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spk00: Good day, and thank you for standing by, and welcome to Southside Bank Shares, Inc. Second Quarter 2022 Earnings Conference Call. At this time, all participants are on a listen-only mode. After this speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lindsey Biles, Vice President of Investor Relations. Please go ahead.
spk01: Thank you, Justin. Good morning, everyone, and welcome to Southside Bank Shares' second 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 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.
spk04: Good morning, everyone, and welcome to Southside Bank Share's second quarter earnings call for 2022. This morning, we reported strong financial results for the second quarter. Highlights for the quarter included earnings per share of 79 cents, a return on average tangible common equity of 18.62%, annualized linked quarter loan growth of 18.3% net of PPP, a linked quarter eight basis point increase in the net interest margin, an efficiency ratio of 47.74%, and continued strong asset quality metrics. The linked quarter increase in our net interest margin reflected a 17 basis point increase in the average yield on loans, a nine basis point increase in the average yield on securities, partially offset by an eight basis point increase in the average rate on our interest bearing liabilities. We're extremely pleased with our continued strong loan growth during the second quarter of 2022. Our loan pipeline remains strong, and we are encouraged about the loan growth prospects for the second half of 22. However, I do want to point out that approximately $60 million of the second quarter loan growth may be short term and pay off prior to year end. Given the solid outlook for the high growth markets we serve, as well as the growth occurring in our other markets, We're increasing our anticipated full year 2022 loan growth estimate, net of PPP, from 9% to the mid-teens. During the quarter, as interest rates increased, we sold lower coupon mortgage-backed securities and purchased primarily higher coupon mortgage-backed securities. In addition, we purchased municipal securities, over half of which had 5% coupons. We hedged approximately 72% of the municipal securities purchased during the quarter to the call date to reduce the overall duration of these securities. We have also hedged additional AFS municipal securities. Currently, approximately 30% of the par amount of our AFS municipal securities are hedged to the call date. 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 performing growth markets in the country. Rising mortgage rates and higher costs have taken some of the steam out of the highly robust single-family market, moving this market closer to the very solid pre-pandemic levels. And there continues to be a housing shortage in several Texas markets. We continue to successfully execute our business model in what we consider to be the best state in which to operate in the country. We recently hired two additional seasoned lenders, one in Austin and one in Houston that should enhance overall loan growth. I want to recognize and thank the entire Southside team for their continued contributions and efforts, without which these results would not have been possible. I look forward to answering your questions following Julie's remarks. I will now turn the call over to Julie.
spk02: Thank you, Lee. Good morning, everyone, and welcome to our call today. We're pleased to report second quarter net income of $25.4 million, an increase of $409,000 on a linked quarter basis, and diluted earnings per common share of $0.79 for the second quarter, the two-cent increase linked quarter. Length quarter, net of a $10.9 million decrease in PPP loans, our loan portfolio increased $173 million to $3.96 billion, driven primarily by strong growth within our real estate loan portfolio. Our CRE loans increased $112.2 million, construction loans increased $30.3 million, and we also experienced an increase in commercial loans of $38.7 million net of PPP on a linked quarter basis. The weighted average rate of new loans funded during the second quarter was approximately 4.3%. As of June 30th, our PPP loans included in the commercial loan category totaled $3 million, down from $13.9 million last quarter. The average balance of PPP loans was approximately 9.4 million for the second quarter. We continue to experience strong asset quality metrics with non-performing assets of 11.8 million or 16.16% of total assets at June 30th, consistent with the first quarter. For the three months into June 30th, our allowance for loan loss decreased slightly due to the reversal of provision for credit losses on loans of $112,000 recorded in the second quarter, partially offset by net recoveries of $37,000. As of June 30th, our allowance for loan losses as a percentage of total loans was 0.89%. Our allowance for off-balance sheet credit exposures decreased to $1.9 million on an each quarter basis due to a reversal of provision of $521,000 compared to provision expense of $28,000 in the prior quarter. As of June 30th, our loans with oil and gas industry exposure were $154.5 million, or 3.9% of total loans. Our securities portfolio increased $276.7 million, or 10.9% on a linked order basis. The increase was driven by purchases in the securities portfolio that more than offset the sales of securities, principal payments, and the increase in unrealized losses in the portfolio. The purchases consisted of approximately $320 million in mortgage-backed securities, $195 million in municipal bonds, and $54 million combined of U.S. Treasuries and corporate bonds. During the second quarter, we transferred additional available for sale securities with fair values of $612.7 million to Health and Maturity. We recognized additional net losses of $2.2 million on the sale of AFS securities during the quarter. At quarter end, we had a net unrealized loss in the securities portfolio of 288.3 million compared to 103.7 million at the end of the first quarter. As of June 30th, the duration of the entire securities portfolio was 9.3 years, an increase from 8.1 years at March 31st. The duration of the AFS portfolio at June 30th was 7.4 years. Our mix of loans and securities at June 30 shifted closer to 58% and 42% respectively from 60% and 40% on a linked quarter basis due to the purchases in the securities portfolio more than offsetting the growth in the loan portfolio. Our deposits increased 178 million or 2.9% on a linked quarter basis. which includes an increase in our non-interest-bearing deposits of 105.4 million, or 6.5%. In the first quarter, our board approved a new stock repurchase plan with an authorization to purchase up to 1 million shares. During the second quarter, we purchased 223,901 shares at an average price of $39.49. Since quarter end and through July 22nd, We repurchased 8,613 shares at an average price of $35.93 per share. Our net interest margin increased on a length quarter basis to 330 from 322, and net interest spread increased for the same period to 314 from 309. The increase in net interest margin was primarily driven by the increase in the average yield on loans of 17 basis points and nine basis points on the securities portfolio. Together, this resulted in a $2.1 million or 4.4% increase in net interest income for the three months into June 30th when compared to the linked quarter. We recorded approximately $268,000 in net fees related to PPP loans included in interest income this quarter compared to $569,000 last quarter. As of June 30, 2022, we had net deferred fees of $99,000 remaining to be recognized as a yield adjustment over the remaining terms of these loans. Additionally, we recorded $372,000 in purchase loan accretion this quarter. For the three months into June 30, 2022, non-interest income excluding net loss on the sale of AFS securities decreased $994,000 or 8.1% for the length quarter. The decrease was driven by a non-recurring net gain recorded on other investments of $837,000 in the prior quarter and decreases in deposit services income, mortgage servicing fee income, and swap fee income, partially offset by an increase in brokerage services income. For the second quarter, non-interest expense was $32.1 million, an increase of $911,000, or 2.9% on a length quarter basis, due primarily to increases in salaries and employee benefits, professional fees, and software expense. For the remainder of 22, we expect quarterly non-interest expense to be approximately $32.5 million. Our fully taxable equivalent efficiency ratio decreased to 47.74% from 4815 for the previous quarter. Income tax expense increased to 3.3 million compared to 3.1 million for the three months ended March 31st. Our effective tax rate increased to 11.5% from 11.2% for the second quarter. At this time, we estimate an annual effective tax rate of 11.5% for 2022. Thank you for joining us today. This concludes our comments, and we will open the line for your questions.
spk00: And thank you. As a reminder, to ask a question, you'll need to press star 1 1 on your telephone. Please stand by while we compile the Q&A roster. One moment for questions. And our next question comes from Brad Gailey. Your line is now open.
spk03: Yeah, thanks. Good morning. It's Brady. Good morning, guys. Good morning, Brady. Good morning. Good morning. So Southside has enjoyed a nice, healthy level of service charges for a while. I just wondered, can you update us on where y'all are at as far as any changes to overdraft or NSF? And do you think that that revenue, you know, kind of bigger picture is at risk over the next couple of years? Or do you think that we should think of it more as stable?
spk04: We made some adjustments earlier in the year. We're probably going to make a few more adjustments effective, I think, September 1st. Yeah. Right now, it's tough to tell, Brady. It just depends on, you know, what the regulatory actions are out there. But I can see that on the overdraft side that it's, you know, we're going to slowly see that, you know, reduce over time. But I'm not expecting it to go away by any means. But, you know, I can see it reducing a little bit over the next couple of years. You know, we anticipated approximately 10% this year. Actually, we're a little above what we budgeted so far. And so, you know, we're going to take additional action and expect, you know, some of that revenue to come down, but not substantially between now and herein.
spk02: True. And the change that Lee mentioned that we did make already was effective April 1st. So that changes. That explains some of the impact that you see in that line quarter to quarter. It was an April 1st effective date change.
spk03: All right. And then, you know, if you look at the average balance sheet, you know, bonds, your bond portfolio has been stable to, you know, it was down a little bit this quarter. But how should we think about, you know, the size of the bond portfolio for the rest of the year and into next year?
spk04: My thought would be that assuming that loan growth continues and we may gradually begin to bleed some of that off through the mortgage-backed securities prepayment and let it, you know, become less a part of the organization. But that's dependent on the loan growth, which right now looks very good. And if that continues, like I say, the bond portfolio is probably as high as you're going to see it.
spk03: Okay. And then finally for me, just on your reserve, you know, the reserve has been coming down the last year or so, you know, now at roughly 90 basis points. Do you think that's, at least in terms of a percentage, do you think that's kind of hit a floor? here at around 90 basis points, do we think of that as stable, or do you think there's, you know, more of a downfall?
spk04: I would think it's, yeah, I would think it's pretty stable. You know, one of the things that brings that down some is a little over 10% of our loans are in municipal loans, and those, you know, loans have, for the most part, have ad valorem tax pledges, and the reserves on those are very, very small. since we've not ever experienced any losses on those. So I am thinking that the reserves about, you know, from a percentage standpoint, it's where it really needs to be and should be fairly stable moving forward, absent any changes in economic conditions. And if, you know, the economic forecast worsens, then you'll see that ratio move up.
spk03: Okay. All right, great. Thanks for the color, guys.
spk00: All right. Thank you, Brady. And one moment for our next question. And our next question comes from Brett Rabattin from Hovde Group. Your line is now open.
spk06: Hey, good morning.
spk04: Good morning. How are you?
spk06: I'm great, thanks. Wanted to first ask you, You guys kind of bucked the trend a little bit with deposits this quarter being up and just wanted to kind of get a sense of the deposit flows in the quarter. Was that new account openings? Was that new or existing customers and kind of how you think about your balances from here and then the deposit beta and how that affects the margin?
spk04: Yeah. Some of it was new account openings. Some of it was existing customers. A portion of the interest bearing was a little bit of a seasonal increase that will likely go away in the third quarter. But as Julie mentioned, I think it was around 105 million of that positive increase was in non-interest bearing. And that's new accounts, you know, existing customers. In terms of the deposit beta, you know, moving forward, since we're, you know, likely next week going to be into the, you know, well above 200 into that next, you know, 100 basis point tier, that third one, we're thinking the deposit beta is going to be somewhere in the 30% range. And it just really is difficult to say exactly. know where it's going to be but um and and that's that's on all deposits um so you know because we do have uh approximately five 575 million of those deposits are um hedged uh at this point and so we really don't anticipate any um any movement in those and then of course we've got the non-interest bearing deposits okay um that's helpful and then um
spk06: One is just to talk about the loan growth and, you know, obviously really strong loan growth in 2Q. You know, was any of that, Lee, you think kind of loans that were on a rate sheet that might have been a little older or was that all production that, you know, has fairly high rates on it? Can you talk maybe about the loan rates that you got on that production in 2Q?
spk04: You know, some of it was, you know, loans that we had – set for closing in the first quarter that basically ended up closing in the second quarter. But for the most part, you know, they were new loan closings for the second quarter. And then, of course, we have some now that are set to close in the third quarter. In terms of the rates, you know, that's the combined rate that they went on. Approximately half of those are probably floating rate loans. And so, you know, those floating rate loans are moving up. And, you know, we anticipate that that average rate's going to move up here in the third quarter pretty nicely, especially with what's likely going to happen next week.
spk06: Okay. And then maybe just last one back on the margin. Would it be fair to assume that the margin continues to tweak up here, but maybe at a slightly lower pace than the second quarter?
spk04: Yeah, so if the loan growth, you know, continues at the pace we've seen, then I would think it would tweak up a little bit, but it's, you know, it's certainly not going to be at the pace we saw in the second quarter, simply because I think the deposit rate is going to be higher than what we saw in the first and second quarters.
spk06: Okay, great. Appreciate all the color.
spk00: All right. And thank you. And one moment for our next question. And our next question comes from Brad Millsaps from Piper Sandler. Your line is now open.
spk07: Hey, good morning.
spk02: Good morning.
spk07: Good morning, Brad. You guys have done a good job addressing most everything. I did want to maybe follow back up on the bond portfolio, just kind of maybe the timing of some of the purchases. It looked like the average was a good bit below period end, so I'm assuming a lot of those moves kind of came late in the quarter, particularly maybe around some of the MBS. Is it safe to say that the MBS category should be up on average quite a bit from the 2Q level? I'm just curious if you guys can kind of talk about some of the, some of the timing of the moves and then maybe also to kind of what that would mean for kind of the rates on those, you know, three individual buckets that you guys have, you know, taxable tax exempt and MBS as we think about the third quarter.
spk04: Okay. Yeah. The, uh, a lot of the MBS was purchased, um, uh, in the, uh, in June. Um, and. Basically, we purchased, for the most part, mortgage pools that were four and a halves and fives. The fives had very little premium on them, meaning 1%, maybe 1.5% premium. And the four and a halves were purchased pretty close to par, maybe just slightly above par. But yes, I would think the, definitely the average balance for the MBS will be up in the third quarter. And in terms of, oh okay, so the yields on the municipal side, we purchased a lot of fives and we also purchased some fours and four and a half coupons. Most of those were purchased, some were purchased in May when rates got really high. But a lot of them were purchased in June when basically the spreads widened considerably on the municipal securities. But we did, you know, we took into consideration and we pretty much shortened the final maturity on a lot of the securities we purchased. And that's why when we hedged them to the call, that, you know, we've taken a lot of the duration risk out of those securities. So, you know, basically, as overnight SOFA rises, the cost of our hedge goes down. And based on what happens next week, the cost of the hedge should be very low starting in August. And I don't know if that helps you or gives you any color on that.
spk07: So, yeah, that does help. But I would think based on kind of the timing and such, you should see another nice lift, you know, kind of across the three buckets in terms of the yield that you're going to report in the third quarter. You know, back to Brett's question, it would seem like that.
spk04: Yes, yes. No, you are correct.
spk07: You are correct.
spk04: I think securities portfolio as a whole will see a nice lift in overall yields.
spk07: So it should be larger on average and it should be higher yielding on average, correct?
spk04: That is correct.
spk07: Okay. All right. Perfect. I appreciate all the colors. Thank you guys. Nice quarter.
spk00: All right. Thank you. And thank you. And one moment for our next question. And our next question comes from Matt Olney from Stevens Inc. Your line is now open.
spk05: Yeah, good morning and thanks for taking the question. You bet. Circle back on the loan growth. I think you gave some good color by loan type. Any more color you can give as far as the 2Q loan growth by market? And then also would like to hear about the loan pipeline as it stands today as compared to three months ago. Thanks.
spk04: Okay. A lot of the loan, well, the loan growth occurred, I guess, primarily in four of the markets. It was in Austin, in East Texas, in Southeast Texas, and then in Houston. The DFW market is where we saw some payoffs occur, and so that was that was pretty much flat there. So those are the four markets that we saw. In terms of the pipeline, it's still strong. It may not be as strong as it was when we had the last earnings call, but it's still, you know, well above what we would have anticipated at the beginning of the year.
spk05: Okay. That's helpful. I guess you gave us an outlook for deposit betas, but I guess just taking a step back, we'd love to hear how you'd characterize the overall level of competition on both sides of the balance sheet, on both deposits and loans. Here we are in July. We'd love to maybe appreciate how you think it compares to what your expectations would have been a few months ago.
spk04: The competition on deposits is fierce, which I would have anticipated with the rates up and customers having opportunities for return in other areas. The competition for loans, you know, remains extremely competitive. But, you know, I think the thing that surprised us is the amount of really quality loans that are available in the marketplace. And so while the competition, you know, there is fierce, the amount and the total volume of those is much larger than we would have anticipated the latter part of last year.
spk05: And just to follow up on that last point, I know the bank's done a lot of commercial loan hirings over the last year or two that's producing a portion of that growth. So how much of the opportunities that you mentioned are maybe from some of the new hires versus just a really robust market?
spk04: Quite a bit. I don't know that I can quantify in numbers, but my guess would be that at least a third of the overall loan growth has come from the new hires. from the last, you know, 18 months. So it's, you know, they've been very successful and they've been great new hires. And we're looking forward to the two new hires we've just added and what the potential there is.
spk05: Okay, great. Thanks for taking the questions.
spk00: And thank you. And I am showing no further questions. I would now like to turn the call back over to Lee Gibson for closing remarks.
spk04: 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 continued positive economic conditions in our markets, our strong loan pipeline, balance sheet, core earnings, and asset quality, we are excited about the prospects for the second half of 2022 and look forward to reporting third quarter results to you during our next earnings call in October. This concludes the call. Thank you again for joining.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
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