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spk07: Good day, and thank you for standing by, and welcome to the Southside Bank Shares, Inc. second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to introduce your host for today's call, Lindsey Bell, Vice President of Investor Relations. Please go ahead.
spk00: Thank you, Justin. Good morning, everyone, and welcome to Southside Bank Shares' second quarter 2023 earnings call. A transcript of today's call will be posted on southside.com under Investor Relations. During today's call and in other disclosures and presentations, I will remind you that any forward-looking statements are subject to risk and uncertainty. Factors that could materially change our current forward-looking assumptions are described in our earnings release and our Form 10-K. Joining me today are Lee Gibson, President and CEO, and Julie Schamberger, 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: Thank you, Lindsey. Good morning, everyone, and welcome to Southside Bank Shares 2023 Second Quarter Earnings Call. This morning, we reported net income of 24.9 million, earnings per share of 81 cents, a return on average assets of 1.29 percent, a return on average tangible common equity of 18.59 percent, and continued strong asset quality metrics. During the quarter, we experienced strong loan growth, 80% of which occurred during June. In fact, approximately 52% of the second quarter loan growth occurred in the last two weeks of June. Our loan pipeline remains strong, and we are projecting healthy construction loan advances for the remainder of the year. We are continuing to budget for overall loan growth for 2023 in the high single digits. Our net interest margin held in well during the quarter, contracting only four basis points. Late second quarter loan growth, along with our interest rate swaps, fair value hedges, and Fed term funding, should help mitigate most, if not all, any further net interest margin compression during the third quarter. Length quarter deposits, net of brokered and public fund deposits, increased 73 million, or 1.6%. In July, we began offering Intrify to deposit customers with deposit insurance concerns. We anticipate this will assist with deposit growth in the coming quarters. We are glad to report that the markets we serve remain healthy and continue to grow and perform well. I look forward to answering your questions following Julie's remarks, and I will now turn the call over to Julie.
spk04: Thank you, Lee. Good morning, everyone. Welcome to our call today. We are pleased to report second quarter net income of 24.9 million, a decrease of 1.1 million on a linked quarter basis, and diluted earnings per common share of 81 cents, a decrease of two cents, or 2.4% linked quarter. We had strong loan growth in our loan portfolio this quarter with an increase of $176.4 million or 4.2% linked quarter, driven by our real estate portfolio, with an increase in CRE of $109.5 million and a $65.5 million increase in construction loans. The interest rate of loans funded during the quarter was on average approximately 7.5%. Asset quality metrics remain strong with non-performing assets of $3.1 million or 0.04% of total assets at June 30th. At June 30th, our allowance for loan losses as a percentage of total loans was 0.84%, a slight decrease compared to 0.87% on March 31st due to second quarter loan growth. Our allowance for credit losses decreased $381,000 for the linked quarter to $39.5 million. As of June 30th, our loans with oil and gas industry exposure were $108.5 million, or 2.5% of total loans. Our securities portfolio decreased $97.4 million, or 3.5% on a linked quarter basis. The second quarter decrease was driven primarily by sales of AFS securities. The sales of the AFS securities resulted in a net realized loss of 3.5 million. Additionally, in the second quarter, we recognized a net gain of 2.6 million on the sale of correspondent bank stock. There were no transfers of AFS securities during the second quarter. At June 30th, we had a net unrealized loss in the AFS securities portfolio of $69.7 million compared to $61.9 million last quarter, an increase of $7.8 million. As of June 30th, the unrealized gain on the fair value hedges and municipal securities was approximately $27.9 million compared to $9.8 million linked quarter, which partially offset the unrealized losses in the AFS securities portfolio. As of June 30th, the duration in the entire securities portfolio was nine years, and the duration of the AFS portfolio was 6.7 years. Our mix of loans and securities shifted to 62% and 38% respectively, compared to 60% and 40% on March 31st. Deposits increased $279.5 million, or 4.8%, on a linked quarter basis, driven by an increase in broker deposits. Our capital ratios remain strong, with all capital ratios well above the capital adequacy and well-capitalized thresholds. Liquidity resources remain solid, with $2.5 billion in liquidity lines available as of June 30th. During the second quarter, we completed the purchase of all the remaining authorized shares of our common stock in our stock repurchase plan, a total of 618,831 shares at an average price of $30.27. In our earnings release this morning, we reported that our board of directors approved a stock repurchase plan on July 20th authorizing the repurchase of up to 1 million shares of the company's outstanding common stock. As of today, no shares have been purchased under this recently approved stock repurchase plan. Our tax equivalent net interest margin decreased four basis points on a linked quarter basis to 317 from 321, primarily due to larger average rate and balance increases on our interest-bearing liabilities when compared to the interest-earning assets. The tax equivalent net interest spread decreased for the same period by seven basis points to 255, down from 262. For the three months into June 30th, net interest income increased 563,000, or 1.1%, compared to the linked quarter. We also recorded $81,000 in purchase loan accretion this quarter. Non-interest income, excluding the net loss on the sales of the AFS securities and equity securities, decreased $486,000, or 4.1%, for the linked quarter. The result of bully income related to death benefits of $950,000 realized in the first quarter, partially offset by increases in brokerage services and other non-interest income. Non-interest expense increased $144,000 on a linked quarter basis to $35 million. For 2023, we have budgeted approximately $35.5 million in non-interest expense each quarter. Our fully taxable equivalent efficiency ratio increased to 5106 as of June 30th from 50.99 as of March 31st. Income tax expense increased slightly to $4.6 million, and our effective tax rate increased to 15.5% for the second quarter from 14.9% in the previous quarter. At this time, we estimate an annual effective tax rate of 15.5% for 2023. Thank you for joining us today. This concludes our comments, and we will open the line for your questions.
spk07: And thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. And one moment for our first question.
spk09: And our first question comes from Brady Gailey from KBW.
spk07: Your line is now open.
spk01: Hey, thanks. Good morning, guys. Good morning. So it was great to see the margin hold in so well. It was only down four basis points. Lincora is a lot better than some of your peers. And it sounds like you expect the margin to be stable going forward. Is that the right way to think about the margin? And can you just talk about any sort of impacts? I know you have some hedges. Any sort of impact from those hedges over time on the margins?
spk06: We're thinking, I agree that we're thinking that the margin, you know, holds steady, especially in the third quarter. And, you know, with the interest rate hedges that right now are around $760 million, and I don't think we have any that roll off the remainder of this year. There's an average right there of a 319. And then with our Fed term funding from the Fed term window, uh 296 million at the quarter end at an average rate of 446 you know that gives us a little over a billion dollars of money that's locked in combine that with the um the non-interest-bearing deposits that we have in the capital that gives us a pretty good solid funding base at uh you know this locked in and so um You know, we feel good about being able to hold the margin where it is, especially with the loans that we put on.
spk01: All right. And then, you know, I heard the expectation for high single-digit loan growth this year. If you look at deposits, they've been kind of, you know, flat, if not down a smidge, year to date. So how do you think about deposit growth? going forward and you know, your, your loan, your, uh, loan deposit ratio is 71%, which is pretty low. How high would you be willing to allow that to go?
spk06: Yeah. If our loan deposit ratio got up into, um, you know, as long as it stayed below 90, I think, I think we'd be comfortable. Uh, and we're a long way from that, um, in terms of, uh, The deposit growth for the rest of the year, we feel like, you know, it's not going to be robust because raising deposits right now is an expensive proposition. But we feel like, you know, we can increase deposit sum. You know, we funded almost $100 million of our loan growth during the quarter by reducing securities. So that is something that, you know, we can do in the coming quarters as well. So, you know, overall, if we can continue to have the loan growth that we think we're going to have, then, you know, shifting some of those assets from the lower investment category up into the higher loan category, and then with, you know, some deposit growth, you know, we should be able to easily fund those loans.
spk01: All right. And then? Finally for me, it was good to see the new buyback authorization and the completion of the prior one. You guys have been pretty consistently buying back your stock at least the last three quarters. Is there any reason to think that that would slow in the back half of this year?
spk06: You know, we'll just have to see what price the stock's at. And, you know, we're going to, you know, buy as we feel like it makes sense based on, you know, where the price is. And so I don't anticipate it'll slow. It just really is going to depend on market conditions. Okay.
spk01: All right. Great. Thanks for the call, guys.
spk08: All right. Thank you, Brady.
spk07: And thank you. And one moment for our next question.
spk09: And our next question comes from Graham Dick from Piper Sandler. Your line is now open. Hey, good morning, everybody.
spk08: Morning, Graham.
spk05: So I just wanted to kind of touch a little bit more on the deposit side of things as it pertains to the mix going forward. I know you said you think you can grow deposits a little bit. I'm just trying to try to get a sense for, you know, what you guys are seeing on the non-interest bearing side. Uh, and then also where you guys think you might be able to grow. Cause it looks like the majority of this, the growth this quarter was from brokered. Um, so just trying to get a sense of where you think, you know, or when you might think non-sparing kind of slows down on the outflows. Um, and then core deposit growth can resume and kind of, you know, take the baton from brokered in a sense.
spk06: Right now, you know, the, uh, the core deposits, we feel like grew about 73 million during the quarter. The increase in broker deposits, I think you can see kind of a corresponding decrease in Fed borrowings and home loan bank borrowings. Basically, we were able to, we have to fund our interest rate swaps at $760 million with some type of wholesale funding. And so we were able to get cheaper funding to fund those swaps through the brokered CD market than we were through the Fed discount window. And so it basically moved from one place to another. And it was just, you know, where the cheapest funding is. But, you know, those, that funding is basically locked in at a fixed term rate. You know, we're hoping to be able to, you know, continue to have that core deposit increase. And some of it will likely be in that non-interest-bearing deposit as we, bring on new loan relationships. We, you know, want to bring on deposit relationships as well with some of those loan relationships. So we, you know, we hope to basically, you know, grow those core deposits in all the different categories.
spk05: Okay. All right. Would it be safe to assume then that we're getting closer to the bottom of non-interest bearing, kind of remixing into some higher cost stuff? I mean, it sounds like you bring on a lot of relationships right now. So I figure kind of if you bring on the full relationship with the non-interest bearing piece, it could help, you know, slow things down on that front. Is that fair to assume?
spk06: That is correct. And, you know, some of the non-interest bearing on the commercial side are tied to analysis. And, you know, some of that decrease you've seen is, the fact that they don't need to carry as many balances in order to pay their analysis fees. So in higher interest rate environments, you typically see some deterioration in the non-interest-bearing deposits on the commercial side.
spk05: Right. Okay. Thanks. And then I guess just shifting bigger picture, as we look at the balance sheet as a whole, I know you said there is obviously a shift towards loan book out of the securities book this quarter. Do you guys have any near-term or medium-term targets for the percentage of assets you would like in loans?
spk06: Our target for a long time has been to get to 70% asset at 70% loans and 30% securities. I think we moved to 62, 38 this quarter. I think we've moved move the needle about 2% in each direction towards getting there. But that would be our goal. And I think for us to do that in an orderly fashion, it would probably take another year and a half to two years to do that, assuming we continue to have the loan growth we've had.
spk05: Okay. And then, yeah, just you kind of gave a good segue there. But on the loan growth front, I know you said a lot of that came in at the very end of the quarter. Was that like, you know, one or two larger relationships or is that, you know, is that a pretty granular amount of growth that came in there during the last two weeks? I was trying to get a sense for, I guess, the 3Q versus 4Q23 loan growth outlook.
spk06: There were some larger loans that came in, but, you know, it was just everything seemed to kind of – settle and close in that in June for some reason. And, you know, we did have some closings in the first two months. There were holdovers from the first quarter. And then we, you know, even some of the stuff that closed in June was a holdover from the first quarter. So it was just kind of one of those odd things that a lot of the loan closings just happened to fall in June. But A few of them were larger loans. They closed.
spk05: Okay. That's helpful.
spk09: Thank you, guys. I appreciate it. And thank you. And one moment by our next question. And our next question comes from Brett Rabattin from Hovde Group.
spk07: Your line is now open.
spk11: Hey, good morning. Thanks for the question. Wanted to, I guess, first start with the taxable portfolio, the 45 basis point increase in that link quarter. I know there's some hedges. I don't know if that flows through that line item. Can you talk maybe about the improvement in that piece of the securities book?
spk06: The tax exempt that went from 395 to 415, is that what you're talking about, on the link quarter basis? Well, I guess the tax... Oh, you're talking about the taxable. You're talking about the taxable. Right, right. That has to do with the 300 million in T-bills that we have. And so you can see the increase there and those, those, that basically we were in T-bills and we're yielding a little over 5%.
spk11: Okay. Um, and then was, was hoping you could talk about the construction portfolio, you know, what, what, um, what's the makeup of the construction book and what you were funding, you know, here this quarter, um, in that piece of the loan portfolio.
spk06: You know, probably the largest part is multifamily. We do have some industrial that we funded, and then we continued. I would say the home builder construction portfolio probably remained fairly similar to what we had in the first quarter. So the largest portion of it would be multifamily, and the next would be industrial.
spk11: Okay. And then wanted to make sure I understood the reconciliation non-GAAP last page of the price release. You've got the net of the non-recurring income at $226,000, but it would seem like you had the securities losses of $34.55 and the gain of $26.42. I don't know if there's a... strange tax rate on one of those things, but it would seem like that would have netted to a bigger number. Any color on that, Lee?
spk04: Brett, I'll give you some color on that. During the quarter, we had an opportunity to purchase a piece of our sub-debt, a $5 million piece, and we did so at a discount of about $587,000. And so for the purpose of the efficiency ratio, we did exclude it from non-recurring income. So that was the missing piece that you don't have, the 587.
spk11: Okay. That's helpful. And then when I look at the link quarter improvement in the FHLB funding costs, is that just due to the duration of those being short-term and you've re-upped them or any color around that?
spk08: That line item.
spk11: Okay, just a sec. Let me get down here. Sorry, so link quarter went from... Oh, okay.
spk06: Right. That has to do with the hedges. And we basically weren't borrowing overnight as much from the home loan bank, and we were borrowing overnight. from the Fed discount window. Okay.
spk11: So none of the... I'm sorry, go ahead. Go ahead.
spk06: No, go ahead.
spk11: Well, I was just going to ask, Lee. So none of the... If I have it right, the duration of all of the borrowings is, you know, less than six months. You don't have any longer dated borrowings at this point on the balance sheet?
spk06: We don't. We... We have longer-dated funding through the swaps. It's the funding we have to renew every 30 to 90 days, depending on what the swap's tied to. But with the swap, you know, we're paying a fixed rate. We're receiving a floating rate on the swap, and then we're paying out the floating rate on the borrowings. So it nets out. There's a few basis points in there. But it basically nets out to our cost is the fix that we're paying on the swap.
spk11: Okay. That's helpful.
spk06: And those swaps have about a two and a half year duration.
spk11: Okay. Great. That's what I was looking for. Thanks so much for the color.
spk09: All right. And thank you. And one moment for our next question. And our next question comes from Matt Olney from Stevens.
spk07: Your line is now open.
spk02: Hey, good morning, everybody. I want to go back to the loan growth commentary, and you mentioned that the closing rates were particularly strong just the last few weeks of the quarter. Any other themes or takeaways for us within the loan growth as it relates to borrowers? Is there any more? optimism, would you say? Or is it just more about the closing timelines? And then, I guess related to that, was any of the growth in the second quarter from taking market share from other banks that may have stepped back in recent months?
spk06: Answer to the last question, I would think so, because there are some less banks out there pursuing loan growth at this point in time. And You know, in terms of the borrowers, you know, there seems to be optimism. It's requiring a lot more equity going into these projects. You know, 50% equity is not uncommon. And in some cases, we have as much as 60, 62% equity going into some of these deals. My guess is that they're extremely optimistic if they're willing to put that much equity into a project at this point in time.
spk02: Okay. What about on sticking with long-growth, what about the back end of that, thinking about loan paydowns? Any notable trend you're observing there as some of these construction loans are completed?
spk06: We have probably... three or four construction projects that should finish sometime later in the year. I think most of them are slated to be late third quarter or, you know, sometime during the fourth quarter. And we would anticipate that, you know, at least a couple of those would probably prepay. And it's possible all four of those could prepay before year end. But usually they've got to get to stabilization, and so that takes a little while. And, you know, unlike back during the pandemic when you were seeing things pay off before they reached stabilization, now typically they're needing to reach stabilization. So, like I said, we might see a couple pay off, but my guess is that would be about it.
spk02: And those projects you mentioned, are those – David Stegall- multifamily projects.
spk06: David Stegall- Yes, they are.
spk02: David Stegall- Okay that's helpful and then I guess switching over to fees anything notable there, I think you called out some one time items. David Stegall- Anything else notable from the the core fees or any kind of outlook there, you can share.
spk04: No, I don't think there were any other notable fees this this quarter.
spk02: Okay. Go ahead.
spk04: I was just going to say, you know, last quarter we also had the death benefits on our BOLI that, you know, did obviously not reoccur again this quarter. So that was part of the decrease on that.
spk02: Okay. Got it. That's helpful. And then I think one of the comments made earlier was as far as kind of funding loan growth that perhaps, T. Securities can help fund the loan growth just want to dig in there would that be more security maturities that are upcoming or would you look to tell some securities in the back half year to help fund that longer.
spk06: T. we've got you know we've got a short term T bills around 300 million that we could you know let go of anytime we wanted. And then, you know, we've sold securities, a fair number of securities the first half of this year. And, you know, we wouldn't be bashful about selling some of those in the back half of the year if it made sense.
spk02: Okay. And then I think you disclosed that the unrealized loss position of the AFS securities portfolio was around, 70 million dollars did I did I capture that right and and I guess that is correct okay and I guess how do I just think about kind of the recapture of that the next several years is there any any guideposts you give us to think about kind of recapturing that the recapture would come either through maturity or through a change in interest rates down
spk06: In addition on that, we do have on our fair value hedges, we do have a, I think it was a $27 million unrealized gain that helps offset that $70 million. So when we look to sell securities, we're able to, you know, take that into consideration as well.
spk02: Okay. So what's the, I guess the total, AOCI mark at this point. It was probably disclosed. I just didn't see it in there.
spk06: I'm going to have to ask. Julie's looking for it.
spk08: Okay.
spk04: At June 30th, the AOCI is a debit of $115,693 or lost, I should say. $125.9 million is unrealized loss on securities, and that includes transferred, and then a gain of 29.4 on derivatives, and then AOCI to the negative of 19.2 related to the retirement plan.
spk02: Okay. Got it. All right. That's all from me. Thanks for taking my questions.
spk06: All right. Thank you, Matt.
spk10: And thank you. And one moment, please. And we have a follow-up question. One moment, please.
spk09: And we have a follow-up question from Brett Rabattin from Hovde Group.
spk11: Hey, Julie, just one clarification on the expense guidance for the full year. I think you said $35.5 million per quarter. Does that mean you add those up to $142 million for the full year, or is that $35.5 million for the back half of the year each quarter?
spk04: I think it's just, well, it's for the remaining part of the year.
spk11: Okay.
spk06: So not necessarily for the full year. Okay. Great. Yeah, basically we're looking at $71 million for the remainder of the year.
spk08: Okay.
spk06: Thanks for that clarification.
spk07: And thank you. And I am showing no further questions. I would now like to turn the call back over to Lee Gibson, President and CEO, for closing remarks.
spk06: Thank you everyone for joining us today. We appreciate the opportunity to answer your questions along with your interest in Southside Bank shares. In closing, we're excited about our prospects for the remainder of 2023 and look forward to reporting third quarter results to you during our next earnings call in October. Thank you.
spk07: This concludes today's conference call. Thank you for participating. You may now disconnect.
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