Q3 2024 Southside Bancshares Inc Earnings Call
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Speaker Change: Ladies and gentlemen, thank you for standing by welcome just South side Bancshares' third quarter 'twenty 'twenty four earnings 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.
Speaker Change: During this session you will need to press star one on your telephone.
Speaker Change: Didn't hear an automated message it bites in your hand, just raised to withdraw your question. Please press star one again, please be advised that today's conference is being recorded.
Speaker Change: I would like now to turn the conference over to your Speaker today, Lindsey Bailes, Vice President Investor Relations. Please go ahead.
Lindsey Bailes: Thank you Michele good morning, everyone and welcome to Southside Bancshares' third quarter 2024 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.
Subject to risk and uncertainty 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, CEO and Julie Shamburger CFO. Firstly, you will share his comments on the quarter and then Julie will give an ever.
Lindsey Bailes: View of our financial results I will now turn the call virtually.
Lee Gibson: Thank you Lindsay and good morning, everyone. This morning, we reported third quarter net income of $20 5 million earnings per share of <unk> 68 cents a return on average tangible common equity of $13 six 9% and continued strong asset quality metrics linked quarter, our net interest income.
Lee Gibson: <unk> increased 1.86 million and our net interest margin increased eight basis points to 295%.
Lee Gibson: During the quarter, we sold approximately $28 million of lower yielding municipal securities.
Lee Gibson: Wound the related fair value swaps and recorded a loss of $1 $9 million.
Lee Gibson: We reinvested the proceeds in higher yielding agency mortgage backed securities.
Lee Gibson: The increase in other noninterest income was primarily due to recording an impairment charge of $868000 on the sale of approximately $10 million of municipal securities and the unwind of the related fair value swaps on October one.
Lee Gibson: Recent investments made in our wealth management and trust department are paying dividends as reflected by the steady growth in new clients and quarterly fee income. We anticipate this trend will continue.
Lee Gibson: Linked quarter loans decreased slightly as we experienced a few large payoffs at the end of the quarter. Our loan pipeline remains solid however headwinds of anticipated additional loan payoffs have caused us to reduce our target loan growth for 2024 from 5% to 3%.
Lee Gibson: Our initiative to expand C&I lending in our metropolitan markets is progressing as we are hiring additional relationship managers and we expect expect to begin seeing results in 2025.
Lee Gibson: The markets, we serve remain healthy and continue to grow and perform well I look forward to answering your questions. Following <unk> remarks, I will now turn the call over to Julie.
Julie: Thank you Lee good morning, everyone and welcome to our third quarter call. When we reported third quarter net income of 25 million a decrease of $4 1 million or 16, 8% on a linked quarter basis and diluted earnings per share of <unk> 68 cents and decrease of 16% linked quarter.
Lee Gibson: Sure.
Lee Gibson: While <unk> decreased slightly to 458 billion down from 459 billion at June 30th.
Lee Gibson: Annualized year to date loan growth was one 6%.
Lee Gibson: The linked quarter. The increase was driven by decreases of $15 2 million in commercial real estate loans and $14 9 million in municipal loans, partially offset by increases of $39 8 million in construction loans and $17 4 million in one to four family residential.
Lee Gibson: <unk>.
Lee Gibson: The decrease in commercial real estate was primarily a result of a few pay a few large payoffs in the third quarter.
Lee Gibson: The average interest rate everyone's standard during the quarter with approximately eight 1%.
Lee Gibson: As of September 30th our loans with oil and gas industry exposure were $116 1 million or two 5% of total loans.
Lee Gibson: For credit losses increased 2 million for the linked quarter to $47 6 million.
Lee Gibson: Asset quality metrics remained strong nonperforming assets remained at low levels with nonperforming assets of $7 7 million or 9% of total assets at September 30th.
Lee Gibson: That increase from <unk>, 8% at June 30th.
Lee Gibson: On September 30th our allowance for loan losses, as a percentage of total loans with nine 7% compared to nine 2% on June 30th.
Lee Gibson: The increase in the allowance as a percentage of total loans was primarily due to the increased economic concerns forecasted in the see some model specific to office and multifamily markets in metro areas.
Lee Gibson: Our securities portfolio was $2 7 billion at September 30th.
Lee Gibson: <unk> decrease from $2 79 billion last quarter.
Speaker Change: As Les mentioned during the third quarter, we sold approximately 28 million of lower coupon ASF municipal securities and <unk>.
Speaker Change: Place them with higher yielding agency mortgage backed securities.
Speaker Change: In connection with the sell in these securities we unwound their related fair value swaps, which resulted in a net loss in the third quarter of $1 9 million.
In addition, we recorded an impairment loss of $868000 in other non interest income on the sale of ISS municipal securities and the unwind as it related fair value hedges sold subsequent to quarter end.
Speaker Change: There were no transfers in Iff's securities during the third quarter.
Speaker Change: As of September 30, we had a net unrealized loss in the securities portfolio of $24 7 million, a decrease of $23 6 million compared to $48 3 million last quarter.
Speaker Change: At September 30, the unrealized gain on the fair value hedges on municipal and mortgage backed securities was approximately $3 5 million compared to $18 6 million linked quarter.
Speaker Change: This unrealized gain partially offset the unrealized losses in the.
Speaker Change: Securities portfolio.
Speaker Change: Our LCR on September 32024, with a net loss of $118 5 million compared to a net loss of $111 million on June 30 of 2024.
Speaker Change: The net loss was comprised of net losses on our securities and swap derivatives of $99 3 million and $19 2 million related to our retirement plans.
Speaker Change: As of September 30th the duration and the total securities portfolio was eight three years and the duration in the <unk> portfolio was $5 nine years, a decrease from $8 nine years in six seven years, respectively at June 30.
Speaker Change: At quarter end, our mix of loans and securities was 63% and 37% respectively with no change in the mix from last quarter.
Speaker Change: Deposits decreased 62 million or 9% linked quarter basis. The decrease was primarily driven by commercial account that increases during the second quarter, each year and exiting the third quarter.
Speaker Change: Offset by increases and other funding sources, such as broker deposits at a $71 9 million.
Speaker Change: Our capital ratios remained strong with all capital ratios, well above the capital adequacy and well capitalized threshold.
Speaker Change: Liquidity resources remains solid with $2 3 billion in liquidity lines available as of September 30th.
Speaker Change: We did not purchase any shares of our common stock during the third quarter or subsequent to September 30. However, we have approximately 583000 shares remaining in the current repurchase authorization.
Speaker Change: Our tax equivalent net interest margin increased eight basis points on a linked quarter basis to $2 nine 5% from 287%.
Speaker Change: The tax equivalent net interest spread increased from the same period by 10 basis points to two 3% up from 2014.
Speaker Change: For the three months ended September 30th.
Speaker Change: Experienced an increase in net interest income of $1 9 million or three 5% compared to the linked quarter.
Speaker Change: Non interest income excluding the net loss on the sale today at the securities decreased $2 million or 16, 7% for the linked quarter, primarily due to the impairment loss of 868000 recorded on <unk> securities in the third quarter and a decrease in.
Speaker Change: Lower income due to depth Minera death benefits received in the second quarter.
Speaker Change: Noninterest expense increased $567000 or one 6% on a linked quarter basis to $36 3 million driven primarily by an increase in salaries and employee benefits.
Speaker Change: And other noninterest expense.
Speaker Change: We are expecting noninterest expense at 37 million for the fourth quarter in 2024, our fully taxable equivalent efficiency ratio decreased to 51, 9% as of September 30th from 50% to 71% as of June 30th.
Speaker Change: We recorded income tax expense at $4 4 million a decrease of 822000 compared to the second quarter.
The decrease in tax expenses, driven by the decrease in pretax income.
Speaker Change: Our effective tax rate increased slightly to 17, 6% for the third quarter from 17, 4% in the previous quarter.
Speaker Change: We currently estimate an annual effective tax rate of 17, 6% for 2024.
Speaker Change: 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. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Speaker Change: Please standby, while we compile the Q&A roster.
Speaker Change: And the first question comes from Brett <unk> with <unk>. Your line is now open.
Speaker Change: Hey, good morning, everyone.
Speaker Change: Good morning, Brian wanted to.
Brett: Good morning, I wanted to start with the with the securities portfolio actions on that hedge can you guys. I guess first can you talk about there were lower yielding securities.
Brett: Can you talk about what you what the yield was on what you sold and what <unk> purchased and then maybe if.
Donna just.
Brett: The net effect of the margin on a go forward basis would be helpful.
Speaker Change: The net effect on the margin it'll be positive it probably in about one or two two basis points, but.
Speaker Change: With the small amount of securities we dealt with it.
Speaker Change: Not going to move the margin materially but.
Speaker Change: Basically we had some fair value hedges on some of these municipal security. So those are the ones that we unwound.
Speaker Change: And we.
Speaker Change: Primarily bought premium mortgage backed securities.
Speaker Change: With the shorter duration higher yields.
Speaker Change: Not too big of a premium so if rates decline, which obviously they have been over the last.
Speaker Change: Two or three weeks.
Speaker Change: Prepayments would impact the yield pretty much so.
Speaker Change: Hopefully that gives you some color on it.
Speaker Change: Yes, that's helpful.
Speaker Change: Didn't think it was going to be a big number, but just want to make sure our noon the detail there.
Speaker Change: Wanted to also ask.
Speaker Change: A lot of banks for struggling with payoffs.
Wanted to just a year.
Speaker Change: Payoff activity in the quarter.
Speaker Change: And then just what the loan pipeline looks like and what that might suggest maybe for loan growth going forward.
Speaker Change: I mean, I view loan payoffs.
Speaker Change: Two ways, one I would like to see the balances, but two it's a sign of a great economy, because these are being <unk>.
Speaker Change: The jacks that are being sold out there.
Speaker Change: But we are we are beginning to see some of our construction projects that have reached stabilization or close that are beginning to pay off we anticipate that.
Speaker Change: A few of them have paid off a little bit earlier than we anticipated.
Speaker Change: We did have a large loan that.
Speaker Change: We put on the books in early October that would have offset this and we would've shown.
Speaker Change: An increase in loans, but.
Speaker Change: The two didn't match up and so we had these two large payoffs that caused us to have that slight decrease.
Speaker Change: Our loan pipeline looks good as just we expect some additional payoffs in the fourth quarter.
Speaker Change: And there's just not enough time to make up the difference to get to 5% loan growth for the year. So that's why we're lowering at 3%, but we have we have experienced some good loan growth in October but we also do it.
Speaker Change: Some additional payoffs.
Speaker Change: Okay. That's helpful and then if I could.
Speaker Change: Sneak in one last one just around the margin from here.
Speaker Change: Any thoughts on the margin.
Speaker Change: Going forward.
Speaker Change: Yeah.
Speaker Change: I think going forward it will be a little bumpy, but from the standpoint of Darien.
Speaker Change: The third quarter, we have this large deposit account buildup.
Speaker Change: Bill.
Speaker Change: <unk> is pretty close to maximum by the end of June, but if it's not there yet say real quick in July.
Speaker Change: And it's one that we have every year that builds out during June.
Speaker Change: Pretty much reaches peak during July and then pays off usually in early August.
Speaker Change: And it was at a.
Speaker Change: Lower rate than the wholesale funding so that helped our margin.
Speaker Change: During the during the third quarter, we obviously won't have that again in the fourth quarter. So that's why I'm, saying, it's a little bumpy and then it really just depends how fast if.
Speaker Change: Hey, if at all the fed continues to.
Speaker Change: Whether they continue to lower short term rates.
Speaker Change: What will happen with the margin moving forward, but thats why im saying there'll be a little bumpy because we won't have that occurring again in the fourth quarter.
Speaker Change: And then that balance right. Thanks, Scott.
Speaker Change: Thank you you got to around $175 million.
Speaker Change: So it was.
Speaker Change: At June 30.
Speaker Change: And then quickly got there Darrin.
Speaker Change: Ramped up in early July so.
Speaker Change: Yes.
Speaker Change: It was a positive for us in terms of our NIM and we won't have that again, but we also had some other positive things related to the NIM.
Speaker Change: Okay.
Speaker Change: That's helpful. Thanks for all the color.
Speaker Change: Okay.
Speaker Change: And our next question comes from Wood lay with <unk>. Your line is open.
Speaker Change: Hey, guys. Thanks for taking the question wanted to.
Speaker Change: I wanted to start on the C&I initiatives, just any update on how the build out is going and how many hires were made in the quarter.
Speaker Change: We had two hires during the quarter were looking for some additional lenders and are interviewing people right. Now so we expect to hire at least a couple of more.
Speaker Change: And they are hitting the ground running in.
Speaker Change: It's moving along as we didn't expect to hire everybody at once.
Speaker Change: Because we're looking for certain type of people.
Speaker Change: And that's why I say that we should begin to see results during 2025 associated with this.
Speaker Change: Okay.
Speaker Change: We'll continue to hire during 2025 as well.
Speaker Change: Alright Thats helpful.
Speaker Change: Maybe shifting over to deposit costs. It was great to see total deposit cost ticked down in the quarter.
Speaker Change: We got the 50 basis point cut near the end could you just walk us through how deposit pricing trends.
Speaker Change: When sort of pre and post cut.
Speaker Change: Post <unk>, we were able to we have we have.
Speaker Change: Sure.
Speaker Change: Probably close to $1 billion.
Speaker Change: That we were able to cut.
Speaker Change: It's pretty close to what the fed did.
Speaker Change: Maybe not exactly the full amount, but at least.
Speaker Change: Probably 80% of what they did.
Speaker Change: And some of that takes 30 days to take effect, but we were able to do that we also have a little over $50 million a month in Cds that are maturing and.
Speaker Change: Those rates, we were able to cut hurting.
Speaker Change: Pretty much by the full 50 basis points.
Speaker Change: And then with the forward outlook at that time.
Speaker Change: Being that they were going to be aggressive rate cuts moving forward, we were able to cut some of the longer ones.
Speaker Change: We've increased those a little bit but still overall.
Speaker Change: We're going to be seeing those those move down in general probably 40 basis points over every mark so.
Those are the primary things and then our wholesale funding all of that.
Unless it swap.
Speaker Change: We'll move down as well.
Speaker Change: Yes.
Speaker Change: I look at the Alco model.
Speaker Change: You all show up as asset sensitive, but obviously those are assumption, having it sounds like youre, making pretty good progress on the deposit cost side.
Speaker Change: Asset sensitive so the right way to think about you guys.
Speaker Change: Yes, I think so because we have yet.
Speaker Change: We've got about 1 billion seven I think in loans that reprice.
Speaker Change: Probably within.
Speaker Change: Two to three months.
Speaker Change: So.
Speaker Change: More on that side right now, but ultimately and that's why I say it really just depends what the fed action as going forward, how much how much more.
Speaker Change: Cut there is but.
Speaker Change: I would consider us to some extent.
Speaker Change: Asset sensitive at this point in time in terms of.
Speaker Change: Quarterly move.
Speaker Change: And right and.
Speaker Change: What we're able to do now over a six to nine month period, I think we go back pretty much even.
Speaker Change: Yes.
Speaker Change: Alright, that's all from me thanks for taking my questions.
Speaker Change: You bet.
Speaker Change: As a reminder to ask a question. Please press star one on your telephone. The next question comes from Matt Olney with Stephens. Your line is now open.
Matt Olney: Thanks for taking the question guys just wanted to ask more about M&A.
Matt Olney: Just ask more about M&A in your Texas market.
Speaker Change: I appreciate your color on kind of the M&A.
Matt Olney: And kind of what Youre hearing from.
Other other banks in the marketplace.
Yes.
Matt Olney: Yeah.
Matt Olney: With.
Matt Olney: Bank stocks.
Matt Olney: From primarily three to six months ago.
Matt Olney: <unk> picked up some.
Matt Olney: I think.
Matt Olney: A lot of people are.
Matt Olney: Looking to see what happens with the election in terms of additional regulation.
Matt Olney: I am hearing hearing more chatter around M&A right now and really expect.
In 2025, we'll probably say more activity here in Texas, and we have the same this year.
Matt Olney: There.
Matt Olney: I know of a few banks that are for sale, but.
Matt Olney: Nothing nothing at this point that we're interested in.
Matt Olney: Okay.
Speaker Change: Maybe just following up there just remind us of your of your target profile Bank.
Speaker Change: At this point your Youre looking for.
Speaker Change: With our size, where we are now Matt.
Speaker Change: Probably.
Matt Olney: No more than 1 billion too.
Matt Olney: For a target or we'd made target.
Matt Olney: North of $3 billion.
Matt Olney: Order for it to make sense since we're so close to the $10 billion.
Matt Olney: At 1 billion two we'd be able to stay under the 10 billion and then go look for something in that two to $3 billion to $4 billion raise but.
Matt Olney: That really would be the target range.
Matt Olney: The dollar amount in terms of geography I think.
Matt Olney: No.
Matt Olney: Consistently said that wed like stay along I 35 to the east we'd be willing to go out probably 75 miles or so out of the west.
Matt Olney: Just following that I 35 lined down three or four or Austin, and San Antonio and pretty much to the east.
Matt Olney: Okay.
Speaker Change: Thanks for the color there and then also wanted to shift gears over to the expenses I think you gave us some good guidance for the fourth quarter, just trying to feel out.
Matt Olney: Next year, and just thinking more about.
Matt Olney: Kind of the puts and takes you've got this C&I initiative that we've talked about and seen some good.
Matt Olney: Movements there.
Matt Olney: This past quarter I expect to have some more hires into fourth quarter and into next year is it is it fair to assume that expense growth kind of a year over year and 25.
Matt Olney: It would be a little bit higher than what we're going to see in 'twenty four as far as the year over year growth just from that C&I initiative are there other other puts and takes to consider.
Matt Olney: Okay.
Speaker Change: And you compare if you if you compare to what we've seen in 2024, I think there will be some increase.
Matt Olney: Yes.
Matt Olney: Will happen in salaries more than likely.
Matt Olney: We've talked a little bit about 2025 salaries.
Matt Olney: Increases overall.
Matt Olney: Hey.
Matt Olney: The C&I initiative will add some and then.
Matt Olney: Probably the software and data processing more we did not we have not seen it go up as much. This year as we had first thought in our budget.
Matt Olney: I suspect in 2025, we won't get closer to that to a higher level.
Matt Olney: In that category for sure.
Matt Olney: So I think it's fair to I mean, I know why I believe I projected or forecasted out around 37 million or maybe even higher than that very early in the year and then we brought it down there is some cost initiatives that we did in Q1.
Matt Olney: And I think I think 37.
Matt Olney: We haven't finished the budgeting process for certain yet, but I think closer to 37.
Matt Olney: More a little more next year, its probably appropriate at this point.
Matt Olney: And certainly in the next quarter I'll be able to give you certain bond entertained.
Speaker Change: Sure Okay great.
Speaker Change: Thanks for the color guys Thats all from me.
Speaker Change: Thank you.
Speaker Change: I show no further questions at this time I would now like to turn the call back over to Lee Gibson CEO for the closing remarks.
Lee Gibson: Thank you everyone for joining us today, we appreciate your interest in SaaS side Bancshares, along with the opportunity to answer your questions.
Lee Gibson: Closing were looking forward to our prospects for the remainder of the year and reporting year end and fourth quarter results to you during our next earnings call in January.
Lee Gibson: This now concludes our call. Thank you very much.
Speaker Change: This concludes today's conference call. Thank you for participating you may now disconnect.
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