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spk06: Good day and thank you for standing by. Welcome to the Southside Bank Shares four-quarter 2024 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you 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 hand the conference over to your first speaker today, Lindsay Bills, Vice President, Investor Relations. Please go ahead.
spk00: Thank you, Marvin. Good morning, everyone, and welcome to Southside Bank Shares' first quarter 2024 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 Shanberger, 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.
spk05: Thank you, Lindsay. Good morning, everyone, and welcome to Southside Bank Shares' first quarter 2024 earnings call. This morning, we reported first quarter net income of $21.5 million, earnings per share of $0.71, a return on average tangible common equity of 15.07%, and continued strong asset quality metrics. Linked quarter, loans increased and annualized 4.7%, just slightly below our projected 5% loan growth for 2024. Our loan pipeline is solid and the markets we serve remain healthy and continue to grow and perform well. Linked quarter, our net interest margin decreased 13 basis points. During the quarter, three of our Lower interest rate cash flow swaps totaling $120 million matured and the rate for that funding increased over 4%. Our BTFP funding renewed at a higher rate for an additional year and we continue to experience deposit pricing pressures. We do not have any additional swaps maturing during 2024. While we anticipate ongoing deposit pricing pressure in the absence of the Fed cutting interest rates, we believe anticipated loan growth will help partially mitigate any further NIM compression. During the quarter, we implemented several initiatives associated with our new five-year strategic plan. One of the initiatives is to carefully examine additional revenue as well as cost containment opportunities. Through retirements, reduction in workforce, and attrition during the first quarter of 2024, we currently anticipate annualized cost savings of approximately $3.5 million, 80% of which should be reflected beginning in the third quarter of this year and 100% in 2025. During the quarter, we expensed approximately $618,000 associated with these expense reductions. We continue to evaluate expenses as well as revenue opportunities and will update you on any further progress in future quarters. I look forward to answering your questions following Julie's remarks. I will now turn the call over to Julie.
spk01: Thank you, Lee. Good morning, everyone, and welcome to our first quarter call. We began the year with first quarter net income of $21.5 million, an increase of $4.2 million, or 24.2%. and deleted earnings per share of 71 cents, an increase of 24.6% length quarter. For the first quarter, we had loan growth of 52.9 million, or 1.2% length quarter, and 4.7% annualized. The growth was driven primarily by increases of 244.9 million in commercial real estate loans, partially offset by decreases in construction loans of 190.3 million. The interest rate of loans funded during the quarter was on average approximately 7.8%. As of March 31st, our loans with oil and gas industry exposure were $114 million, or 2.5% of total loans. Our allowance for credit losses decreased by $229,000 for the linked quarter to $46.4 million. Asset quality metrics remain strong, although our nonperforming assets increased to $8 million from $4 million or 0.10% of total assets on March 31st compared to 0.05% at year end. The increase in nonperforming assets was primarily related to two larger relationships, one commercial real estate and one commercial relationship. and not specific to any particular market or industry in our portfolio. Since March 31st, 2024, we have received approximately $1.6 million combined of payments on the commercial loan relationship and the payoff of a larger existing residential real estate loan on non-accrual status. On March 31st, our allowance for loan losses as a percentage of total loans was 0.95%, a slight increase compared to 0.94% on December 31st. Our securities portfolio increased 108.8 million, or 4.2% on a linked quarter basis, driven by purchases of mortgage-backed securities during the first quarter. There were no transfers of AFS securities during the first quarter, and as of March 31st, we had a net unrealized loss in the AFS securities portfolio of $48.8 million compared to $36.2 million last quarter. As of March 31st, the unrealized gain on the fair value hedges on municipal securities was approximately $20.4 million compared to $13.6 million linked quarter. This unrealized gain partially offsets the unrealized losses in the AFS securities portfolio. Our AOCI on March 31, 2024, was a net loss of $110.9 million compared to a net loss of $113.5 million on December 31, 2023. The net loss was comprised of net losses on our securities and swap derivatives of $92.2 million and $18.7 million related to our retirement plans. As of March 31st, the duration in the securities portfolio was 9.1 years and the duration of the AFS portfolio was 6.9 years, an increase from 8.4 years and 5.8 years respectively on December 31st. At quarter end, our mix of loans and securities changed slightly to 63% and 37%, respectively, compared to 64% and 36% on December 31st. Deposits decreased slightly by 0.06% or 3.9 million on a linked quarter basis. Our capital ratios remain strong with all capital ratios well above the capital adequacy and well capitalized threshold. Liquidity resources remain solid with $2.3 billion in liquidity lines available as of March 31st. Our tax-equivalent net interest margin decreased 13 basis points on a linked quarter basis to $2.86 from $2.99. The tax-equivalent net interest spread decreased for the same period by 10 basis points to 216% down from 2.26%. For the three months into March 31st, net interest income decreased by 1.1 million or 2.1% compared to the linked quarter. The purchase loan accretion recorded this quarter was $42,000. Non-interest income, excluding the net loss on the sales of AFS securities, decreased 3.1 million or 24.4% for the linked quarter primarily due to the decrease in bully income of $1.8 million due to a death benefit realized in the fourth quarter, a loss on sale of loans, a decrease in deposit services income, and a loss in fair value of equity securities. Non-interest expense increased $1.7 million on a linked quarter basis to $36.9 million, driven by increases in salaries and employee benefits which included approximately $618,000 associated with future cost reductions. During last quarter's earnings call, I reported our budget of $37.9 million quarterly for non-interest expense in 2024. As a result of the cost containment initiatives, we expect to realize approximately $400,000 of savings in the second quarter and $700,000 to $800,000 in the third and fourth quarters of the year. Our fully taxable equivalent efficiency ratio increased to 55.54% as of March 31st from 50.86% as of December 31st. We recorded income tax expense of $4.6 million, an increase of $2.4 million compared to the fourth quarter. The increase in tax expense was driven by a higher effective tax rate and increase in pre-tax income. Our effective tax rate increased to 17.7% for the first quarter up from 11.3% in the previous quarter due to a decrease in tax exempt income as a percentage of pre-tax income. We currently estimate an annual effective tax rate of 17.7% for 2024. I will now
spk07: Turn the call over for questions.
spk06: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Brett Rubitin of Hupty Group. Your line is now open.
spk04: Hey, good morning, everyone. Morning, Brett. Wanted to ask first, Lee or maybe Julie, on the expense reductions. Were those all personnel related or are there other things that you made an adjustment to? And then is this kind of the end of taking a look at that in terms of potentially reducing expenses?
spk05: These were largely, in fact, if not all, personnel-related reductions. We are continuing to evaluate other areas in the expense area, and, you know, as we come to further conclusions, we'll report on that in future quarters, but So far, these are the personnel reductions at this point.
spk04: Okay. And then, Lee, you know, you've always been very good with the bond portfolio. And, you know, I'm just curious with the tenure here at over 470, kind of what you're thinking about in terms of, you know, additional securities, any restructurings, you know, what you think about the current level or term structure of interest rates and what you might see from here in your view?
spk05: I think, you know, in terms of the Fed, which is not, you know, I think their, you know, their view of higher for longer is probably correct. We're really not anticipating any more than, you know, one cut the rest of this year. At this point in time, I think initially we had factored in three cuts. unless the economy changes significantly. In terms of the long-term rates, I feel like they could go even just a little bit higher, but I think cresting 5% on the 10-year would be equivalent to where it got to last year, and that might put some additional pressure on the economy that could could allow the Fed to begin to decrease rates. So in terms of the bond portfolio, you know, we'll look for opportunities. We found a few minor ones in the first quarter. But, you know, with these higher rates and cheaper bond prices, you know, there may be some additional opportunities as we take a look at those. But right now we don't have anything, you know, that we're planning on doing at this point in time.
spk04: Okay, that's helpful. And if I could sneak in one last one just around the margin, Julie, if I heard you correctly, you feel like there's offsets to additional pressure from here, but I didn't quite get the full body language there to comment around, you know, the positives for the margin from here. And then if I heard you correctly, maybe a little bit more pressure from here and then stabilization on the margin. Was that fair?
spk05: Yeah, I think that's fair. You know, the swaps that rolled off in the first quarter, you know, were pretty significant. We'll see a little bit of that in the second quarter, but I think, you know, it'll be pretty much on par with what we saw in the first quarter. The BTFP funding, you know, repriced a little bit higher, and that's locked in for a year or so. We won't have that pressure. But, yeah, in terms of the margin going forward, you know, we're thinking that the anticipated loan growth will, you know, at least partially mitigate any further deposit pressures. A large part of the funding pressures in the first quarter were due to the swap ETF and then to some extent the deposit pressure.
spk04: Okay. That's helpful. Thanks for the call, Eric. All right.
spk06: Thank you. One moment for our next question. Our next question comes from the line of Molly from Stevens. Your line is now open.
spk03: Hey, thanks, guys. Good morning. Good morning, Matt. I wanted to ask about fees. I think the core fees took a step down in the first quarter. Anything to call out there as far as a step down? And then what's the road look like to return to where we were for most of 2023 in that, we'll call it $10.8 million range for the core fees per quarter? Thanks.
spk01: The deposit fees were down $320,000, and around $200,000 of that was due to debit card income. Overdraft fees and service charge fees were down a little, were the difference in that decrease. But most of it was debit card income.
spk05: And then we did have a loss on a sale of a available for sale loan uh of about 500 000 um so that um that caused a decrease there that you see the negative 436 and that that loan we have like i say a charge off around 500 000 we don't anticipate that in the future and um you know extra hundred thousand on that in fact yeah we're going to recover another hundred thousand in the in the second quarter on the on that loan um trustees should be back up more in line with what we've seen on a quarterly basis going forward. And as Julie mentioned, the debit card income and the overdraft were down. I would anticipate the debit card income would come back some, but the overdraft fees, we've made some changes along the lines of things that have come out from the CFPB associated with that. And so the Overdraft fees probably won't come back significantly. First quarter, they're typically down because of tax returns, so they should come back maybe $100,000 to $150,000 per quarter. But other than that, those are the major things. So I think we could get back up closer to that maybe $10.5 million range moving forward.
spk03: Thanks for the color on that. And on the overdraft fees kind of shift there, any color on just the overall impact we'll see from the change in pricing that you mentioned?
spk05: Well, you're seeing it. We made these changes last year. I think it was third quarter.
spk01: Some happened late 22, and then some happened in early 2023. Yeah. So you're seeing it.
spk05: And we did increase the amount you have to be overdrawn in order to have an overdraft fee pretty significantly. So I think you're seeing the full result of any of that. And then, like I say, the first quarter just typically is less because of tax returns, refunds that come in, and people aren't overdrawn as much. Sure.
spk03: Okay. Okay. Thanks for that. And then on the credit front, there was some commentary and prepared remarks about two large raiseships during the quarter. I think you mentioned that there were some payoffs or you received partial payments on some of those loans. Can you just go over that again as far as kind of the post, the movements post March 31st? Sure.
spk01: So one of the relationships, the commercial relationship was about a million and a half, and it was securing equipment. And that particular client is going out of business and has been liquidating at better prices than the appraisals that we were expecting at the end of the quarter. And to date, that relationship is down to around $880,000. So just in the last few weeks. As late as yesterday, received some payments on that. And then there was a 1 to 4 in the non-recrual status that was around $869,000 that paid off during April. So those are two of the large things I was referring to in the $1.6 million.
spk05: Yeah, so of the $8 million in non-performing assets, we've had paydowns of about $1.6 million. And the one commercial loan Julie mentioned, you know, we're feeling a lot better about it right now than we did at quarter end based on the sales that have occurred in April.
spk03: Okay. All right. Appreciate that. And then just lastly, I think you mentioned in prepared remarks, you know, the five-year strategic plan, you know, resulted in some of those cost containment measures. Anything else notable in the five-year strategic plan that we should appreciate as we think about kind of longer-term direction of the bank?
spk05: We're looking at different revenue opportunities, and I hope to report on something in either July or October related to additional revenue that we anticipate. receiving and non-interest income. And then it's just a lot of things that we're going to be moving more towards IT-related issues and software in the future and what we need the bank to look like and what markets we want to be in and potentially expand into. And so You know, those are initiatives that are being kicked off and discussed. And at this point, we don't have anything significant to report. But we will update on a quarterly basis as we move forward.
spk03: Okay. All right, guys. Thanks for taking my questions. You bet.
spk06: Thank you. One moment for our next question. Our next question comes from the line of Booty Lay of KBW. Your line is now open.
spk02: Hey, good morning, guys. Good morning. I wanted to hit just real quick on that cash flow swap. So when exactly did that mature in the quarter?
spk05: There were three of them that matured. Two of them were in February, and one was in March, March 11th. Um, the overall rate, uh, that we had on those swaps was a little below, uh, 1%. I think it was like 0.98 or somewhere in that range. Um, so when that, when those rolled off, you know, on that, that 120 million, uh, we had to reprice at, uh, at today's rate, which is closer to 540. Um, and so that's, you know, that, that was, uh,
spk02: pretty significant on that that 120 million dollars yeah all right that that's helpful colors um and and then last for me we we didn't get any buybacks in the quarter but if you look at where the stock is trading today it's below the range on where you bought back in 2023 is it fair to expect that uh buybacks could pick up again in the second quarter
spk05: We're going to be evaluating that and just, you know, we'll take a look at it and make an appropriate decision in conjunction with the board. Got it.
spk02: All right. Thank you.
spk06: Thank you. This concludes the question and answer session. I would now like to turn it back to Lee Gibson, President and CAO, for closing remarks.
spk05: Thank you everyone for joining us today. We appreciate your interest in Southside Bank shares along with the opportunity to answer your questions. In closing, we're looking forward to our prospects during 2024 and reporting our second quarter results to you during our next earnings call in July. Thank you again.
spk06: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
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