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spk04: Thank you for standing by, and welcome to the Southside Bank Shares Incorporated fourth quarter and year-end 2021 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1 on your telephone. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Lindsay Biles, Vice President, Investor Relations. Please go ahead.
spk16: Thank you, Jonathan. Good morning, everyone, and welcome to Southside Bank Shares' fourth quarter and year-end 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 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, and then Julie will give an overview of our financial results. I will now turn the call over to Lee.
spk06: Good morning, everyone, and welcome to Southside Bank Shares' fourth quarter and year-end earnings call for 2021. This morning, we reported exceptional results for the year and fourth quarter. I want to start by recognizing and thanking the entire Southside team for their extraordinary contributions and efforts during 2021, without which these results would not have been possible. Highlights for the quarter included earnings per share of 88 cents, an ROA TCE of 16.8%, annualized link quarter deposit growth of 29.1%, annualized linked quarter loan growth, net of PPP, of 3.8 percent, an increase in the net interest margin to 3.23 percent, and continued strong asset quality with non-performing assets decreasing to 0.16 percent of total assets. Highlights for the full year included record net income of 113.4 million, record earnings per share of $3.47, an ROATCE of 17%, a 16% increase in deposits, a 5% increase in loans, net of PPP, an increase in the net interest margin of nine basis points, and further improvement in our strong asset quality. The fourth quarter results included a reversal of provision for credit losses of 3.4 million. Length quarter, our net interest margin, increased seven basis points. The average yield on securities increased eight basis points, and the rate on our interest-bearing liabilities decreased 13 basis points, 11 basis points of which resulted from the decrease in sub-debt expense. The average yield on loans decreased 12 basis points, largely due to the decrease in PPP loan accretion. We were extremely pleased with our annualized link quarter loan growth, net of PPP of 3.8%, given the previously discussed anticipated large payoffs that occurred during the fourth quarter. As we begin 2022, our loan pipeline is extremely strong. What is especially encouraging is that the pipeline in each of our regions is very strong. Given the excellent outlook for the high-growth markets we serve, as well as the growth occurring in our other markets, we anticipate solid loan demand will continue well into 2022. We are projecting 2022 loan growth net of PPP loans of 9%. During the fourth quarter, we continue to experience an increase in our average non-maturity deposits, which represent our lowest cost of interest-bearing liabilities. Over the past 24 months, non-maturity deposits have increased significantly, which has allowed us to strategically transform the funding base by significantly reducing dependence on higher cost and shorter duration CDs and unswapped FHLB, and other wholesale borrowings. Currently, our swapped borrowings are 575 million, down 30 million since December 31st. The economic conditions in our markets remain strong, bolstered by continued company relocations and existing company expansions combined with population growth resulting from continued migration 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 remarks, and I will now turn the call over to Julie.
spk19: Thank you, Lee. Good morning, everyone, and welcome to our call today. We end 2021 with another strong quarter and record financial results for the year, with annual net income of $113.4 million and diluted earnings per common share of $3.47, a 40.5% increase from $2.47 for 2020. We reported fourth quarter net income of $28.7 million, a linked quarter decrease of $619,000, or 2.1%. due to a lower reversal of provision for credit losses and a decrease in gain on sale of AFS securities, partially offset by a decrease in interest expense. For the quarter ended December 31st, 2021, our diluted earnings per common share were 88 cents, a decrease of two cents or 2.2% on a linked quarter basis. Linked quarter net of the decrease in PPP loans of 36.5 million, our loan portfolio increased $34 million to $3.61 billion. Our construction loans increased $25.8 million. Commercial loans, excluding the PPP forgiveness, increased $11.7 million. And we also experienced an increase in municipal loans of $15.8 million on a linked quarter basis. We had increased payoffs in commercial real estate, including several large loans, between 24 and $30 million. The weighted average rate of new loans funded during the fourth quarter was approximately 3.4%. As of December 31st, our PPP loans included in the commercial loan category totaled $31 million, down from 67.5 million at September 30th, 2021. The average balance of PPP loans was approximately 53.6 million for the fourth quarter and 142.7 million for 2021. Currently, our remaining PPP loans are approximately $25 million. Our asset quality remains strong. Non-performing assets decreased throughout 2021. with a total decrease of $5.9 million, or 33.6% for 2021, or 0.16% of total assets compared to 0.25% at December 31, 2020. On a linked quarter basis, nonperforming assets decreased $815,000, or 6.6%. Length quarter, our allowance for loan loss decreased 2.7 million or 7.2% to 35.3 million at December 31st due to recording a reversal of provision for credit losses on loans of 2.7 million in the fourth quarter of 2021. The reversal of provision for the fourth quarter was primarily due to an improved forecast for commercial real estate as well as the impact of loan payoffs on the allowance. As of December 31st, our allowance for loan losses as a percentage of total loans was .97% and .98% when excluding PPP loans. Our allowance for off-balance sheet credit exposures at December 31st decreased to 2.4 million when compared to 3.1 million at September 30th, 2021, due to a reversal of provision of 706,000 in the fourth quarter. This combined with the reversal of provision for credit losses on loans, the total reversal of provision for credit losses was 3.4 million for the three months ended December 31st, 2021. As of December 31st, our loans with oil and gas industry exposure was 69.7 million or 1.9% of total loans. Our securities portfolio increased 9.5 million or 0.3% on a linked quarter basis. We recognized $463,000 in net security gains on the sale of AFS securities during the quarter, a decrease from the net gains of 1.4 million reported last quarter. At year end, we had a net unrealized gain in the securities portfolio of $111.7 million. and the duration of the portfolio was 5.9 years, up from 5.8 years linked quarter and 4.7 years at the end of 2020. Our mix of loans and securities at December 31st was 56% and 44%, respectively, remaining consistent on a linked quarter basis, with a shift from 58% loans and 42% securities for the prior year end. Our deposits increased $390.7 million, or 7.3%, compared to September 30, 2021. This increase consisted of an increase in public fund deposits of $126.6 million, or 14.7%. Public fund deposits normally increase in the fourth quarter each year. Additionally, broker deposits increased 180%. 1.3 million, or 159.8%. In December, in order to obtain lower-cost funding, we utilized $265 million in broker deposits for funding our cash flow hedge swaps and reduced FHLB advances. During the first quarter of 2022, we plan to utilize broker deposits in place of FHLB advances on the remaining $310 million of cash flow hedge swaps. We expect this to reduce the overall funding cost on the swaps by approximately 10 basis points. Our net interest margin increased seven basis points on a linked quarter basis to 3.23%, and the net interest spread increased nine basis points to 3.09. The reduction of our subordinated notes on September 30th impacted the average rate paid on our interest-bearing liabilities by approximately 11 basis points. for an impact of nine basis points on the NIM. Approximately eight basis points of the net interest margin related to fees earned on PPP loans compared to 18 basis points last quarter. For the three months into December 31st, net interest income increased 1.2 million or 2.5% when compared to the linked quarter. We recorded approximately 1.4 million in net fees related to the PPP loans included in interest income this quarter compared to 3.1 million last quarter. As of December 31st, 2021, we had net deferred fees of approximately $935,000 remaining to be recognized as a yield adjustment over the terms of the loans. Additionally, we recorded $364,000 in purchase loan accretion this quarter, an increase of 168,000 from the prior quarter. For the three months into December 31st, 2021, non-interest income, excluding net gains on the sale of AFS securities, increased 160,000 or 1.4% for the linked quarter. For the fourth quarter, non-interest expense was $31.3 million. Excluding the loss on the redemption in the third quarter, non-interest expense increased $689,000 or 2.2% on a linked quarter basis. For 2022, we expect quarterly non-interest expense to be approximately $32.5 million. We are pleased to report Our fully taxable equivalent efficiency ratio for the three and 12 months ended December 31st was 47.61% and 49.03% respectively. Income tax expense decreased 165,000 or 3.3% compared to the three months ended September 30th, 2021. Our effective tax rate decreased slightly to 14.4% for the fourth quarter. At this time, we are estimating an annual effective tax rate at 12% for 2022. Thank you for joining us today. This concludes our comments, and we will open the line for your questions.
spk04: Certainly. Once again, ladies and gentlemen, if you have a question at this time, please press star then 1. Our first question comes from the line of Graham Dick from Piper Sandler. Your question, please.
spk15: Hey, good morning, everyone. Good morning. So just wanted to start on the bond portfolio. Do you guys have any plans to grow it from here? I know you all talked about the addition of those broker deposits, but it looks like there might have been some seasonal funds in there as well. Overall deposit growth is pretty strong. Just wondering if you guys are planning to grow it any more from here.
spk06: No. I think for the year we're budgeting just an ever so slight increase in the bond portfolio growth. $30 or $40 million, somewhere in that range. But no, we're really not. And those growth and broker deposits were due to us changing the funding of our swap funding from a home loan bank to the broker deposit so that we could save approximately 10 basis points.
spk15: Right. That sounded like a pretty good trade for you guys. And then I guess, One last thing on the bond portfolio is just wondering if there's anything non-recurring driving the improvement in the MBS yields this quarter?
spk06: I think the increase had to do with less amortization expense on the mortgage-backed securities. And we did, you know, we continue to have some prepayments where there's yield maintenance on some of those mortgage securities. And I would anticipate with rates being up a little bit on the long end that, you know, we may see some further slowing of repayment speeds that could possibly, you know, move the mortgage yield up a little bit.
spk15: Okay. That's kind of what I thought. And then just moving, I guess, more to asset sensitivity and looking at a higher rate environment. So I wonder if you guys could provide just a little color on how you all are positioned heading into this. Maybe like broadly your NII shock scenarios or what percent of loans reprice immediately. And then even like what you guys might be expecting on the deposit pay to front would all, all that would be very helpful. Thank you.
spk06: Okay. You know, I think, you know, over the last really since the pandemic began and deposits, you know, in all banks started growing, we basically utilized that deposit growth in non-maturity deposits to become significantly less dependent on the CDs and to become significantly less dependent on unswapped wholesale funding, which right now we just don't have a lot of. So, you know, as the short-term interest rates increase, we don't feel like we're going to have to raise our our funding costs anywhere, you know, near what those increases are. In fact, the first increase, you know, on some of the non-maturity deposits, there may not be any increase at all, but, you know, it would be a very small percentage increase of the going forward even throughout the year if it goes up the four rate increases that they're anticipating this year. On the loan side, I think just a little less than 50%, and Julie probably has the number, is in floating rate of that probably, you know, 60% to 70% reprices immediately, but most of it reprices within, you know, six months to a year. Some of it's based off a three-month LIBOR, and some of it's, you know, one month, but a lot of it is overnight and immediate.
spk15: Okay, I appreciate that. Thanks, guys, and congrats on a pretty solid quarter.
spk04: Thank you. Thank you. Our next question comes from the line. Michael Young from Tourist Securities. Your question, please.
spk14: Hey, good morning. Just wanted to touch on the loan growth outlook. You mentioned, I think, 9%. I assume that's kind of ex-PPP, so just the core loan growth, and I was just curious, you know, what areas you're seeing the most strength in, if it's kind of the historical construction bucket and what the new yields are on loans that you might be putting on. Are they a good bit higher at this point than kind of the back book of what's rolling off?
spk06: We are seeing, you know, a fair amount of construction loans. And, you know, those are typically – not typically, they're almost always floating loans. and they're either tied to Prime or they're tied to, you know, one month LIBOR or SOFR at this point. So they, you know, as rates move up, those construction loans move up. But what's really encouraging is we're seeing a lot of full funders, and it's primarily on the commercial real estate side that we're seeing that. And then we're – seeing some nice increases in municipal loans that we anticipate throughout the year. Does that kind of answer your question, Michael?
spk14: Yeah, I guess I'm trying to get at basically are the new loans you're putting on, are they sort of at higher rates and higher yields than what's running off and that it should be sort of accretive to loan yields or is it more in line or still kind of slightly diluted?
spk06: I'd say the full funders that if we're fixing the full funders, they're at slightly higher yields than what's rolling off. And on the floating rate, they're probably at similar yields to what we have today. But, you know, they're going to, you know, in March, I think everybody's anticipating at least a 25 basis point increase. And, you know, you'll see that across the board reflected in SOFR, LIBOR, and PRIME if that occurs. So, you know, those floating rate loans, you know, the spreads on those, you know, let's say we've got one at PRIME at 325, the real spread is going to increase over what our cost of funds is pretty much. I wouldn't say the full 25 basis points, but it ought to. it'll be in the 20 somewhere, 20, 22, 23 basis points that spread will increase.
spk14: Right. Okay. And then on the capital side, Lee, just sort of curious, you know, you guys are going to have stronger loan growth. So, you know, wanted to just get your updated thoughts on capital returns, share buybacks even still in the equation given, you know, where the stock is and then, you know, what the outlook is for M&A.
spk06: Okay. In terms of, you know, stock buybacks, we do not have one at this point in time currently in place, but that's something that we're looking at and would anticipate that, you know, sometime during the first half of this year, you'll probably see something on that. In terms of, let's see, it was You mentioned capital. I mean, there's, you know, M&A, we're actually, you know, having some more meaningful conversations with, you know, some potential partners that would be something we'd be interested in acquiring. And, you know, I don't look for anything to happen overnight. immediately but i think you know i'm hopeful that uh sometime maybe during the first half or first three quarters of 2022 uh it may be possible that um you know we're able to um announce something but there's nothing sitting on the table exactly you know today but just good conversations okay great thanks for the color appreciate it
spk04: Thank you. Our next question comes from the line of Brady Gailey from KBW. Your question, please. Yeah, thank you. Good morning, guys.
spk06: Hey, Brady. How are you doing?
spk10: I'm great. So when I look at your fee income, a lot of it is driven by service charges on deposits. Can you just talk about, I know the industry is seeing some pressure on NSFBs and overdrafts, but maybe just specifically One, tell us how much NSF and overdraft was in 2021 and then how you guys are thinking about that going forward.
spk06: Julie's grabbing the number for 2021. What I can tell you is that we're cognizant of that and our budget for 2022 uh we basically have have lowered it um by ten percent uh for the last nine months of the year is that correct yeah uh and the only reason we're doing that is because if we you know look to make a change today on something it would it could take a while for that to filter through and um really some of our lower uh months of of um Overdraft income occurs in the first quarter because of tax refunds and things of that nature. So we are cognizant of that, and I think Julie has that number for 2021.
spk19: Brady, the overdraft and return check charges together were about $9.2 million. The overdraft just by itself was $8.4 million. And that was some decline from 2021. as well, not significant, but some decline, mainly due to the abundance of deposits probably in all institutions right now.
spk10: And then moving to the expense base, the guidance of $32.5 million, is that more kind of the run rate in the first quarter, and you're going to see some growth beyond that? Or is that more kind of the average run rate for the full year?
spk19: It's probably closer to an average for the full year. They sign budgeting.
spk06: And we've budgeted in some additional loan officer hires that likely you'll see hopefully in the second and third quarter, possibly fourth quarter. So that's, you know,
spk17: I think we're running a little lower in Q1.
spk06: Yeah, we're running a little lower in Q1. I think you were guessing somewhere closer to $32 million, weren't you? Yeah. Yeah, in the first quarter. But on average, we think it's, you know, Julie's budgeting $32.5 for the year per quarter.
spk10: Okay. And then, Lee, you know, it sounds like you're a little more active on M&A now than you have been the last couple years. Just remind us, you know, what geographies do you like and kind of what's the sweet spot from a size point of view for a bank target for Southside?
spk06: Geography, you know, basically we'd like to stay, and at this point in time we plan on staying along Interstate 35 to the east. We might go, you know, 50, 60 miles east. west of interstate 35, but probably not much past that. And that encompasses about 85% of the population of the state and probably at least that percentage of the economy in the state. So in terms of size, ideal size would be somewhere between a billion and 2 billion. We start getting too much above $2 billion and we're touching on $10 billion. So we'd like to, if we do an acquisition, we'd like to stay under that unless we were to look at a really, really large acquisition that would take us at least a billion or two over $10 billion. But the sweet spot for us really is probably a billion to $2 billion.
spk10: And then just on that topic, Durbin, and it sounds like you guys are going to stay on the 10 billion for a while here, but if you do cross, remind us what the Durbin impact could be.
spk19: Our last estimate was around $8 million. It probably does seem to be refreshed, but that was, I think, last quarter.
spk10: And, Julie, that $8 million, is that $8 million on today's balance sheet? or a $10 billion balance sheet?
spk18: That would be today's balance sheet. Okay.
spk10: All right, great. Thank you, guys. All right. Thank you, Brady.
spk04: Thank you. Our next question comes from the line. That meant only from Stephens. Your question, please.
spk21: Yeah, thank you. I want to ask about the loan growth guidance that you guys provided of 9% for the full year ex PPP. It implies a nice pickup versus what we've seen over the last few quarters. Any more color on that improvement? And I think you mentioned paydowns were heavier in the back half of 2021. So are you assuming a more moderate level of paydowns in 2022?
spk06: We certainly are not expecting paydowns like that in the first half of the year. And then we had a lot of – there was some uncertainty about tax laws and things of that nature that probably drove a few of the payoffs via some sales that occurred in the fourth quarter. But no, we're not anticipating the volume. But the main thing is our pipeline, typically December and January are pretty slow months. And it's been fast and furious. And we have not seen a start to the year like this in quite some time. So it's just... you know, very encouraging and it, and it's not just, you know, one or two regions, it's in all of our regions. So, uh, we, you know, we just feel good. Uh, the economy's doing extremely well and, um, you know, growth is occurring and, and it's, um, you know, it's real growth. It's, it's new jobs, uh, people moving in, companies moving in. It's just, you know, it's amazing what's going on. So they're not, you know, we're not, we're not talking about, we're talking about apartments that, you know, down in Austin and the DFW area that, you know, we heard this week that there's bidding wars for apartments in Austin, you know, kind of like you see bidding wars for houses. So it's, you know, it's, it's housing related. It's, you know, company relocation related and a lot of warehouse related type stuff. So it's just really positive right now. And, you know, we're beginning to see a real impact as a result of that on our pipeline.
spk21: That's helpful, Lee. Thank you for that. And you also mentioned earlier optimism around hiring additional new producers for the year. is loan production from those producers you expect later on this year, is that also embedded in that 9% or could that be potential upside even from the current guidance?
spk06: I think that could be a potential upside from the current guidance. We're visiting actively with different lenders and feel good that over the you know, especially the first three quarters that we're going to, you know, land a few. And it always takes about a month for somebody to kind of get their feet on the ground and notify everybody that they've moved. But, you know, we expect, you know, we're hoping to get some additional, you know, lift out of loan officers that we hire. But we're not including that in our 9% because that, you know, not something we have in place today.
spk02: Yeah. Okay. Okay, great. Thank you, guys.
spk04: All right. Thank you. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Lee Gibson for any further remarks.
spk06: 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 pipeline, balance sheet, capital position, core earnings, and asset quality, we're excited about the prospects for 2022 and look forward to reporting first quarter results to you during our next earnings call in April. This concludes the call. Thank you.
spk04: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day. THE END you Thank you. Bye. Bye. you you Thank you for standing by, and welcome to the Southside Bank Shares Incorporated fourth quarter and year-end 2021 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1 on your telephone. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Lindsay Biles, Vice President, Investor Relations. Please go ahead.
spk16: Thank you, Jonathan. Good morning, everyone, and welcome to Southside Bank Shares' fourth quarter and year-end 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 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, and then Julie will give an overview of our financial results. I will now turn the call over to Lee.
spk06: Good morning, everyone, and welcome to Southside Bank Shares' fourth quarter and year-end earnings call for 2021. This morning, we reported exceptional results for the year and fourth quarter. I want to start by recognizing and thanking the entire Southside team for their extraordinary contributions and efforts during 2021, without which these results would not have been possible. Highlights for the quarter included earnings per share of 88 cents, an ROA TCE of 16.8%, annualized link quarter deposit growth of 29.1%, annualized linked quarter loan growth, net of PPP, of 3.8 percent, an increase in the net interest margin to 3.23 percent, and continued strong asset quality with non-performing assets decreasing to 0.16 percent of total assets. Highlights for the full year included record net income of 113.4 million, record earnings per share of $3.47, an ROATCE of 17%, a 16% increase in deposits, a 5% increase in loans, net of PPP, an increase in the net interest margin of nine basis points, and further improvement in our strong asset quality. The fourth quarter results included a reversal of provision for credit losses of 3.4 million. Length quarter, our net interest margin increased seven basis points. The average yield on securities increased eight basis points, and the rate on our interest-bearing liabilities decreased 13 basis points, 11 basis points of which resulted from the decrease in sub-debt expense. The average yield on loans decreased 12 basis points, largely due to the decrease in PPP loan accretion. We were extremely pleased with our annualized link quarter loan growth, net of PPP of 3.8%, given the previously discussed anticipated large payoffs that occurred during the fourth quarter. As we begin 2022, our loan pipeline is extremely strong. What is especially encouraging is that the pipeline in each of our regions is very strong. Given the excellent outlook for the high-growth markets we serve, as well as the growth occurring in our other markets, we anticipate solid loan demand will continue well into 2022. We are projecting 2022 loan growth net of PPP loans of 9%. During the fourth quarter, we continue to experience an increase in our average non-maturity deposits, which represent our lowest cost of interest-bearing liabilities. Over the past 24 months, non-maturity deposits have increased significantly, which has allowed us to strategically transform the funding base by significantly reducing dependence on higher cost and shorter duration CDs and unswapped FHLB, and other wholesale borrowings. Currently, our swapped borrowings are 575 million, down 30 million since December 31st. The economic conditions in our markets remain strong, bolstered by continued company relocations and existing company expansions combined with population growth resulting from continued migration 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 remarks, and I will now turn the call over to Julie.
spk19: Thank you, Lee. Good morning, everyone, and welcome to our call today. We end 2021 with another strong quarter and record financial results for the year, with annual net income of $113.4 million and diluted earnings per common share of $3.47, a 40.5% increase from $2.47 for 2020. We reported fourth quarter net income of $28.7 million, a linked quarter decrease of $619,000, or 2.1%. due to a lower reversal of provision for credit losses and a decrease in gain on sale of AFS securities, partially offset by a decrease in interest expense. For the quarter ended December 31st, 2021, our diluted earnings per common share were $0.88, a decrease of $0.02, or 2.2% on a linked quarter basis. Linked quarter net of the decrease in PPP loans of $36.5 million our loan portfolio increased $34 million to $3.61 billion. Our construction loans increased $25.8 million. Commercial loans, excluding the PPP forgiveness, increased $11.7 million. And we also experienced an increase in municipal loans of $15.8 million on a linked quarter basis. We had increased payoffs in commercial real estate, including several large loans, between 24 and $30 million. The weighted average rate of new loans funded during the fourth quarter was approximately 3.4%. As of December 31st, our PPP loans included in the commercial loan category totaled $31 million, down from 67.5 million at September 30th, 2021. The average balance of PPP loans was approximately $53.6 million for the fourth quarter and $142.7 million for 2021. Currently, our remaining PPP loans are approximately $25 million. Our asset quality remains strong. Non-performing assets decreased throughout 2021. with a total decrease of $5.9 million, or 33.6% for 2021, or 0.16% of total assets compared to 0.25% at December 31, 2020. On a linked quarter basis, non-performing assets decreased $815,000, or 6.6%. Length quarter, our allowance for loan loss decreased 2.7 million or 7.2% to 35.3 million at December 31st due to recording a reversal of provision for credit losses on loans of 2.7 million in the fourth quarter of 2021. The reversal of provision for the fourth quarter was primarily due to an improved forecast for commercial real estate as well as the impact of loan payoffs on the allowance. As of December 31st, our allowance for loan losses as a percentage of total loans was 0.97% and 0.98% when excluding PPP loans. Our allowance for off-balance sheet credit exposures at December 31st decreased to 2.4 million when compared to 3.1 million at September 30th, 2021, due to a reversal of provision of 706,000 in the fourth quarter. This combined with the reversal of provision for credit losses on loans, the total reversal of provision for credit losses was $3.4 million for the three months ended December 31, 2021. As of December 31, our loans with oil and gas industry exposure was $69.7 million, or 1.9% of total loans. Our securities portfolio increased 9.5 million or 0.3% on a linked quarter basis. We recognized $463,000 in net security gains on the sale of AFS securities during the quarter, a decrease from the net gains of 1.4 million reported last quarter. At year end, we had a net unrealized gain in the securities portfolio of 111.7 million. and the duration of the portfolio was 5.9 years, up from 5.8 years linked quarter and 4.7 years at the end of 2020. Our mix of loans and securities at December 31st was 56% and 44%, respectively, remaining consistent on a linked quarter basis, with a shift from 58% loans and 42% securities for the prior year end. Our deposits increased 390.7 million, or 7.3%, compared to September 30, 2021. This increase consisted of an increase in public fund deposits of 126.6 million, or 14.7%. Public fund deposits normally increase in the fourth quarter each year. Additionally, broker deposits increased 183. $1.3 million, or 159.8%. In December, in order to obtain lower-cost funding, we utilized $265 million in broker deposits for funding our cash flow hedge swaps and reduced FHLB advances. During the first quarter of 2022, we plan to utilize broker deposits in place of FHLB advances on the remaining $310 million of cash flow hedge swaps. We expect this to reduce the overall funding cost on the swaps by approximately 10 basis points. Our net interest margin increased seven basis points on a linked quarter basis to 3.23%, and the net interest spread increased nine basis points to 3.09. The reduction of our subordinated notes on September 30th impacted the average rate paid on our interest-bearing liabilities by approximately 11 basis points. for an impact of nine basis points on the NIM. Approximately eight basis points of the net interest margin related to fees earned on PPP loans compared to 18 basis points last quarter. For the three months into December 31st, net interest income increased 1.2 million or 2.5% when compared to the linked quarter. We recorded approximately 1.4 million in net fees related to the PPP loans included in interest income this quarter, compared to 3.1 million last quarter. As of December 31st, 2021, we had net deferred fees of approximately $935,000 remaining to be recognized as a yield adjustment over the terms of the loans. Additionally, we recorded $364,000 in purchase loan accretion this quarter, an increase of 168,000 from the prior quarter. For the three months into December 31st, 2021, non-interest income, excluding net gains on the sale of AFS securities, increased 160,000 or 1.4% for the linked quarter. For the fourth quarter, non-interest expense was $31.3 million. Excluding the loss on the redemption in the third quarter, non-interest expense increased $689,000 or 2.2% on a linked quarter basis. For 2022, we expect quarterly non-interest expense to be approximately $32.5 million. We are pleased to report Our fully taxable equivalent efficiency ratio for the three and 12 months ended December 31st was 47.61% and 49.03% respectively. Income tax expense decreased 165,000 or 3.3% compared to the three months ended September 30th, 2021. Our effective tax rate decreased slightly to 14.4% for the fourth quarter. At this time, we are estimating an annual effective tax rate at 12% for 2022. Thank you for joining us today. This concludes our comments, and we will open the line for your questions.
spk04: Certainly. Once again, ladies and gentlemen, if you have a question at this time, please press star then 1. Our first question comes from the line of Graham Dick from Piper Sandler. Your question, please.
spk15: Hey, good morning, everyone. Good morning. So just wanted to start on the bond portfolio. Do you guys have any plans to grow it from here? I know you all talked about the addition of those broker deposits, but it looks like there might have been some seasonal funds in there as well. Overall deposit growth is pretty strong. Just wondering if you guys are planning to grow it any more from here.
spk06: No. I think for the year we're budgeting just an ever so slight increase in the bond portfolio. $30 or $40 million, somewhere in that range. But no, we're really not. And those growth in broker deposits were due to us changing the funding of our swap funding from a home loan bank to the broker deposit so that we could save approximately 10 basis points.
spk15: Right. That sounded like a pretty good trade for you guys. And then I guess, One last thing on the bond portfolio is just wondering if there's anything non-recurring driving the improvement in the MBS yields this quarter?
spk06: I think the increase had to do with less amortization expense on the mortgage-backed securities. And we did, you know, we continue to have some prepayments where there's yield maintenance on some of those mortgage securities. And I would anticipate with rates being up a little bit on the long end that, you know, we may see some further slowing of prepayment speeds that could possibly, you know, move the mortgage yield up a little bit.
spk15: Okay. That's kind of what I thought. And then just moving, I guess, more to asset sensitivity and looking at a higher rate environment. So I wonder if you guys could provide just a little color on how you all are positioned heading into this. Maybe like broadly your NII shock scenarios or what percent of loans reprice immediately. And then even like what you guys might be expecting on the deposit pay to front would all, all that would be very helpful. Thank you.
spk06: Okay. You know, I think, you know, over the last really since the pandemic began and deposits, you know, in all banks started growing, we basically utilized that deposit growth in non-maturity deposits to become significantly less dependent on the CDs and to become significantly less dependent on unswapped wholesale funding, which right now we just don't have a lot of. So, you know, as the short-term interest rates increase, we don't feel like we're going to have to raise our our funding costs anywhere, you know, near what those increases are. In fact, the first increase, you know, on some of the non-maturity deposits, there may not be any increase at all, but, you know, it would be a very small percentage increase of the going forward even throughout the year if it goes up the four rate increases that they're anticipating this year. On the loan side, I think just a little less than 50%, and Julie probably has the number, is in floating rate of that probably, you know, 60% to 70% reprices immediately, but most of it reprices within, you know, six months to a year. Some of it's based off a three-month LIBOR, and some of it's, you know, one month, but a lot of it is overnight and immediate.
spk15: Okay, I appreciate that. Thanks, guys, and congrats on a pretty solid quarter.
spk04: Thank you. Thank you. Our next question comes from the line. Michael Young from Tourist Securities. Your question, please.
spk14: Hey, good morning. Just wanted to touch on the loan growth outlook. You mentioned, I think, 9%. I assume that's kind of ex-PPP, so just the core loan growth, and I was just curious, you know, what areas you're seeing the most strength in, if it's kind of the historical construction bucket and what the new yields are on loans that you might be putting on. Are they a good bit higher at this point than kind of the back book of what's rolling off?
spk06: We are seeing, you know, a fair amount of construction loans. And, you know, those are typically – not typically, they're almost always floating loans. And they're either tied to prime or they're tied to, you know, one month LIBOR or SOFR at this point. So they, you know, as rates move up, those construction loans move up. But what's really encouraging is we're seeing a lot of full funders. And it's primarily on the commercial real estate side that we're seeing that. And then we're... seeing, you know, some nice increases in municipal loans that we anticipate throughout the year. Does that kind of answer your question, Michael?
spk14: Yeah, I guess I'm trying to get at, you know, basically are the new loans you're putting on, are they sort of at higher rates and higher yields than what's running off and that it should be sort of the creative loan yields or is it more, you know, in line or still kind of slightly diluted?
spk06: I'd say the full funders that if we're fixing the full funders, they're at, you know, they're at slightly higher yields than what's rolling off. And on the floating rate, they're probably at similar yields to what we have today. But, you know, they're going to, you know, in March, I think everybody's anticipating at least 25 basis point increase. And, you know, you'll see that across the board reflected in SOFR, LIBOR, and PRIME if that occurs. So, you know, those flooding rate loans, you know, the spreads on those, you know, let's say we've got one at PRIME at 325, the real spread is going to increase over what our cost of funds is pretty much. I wouldn't say the full 25 basis points, but it ought to. it'll be in the 20 somewhere, 20, 22, 23 basis points that spread will increase.
spk14: Right. Okay. And then on the capital side, Lee, just sort of curious, you know, you guys are going to have stronger loan growth. So, you know, wanted to just get your updated thoughts on capital returns, share buybacks even still in the equation given, you know, where the stock is and then, you know, what the outlook is for M&A.
spk06: Okay. In terms of, you know, stock buybacks, we do not have one at this point in time currently in place, but that's something that we're looking at and would anticipate that, you know, sometime during the first half of this year, you'll probably see something on that. In terms of, let's see, it was You mentioned capital. I mean, there's, you know, we're actually, you know, having some more meaningful conversations with, you know, some potential partners that would be something we'd be interested in acquiring. And, you know, I don't look for anything to happen immediately. immediately but i think you know i'm hopeful that uh sometime maybe during the first half or first three quarters of 2022 uh it may be possible that um you know we're able to um announce something but there's nothing sitting on the table exactly you know today but just good conversations okay great thanks for the color appreciate it
spk04: Thank you. Our next question comes from the line of Brady Gailey from KBW. Your question, please. Yeah, thank you. Good morning, guys.
spk06: Hey, Brady. How are you doing?
spk10: I'm great. So when I look at your fee income, a lot of it is driven by service charges on deposits. Can you just talk about – I know the industry is seeing some pressure on NSF fees and overdrafts, but maybe just – One, tell us how much NSF and overdraft was in 2021 and then how you guys are thinking about that going forward.
spk06: Julie's grabbing the number for 2021. What I can tell you is that we're cognizant of that and our budget for 2022 we basically have lowered it by 10% for the last nine months of the year. Is that correct? Yeah. And the only reason we're doing that is because if we, you know, look to make a change today on something, it would take a while for that to filter through, and really some of our lower months of growth Overdraft income occurs in the first quarter because of tax refunds and things of that nature. So we are cognizant of that, and I think Julie has that number for 2021.
spk19: Brady, the overdraft and return check charges together were about $9.2 million. The overdraft just by itself was $8.4 million. And that was some decline from 2021. as well, not significant, but some decline, mainly due to the abundance of deposits probably in all institutions right now.
spk10: And then moving to the expense base, you have a guidance of $32.5 million. Is that more kind of the run rate in the first quarter, and you're going to see some growth beyond that? Or is that more kind of the average run rate for the full year?
spk19: It's probably closer to an average for the full year based on budgeting.
spk06: And we've budgeted in some additional loan officer hires that likely you'll see hopefully in the second and third quarter, possibly fourth quarter. So that's, you know,
spk17: I think we're running a little lower in Q1.
spk06: Yeah, we're running a little lower in Q1. I think you were guessing somewhere closer to $32 million, weren't you? Yeah, in the first quarter. But on average, we think it's, you know, Julie's budgeting $32.5 for the year per quarter.
spk10: Okay. And then, Lee, you know, it sounds like you're a little more active on M&A now than you have been the last couple of years. Just remind us, you know, what geographies do you like and kind of what's the sweet spot from a size point of view for a bank target for Southside?
spk06: Geography, you know, basically we'd like to stay, and at this point in time we plan on staying along Interstate 35 to the east. We might go, you know, 50, 60 miles east. west of Interstate 35, but probably not much past that. And that encompasses about 85% of the population of the state and probably at least that percentage of the economy in the state. So in terms of size, ideal size would be somewhere between a billion and two billion. We start getting too much above $2 billion and we're touching on $10 billion. So we'd like to, if we do an acquisition, we'd like to stay under that unless we were to look at a really, really large acquisition that would take us at least a billion or two over $10 billion. But the sweet spot for us really is probably a billion to $2 billion.
spk10: All right. And then just on that topic, Durbin, and it sounds like you guys are going to stay on the 10 billion for a while here, but if you do cross, remind us what the Durbin impact could be.
spk19: Our last estimate was around $8 million. It probably does seem to be refreshed, but that was, I think, last quarter.
spk10: And Julie, that $8 million, is that $8 million on today's balance sheet? or a $10 billion balance sheet?
spk18: That would be today's balance sheet. Okay.
spk10: All right, great. Thank you, guys. All right. Thank you, Brady.
spk04: Thank you. Our next question comes from the line. That meant only from Stephens. Your question, please.
spk21: Yeah, thank you. I want to ask about the loan growth guidance that you guys provided of 9% for the full year ex PPP. It implies a nice pickup versus what we've seen over the last few quarters. Any more color on that improvement? And I think you mentioned paydowns were heavier in the back half of 2021. So are you assuming a more moderate level of paydowns in 2022?
spk06: We certainly are not expecting paydowns like that in the first half of the year. And then we had a lot of – there was some uncertainty about tax laws and things of that nature that probably drove a few of the payoffs via some sales that occurred in the fourth quarter. But no, we're not anticipating the volume. But the main thing is our pipeline, typically December and January are pretty slow months. And it's been fast and furious. And we have not seen a start to the year like this in quite some time. So it's just... you know, very encouraging and it, and it's not just, you know, one or two regions, it's in all of our regions. So, uh, we, you know, we just feel good. Uh, the economy's doing extremely well and, um, you know, growth is occurring and, and it's, um, you know, it's real growth. It's, it's new jobs, uh, people moving in companies moving in. It's just, you know, it's amazing what's going on. So they're not, you know, we're not, we're not talking about, we're talking about apartments that, you know, down in Austin and the DFW area that, you know, we heard this week that there's bidding wars for apartments in Austin, you know, kind of like you see bidding wars for houses. So it's, you know, it's, it's housing related. It's, you know, company relocation related and a lot of warehouse related type stuff. So it's just really positive right now. And, you know, we're beginning to see a real impact as a result of that on our pipeline.
spk21: That's helpful, Lee. Thank you for that. And you also mentioned earlier optimism around hiring additional new producers for the year. Is loan production from those producers you expect later on this year, is that also embedded in that 9% or could that be potential upside even from the current guidance?
spk06: I think that could be a potential upside from the current guidance. We're visiting actively with different lenders and feel good that over the you know, especially the first three quarters that we're going to, you know, land a few. And it always takes about a month for somebody to kind of get their feet on the ground and notify everybody that they've moved. But, you know, we expect, you know, we're hoping to get some additional, you know, lift out of loan officers that we hire. But we're not including that in our 9% because that's, you know, not something we have in place today.
spk02: Yeah, okay. Okay, great. Thank you, guys.
spk04: All right, thank you. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Lee Gibson for any further remarks.
spk06: 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 pipeline, balance sheet, capital position, core earnings, and asset quality, we're excited about the prospects for 2022 and look forward to reporting first quarter results to you during our next earnings call in April. This concludes the call.
spk04: Thank you. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
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