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spk00: Thank you for standing by, and welcome to the Southside Bank Shares, Inc. First Quarter 2022 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentations, there will be a question-and-answer session. To ask a question at that time, please press star then 1 on your touchtone telephone. As a reminder, today's conference call is being recorded. I would now like to turn the conference to your host, Ms. Lindsay Bales, Vice President of Investment Relations. Ma'am, please go ahead.
spk08: Thank you, Valerie. Good morning, everyone, and welcome to Southside Bank Share's first quarter 2022 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 uncertainties. Factors that could materially change our current forward-looking assumptions are described in our earnings release and our Form 10-Ks. 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.
spk02: Thank you. Good morning, everyone, and welcome to Southside Bank Share's first quarter earnings call for 2022. This morning, we reported strong financial results for the first quarter. I want to start by recognizing and thanking the entire Southside team for their continued contributions and efforts, without which these results would not have been possible. Highlights for the quarter included earnings per share of 77 cents, a return on average tangible common equity of 15.2%, annualized link quarter loan growth, net of PPP of 19%, continued strong asset quality metrics, and an efficiency ratio of 48.15%. Linked quarter, our net interest margin decreased one basis point due to a $780,000 decrease in PPP loan accretion, which resulted in a nine basis point decrease in the average yield on loans, partially offset by a two basis point increase due to the increase in interest rates. Length quarter, the average yield on securities increased three basis points, and the average rate on our interest-bearing liabilities decreased two basis points. During the quarter, as interest rates increased, we sold $168 million of AFS securities and realized a loss of $1.5 million. In addition, during March and subsequent quarter end on April 1, 2022, we transferred longer-duration securities with a fair value of $662 million from AFS to HTM. With the flattening of the yield curve, reduced Fed purchasing, and higher current coupons, agency mortgage-backed securities are once again beginning to look attractive from a risk-reward perspective. We were extremely pleased with our annualized linked quarter loan growth of 19%. Our loan pipeline remains strong, and we are encouraged about second-quarter loan prospects despite a few expected loan payoffs. 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 for most, if not all, of 2022. For now, we are maintaining our anticipated 2022 loan growth estimate net of PPP loans at 9%. We plan to reconsider this estimate after the second quarter. During the first quarter, we continued to benefit from the increase in our average non-maturity deposits over the last 24 months. At March 31st, 85% of our $676 million of broker deposits were hedged with $575 million of fixed-rate swaps. FHLB borrowings decreased to $3.9 million during the quarter. 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 Arston markets that we serve continue to be among the highest performing 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.
spk09: Thank you, Lee. Good morning, everyone, and welcome to our call today. We are pleased to report a strong start to 2022 with net income of $25 million in diluted earnings per common share of $0.77 for the first quarter. Net income decreased $3.7 million from the fourth quarter of 2021, driven by the provision of credit losses of $294,000 compared to the $3.4 million reversal of provision last quarter, and a net loss on the sale of AFS securities of $1.5 million compared to a net gain of $463,000. Next quarter, net of the $17.1 million decrease in PPP loans, our loan portfolio increased 172.9 million to 3.79 billion, driven by strong growth within our real estate portfolio. Our CRE loans increased 124.4 million. Construction loans increased 42.3 million. And we also experienced an increase in municipal loans of $12.1 million on a linked quarter basis. The weighted average rate of new loans funded during the fourth quarter was approximately, during the first quarter was approximately 3.6%. As of March 31st, our PPP loans included in the commercial loan category totaled $13.9 million. down from $31 million at year end. The average balance of PPP loans was approximately $20.9 million for the first quarter. Currently, our remaining PPP loans are approximately $13 million. We continue to experience very strong asset quality metrics with non-performing assets of $11.5 million or 0.16% of total assets at March 31st, consistent with year end. Linked quarter, our allowance for loan loss increased $251,000, or 0.7%, due to the provision for credit losses on loans of $294,000 recorded in the first quarter. As of March 31st, our allowance for loan losses as a percentage of total loans was 0.93% and 0.94% when excluding PPP loans. Our allowance for off-balance sheet credit exposures remained consistent on a linked quarter basis at $2.4 million. As of March 31st, our loans with oil and gas industry exposure were $85.9 million, or 2.3% of total loans. Our securities portfolio decreased $314.8 million, or 11% on a linked quarter basis. The decrease was driven by an increase in the unrealized loss in the portfolio, sales of securities, and principal payments, and when combined, exceeded purchase securities during the quarter. The sales consisted of U.S. Treasury securities of $68 million and mortgage-backed securities of approximately $99 million. In March, we transferred available for sale securities with fair values of $385.8 million to health and maturity. Subsequent to quarter end on April 1st, we transferred AFS tax-free municipal and U.S. agency mortgage-backed securities with fair values of $276 million to health and maturity. We recognized 1.5 million in net security losses on the sale of AFS securities during the quarter, a decrease from the net gains of 463,000 reported last quarter. At quarter end, we had a net unrealized loss in the securities portfolio of $103.7 million compared to the unrealized gain of $111.7 million at the end of the year. As of March 31st, the duration of the entire securities portfolio was 8.1 years, an increase from 5.9 years on a linked quarter basis. The duration of the AFS portfolio at March 31st was 6.9 years. Our mix of loans and securities at March 31st was 60% and 40%, respectively, shifting from 56% and 44% on a linked quarter basis due both to the increase in the loan portfolio and the decrease in the securities portfolio. Our deposits increased $348.1 million, or 6.1%, compared to year-end, This increase was driven by an increase in broker deposits of $380.8 million. In order to obtain lower-cost funding, we utilized an additional $310 million of broker deposits included in the $380 million for funding our cash flow hedge swaps and reduced FHLB advances. During the first quarter, our board approved a new stock repurchase plan with an authorization to purchase up to 1 million shares. As of March 31st, we had purchased 82,285 shares at an average price of $40.81. Since quarter end and through April 22nd, we have repurchased 139,737 shares at an average price of $39.67 per share. Our net interest margin decreased slightly on a linked quarter basis to 3.22%, and net interest spread remained consistent at 3.09%. Approximately three basis points of the net interest margin related to fees earned on PPP loans compared to eight basis points last quarter. For the three months ended March 31st, net interest income decreased $495,000 or 1% when compared to the linked quarter. We recorded approximately $569,000 in net fees related to the PPP loans included in interest income this quarter compared to 1.4 million last quarter. As of March 31, 2022, we had net deferred fees of approximately $368,000 remaining to be recognized as a yield adjustment over the terms of these loans. Additionally, we recorded $345,000 in purchase loan accretion this quarter. For the three months ended March 31, 2022, non-interest income, excluding net loss on the sale of AFS securities, increased $720,000, or 6.2%, for the linked quarter, which was driven by a net gain recorded on other investments of $837,000, mortgage servicing fee income, and swap fee income, partially offset by a decrease in deposit services and trust fees. For the first quarter, non-interest expense was $31.2 million, a slight decrease of $139,000 on a linked quarter basis. For the remainder of 2022, we expect quarterly non-interest expense to be approximately $32.5 million. Our fully taxable equivalent efficiency rate ratio increased slightly to 48.15% from 47.61% for the previous quarter. Income tax expense decreased 1.7 million or 34.6% compared to the three months into December 31st, 2021. Our effective tax rate decreased to 11.2% from 14.4 for the fourth quarter. At this time, we are estimating an annual effective tax rate of 11.3% for 2022. Thank you for joining us today. This concludes our comments, and we will open the line for your questions.
spk00: Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star then 1 on your touchtone telephone. Again, to ask a question, please press star then 1. One moment for our first question. Our first question comes from Bradley Bailey, Jr. of KDW. The line is open.
spk03: Yeah, this is Brady Gailey. Good morning, guys. I wanted to start just with what you did with bringing on brokerage to reduce the FHLB. Can you just talk more about the details there and how that's going to impact spread income going forward, especially as the Fed continues to push rates higher?
spk02: Sure. The broker deposits, we just basically replaced, you know, we have a cash flow hedge, and we just basically replaced borrowings, short-term borrowings at the home loan bank with short-term borrowings from brokered CDs, not brokered CDs, but brokered deposits. We were offered a special deal by one of the brokered deposit groups, at an extremely low rate that they guaranteed for 90 days. And so I think it was an all-in rate of around three basis points, which was, you know, probably eight to nine basis points below what the home loan bank was offering at that time, and they weren't guaranteeing it for 90 days. So that's the whole reason that we switched there. Now, going forward, we'll just have to determine, you know, whether it's home loan bank or whether it's or whether it's the brokered market that provides us the cheaper funding.
spk03: Okay. And then just thoughts on the bond book going forward. I mean, the balance is there, at least on an average point of view, have been fairly consistent for the last few quarters. Now reinvestment yields are headed a lot higher. So do you start growing the bond portfolio more from here? What's the outlook on balances in the bond book?
spk02: One of the things we did during the first quarter is, you know, these rates rose, you know, faster than I think most people anticipated, and the curve flattened pretty quickly. We sold a lot of shorter securities, and we sold some longer securities, but it was primarily shorter securities. that we could get out of relatively flat. I know there was a million and a half dollar loss, but on the amount we sold, it was, you know, percentage-wise pretty small, so that we could look for a time to reinvest those funds moving forward. So that's, you know, that's what we're planning on doing. If we get more confident that rates are pretty close to, you know, I don't want to say the top, but, you know, the longer term rates are, you know, stop rising at the rate they are, you know, we may look to increase securities portfolios.
spk03: Okay. And then just finally for me, it's good to see some activity with the buyback last quarter and then, you know, here in this month. Do you think that you execute on the full 1 million share buyback this year, or is it too hard to know if you'll be able to do all of it this year?
spk02: It's really too hard to know. And, you know, we hope we don't from the standpoint of we hope the price doesn't get to where we want to buy it back further, that it exceeds that. But it's just really too early to know at this point in time. Okay.
spk03: All right, great. Thanks for the call, guys.
spk02: All right. Thank you, Brady.
spk00: Thank you. Our next question comes from Brett Robinson of Holy – your line is open.
spk05: Hey, good morning, everyone.
spk07: Good morning.
spk00: Morning.
spk05: Wanted to – first – Talk about the loan growth guidance of 9%. Obviously, the first quarter was exceptionally strong, and you indicated you expect a few payoffs to possibly impact growth going forward. Can you talk maybe about the magnitude of those payoffs and if the payoffs specifically are the reason why you're expecting growth to slow a little bit, i.e., originations continue to be at a high rate and payoffs affect that, or? Maybe you could give us a little color around the inputs and whatnot on the loan growth outlook.
spk02: Sure. Right now, we have a couple of loans that we know are going to pay off, but the loans in the pipeline and things we have set for closing well exceed those anticipated payoffs at this point in time. The only reason we haven't changed the 9% is You know, it's just the first quarter and it's, you know, while we can kind of look forward and get a pretty good gauge on the second quarter, you know, we don't want to be overly optimistic about the third and fourth quarter until we have a better feel for it. You know, if our lung growth continues like it's been, then yeah, we're going to, you know, we're going to take a look at it after the second quarter and readjust that. It's not that we're anticipating slower growth. We just don't want to overpromise at this point in time based just on the first quarter loan growth. But right now, you know, the pipeline is probably as strong as we've seen it. It looks good. And, you know, we do have a couple of payoffs coming, but they're not of the magnitude that it should impede loan growth at this point in time based on what we know today.
spk05: Okay. And then on the securities portfolio, wanted to make sure I understood sort of the thoughts around that. With the extension of the duration during the quarter, you know, is there essentially an implicit, you know, sort of statement that you think rates of the market rates have kind of topped out and the Fed, you know, catches up as much as they can or we'll see how far they go in terms of raising rates. But It sounds like, Lee, you're essentially saying you think the rates have moved up enough that they're not going to move up much from here, and so you kind of make a bet that we've topped out from a rate perspective, or is there some other thesis at play?
spk02: I think the extension in the bond portfolio is on the muni side, some of the lower coupon munis extended, and they've Basically, they went from yield to call to yield to maturity, not the yield portion, but the maturity did, because some of them now traded at discounts. So that, plus the fact that we sold some shorter duration securities, knowing that they would quickly be underwater pretty significantly if we didn't get out of them and rates kept rising, and we knew had a pretty good idea that short-term rates are definitely going up with what the Fed's going to do combined to see that, to show that extension out there. You know, we're not saying rates are at the top by any means. You know, and that's why I said that if it looks like, you know, we're beginning to think that they're, you know, near the top or not going to be trending up quite as fast, we plan to redeploy some of the money that we gathered as a result of selling securities. Does that kind of help you?
spk05: Yeah, that's great, Kelly. That helps explain it. And then just lastly, I wanted to make sure I understood the expense guides going forward, the $32.5 million, was that specifically for 2Q? I didn't quite catch that. Or was that for sort of the average for the year? What was the $32.5 million?
spk09: Yes, Brett, that was an average for the year, what we expect for the next three quarters individually. We had guided towards that as well for the first quarter. Of course, we didn't get to that point. Looking over some of that guidance, we basically just did not hit in some of the expense categories the budgeted amounts we had hit. The biggest area within personnel with relationship to health insurance expense. And we budgeted, you know, close, you know, with some inflation over last year's amount, and we did not incur that. But, of course, that's a very volatile item and can change, you know, from quarter to quarter. So that was one of the biggest items of why we did not hit the 32.5. and then just some other various items. Also, we are putting several software platforms in place, some new things we're doing, and so we do expect some expense there. So that's why I'm holding to that 32.5. Okay.
spk05: Does that help? Yeah, that's great. Thank you. Thanks for all the color. Sure. All right.
spk00: Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star then one on your text or telephone. Our next question comes from Brad Millsap, the Piper Stanley. Your line is open.
spk07: Hey, good morning. Good morning, Brad. Thanks for taking my question. You guys have addressed most everything. I did want to follow up on the brokered money that you brought in. It looks like per the release, the cost of interest-bearing demand accounts, I assume that's where it might be housed, just given the increase there, went up from about 20 basis points to 31. Lee, I think you mentioned the cost of that funding was like three basis points. I was just trying to get a handle on kind of what it was. Was that the key driver there, or is there some kind of LIBOR-linked money in that category? Just wanted to get a sense of kind of how that's going to reprice going forward.
spk02: Yeah, it's because we have that, you know, swapped to fixed. The funding side was three basis points. We received LIBOR, and our overall cost from a fixed standpoint was 83 basis points on that money. Okay. So that's showing up. Does that make sense? Yes, that is correct. Okay.
spk09: Yes.
spk02: Yeah, we have that floating swap to fix.
spk09: And those are brokered money markets or non-maturity, if you will, as opposed to brokered CDs.
spk02: We were actually getting some benefit in that we were getting a rate, a floating rate of LIBOR receiving it greater than what we were paying for that 90-day period.
spk07: Okay, got it. And then Remind me, I think you've mentioned before that maybe about half the loan portfolio would be considered floating, you know, repricing with Fed funds, and you have, you know, kind of minimal floors. Can you maybe update us there? And I think you mentioned new loans coming in around 360. Do you think you've kind of hit a floor there in terms of kind of where the loan yield is currently?
spk02: Yeah, because, you know, as those flooding rate loans that we put on in the first quarter hit, As the Fed raises those rates, we're going to see SOFR, LIBOR, and all that increase as well. Currently, our portfolio stands at 53% fixed and 47% floating.
spk07: And do floors have a big impact, Lee?
spk02: They really don't. We didn't have any really high floors. Most of our floors were set to where they couldn't go below zero, and like prime was usually set pretty close to prime and things of that nature. So we just – the kind of customers we deal with, they're sophisticated enough that they're not going to let you put in a floor that's very high at all.
spk07: Great. Appreciate it, Collar. Thank you.
spk00: Thank you. Our next question comes from . Your line is open.
spk04: Yeah. Thanks for taking the question. Just a few follow-ups here. On the allowance ratio, I think we're now at 93 basis points. Is there any more room to move this lower, or should we anticipate this to flatten out?
spk02: That's a good question. With CECL, you never know exactly what is going to happen. Uh, it really comes down to the economic forecast moving forward. If, um, you know, they start factoring in, uh, we use the Moody's economic forecast, uh, kind of a mix of, of their different forecasts. Uh, you know, if they start forecasting in, you know, a more optimistic scenario, then yeah, there's, there's a real possibility that it could go down. Uh, if they start folks, you know, uh, factoring in recession or something like that, it could certainly go the other way. And I think, you know, you're going to see that among all the banks. It really just kind of comes down to that economic forecast. This time we did, you know, take a look at the forecast and decided to go kind of with a 50-50, mostly their base case. And then there, I think it was the S3 case, which is somewhat bearish in order, you know, to come up with a scenario that we felt comfortable with in terms of an economic forecast.
spk04: Okay.
spk02: I don't know if that helps you or not, but, you know, the asset quality is right now as strong as we've seen it. And, you know, 93 basis points, I can see where we get that simply because of our municipal portfolio has a very low rate CECL reserve. And then the mortgages have a reserve, the one to four family mortgages have a reserve less than 0.93. So those two parts of the portfolio, you know, drag it down and which is, you know, certainly justified. and then the rest of the portfolio is above that 1%.
spk04: Yep, that's helpful. Lee, thanks for that. And then, Julie, on the impact of the NII in this quarter, I wrote down the PPP fees, but I missed what you said around the accretion income. Can you go over that again, please?
spk09: Yes. The accretion we recorded was $345,000 for the quarter. And we are seeing, you know, that, of course, is, you know, starting to decline. It can vary, obviously, with early payoffs of those purchase loans. But, you know, we are typically seeing it start to decline for the most part. And on the fees on PPP, they were $569,000, and they had a three basis point impact on the NIM. Did that answer your question?
spk04: Yep, that's it. Thank you for that.
spk09: Okay.
spk04: Sure. And then just lastly, I guess, for Lee on the M&A front, curious what the updated thoughts are within the Texas landscape. Lots of volatility in some of these bank valuations. Curious kind of what the updated outlook is from here.
spk02: You know, we're actively looking, and there's just – We're not seeing a lot of sellers at this point in time that are in geographic locations that we would be interested in acquiring. But, you know, we are hopeful that sometime this year, you know, we're going to find a partner for us to acquire.
spk01: Thank you.
spk00: Our next question comes from Michael Young of Trust Securities. Your line is open.
spk06: Hey, thanks for taking the question. Just wanted to dig a little deeper into kind of commercial real estate and construction growth and just the outlook. Where are you guys seeing sort of the most demand maybe by food group, kind of the type of CRE demand that you're seeing? And then is there anything in the market that you're seeing in terms of underwriting or competition that that you think could pose a risk to growth maybe going forward at some point?
spk02: The biggest part of the increase in the construction portfolio has to do with multifamily. A lot of the projects that we put on last year are just now beginning to fund. And there's, you know, multifamily in a lot of these metropolitan areas is still in short supply and badly needed, especially with the affordability of housing, you know, decreasing. So that's the biggest part of the construction bucket. And then the second part of your question was, help me out again.
spk06: Yeah, just, you know, anything in sort of the competitive landscape that you're seeing change that might, you know, cause you guys to kind of, you know, see a change in growth, i.e., you know, getting too competitive or pricing too skinny, et cetera.
spk02: Yeah, I mean, what we're seeing on the competition, you know, front is we're not really seeing people give on credit. where we're seeing competition is on pricing, especially the fixed rate pricing. And, you know, some folks are just pricing things at levels we don't believe is appropriate for our balance sheet. But, you know, we're able to get our pricing on more deals than not. But there are a few a few loans that we would have liked to make that, you know, we weren't able to make simply because the rate was what we felt like considerably too skinny given the fixed rate environment that we're in at this point in time.
spk01: Okay. Thank you. Appreciate it. Thank you.
spk00: I'm showing no further questions at this time. I'd like to turn the call back over to Lee Gibson, President and CEO, for any closing remarks.
spk02: 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 loan pipeline, balance sheet, core earnings, and asset quality, we're excited about the prospects for the and look forward to reporting second quarter results to you during our next earnings call in July. This concludes the call. Thank you again.
spk00: Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.
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