This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk06: Thank you for standing by, and welcome to Southside Bank Shares' fourth quarter and year-end 2023 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. To remove yourself from the queue, you may press star 1 1 again. I would now like to hand the call over to VP of Investor Relations, Lindsay Bales. Please go ahead.
spk00: Thank you, Lateef. Good morning, everyone, and welcome to Southside Bank Shares' fourth quarter and year-end 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 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, CSO. 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. Thank you, Lindsay.
spk03: Good morning, everyone, and welcome to Southside Bank Shares' fourth quarter and year-end earnings call. This morning, we reported fourth quarter net income of 17.3 million, earnings per share of 57 cents, a return on average tangible common equity of 13.1%, and continued strong asset quality metrics. During the fourth quarter, net income was impacted by a loss of 10.4 million, or 27 cents per share, due to a restructuring of a portion of the securities portfolio, by selling approximately $388 million of lower-yielding AFS securities. The proceeds were largely reinvested in premium U.S. agency mortgage-backed securities with approximately 20% reinvested in loans. The restructuring is estimated to increase net interest income, resulting in a two-year payback of the loss. Linked quarter, our net interest income increased $1.2 million, and the net interest margin declined only three basis points, less than originally estimated. Given the restructuring of the securities portfolio, we believe the net interest margin is at or near the bottom and should begin to slowly move higher during 2024. Linked quarter, we continue to experience excellent loan growth. with loans increasing $103.9 million, or 2.3%. We ended the year with 9.1% loan growth, slightly exceeding our estimate. For 2024, we are currently budgeting for 5% loan growth. The markets we serve remain healthy and continue to grow and perform well. 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 fourth quarter and year-end call. We ended the year with net income of 86.7 million and diluted earnings per share of $2.82. For the fourth quarter, we reported net income of 17.3 million, a decrease of 1.1 million on a linked quarter basis, and diluted earnings per common share of 57 cents. a decrease of 3 cents compared to September 30th. For 2023, we had loan growth of $376.8 million, or 9.1%. The growth was driven primarily by increases of $230.1 million in construction loans and $180.7 million in commercial real estate loans. For the fourth quarter, we had loan growth of $103.9 million, or 2.3% linked quarter, driven by increases in construction loans of $69.2 million and commercial real estate loans of $51.1 million. The interest rate of loans funded during the quarter was on average approximately 8%. As of December 31st, our loans with oil and gas industry exposure were $94.5 million or 2.1% of total loans. Our allowance for credit losses increased by $1 million for the linked quarter to $46.6 million. The increase was driven by a loan loss provision of $2.2 million and a provision for off-balance sheet credit exposures of $79,000 for the fourth quarter. The provision on loan loss was primarily driven by the increase in loans during the fourth quarter. Asset quality metrics remain strong with non-performing assets of $4 million or 0.05% of total assets on December 31st. On December 31st, our allowance for loan losses as a percentage of total loans was 0.94%, consistent on a linked quarter basis. Our securities portfolio decreased $40.1 million or 1.5% on a linked quarter basis driven by sales of AFS securities in late December due to strategic opportunities related to a drop in treasury rates and reinvestment of proceeds primarily into higher yielding securities and to a lesser extent into loans. The sales resulted in a net realized loss of $10.4 million. There were no transfers of AFS securities during the fourth quarter or for the year ended December 31st. As of December 31st, we had a net unrealized loss in the AFS securities portfolio of 36.2 million compared to 137 million last quarter, a decrease of 100.8 million, primarily in the municipal securities portfolio due to lower interest rates and to a lesser extent, the sale of securities. As of December 31st, the unrealized gain on the fair value hedges on municipal securities was approximately $13.6 million compared to $42.2 million linked quarter, also driven by the lower interest rates. This unrealized gain partially offset the unrealized losses in the AFS securities portfolio. Our AOCI on December 31, 2023 was a net loss of $113.5 million compared to a net loss of $155 million on September 30, 2023. The net loss was comprised of net losses on our securities and swap derivatives of $94.7 million and $18.8 million related to our retirement plans. As of December 31st, the duration in the total securities portfolio was 8.4 years, and the duration of the AFS portfolio was 5.8 years, a decrease from 9.7 years and 8 years respectively at September 30th. At quarter end, our mix of loans and securities increased slightly to 64% and 36% respectively compared to 63% and 37% on September 30th. Deposits increased 200.1 million or 3.2% on a linked quarter basis driven primarily by an increase in public fund deposits of 145.4 million and broker deposits of 38.4 million. Our capital ratios remain strong with all capital ratios well above the capital adequacy and well capitalized threshold. Liquidity resources remain solid with $2.2 billion in liquidity lines available as of December 31st. During the fourth quarter, we purchased 146,580 shares of common stock at an average price of $28.54 pursuant to our stock repurchase plan. We have not repurchased any shares since the end of the year. Our tax equivalent net interest margin decreased three basis points on a linked quarter basis to 2.99 from 3.02%. The tax equivalent net interest spread decreased for the same period by five basis points to 2.26% down from 2.31. For the three months into December 31st, net interest income increased 1.2 million or 2.3% compared to the linked quarter. The purchase loan accretion recorded this quarter was $63,000. Non-interest income, excluding the net loss on the sales of AFS securities, increased 2.1 million or 19% for the linked quarter, primarily due to the increase in BOLI income of 1.8 million in the fourth quarter. Non-interest expense decreased 370,000 on a length quarter basis to 35.2 million. For 2024, we have budgeted approximately 37.9 million in non-interest expense for each quarter. Our fully taxable equivalent efficiency ratio decreased to 50.86% as of December 31st from 52.29 as of September 30th. Income tax expense decreased $914,000 from $3.1 million during the third quarter, and our effective tax rate decreased to 11.3% for the fourth quarter, down from 14.5% in the previous quarter. We currently estimate an annual effective tax rate of 18% for 2024. Thank you for joining us today. This concludes our comments, and we will open the line for your questions.
spk06: As a reminder, to ask a question, you will need to press star 11 on your telephone. Again, that's star 11 on your telephone to ask a question. To remove yourself from the question queue, you may press star 11 again. Please stand by while we compile the Q&A roster. Thank you for standing by. Our first question comes from the line of Graham Dick of Piper Sandler. Please go ahead, Graham.
spk05: Hey, good morning, guys.
spk09: Good morning.
spk05: I just wanted to start on loan growth, another solid quarter for you guys relative to what we've seen from some peers. How are you thinking about growth into 2024 as it relates to what your markets are offering right now versus maybe the potential for also new hires? Just generally, if you give an idea for the trajectory you're expecting, do you think it'd be less or more about in line with what we've seen over the last, maybe the back half of 2023? Thanks.
spk03: Right now, Graham, we're projecting 5% loan growth throughout 2024. Some of that's going to be dependent on interest rates. If interest rates do decrease quite a bit, then some of these loans we may be able to make. But right now, with the interest rates where they are, even with the healthy markets we have, we feel like 5% is a good place for us to budget right now. Obviously, if we see things change during the year, we'll update that estimate.
spk04: Got it.
spk05: And then I guess, Lee, on the securities transaction this quarter, can you just run through some of your thoughts on it, how you view, I guess, how you viewed it as appealing or attractive when you initially did it?
spk03: Yeah, when the rates came down during the fourth quarter, We took a look at some of our interest rate swaps on our municipals, and basically we were able to come out of about $200 million of long-term lower rate municipals at pretty much a push. And then we sold as mortgage-backed securities increased in value. We sold another $188 million of mortgage-backed securities And that's really where the loss ended up being, because we ended up with about a $6.4 million gain on our swaps that we unwound. And that gave us the net $10,400,000 loss on the security sales. So basically, we were able to come out of things even with the rate that we were making on the swaps. and increase the overall yield on the $388 million, about 175 basis points.
spk05: Yeah, it seems like a good trade. Is there anything else like this that you're looking at right now, or do you think that you kind of have to wait to get some more clarity on where rates are going, or do you have a certain call on where rates might be going, I guess?
spk03: I think at this point, in terms of any additional movement in the securities portfolio, we really aren't, you know, looking at anything should interest rates change further. You know, long-term rates move down further from here. We certainly would take a look at that, but right now, we don't. In terms of, you know, forecasts on interest rates, I guess it's pretty much anybody's guess. The biggest guess is on, you know, when and if the Fed's going to begin to lower rates, you know, our thought is that it's probably closer to summer than it is March, you know, if they make that first move. Long-term rates, you know, they've already come down in anticipation of some of that decline.
spk05: Yeah, okay, good to hear. And then I guess just lastly on the margin, this may be more a point of clarification, but There's only down three basis points this quarter, a lot better than I think I was expecting and the rest of the analysts in the street. I just wanted to hear if there was something there that surprised you, I guess, to allow for basically a flattish margin or, you know, if there's more pressure to come. I remember you referenced it, I think, 2.75% number last quarter.
spk03: Yeah, I think when the question last quarter was, you know, could it get down to 2.75, and I didn't mean in one quarter. At that time, you know, we weren't sure what kind of loan growth we were going to have, and we were, you know, continuing to see the deposit pressure with the, you know, the deposit pressure remained during the quarter, but the loan growth ended up being probably a little stronger than we anticipated. And, you know, then with the restructuring primarily occurring in December, that gave us a little lift in the back half of December. So it did surprise me that we only dropped three basis points. But, you know, with the restructuring and the loan growth that we had, you know, that's why I feel like we're either at or near the bottom at this point. And we should be able to see the NEM move up during 2024.
spk05: Okay. And I assume that, you know, increase in the NEM in 2024 does include some rate cuts. Maybe not as many as the market's predicting right now, but something's starting at some point this year, right?
spk03: Yeah, right now we're budgeting for three. It's anybody's guess, you know, and the first one we're budgeting for is in June, last one in December. So really only two rate cuts would help the NEM. The one in December, I don't, you know, it certainly won't hurt, but it's not going to lift it dramatically.
spk04: Okay. All right. I appreciate it, guys. Thank you very much.
spk09: All right. Thank you.
spk06: Thank you. Again, to ask a question, please press star 11 on your telephone. Again, that's star 11 on your telephone to ask a question. Please stand by for our next question. Our next question comes from the line of Mark Shetley of KBW. Your question, please, Mark. Hey, good morning. Good morning.
spk09: Good morning.
spk07: um so i guess on expenses just to clarify that i heard you correctly so looking at like 37 million quarterly run rate in 24 and with you know sort of a lot of the technology implementation stuff uh sort of baked into 2023 i'm wondering what's what's really going to drive that growth um in 24. thanks
spk02: Yes, Mark. The biggest things driving that is our salaries and employee benefits. And then there is additional, a little bit over $3 million for additional software technologies that is built into that number as well. And then we have budgeted for 2020 for about a million dollars. We're going to be combining two locations in one of our smaller markets and probably be disposing of one of the buildings and so we've put we budgeted for some loss there so that those are the three largest items but still you know i guess one of the bigger the software and technology we still can you know we're looking at more spin there got it that's helpful thank you um and then the security's restructuring and
spk07: sort of the shifting of the balance sheet. I was just wondering more, you know, what's your goal for that mix of assets, maybe by year end and possibly longer term, you know, currently sitting at, I think you said like a 64, 36, but just, yeah, kind of wondering how you anticipate the balance sheet playing out from here. Thanks.
spk03: Um, you know, as with the shift in the, um, well, with the restructuring of the securities portfolio, you know, right now, um, we have the, the securities that we purchased are all, um, well, they're, they're at least all of them total or at least at par. And I think they're probably all at gains, uh, net. Um, so that gives us a lot of flexibility without impacting the P and L to, um, you know, sell those securities if we want to put them into loans. And if the loan growth is greater than what we're anticipating and, you know, a lot of that depends on what deposit growth is. If deposit growth can keep up with loan growth, then we, you know, likely will keep those securities. If not, we'll be able to sell some of those securities with little, literally no loss and put that into higher margin loans. So ideally, with the loan growth we expect to see in 2024, we'll move that mix to less securities and more loans. You know, how much that moves, I don't really know, but, you know, it would probably be a few basis points in either in, you know, up in loans and down in securities.
spk07: Got it. Thank you. And maybe just one more. Do you still see yourself sort of not slowing down on the buybacks until the current authorization is used up? And I guess sort of What's your outlook for that as far as your capital card 2024?
spk03: I think what we're going to look for there is if there are opportunistic times to buy, we'll be in the market buying. If the stock is at certain levels, we'll probably pull back from that. I think our average buy price in the fourth quarter was somewhere in the $28 range.
spk02: Most of that all happened early. Well, in October. It went through late October.
spk03: So, you know, we'll be looking for, you know, hopefully there aren't any opportunistic times to buy stock. But if there are, you know, we have that buyback available for us.
spk07: Got it. That makes sense. Thanks for taking my questions.
spk09: All right. Thank you.
spk06: Thank you. Our next question comes from the line of Matt Oni of Stevens, Inc. Please go ahead, Matt.
spk08: Thank you. Just a few follow-ups here from some previous questions. On the loan growth front, it looks like the construction loans continue to build a pretty healthy clip. Any more color here? Has construction peaked or you still see some more growth in 24 in that book?
spk03: I think we'll see some more growth in that, and they're primarily loans that we originated in late 21, during 22, and then in early 23. We're not seeing as many new construction loans at this point in time, but these are just advances where that 40 to 50% equity has gone in and now you know, they're looking for draws, and that's what's really creating that at this point.
spk08: And remind me of this construction book, any concentrations by market, and does it lean more residential or commercial?
spk03: It's, you know, primarily multifamily home building and warehouses. would be the three largest concentrations. And I don't really think there's a huge concentration by market. They, you know, they're pretty well split between DFW, Austin, and maybe to a little lesser extent the Houston market.
spk08: Okay. Appreciate those details. And then any color on the recent loan growth as far as what some of those yields are? So the new loan yields?
spk09: Go ahead, Julie.
spk01: The average for the quarter was 8%. I mean, on all loans.
spk08: And that's a, I assume, some kind of new and renewed yield. Is that right?
spk09: That is correct. I'm sorry, I missed that. Yeah, that is correct.
spk08: Okay, perfect. Thank you. And then going back to the securities restructure, you gave us lots of good details there a few minutes ago as far as what was sold. I think I missed maybe some details about what was purchased in that restructure. Do you have anything from that point of view?
spk03: Sure. About 80% of the proceeds from the sale went into premium US agency mortgage-backed securities, you know, Fannie and Freddie. And about 20% of those proceeds went into loans. We just wanted to go ahead and get with the rates and what they're doing and potential anticipation of the Fed doing something. We wanted to go ahead and get that money working. But right now, the mortgage-backed securities overall are ahead of game. And, you know, if we need to move out of those and into loans, higher-yielding loans, then, you know, we feel like we're in a good position to do that without impacting the P&L on the sale of those securities at this point.
spk08: Okay. And what were the yields on some of the securities that you purchased?
spk03: They were... They were Fannie and Freddie, and the average yield was a little over 6%. Okay.
spk08: That's all helpful. And then earlier in your comments around the margin, you mentioned that you're feeling better about the deposit cost pressure. Just wanted to kind of focus on that comment. Any more color you can provide as far as what you're seeing more recently and kind of how much conviction you have that deposit costs are flying out and we'll peak here shortly?
spk03: You know, I don't expect, well, until the Fed starts cutting, you know, I don't expect them to flatten out. I expect them to continue to increase, but I don't think they're going to increase at the pace they've been increasing. And then with loan growth and with the restructuring of securities portfolio, we feel like that the benefit associated with that is going to help offset any further deposit pressure at this point in time. But we do expect deposit pressure to continue, but most of the heavy lifting is behind us, but there's still going to be some going forward. Even after the first rate cut, 25 basis points, likely to take, you know, pressure off of some of the non-maturity interest-bearing deposits.
spk08: Okay. Perfect. All right. Thanks to all your color.
spk09: All right. Thank you.
spk06: Thank you. I would now like to turn the conference back over to Lee Gibson for closing remarks. Sir?
spk03: All right. 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 looking forward to our prospects during 2024 and to reporting first quarter results to you during our next earnings call in April. Thank you again.
spk06: This concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer