Southside Bancshares : Q2 2023 Earnings Call Transcript

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Q2 2023 Southside Bancshares Inc Earnings Call

EVENT DATE/TIME: JULY 25, 2023 / 4:00PM GMT

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JULY 25, 2023 / 4:00PM GMT, Q2 2023 Southside Bancshares Inc Earnings Call

CORPORATE PARTICIPANTS

Julie N. Shamburger Southside Bancshares, Inc. - CFO

Lee R. Gibson Southside Bancshares, Inc. - President, CEO & Director

Lindsey Bailes Southside Bancshares, Inc. - VP & IR Officer

CONFERENCE CALL PARTICIPANTS

Brady Matthew Gailey Keefe, Bruyette, & Woods, Inc., Research Division - MD

Brett D. Rabatin Hovde Group, LLC, Research Division - Head of Research

Graham Conrad Dick Piper Sandler & Co., Research Division - VP & Research Analyst

Matthew Covington Olney Stephens Inc., Research Division - MD & Analyst

PRESENTATION

Operator

Good day, and thank you for standing by, and welcome to the Southside Bancshares, Inc. Second Quarter 2023 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to introduce your host for today's call, Lindsey Bailes, Vice President of Investor Relations. Please go ahead.

Lindsey Bailes Southside Bancshares, Inc. - VP & IR Officer

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.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 Lee.

Lee R. Gibson Southside Bancshares, Inc. - President, CEO & Director

Thank you, Lindsey. Good morning, everyone, and welcome to Southside Bancshares' 2023 second quarter earnings call. This morning, we reported net income of $24.9 million; earnings per share of $0.81; a return on average assets of 1.29%; a return on average tangible common equity of 18.59%; and continued strong asset quality metrics.

During the quarter, we experienced strong loan growth, 80% of which occurred during June. In fact, approximately 52% of the second quarter loan growth occurred in the last 2 weeks of June. Our loan pipeline remains strong, and we are projecting healthy construction loan advances for the remainder of the year.

We are continuing to budget for overall loan growth for 2023 in the high single digits. Our net interest margin held in well during the quarter, contracting only 4 basis points. Late 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 1.6%. In July, we began offering Intrafi to 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 answering your questions following Julie's remarks. And I will now turn the call over to Julie.

Julie N. Shamburger Southside Bancshares, Inc. - CFO

Thank you, Lee. 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 $0.81, a decrease of $0.02 or 2.4% linked quarter.

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JULY 25, 2023 / 4:00PM GMT, Q2 2023 Southside Bancshares Inc Earnings Call

We had strong loan growth in our loan portfolio this quarter with an increase of $176.4 million or 4.2% linked quarter, driven by our real estate portfolio with an increase in CRE of $109.5 million and a $65.5 million increase in construction loans. The interest rate of loans funded during the quarter was on average approximately 7.5%.

Asset quality metrics remained strong with nonperforming assets of $3.1 million or 0.04% of total assets at June 30. At June 30, our allowance for loan losses as a percentage of total loans was 0.84%, a slight decrease compared to 0.87% on March 31 due to second quarter loan growth.

Our allowance for credit losses decreased $381,000 for the linked quarter to $39.5 million. As of June 30, our loans with oil and gas industry exposure were $108.5 million or 2.5% of total loans.

Our securities portfolio decreased $97.4 million or 3.5% on a link-quarter basis. The second quarter decrease was driven primarily by sales of AFS securities. The sales of the AFS securities resulted 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 AFS securities during the second quarter.

At June 30, we had a net unrealized loss in the AFS securities' portfolio of $69.7 million compared to $61.9 million last quarter, an increase of $7.8 million. As of June 30, the unrealized gain on the fair value hedges in municipal securities was approximately $27.9 million compared to $9.8 million linked quarter, which partially offset the unrealized losses in the AFS securities portfolio.

As of June 30, the duration in the entire securities portfolio was 9 years and the duration of the AFS portfolio was 6.7 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 4.8% on a linked-quarter basis, driven by an increase in broker deposits.

Our capital ratios remained strong with all capital ratios well above the capital adequacy and well-capitalized thresholds. Liquidity resources remained solid with $2.5 billion in liquidity lines available as of June 30. During the second quarter, we completed the purchase of all the remaining authorized shares of our common stock in our stock repurchase plan, a total of 618,831 shares at an average price of $30.27.

In our earnings release this morning, we reported that our Board of Directors approved a stock repurchase plan on July 20, authorizing the repurchase of up to 1 million shares of 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 4 basis points on a linked-quarter basis to 3.17% from 3.21% primarily due to larger average rate and balance 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 7 basis points to 2.55% down from 2.62%.

For the 3 months ended June 30, net interest income increased $563,000 or 1.1% compared to the linked quarter. We also recorded $81,000 in purchased loan accretion this quarter.

Noninterest income, excluding the net loss on the sales of the AFS securities and equity securities decreased $486,000 or 4.1% for the linked quarter, the result of BOLI income related to death benefits of $950,000 realized in the first quarter, partially offset by increases in brokerage services and other noninterest income. Noninterest expense increased $144,000 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 51.06% as of June 30 from 50.99% as of March 31. We Income tax expense increased slightly to $4.6 million, and 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.

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JULY 25, 2023 / 4:00PM GMT, Q2 2023 Southside Bancshares Inc Earnings Call

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

QUESTIONS AND ANSWERS

Operator

(Operator Instructions) And our first question comes from Brady Gailey from KBW.

Brady Matthew Gailey Keefe, Bruyette, & Woods, Inc., Research Division - MD

So it was great to see the margin holding so well. It's only down 4 basis points, linked quarter a lot better than some of your peers. And it 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? I know you have some hedges, any sort of impact from those hedges over time on the margin?

Lee R. Gibson Southside Bancshares, Inc. - President, CEO & Director

We're thinking -- I agree that we're thinking that the margin holds steady, especially in the third quarter. And with the interest rate hedges that right now are around $760 million and I don't think we have any that roll off the remainder of this year. There's an average rate there of 3.19%, and then with our Fed term funding from the Fed term window, $296 million at quarter end at an average rate of 4.46%. That gives us a little over $1 billion of money that's locked. Combine that with the noninterest-bearing deposits that we have in the capital, that gives us pretty good solid funding base at this locked in. And so we feel good about being able to hold the margin where it is, especially with the loans that we put on.

Brady Matthew Gailey Keefe, Bruyette, & Woods, Inc., Research Division - MD

All right. And then I heard the expectation for high single-digit loan growth this year. So if you look at deposits, they've been kind of flat, if not down a smidge year-to-date. So how do you think about deposit growth going forward? And your loan-to-deposit ratio is 71%, which is pretty low. How high would you be willing to allow that to go?

Lee R. Gibson Southside Bancshares, Inc. - President, CEO & Director

Yes. If our loan-to-deposit ratio got up into -- as long as it's stay below 90%, I think we'd be comfortable, and we're a long way from that. In terms of the 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 some. We funded almost $100 million of our loan growth during the quarter by reducing securities. So that is something that we can do in the coming quarters as well. So overall, if we can continue to have the 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.

Brady Matthew Gailey Keefe, Bruyette, & Woods, Inc., Research Division - MD

All right. And then finally for me, it was good to see the new buyback authorization and the completion of the prior one. You guys have been pretty consistently buying back your stock at least the last 3 quarters. Is there any reason to think that, that would slow in the back half of this year?

Lee R. Gibson Southside Bancshares, Inc. - President, CEO & Director

We'll just have to see what price the stock is at, and we're going to buy as we feel like it makes sense based on where the price is and -- so I don't anticipate it will slow. It just really is going to depend on market conditions.

Operator

And one moment for our next question. And our next question comes from Graham Dick from Piper Sandler.

Graham Conrad Dick Piper Sandler & Co., Research Division - VP & Research Analyst

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 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 -- the growth this quarter was from brokered. So I'm 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 in a sense.

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JULY 25, 2023 / 4:00PM GMT, Q2 2023 Southside Bancshares Inc Earnings Call

Lee R. Gibson Southside Bancshares, Inc. - President, CEO & Director

Right. Now the 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 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 it basically moved from one place to another. And it was just where the cheapest funding is. But those -- 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. And some of it will likely be in that noninterest-bearing deposit as we bring on new loan relationships. We want to bring on deposit relationships as well with some of those loan relationships. So we hope to basically grow those core deposits in all of the different categories.

Graham Conrad Dick Piper Sandler & Co., Research Division - VP & Research Analyst

Okay. All right. 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 figure kind if you bring on the full relationship with the noninterest-bearing piece, it could help slow things down on that front. Is that fair to assume?

Lee R. Gibson Southside Bancshares, Inc. - President, CEO & Director

That is correct. And some of the noninterest-bearing 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 fees. So in higher interest rate environments, you typically see some deterioration in the noninterest-bearing deposits on the commercial side.

Graham Conrad Dick Piper Sandler & Co., Research Division - VP & Research Analyst

Right. Okay. 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 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?

Lee R. Gibson Southside Bancshares, Inc. - President, CEO & Director

Our target for a long time has been to get to 70% loans and 30% securities. I think we moved to 62% [loans and] 38% [securities] (added by company after the call) this quarter. So we -- I think we've moved move the needle about 2% in each direction towards getting there, but that would be our goal. And I think for us to do that in an orderly fashion, it would probably take another 1.5 years to 2 years to do that, assuming we continue to have loan growth we've had.

Graham Conrad Dick Piper Sandler & Co., Research Division - VP & Research Analyst

Okay. And then, yes, just -- you kind of gave a good segway there. But on the loan growth front, I know you said a lot of that came in at the very end of the quarter. Was that like 1 or 2 larger relationships? Or is that a pretty granular amount of growth that came in there during the last 2 weeks? Just trying to get a sense for I guess, 3Q versus 4Q '23 loan growth outlook?

Lee R. Gibson Southside Bancshares, Inc. - President, CEO & Director

There were some larger loans that came in, but it was just -- everything seemed to kind of settle and close in June for some reason. And we did have some closings in the first two months that were holdovers from the first quarter and then we've -- 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 odd things that a lot of the loan closings just happened to fall in June, but a few of them were larger loans that closed.

Operator

And one moment by our next question. And our next question comes from Brett Rabatin from Hovde Group.

Brett D. Rabatin Hovde Group, LLC, Research Division - Head of Research

I wanted to, I guess, first start with the taxable portfolio. The 45 basis point increase in that linked quarter. I know there's some hedges. I don't know if that flows through that line item. Can you talk maybe about the improvement in that piece of the securities book?

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