Southside Bancshares, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to Southside Bank Shares, Third Quarter 2024 earnings call. At this time, all participants are in a listen-only mode. After 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 like now to turn the conference over to your speaker today, Lindsay Bales, Vice President, Investor Relations. Please go ahead.

Thank you, Michelle. Good morning, everyone, and welcome to Southside Bank Shares, Third 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 are current forward-looking assumptions are described in our earnings release in our 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.

Thank you, Lindsay. Good morning, everyone. This morning, we reported Third Quarter net income of 20.5 million, earnings per share of 68 cents, a return on average tangible common equity of 13.69%, and continued strong asset quality metrics. Linked quarter, our net interest income increased 1.86 million, and our net interest margin increased eight basis points to 2.95%. During the quarter, we sold approximately $28 million of lower-yielding AFS municipal securities, unwound the related fair value swaps, and recorded a loss of $1.9 million. We reinvested the proceeds in higher-yielding agency mortgage-backed securities. The decrease in other non-interest income was primarily due to recording an impairment charge of $868,000 on the sale of approximately $10 million of AFS municipal securities, and the unwind of the related fair value swaps on October 1. Recent investments made in our wealth management and trust department are paying dividends as reflected by the steady growth in new clients and quarterly fee income. We anticipate this trend will continue. Linked quarter, loans decreased slightly as we experienced a few large payoffs at the end of the quarter. Our loan pipeline remains solid. However, headwinds of anticipated additional loan payoffs have cost us to reduce our target loan growth for 2024 from 5% to 3%. Our initiative to expand C&I lending in our metropolitan markets is progressing as we are hiring additional relationship managers, and we expect to begin seeing results in 2025. 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.

Thank you, Lee. Good morning, everyone, and welcome to our third quarter call. We reported third quarter net income of 20.5 million, a decrease of 4.1 million, or .8% on a linked quarter basis, and diluted earnings per share of 68 cents, a decrease of 16% linked quarter. Loans decreased slightly to 4.58 billion, down from 4.59 billion at June 30th. Our annualized -to-date loan growth was 1.6%. The linked quarter decrease was driven by decreases of 50.2 million in commercial real estate loans and 14.9 million in municipal loans, partially offset by increases of 39.8 million in construction loans and 17.4 million in -four-family residential loans. The decrease in commercial real estate was primarily a result of a few large payoffs in the third quarter. The average interest rate of loans funded during the quarter was approximately 8.1%. As of September 30th, our loans with oil and gas industry exposure were 116.1 million, or .5% of total loans. Our allowance for credit losses increased 2 million for the linked quarter to 47.6 million. Asset quality metrics remained strong. Non-performing assets remained at low levels with non-performing assets of 7.7 million, or .09% of total assets at September 30th, a slight increase from .08% at June 30th. On September 30th, our allowance for loan losses as a percentage of total loans was .97% compared to .92% on June 30th. The increase in the allowance as a percentage of total loans was primarily due to the increased economic concerns forecasted in the Cecil model, specific to office and multifamily markets in metro areas. Our securities portfolio was 2.70 billion at September 30th, a slight decrease from 2.71 billion last quarter. As Ling mentioned, during the third quarter, we sold approximately 28 million of lower-key pawn AFS municipal securities and replaced them with higher-yielding agency mortgage-backed securities. In connection with the sale of these securities, we unwound their related fair value swaps, which resulted in a net loss in the third quarter of 1.9 million. In addition, we recorded an impairment loss of $868,000 in other non-interest income on the sale of AFS municipal securities and the unwind of the related fair value hedges sold subsequent to quarter end. There were no transfers of AFS securities during the third quarter. As of September 30th, we had a net unrealized loss in the AFS securities portfolio of 24.7 million, a decrease of 23.6 million compared to 48.3 million last quarter. At September 30th, the unrealized gain on the fair value hedges on municipal and mortgage-backed securities was approximately 3.5 million compared to 18.6 million linked quarter. This unrealized gain partially offset the unrealized losses in the AFS securities portfolio. Our ALCI on September 30th, 2024 was a net loss of 118.5 million compared to a net loss of 111 million on June 30th, 2024. The net loss was comprised of net losses on our securities and swap derivatives of 99.3 million and 19.2 million related to our retirement plans. As of September 30th, the duration in the total securities portfolio was 8.3 years and the duration of the AFS portfolio was 5.9 years, a decrease from 8.9 years and 6.7 years respectively at June 30th. At quarter end, our mix of loans and securities was 63% and 37% respectively, with no change in the mix from last quarter. Deposits decreased 60.2 million or .9% on a linked quarter basis. The decrease was primarily driven by a commercial account that increases during the second quarter each year and exits the third quarter, offset by increases in other funding sources, such as broker deposits of $71.9 million. Our capital ratios remain strong with all capital ratios well above the capital adequacy and well-capitalized threshold. Liquidity resources remain solid with 2.23 billion in liquidity bonds available as of September 30th. We did not purchase any shares of our common stock during the third quarter or subsequent to September 30th. However, we have approximately 583,000 shares remaining in the current repurchase authorization. Our tax equivalent net interest margin increased eight basis points on a linked quarter basis to .95% from 2.87%. The tax equivalent net interest spread increased for the same period by 10 basis points to .23% up from 2.13. For the three months in the September 30th, we experienced an increase in net interest income of 1.9 million or .5% compared to the linked quarter. Non-interest income excluding the net loss on the sales of AFS securities decreased $2 million or .7% for the linked quarter, primarily due to the impairment loss of 868,000 recorded on AFS securities in the third quarter and a decrease in bully income due to death benefits received in the second quarter. Non-interest expense increased $567,000 or .6% on the linked quarter basis to 36.3 million, driven primarily by an increase in salaries and employee benefits and other non-interest expense. We are expecting non-interest expense of 37 million for the fourth quarter of 2024. Our fully taxable equivalent efficiency ratio decreased to .9% as of September 30th from .71% as of June 30th. We recorded income tax expense of 4.4 million, a decrease of 822,000 compared to the second quarter. The decrease in tax expense was driven by the decrease in pre-tax income. Our effective tax rate increased slightly to .6% for the third quarter from .4% in the previous quarter. We currently estimate an annual effective tax rate as .6% for 2024. Thank you for joining us today. This concludes our comments and we will open the line for your questions.

Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. And the first question comes from Brett Rabaton with Hovde. Your line is now open.

Hey, good morning, everyone. Morning, Brett. Morning. Morning. I wanted to start with the securities portfolio actions and the hedge. Can you guys, like I guess first, can you talk about, there were lower yielding securities. Can you talk about what the yield was on what you sold and what you purchased? And then maybe if you've done it, just the net effect to the margin on a go-forward basis would be helpful.

The net effect on the margin will be positive. It's probably about one or two basis points, but with the small amount of securities we dealt with, it's not gonna move the margin materially. But basically we had some fair value hedges on some of these municipal securities. So those are the ones that we unwound and we primarily bought pre-purchased securities. Premium mortgage backed securities with shorter duration, higher yields, but not at too big of a premium. So that if rates did decline, which obviously they haven't over the last two or three weeks, the pre-payments wouldn't impact the yield too much. So hopefully that gives you some color on it.

Yeah, that's helpful, Lee. I didn't think it was gonna be a big number, but just wanna make sure I knew the detail there. Wanted to also ask, a lot of banks are struggling with payoffs. Wanted just to hear payoff activity in the quarter and then just what the loan pipeline looks like and what that might suggest maybe for loan growth going forward.

I mean, I view loan payoffs two ways. One, I like to see the balances, but two, it's a sign of a good economy because these are being projects that are being sold out there. But we are beginning to see some of our construction projects that have reached stabilization or are close that are beginning to pay off. We anticipate that. A few of them have paid off a little bit earlier than we anticipated. We did have a large loan that we put on the books in early October that would have offset this and we would have shown an increase in loans, but the two didn't match up. And so we had these two large payoffs that caused us to have that slight decrease. Our loan pipeline looks good. It's just, we expect some additional payoffs in the fourth quarter. And there's just not enough time to make up the difference to get to 5% loan growth for the year. So that's why we're lowering it to 3%. But we have experienced some good loan growth in October, but we also do expect some additional payoffs.

Okay, that's helpful. And then if I could stick in one last one just around the margin from here. Any thoughts, Julie, on the margin going forward?

I think going forward, it'll be a little bumpy, but from the standpoint of during the third quarter, we have this large deposit account that builds up and it reaches pretty close to maximum by the end of June, but if it's not there, it gets there real quick in July. And it's one that we have every year that builds up during June, pretty much reaches the peak during July and then pays off usually in early August. And it was at a lower rate than the wholesale funding. So that helped our margin some during the third quarter. We obviously won't have that again in the fourth quarter. That's why I'm saying it's a little bumpy. And then it really just depends how fast, if at all, the Fed continues to, or whether they continue to lower short-term rates, what'll happen with the margin moving forward. But that's why I'm saying it'll be a little bumpy because we won't have that occurring again in the fourth quarter. And that balance I think got to, and Sunny, you can tell me, I think it got to around 175 million. So it was

- It was 122. June 30th. Yeah.

And it quickly got there during a ramped up in early July. So that was a positive for us in terms of our NIM, and we won't have that again. But we also had some other positive things related to the NIM.

Okay. That's helpful. Thanks for all the color. Okay.

And our next question comes from Woodley with KBW. Your line is open.

Hey guys, thanks for taking the questions. Wanted to start on the C&I initiative. Just any update on how the build-out's going and how many hires were made in the quarter?

We had two hires during the quarter. We're looking for some additional lenders and we're interviewing people right now. So we expect to hire at least a couple of more. And they're hitting the ground running and it's moving along. We didn't expect to hire everybody at once because we're looking for certain type of people. That's why I say that we should begin to see results during 2025 associated with this. And we'll continue to hire during 2025 as well.

Yeah, all right, that's helpful. Maybe shifting over to deposit calls. It was great to see total deposit costs tick down in the quarter. We got the 50 basis point cut near the end. Could you just walk us through how deposit pricing trends went sort of pre and post cut?

Post cut, we were able to, we have probably close to a billion dollars that we were able to cut the rates pretty close to what the Fed did. Maybe not exactly the full amount, but at least probably 80% of what they did. And some of that takes 30 days to take effect, but we were able to do that. We also have a little over $50 million a month in CDs that are maturing. And those rates we were able to cut pretty much by the full 50 basis points. And then with the forward outlook at that time, being that they were gonna be aggressive with the rate cuts moving forward, we were able to cut some of the longer ones. We've since increased those a little bit, but still overall, we're gonna be seeing those move down in general, probably 40 basis points every month. So those are the primary things. And then our wholesale funding, all that, unless it's swap, will move down as well.

Yeah, so if I look at the ALCO models, you all show up as asset-sensitive, but obviously those are assumption-heavy, and it sounds like you're making pretty good progress on the deposit cost side. I mean, is asset-sensitive still the right way to think about you guys?

Yeah, I think so, because we've got about a billion seven, I think, in loans that reprice probably within two to three months. So there's more on that side right now, but ultimately, and that's why I say it really just depends what the Fed action is going forward, how much more cut there is. But I would consider us to some extent asset-sensitive at this point in time, in terms of a quarterly move in what we're able to do. Now over a six to nine month period, I think we go back pretty much even.

Yeah, all right, that's all for me. Thanks for taking my questions. You bet.

As a reminder, to ask a question, please press star one one on your telephone. The next question comes from Matt Olney with Stevens. Your line is now open.

Thanks for taking the question, guys. Just want to ask more about M&A. Just ask more about M&A in your Texas market. Just appreciate your color on kind of the M&A chatter and kind of what you're hearing from other banks in the marketplace.

With bank stocks up from probably three to six months ago, the chatter has picked up some. I think a lot of people are looking to see what happens with the election in terms of additional regulation. But

I

am hearing more chatter around M&A right now and really expect that in 2025, we'll probably see more activity here in Texas than we've seen this year. I know of a few banks that are for sale, but nothing at this point that we're interested in.

Maybe just following up there, just remind us of your target profile bank that at this point you're looking for.

You know, with our size, where we are now, Matt, probably no more than a billion two

for

a target, or we'd need a target north of three billion in order for it to make sense since we're so close to the 10 billion. At a billion two, we'd be able to stay under the 10 billion and then go look for something in that two to four billion. But that really would be the target range in terms of dollar amount, in terms of geography. I think we've consistently said that we'd like to stay along I-35 to the east. We'd be willing to go out probably 75 miles or so to the west, but just following that I-35 line down through Fort Worth, Austin, and San Antonio, and pretty much to the east.

Okay, thanks for the cover there. And then also wanna shift gears over to the expenses. I think you gave us some good guidance for the fourth quarter, just trying to feel out next year, and just thinking more about, you know, kind of the puts and takes. You've got this CNI initiative that we've talked about, seen some good movements there. This past quarter, expect to have some more hires into fourth quarter and into next year. Is it fair to assume that expense growth, kind of year over year in 25, could be a little bit higher than what we're gonna see in 24 as far as the year over year growth just from that CNI initiative, or are there other puts and takes to consider?

I mean, if you compare it to what we've seen in 2024, I think there will be some increase. It will happen in salaries more than likely. We've talked a little bit about 2025 salaries and kind of increases overall. And then the CNI initiative will add some, and then probably the software will add some, software and data processing. Well, you know, we have not seen it go up as much this year as we had first thought in our budget, but I suspect in 2025, we will get closer to that, to a higher level in that category for sure. So I think it's fair to, I mean, I know I, I believe I projected or forecasted out around 37 million, or maybe even higher than that very early in the year. And then we brought it down through some cost initiatives that we did in Q1. But I think 37, I mean, we haven't finished the budgeting process for certain yet, but I think closer to 37 or more, a little more next year is probably appropriate at this point. And certainly in the next quarter, I'll be able to give you something of finer tuned. Okay.

Sure, okay, great. Thanks for the cover guys, it's all for me. All right, thank you.

I show no further questions at this time. I would now like to turn the call back over to Lee Gibson, CEO for the closing remarks.

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 for the remainder of the year and reporting year end and fourth quarter results to you during our next earnings call in January. This now concludes our call, thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.