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spk04: Good day, and thank you for standing by, and welcome to Southside Bank Shares, Inc. Second Quarter 2024 Earnings Call. At this time, all participants are on 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'll 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 speaker today, Sunny Davis, Chief Risk Officer. Please go ahead.
spk00: Thank you, Justin. Good morning, everyone, and welcome to Southside Bankshare's second 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 and Form 10-K. Joining me today are Lee Gibson, 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, Sunny. Good morning, everyone. This morning we reported second quarter net income of $24.7 million. earnings per share of 81 cents, a return on average tangible common equity of 16.9%, and continued strong asset quality metrics. Length quarter, our net interest margin increased one basis point to 2.87%. During the quarter, we sold approximately $93 million of lower coupon municipal securities, unwound the related fair value swaps, and reinvested most of the proceeds in higher yielding agency mortgage-backed securities. We estimate the payback of the loss on the sale of securities will be less than one year. Linked quarter, loans increased an annualized 1.1% as we experienced a few payoffs. Our loan pipeline remains solid, and we continue to target 5% loan growth for 2024. Since last quarter, we have continued implementing initiatives associated with our five-year strategic plan. One of the initiatives is to carefully examine additional revenue as well as cost containment opportunities. Attrition and a slight reduction in workforce resulted in additional cost savings of approximately $600,000. Repricing of services in our wealth management and trust department will result in additional revenue of approximately $500,000. We are executing on an initiative to expand C&I lending in our metropolitan markets to further diversify our loan portfolio, increase revenue, and grow deposits. We've hired a lead C&I relationship manager in the Houston area and expect to add additional CNI team members in the coming months. The $600,000 in cost saves and $500,000 in added revenue are estimated to more than cover the expense associated with this initial CNI expansion phase in the Houston area. We continue to evaluate expenses as well as revenue opportunities, and we'll update you on any further progress in future quarters. 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.
spk06: Thank you, Lee. Good morning, everyone, and welcome to our second quarter call. We are pleased to report second quarter net income of $24.7 million, an increase of $3.2 million, or 14.7% on a linked quarter basis, and diluted earnings per share of 81 cents, an increase of 14.1% linked quarter. We had slot loan growth of $12 million, or 0.3% linked quarter, and 1.1% annualized. Our annualized year-to-date loan growth was 2.9%. The growth was driven by increases of $59.4 million in commercial real estate loans and $17.5 million of one-to-four family residential loans, partially offset by decreases in construction loans of $53.4 million and municipal loans of $10.2 million. The average interest rate of loans funded during the quarter was approximately 8%. As of March 31st, our loans with oil and gas industry exposure were $120.8 million, or 2.6% of total loans. Our allowance for credit losses decreased $762,000 for the length quarter to $45.6 million. Asset quality metrics remain strong. Non-performing assets decreased to $6.9 million from $8 million, or 0.08% of total assets on June 30th, compared to 0.10% at March 31st. On June 30th, our allowance for loan losses as a percentage of total loans was 0.92%, compared to 0.95% on March 31st. Our securities portfolio was 2.5%, consistent with March 30th. As Lee mentioned, we sold municipal securities and replaced them with higher-yielding agency mortgage-backed securities and, to a lesser extent, U.S. Treasury bills. In connection with the sale of the municipal securities, we unwound the fair value swaps associated with the hedged items, which resulted in a net loss in the second quarter of $563,000. there were no transfers of AFS securities during the second quarter. As of June 30th, we had a net unrealized loss in the AFS securities portfolio of $48.3 million compared to $48.8 million last quarter. At March 31st, the unrealized gain on the fair value hedges on municipal and mortgage-backed securities was approximately $18.6 million. compared to 20.4 million linked quarter. This unrealized gain partially offsets the unrealized losses in the AFS securities portfolio. Our AOCI on June 30th, 2024 was a net loss of 111 million compared to a net loss of 110.9 million on March 31st, 2024. The net loss was comprised of net losses on our securities and swap derivatives of $92.5 million and $18.5 million related to our retirement plans. As of June 30th, the duration in the total securities portfolio was 8.9 years, and the duration of the AFS portfolio was 6.7 years, a slight increase from 9.1 years and 6.9 years, respectively, at March 31st. At quarter end, our mix of loans and securities was 63% and 37% respectively, with no change in the mix from March 31st. Deposits decreased 49.8 million or 0.8% on a linked quarter basis due to a decrease in public fund deposits of approximately 71 million and broker deposits of 100 million. These decreases were partially offset by an increase of approximately 121 million in deposits from an account that increases at this time each year for a short time and is expected to exit in the third quarter. This account enabled us to reduce our broker deposits during this same time, saving approximately 190 basis points. Our capital ratios remain strong with all capital ratios well above the capital adequacy and well-capitalized threshold. Liquidity resources remain solid with $2.24 billion in liquidity lines available as of June 30th. During the second quarter, we purchased 57,966 shares of our common stock at an average price per share of $26.22. We have not purchased any shares subsequent to June 30th, and we have approximately 583,000 authorized shares remaining for repurchase. Our tax equivalent net interest margin increased one basis point on a linked quarter basis to 287 from 286. The tax equivalent net interest spread decreased for the same period by three basis points to 213 down from 216. For the three months into June 30th, we experienced a slight increase in net interest income of 260,000 or half a percent compared to the linked quarter. Non-interest income, excluding the net loss on the sales of AFS securities, increased 2.4 million or 24.4 percent for the linked quarter, primarily due to the increase in BOLI income of approximately 1 million due to a death benefit on a former covered officer realized in the second quarter, a loss on sale of loans in the first quarter, an increase in deposit services income and trust fees. Non-interest expense decreased $1.1 million on a linked quarter basis to $35.8 million, driven by decreases in salary and employee benefits, primarily due to approximately $618,000 recorded in the first quarter associated with future cost reductions. Based on the estimated cost savings reported last quarter, we are expecting quarterly expense of $37 million for the remaining two quarters of 2024. Our fully taxable equivalent efficiency ratio decreased to 52.71% as of June 30th, from 55.54 as of March 31st. We recorded income tax expense of 5.2 million, an increase of 590,000 compared to the first quarter. The increase in tax expense was driven by an increase in pre-tax income. Our effective tax rate decreased slightly to 17.4% for the second quarter from 17.7 in the previous quarter. We currently estimate an annual effective tax rate of 17.6% for 2024. Thank you for joining us today. This concludes our comments and we'll open the line for your questions.
spk04: 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. And our first question comes from Woody Lay from KBW. Your line is now open. Hey, thanks for taking my question.
spk01: Yeah, good morning. Wanted to start on the NIM. Obviously, a couple of different moving pieces there. I think in the opening comments, you called out sort of a short-term in nature deposit account that benefited the NIM and the quarter. Any way to quantify how much of an impact that was on either the NIM or NII?
spk02: I can tell you that the account started accumulating money probably in early June and reached that high of around $120 million at June 30th. So I don't know what the exact average was, but I'm going to guess it was $60 million for that for that in one month. So, you know, one-sixth of the quarter we, you know, experienced a benefit on that $60 million. I have not qualified it in basis points, but likely it's probably going to leave sometime in August is what we estimate at this point in time. It's an account that does this every year, and they build up to a certain level, and then they – take the money and for the purposes that it was raised for.
spk01: Got it. And that account is listed in the interest bearing bucket?
spk04: That is correct.
spk01: Okay. And then with the securities reposition, you know, we've seen a pullback in longer term rates over the past couple months. Is there an opportunity for further repositioning from here?
spk02: It's possible. And, you know, we're going to continue to look for those opportunities. You know, we've been doing it off and on now for, you know, probably the last 18 to 24 months. And, you know, as we find opportunities, especially with the fair value swaps that we have in place, you know, and we can get a reasonable payback, then we're going to look for those opportunities. I don't have anything, you know, specific right now. But, you know, we're obviously going to, as rates change, as spreads change on the various securities, you know, we're actively looking at that. Yeah.
spk01: And then maybe lastly, on the loan growth front, any expectations for growth in the back half of the year? You've got the CNI initiative coming on board, but I would imagine that would take some time to contribute to the growth.
spk02: Yeah, I think it will. You know, we may see some growth occur as a result of that in the fourth quarter, but I don't think it's, you know, it'll be 2025 before, you know, we believe that's going to be significant in nature. So, likely most of the growth will be continued funding on our construction portfolio and other, you know, full funders on the CRE front.
spk01: Yep. All right, thanks for taking my questions.
spk04: All right, thank you. And thank you. And one moment for our next question. And our next question comes from Brett Rabattin from Hovde. Your line is now open.
spk03: Hey, good morning, everyone.
spk05: Good morning, Brett.
spk03: Wanted to ask, just staying on the margin, so it looks to me like the securities portfolio actions you've taken, if I look at it right, didn't really affect the second quarter that much. Do those actions raise the margin in 3Q, or does the cost of funds, is that going to be an offset in the back half of the year? Any thoughts on the tenor of the margin in the back half?
spk02: Most of those transactions took place in either late May, but the bulk of them took place in June. And so there really wasn't much impact that we saw in the second quarter. Most of that impact will be in the third quarter. And I agree with you. I think as long as the Fed funds rate stays where it is, You know, that's mainly going to mitigate any potential impact as a result of, you know, potential deposit increases. And really, it's just a point when, you know, when we reach that point where the Fed does decrease rates, then I think, you know, that pressure will wane and it'll move the other direction.
spk03: Okay. And then on the expense guidance, if I heard you correct, Julie, was that $37 million for the back half of the year?
spk05: Yes, that is correct.
spk03: Okay. And so, you know, looking at TQ versus the $37 million, I know you've obviously made some changes and done some things to improve efficiency. You know, is the growth in the back half because of The initiatives that you've added, can you maybe give us some color on the growth in the back half of the year?
spk06: Well, originally we started off with a budget of roughly $37.9 million, and then we did some of the cost containment efforts in the first quarter and kind of projected out that that would have an $800,000 or $900,000 impact. or maybe it was seven or $800,000 impact on the third and fourth quarter. So we're, you know, I'm, I'm taking that off. Um, certainly we continue in, you know, and want to err on the side of, you know, caution with respect to software and software expense continues, you know, has remained steady. And actually most of the categories, if you look at them quarter to quarter, we're pretty steady with, with the exception of salaries and employee benefits. So, I really just didn't want to project a lower number. I mean, so far we have been lower than that anticipated budget, but just didn't want to project it any lower than that for the third and fourth quarter, if that helps.
spk03: Yeah, that's helpful. And then... We're probably being conservative.
spk06: Yeah, I mean, we are being conservative.
spk03: Yeah, we're being conservative. Okay. And then just lastly on credit, you know, the results are really pristine, and you reduced the reserve with the negative provision. You know, any thoughts on or criticized assets lower, you know, any color on if you guys just are basically just not seeing anything from a credit perspective at this point in terms of any over-stress?
spk02: Yeah, we, once a month we have our watch list, uh, meeting and it's basically any credits that are criticized at all. Um, I came away from that meeting, you know, not losing sleep over any of them. Uh, I think we have one small, very small credit that we think we'll have a small loss in, but it's, it looks like now that loss is going to be less than what we've reserved for. Beyond that, you know, there's just, with the equity that we had going into deals, it just doesn't look like we're, you know, at this point we're seeing any credits that give us any significant concern. You know, obviously we have ones that we watch and we get reporting on on a monthly basis, many of them are trending in the right direction. So that's encouraging.
spk03: Okay, great. Appreciate all the color.
spk04: And thank you. And if you have a question, that is star 11. Again, if you have a question, that is star 11. And one moment for our next question. And our next question comes from Matt Olney from Stevens. Your line is now open. Hey, thanks. Good morning.
spk05: Good morning. Juan asked about the fees, good quarter of fees, even after I make a few adjustments that you noted. We'd love to hear any commentary about expectations for fees for the back half of the year.
spk02: I think, you know, we mentioned that we did some repricing and we needed to in the wealth management and trust area. So we anticipate those fees are going to go up the last half of the year. Also, our brokerage is doing extremely well. So I think that's going to go up. And then the deposit services fees have really done probably better than we originally budgeted and anticipated. So those are really the areas. Obviously, we had the extra BOLI income, but that was a death benefit. So, you know, we are hopeful that doesn't reoccur in the third quarter. But, you know, overall fees, it's been encouraging this year to see the fees move in the direction they have.
spk05: Okay. Appreciate that. And then the Houston C&I hiring, appreciate it may take some time to get some traction there. We'd love to hear maybe kind of some longer-term plans. I guess it's early as far as the team. You're still looking for new employees, but maybe it's a longer-term strategy that you want to build out there.
spk02: Yeah. I think our plan is, and it's going to occur over many, many quarters, is We're going to build out that Houston area first, and then we'll decide whether to move to DFW or Austin next. But those would be the three markets that we would build out some additional C&I lending teams that, you know, can focus on, you know, small to midsize C&I lending in those areas. And that'll be their primary focus. so that we can further expand our CNI lending in those metro markets. But we're going to start with the greater Houston area, and then we'll move forward. But we're anticipating, we're hopeful by year end, we'll have a large part of the team in place in Houston.
spk05: Okay. And I guess your existing footings and some of those larger metro Texas markets, I assume at this point those are mostly real estate based, so these new teams would kind of complement those existing teams?
spk02: That is correct. I mean, we do have some C&I lenders in the various markets, but, you know, if you were to look at the concentration of the lenders we have, they're much more heavily focused in the CRE arena. Right.
spk05: Okay. Okay. Thanks for the commentary.
spk04: All right. Thank you. And thank you. And I'm showing no further questions. I would now like to turn the call back over to Lee Gibson, CEO, for closing remarks.
spk02: 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 the second half of 2024 and reporting third quarter results to you during our next earnings call in October. This concludes the call.
spk04: This concludes today's conference call. Thank you for participating. You may now disconnect.
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