime during the fourth quarter.
And we would anticipate that.
At least a couple of those would probably prepay.
And it's possible all four of those.
Prepay before year end.
But usually they got to get to stabilization so that takes a little while.
And.
This unlike back during the pandemic when you were saying.
Things pay off before they reach stabilization now.
Clay there.
<unk> stabilization so.
Like I said.
Might see a couple of payoffs, but my guess is that would that would be about it.
And those projects you mentioned are those.
Multifamily projects.
Yes, they are.
Okay.
Okay. That's helpful and then I guess switching over to fees.
Any notable there I think you called out some one time items.
Anything else notable from the core fees or any kind of outlook. There you can share.
No I don't think there were any other notable phase.
This quarter.
Yeah.
Okay.
Go ahead.
No I was just going to say last quarter. We also had.
The death benefits on our Boeing that.
Obviously, not reoccur again this quarter so that was part.
The decrease.
On that.
Okay.
Got it that's helpful. And then I think one of the comments made earlier was as far as kind of funding loan growth that perhaps.
<unk> can help fund the loan growth.
Just wanted to dig in there would that be more security maturities that are upcoming or would you look to sell some securities in the back half of the year to help fund that loan growth.
We've got we've got short term T bills of around $300 million that we could let go of anytime we wanted.
And then.
We sold Securities a fair number of Securities first half of this year and.
We wouldn't be bashful about selling some of those in the back half of the year if it made sense.
Okay.
And then I think you disclosed that the unrealized loss position of the.
The securities portfolio was around.
$70 million did I did I capture that right and I guess that is correct.
Okay.
How do I, just think about kind of the recapture of that in the next several years is there any any guideposts you gave us to think about kind of recapturing that.
The recapture would come either through maturity or through a change in interest rates down.
In addition on that we do have on our fair value.
Hedges.
We do have a I think it was a $27 million unrealized gain that helps offset that $70 million.
So when we look to sell securities were able to take.
Take that into consideration as well.
Okay.
So with the with the I guess the total <unk>.
Mark at this point.
Probably disclose I just didn't.
Didn't see then.
I'm going to have to ask chili's looking for okay.
And then Ed.
June 30, yes.
AFC is in debit at 115, 693, Ross I should say.
<unk> hundred $25 9 million is unrealized loss on securities and that includes transferred.
And then again in 'twenty 9.4 on derivatives.
In OCI.
To the negative $19 two.
Related to the retirement plan.
Yes.
Okay got it.
Alright, that's all from me thanks for taking my questions.
Alright, Thank you Matt.
And thank you and one moment please.
And we have a follow up question one moment please.
And we have a follow up question from Brett Rebecca from Hovde Group.
Hi, Julien.
Julie just just wanted a clarification on the expense guidance for the full year I think you said 35 5 million per quarter.
Does that mean, you add those up to $142 million for the full year or is that $35 5 million for the back half of the year.
Each quarter I think it's just yes.
For the remaining part of the year.
Okay, so not not necessarily for the full year okay.
Yes, they were.
We're looking at $71 million for the remainder of the year.
Okay.
Thanks for that clarification.
And alright, thank you.
And I am showing no further questions I would now like to turn the call back over to Lee Gibson, President and CEO for closing remarks.
Thank you everyone for joining us today, we appreciate the opportunity to answer your questions along with your interest in South side Bancshares in closing we are excited about our prospects for the remainder of 2023 and look forward to reporting third quarter results to you during our next earnings call in October .
Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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