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spk07: Good day, and thank you for standing by. Welcome to the Southside Bank Shares, Inc. Second Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Ms. Lindsay Bell, Vice President of Investor Relations.
spk00: Please go ahead. Thank you, Rache. Good morning, everyone, and welcome to Southside Bank Share's second quarter 2021 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 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, 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.
spk02: Good morning, and welcome to Southside Bank Shares' second quarter earnings call for 2021. This morning, I am pleased to report we had another solid quarter. with net income of $21.3 million, earnings per share of $0.65, and an annualized ROA of 1.2%, and an annualized return on average tangible common equity of 13.13%. Our quarterly results included continued link quarter deposit and loan growth, net of PPP loans, and continued strong asset quality metrics. The second quarter results included a provision for credit losses of $1.7 million due to a decline in the downside component of the economic forecast and its effects on macroeconomic factors used in the CECL model. Our strong asset quality metrics included non-accruing loans to total loans of 0.14% and non-performing assets to total assets of 0.21%. Our link quarter loan growth net of PPP loans of $14.5 million was partially offset by earlier than anticipated loan payoffs due to recently completed construction projects selling prior to stabilization at very low cap rates. A year ago, we were seeing construction projects typically sold post-stabilization. Annualized loan growth as of June 30, 2021, was 4%. We continue to believe 7% loan growth for 2021 net of PPP loans is achievable as our loan pipeline remains very healthy, a trend we anticipate will continue throughout the year given the outlook for the high growth markets we serve. The $656,000 decrease in our net interest income linked quarter was due entirely to the decrease in PPP loan accretion during the quarter. Length quarter or net interest margin and spread decreased 14 basis points, primarily due to an 18 basis point decrease in the yield on earning assets. The average yield on loans decreased 16 basis points, half of which was due to the decrease in the combined PPP and purchase loan accretion. The average yield on securities decreased 18 basis points linked quarter, largely due to a 42 basis point decrease in the yield on mortgage-backed securities, primarily a result of higher prepays, and a 23 basis point decrease in the yield on taxable securities, primarily due to an increase in the average balance of a treasury position during the second quarter. The mortgage-backed securities position continues to decrease as a percentage of the overall securities portfolio. In addition, during July, we have sold approximately $57 million of our lower-yielding mortgage-backed securities. On September 30th, we anticipate the redemption of our 5.5% coupon $100 million sub-debt issue pending regulatory approval. which will have a positive impact on both net interest income and the net interest margin beginning in the fourth quarter. For the six months into June 30th, 2021, our net interest margin has increased 11 basis points when compared to the prior year. During the second quarter, we continue to see a nice increase in non-maturity deposits, which represents our lowest cost interest-bearing liabilities. Over the past 15 months, we have experienced significant growth in non-maturity deposits, which has allowed us to strategically lower our higher-cost funding sources, CDs, and FHLB borrowings. Economic conditions in our market areas remain strong, bolstered by company relocations or expansions combined with population growth. as the Texas economy continues to benefit from individuals and companies migrating from other states. The DFW and Austin markets that we serve continue to be among the highest growth markets in the country. I look forward to answering your questions following Julie's presentation, and I will now turn the call over to Julie.
spk01: Thank you, Lee. Good morning, everyone, and welcome to our call today. We reported net income of 21.3 million, a linked quarter decrease of 12.8 million, or 37.5%, due primarily to an increase in provision expense of 11.8 million and a decrease in net security gains of 2 million. Net income decreased 237,000, or 1.1%, compared to the same period in 2020. For the quarter ended June 30, 2021, our deleted earnings per share were 65 cents, unchanged when compared to the same period in 2020, and a decrease of 39 cents by 37.5% on a linked quarter basis. Linked quarter netted the decrease in PPP loans of 88.8 million. Our loan portfolio increased 14.5 million to 3.64 billion. Our commercial real estate loans increased 82.3 million, partially offset by a decrease in construction loans of 77.5 million. Construction loans decreased due to several large unexpected early payoffs in the second quarter, and commercial loans, excluding the PPP forgiveness, increased approximately 21 million during the second quarter. As of June 30th, our PPP loans included in the commercial loan category totaled 132.1 million, down from 220.9 million at March 31st, 2021. The average balance of our PPP loans for the three months into June 30th, 2021 was approximately 200.6 million. Our asset quality remains strong as non-performing assets decreased slightly by $98,000, down to 0.21% of total assets compared to 0.22% at March 31, 2021. Lent quarter, our allowance for loan loss increased approximately $1.5 million to 3.5% to $42.9 million at June 30, 2021. due to recording a provision for credit losses on loans of $1.5 million in the second quarter of 2021, an increase of $8.9 million compared to the reversal of provision in the first quarter. The increase in the provision for the second quarter was primarily due to a decline in the S3 downside scenario in the Moody's economic forecast at June 30, 2021, and its effect on macroeconomic factors used in the CECL model. On June 30th, our allowance for loan losses as a percentage of total loans was 1.18%, and when excluding PPP loans, 1.22%. Our allowance for off-balance sheet credit exposures at June 30th increased slightly to $3.8 million when compared to March 31st, 2021, due entirely to provision expense of $157,000. Again, compared to a reversal of provision of $2.8 million in the previous quarter. Combined with the provision expense for credit losses on loans, the provision for credit losses totaled $1.7 million for the three months into June 30th, 2021. Our COVID-19 related deferrals had decreased to one remaining mortgage loan with an approximate balance of $158,000. As of June 30th, our loans with oil and gas industry exposure were 94.3 million or 2.7% of total loans. Our securities portfolio increased 215.8 million or 8.2% on a linked quarter basis. We recognized $15,000 in net security gains on the sale of AFS securities during the quarter, a decrease of $2 million from the net gains reported last quarter. As of June 30, 2021, we had a net unrealized gain in the securities portfolio of $136.4 million, and the duration in the portfolio increased slightly to 5.4 years from 5.3 years at the end of the first quarter. Our mix of loans and securities at June 30th shifted to 56% loans and 44% securities from 58% and 42% respectively at March 31st due to the purchases in the securities portfolio. Our net interest margin and spread were 306 and 289 respectively with a linked quarter decrease in both of 14 basis points, a result of the decrease in yield on interest earning assets. Consistent with last quarter, approximately 10 basis points of the net interest margin related to interest and fees earned on the PPP loans. For the three months into June 30th, net interest income decreased $656,000, or 1.4%. We recorded approximately 1.7 million in net fees related to the PPP loans included in interest income this quarter, compared to 2.6 million linked quarter. As of June 30th, 2021, we had net deferred fees of approximately 5.3 million remaining to be recognized as a yield adjustment over the terms of the loans. Additionally, we recorded $649,000 in purchase loan accretion this quarter, an increase of $234,000 from the prior period. For the three months into June 30th, 2021, non-interest income, excluding net gains on the sale of AFS securities, decreased 702,000, or 6%, for the linked quarter, which was primarily driven by a decrease in other non-interest income, partially offset by an increase in deposit services income. Our other non-interest income decreased primarily due to a decrease in swap fee income and a decrease in the fair value of mortgage servicing rights. An increase in debit card income was the primary driver of the increase in deposit services income. Additionally, we have experienced consistent increases in our trust fees and brokerage services income over each of the five linked quarters since June 30, 2020, resulting in increases of 51% in brokerage services income and 14% in trust fees for the six months into June 30th, 2021, when compared to the same period in 2020. Length quarter non-interest expense decreased $535,000 or 1.7% to 30.7 million. For the third quarter of 2021, we expect non-interest expense to be approximately 31 million. Our fully taxable equivalent efficiency ratio decreased to 50.31% compared to 50.44% linked quarter. The decrease in the fully taxable equivalent efficiency ratio was due to the decrease in non-interest expense for the quarter. Income tax expense decreased 1.9 million or 39.2% compared to the three months ended March 31st, 2021. a result of the decrease in pre-tax income. Our effective tax rate decreased slightly to 11.9% for the second quarter from 12.2% last quarter due to an increase in tax-exempt income as a percentage of pre-tax income. Additionally, we recorded $115,000 of discrete tax benefit in connection with equity award transactions during the second quarter. At this time, we are estimating an annualized effective tax rate of 12.5%. Thank you for joining us today. This concludes our comments, and we will open the line for questions.
spk07: As a reminder, to ask a question, you need to press star 1 on your telephone. To withdraw your question, press the pound key. Your first question came from Brad Millsap from Piper Sandler.
spk05: Hey, good morning, guys. Good morning. Lee, I was going to maybe start with the bond portfolio. I was kind of writing quickly. It looks like the average bond portfolio was around $2.6 billion during the quarter. You were closer to $2.9 at period end. I think you mentioned you sold some stuff, but just kind of curious what categories you did buy into. It sounds like you're continuing to let NBS run off. Did you you go, do you buy more tax exempt or is that in the kind of the taxable book? Um, and then kind of what does that mean for your, for your margin going forward?
spk02: Right. Uh, primarily what we bought were, um, municipals, uh, if you know, some, some taxable, um, a lot of, uh, tax free municipals. Um, we bought a few, um, sub debt deals, bank sub debt deals, but, uh, Primarily, it was in the municipal arena. We're just not finding any value in the mortgage arena at this point in time. In terms of the margin going forward, I think on the taxable side, the Treasury position weighed on that yield. But, you know, we're not increasing that treasury position at this point in time. So I don't see that being an issue. As for the other taxable purchases, they've typically been in the 250 to 270 range. On the tax-free side, it really just depends what maturity you're buying and what the call is. You know, for the really high-quality stuff, obviously whatever we put on is going to be a slight reduction in the rate there.
spk05: Okay, great. And it sounded like you were more optimistic on loan growth, you know, picking back up in the back half. Is that sort of, do you believe that, you know, maybe the NIM can maybe stabilize here above three, or do you think there's, you know, more significant compression coming?
spk02: I think we'll see. I don't know that we'll see a 14 basis point decrease in the NEM going forward, especially in the third quarter, but I do see some slight NEM compression. We just had a number of factors that caused it to be lower. We're anticipating that we'll begin to see some of the round two of PPP loans begin to be forgiven, you know, in the next six months to nine months for sure. So we'll be bringing that income in. And then, of course, pending regulatory approval, if we, you know, when we call the sub-debt deal, that's going to take a lot of pressure off the NIM and it'll go the other direction.
spk05: Great. Thank you. And just one housekeeping question, Julie. Do you happen to have the average number of PPP loans in the quarter?
spk01: You want the average number or the average balance?
spk05: I'm sorry, the balance. I apologize, the balance.
spk01: Okay. Well, that's what I thought you meant. Yes, it's $200.6 million.
spk05: Okay. Yep. You said that. Great. Thank you.
spk07: Your next question might be Brett Rapaton with Houthoudi Group.
spk03: Hey, good morning. Good morning, Brett. It's an interesting pronunciation, Houthoudi Group. I wanted to ask this curious question differently maybe. Lee, how much do you guys have in cash flow coming that you have to reinvest? in the next few quarters and what would be the average rate? I guess I'm just trying to get to, you know, what you have to replace relative to the current portfolio going forward.
spk02: Yeah. Um, the, the cashflow that comes in is, is, uh, is almost exclusively related to, uh, to the mortgage backed securities portfolio. And, uh, it's probably averaging somewhere around 30 million a month at this point in time with the, uh, the sale of some of those mortgage-backed securities, it might decrease a little bit. But, you know, I would anticipate that, you know, we're looking at close to $90 million for this third quarter in redemptions there. And the, you know, that has an average yield of 2.2%. And what's prepaying is typically the lower rate stuff. So, For the most part, we should be able to put on securities that are close, but, you know, it may cause a little bit of additional pressure in the overall, you know, yield of the securities portfolio.
spk03: Okay. That's a good caller. And then just on the payoffs you had in the construction portfolio, it sounds like those were unexpected. You know, it was essentially projects where – but even before the – letter of occupation was filed, they got refinanced away from you, or what maybe drove the decline that you weren't expecting in construction?
spk02: Yeah, we were expecting these to sell, but typically what we've seen is that the project, you know, say it's a multifamily, it'll reach stabilization, which means, you know, it may be 90%, 95% occupied. What we were starting to see in the second quarter was they were able to sell these projects prior to stabilization, so they weren't leased up to stabilization. And so they were prepaying anywhere from, you know, three to nine months faster than we originally anticipated that they would pay off.
spk03: Okay. And then I've heard, last question for me, I've had, you know, some contacts in the state tell me that the talks are picking up, and I know you've been thinking about doing M&A. I was just curious to get, you know, your tea leaf read on M&A for you and, you know, if you were seeing some opportunities and if you were hearing or having conversations with folks these days.
spk02: We are, you know, we are hearing, you know, more opportunities out there and having additional conversations. And, you know, some of the opportunities that are out there are, you know, ones that we may not be interested in. But yes, we are definitely seeing an uptick in opportunities to have conversations surrounding M&A. Okay.
spk03: Great, thanks for all the color.
spk07: Again, if you would like to ask a question, please press star thing and number one on your telephone keypad. Again, that's star thing and number one to ask a question. Your next question line is Will Jones with KBW.
spk06: Hey, good morning. How are you guys?
spk02: Great. How are you doing, Will?
spk06: Hey, we're doing good. So I just wanted to pivot back to loans and loan growth for just a minute. You know, this is unfortunate that you guys had The paydowns, burden growth this quarter, especially coming off the strong momentum and 1Q. But it does sound like you guys are still optimistic in the back half of the year. You know, what are you seeing in your markets today? And, you know, where are you kind of anticipating most of that growth come from? You know, I know you guys are in the process of building out your Houston presence and some lenders in your Dallas market. So I'm just curious on some commentary around loan growth.
spk02: You know, we're starting to see, not starting, we've been seeing a number of opportunities and, you know, in our current pipeline, there are a number of full funders that we're looking at at this point in time, which, you know, gives us, you know, some encouragement about that 7% loan growth. And then some of our construction projects that we put on last year, those are starting to fund up. And so, you know, we're just anticipating that, you know, these early payoffs, we may see a few more early payoffs, but those were ones we were really anticipating, you know, in the back half of this year, if not early next year. So with what we're seeing in our pipeline, the types of loans we're seeing and, you know, the fact that a number of them are full funders, gives us confidence that, you know, barring unexpected payoffs at a large, large volume, you know, we anticipate being able to get to that 7% or real close to it.
spk06: Gotcha. That's great to hear. And then just on the hiring front, are you guys still active in seeking new lenders? Are you guys still active in building out in different markets or maybe hoping to boost some lending talent within certain portfolio segments. Just curious on the commentary around your hiring efforts and what you guys are seeing out there.
spk02: We are definitely interested in, you know, hiring additional revenue producers, especially in our higher growth markets. And, you know, we're actively looking for some. We did bring on three in the first quarter. That has worked out extremely well, and, you know, we're just being very selective on what we do. But, yes, we are continuing to look for, you know, additional revenue producers in those market areas.
spk06: Great. Just for my reference, what would you consider are your highest growth markets?
spk02: The Dallas-Fort Worth area, the Austin market, and, you know, Houston is, you know, while it may not be as high growth as, as the other two, it's still a growing market. And for us, um, you know, we're just scratching the surface there. So, um, there, there's, there seems to be a lot of opportunity there for us. Um, even, even with maybe a little slower growth than, than we're seeing in some of the other markets.
spk06: Awesome. That's great. And just lastly for me, you know, I knew that, um, just looking at it. It looks like the end of period shares were, you know, roughly flat quarter of a quarter, but I know you guys were active on the buyback last quarter. Did you guys buy back any shares this quarter? And how was your appetite for the buyback? Um, as you go into, you know, this upcoming quarter, you know, I know saying sucks, kind of pulled back a little bit. Um, is it possible to see you guys, uh, you know, engage pretty heavily?
spk02: Uh, in terms of, uh, The future, yes. We're definitely looking to repurchase shares moving forward, especially at these prices. And in terms of what we purchased, I'm going to, during the quarter, I'm going to let Julie answer that.
spk01: Yes, we purchased right at 91,000 shares in the first quarter. It was very early on in April at an average price of $38.49. And we likely say we do plan to be back in there.
spk06: Okay, great. Thanks. That's it for me. All right. Thank you.
spk07: Your next question might have Michael Young with Truist Security.
spk04: Hey, thanks for taking the question. Good morning, Michael. wanted to ask just about interest rate sensitivity. You know, you guys have historically been a little bit liability sensitive, but just wanted to kind of get your thoughts or any proactive measures that you may be taking to, you know, maybe be a little more neutral if we think we're moving towards a higher rate environment or, you know, extending duration or shrinking duration as the case may be.
spk02: Yeah. You know, great question. I think, you know, one, One of the things we've been able to do over the last 15 months is utilize this large growth in non-maturity deposits. And while we may see some runoff in it, it appears that the vast majority of it is going to remain fairly sticky. Those tend to be much longer duration liabilities than the liabilities that we let run off, which were the CDs. and the FHLB borrowings. So we feel like our overall liabilities have lengthened pretty nicely in duration as a result of the growth in the non-maturity deposits. So that combined with we have a lot of floating rate loans on the loan side. As we mentioned, we're getting a lot of cash flow on the mortgage side. At this point, I feel like, you know, we're pretty close to neutral because of that growth in the non-maturity deposits.
spk04: Okay, that's helpful. And, you know, just maybe a bigger picture question on sort of the expense infrastructure for the bank. You guys have done a good job of kind of pruning expenses to keep the efficiency ratio at an attractive level. But, you know, just curious, you know, now kind of looking back on the pandemic and the impacts and, you know, having a test run at, you know, maybe branches being closed for a small period of time and, you know, sales activity through that period, you know, are you more confident in continuing to rationalize the branch network or pivoting the branch network to higher growth metros? Just any kind of thoughts there would be helpful.
spk02: Yeah. Yeah. You know, we did in the last 12 months, I think we've closed six branches. I know in the last nine months we've closed six branches. I'm trying to remember what we closed in the third quarter of last year, if any. And, you know, we have opened a branch in, well, two branches. One was an LPO, and it's now a full-service branch. And then we've opened a branch in Houston and one in the DFW area. So, yes, we are looking at, you know, more branches in the higher growth markets, but still providing, you know, sufficient number of branches in our other markets because, you know, they produce a lot of low-cost deposits. And so, you know, it's important that we make sure that those branches those areas are covered sufficiently with branches.
spk04: Okay. That's helpful. Thank you.
spk07: I will now turn the call back over to Mr. Gibson.
spk02: All right. Thank you for joining us today. We appreciate the opportunity to answer your questions and your interest in Southside Bank shares. In closing, given the positive economic conditions in our markets, our strong balance sheet, capital position, asset quality, and core earnings. We are very encouraged and look forward to reporting results to you during our next earnings call in October. This concludes the call.
spk07: This concludes today's conference call. Thank you for participating. You may now disconnect.
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