Southside Bancshares, Inc.

Good morning, ladies and gentlemen, and welcome to the Southside Bank Shares Incorporated Third Quarter 2020 Earnings Call. At this time, all participants are in the listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Ms. Lindsay Bales. Ma'am, please go ahead.

Thank you, Mel. Good morning, everyone, and welcome to Southside Bank Shares' third quarter 2020 earnings call. A transcript of today's call will be posted on southside.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 risk and uncertainties. Factors that could materially change our current forward-looking assumptions are described in our earnings release in our Form 10-K. Joining me today are Lee Gibson, President and CEO, and Julie Schamburger, CFO. First, Lee will share his comments on the quarter. Then, Julie will give an overview of our financial results. I will now turn the call over to Lee.

Good morning, and welcome to Southside Bank Shares' third quarter earnings call. I'm going to provide an overview of the quarterly results, current loan demand, and how we're managing the bank in this economic environment. During the quarter, we reported an annualized return on third quarter average tangible equity of 17.73%, as earnings per share increased 41.4% to 82 cents, and net income increased 36.8%, to 27.1 million compared to the same period in 2019. These increases were largely driven by a decrease in provision for credit losses and an increase in net interest income that were partially offset by the increase in non-interest expense. We recorded a partial reversal of the provision for credit losses of $4.7 million during the third quarter largely driven by an improvement in the economic forecast and the decrease in commercial real estate loans. Approximately $650,000 of the increase in non-interest expense was related to branch closings and branch pricing. Our asset quality metrics further improved during the quarter, as non-performing assets to total assets decreased to 0.23%, while COVID-19 modified loans decreased 76% to 76.5 million and represent 2.2% of total loans net of PPP loans. As the pandemic intensified, we knew this would be a true test of the strength of our consistent loan underwriting standards. We continue our earnest focus on asset quality through ongoing monitoring of the loan portfolio and the most at-risk categories. In addition to our normal procedures, we are reviewing more detailed reports by industry within the loan portfolio and, when appropriate, on an individual loan basis. Overall, we are encouraged by what we have learned and observed relative to asset quality and our underwriting standards. Our net interest margin linked quarter was unchanged at 3.02%. and the net interest spread increased two basis points to 2.84%. The balance sheet moves we made during the first quarter, purchasing approximately $500 million of highly rated, largely Texas municipal securities, along with certain funding decisions, continue to perform as expected during the third quarter. While potential loan growth during the fourth quarter remains uncertain due to anticipated loan payoffs, We are encouraged by our gradually increasing pipeline and the potential for loan growth in 2021. We are carefully considering loan growth projections for 2021. Despite the impact of COVID-19, the Texas markets we serve appear to be experiencing gradual increasing economic activity. When the impact caused by COVID-19 subsides, we anticipate our markets will resume pre-pandemic strength. As a result, utilizing the strength of our balance sheet, liquidity, and capital position, we believe we are well positioned to successfully navigate these challenging times and resume growing our Texas franchise. As we continue operating the bank during this pandemic, We remain keenly focused on the safety of our team members and our customers. Again, I want to thank all of the Southside team members for their outstanding contributions and continued dedication to Southside and our customers. I will now turn the call over to Julie.