Southside Bancshares, Inc. (NASDAQ:SBSI) Q1 2023 Earnings Call Transcript

Southside Bancshares, Inc. (NASDAQ:SBSI) Q1 2023 Earnings Call Transcript April 25, 2023

Southside Bancshares, Inc. beats earnings expectations. Reported EPS is $0.83, expectations were $0.79.

Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to Southside Bancshares, Incorporated First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. At this time, I would like to turn the conference over to Ms. Lindsey Bailes, Vice President of Investor Relations. Ms. Bailes, please begin.

Lindsey Bailes: Thank you, Howard. Good morning, everyone, and welcome to Southside Bancshares' first quarter 2023 earnings call. A transcript of today's call will be posted on southside.com under Investor Relations. During today's call and other disclosures and presentations, I will remind you that any forward-looking statements are subject to risks and uncertainties. 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 Shamburger, 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.

Lee Gibson: Good morning, everyone, and welcome to Southside Bancshares' first quarter earnings call for 2023. This morning, we reported net income of $26 million, earnings per share of $0.83, a return on average assets of 1.38%, a return on average tangible common equity of 19.36% and continued strong asset quality metrics. On a linked quarter basis, our loan growth was less than originally anticipated. This was due to anticipated first quarter loan closing delays now expected to close in the second quarter and a few payoffs. During the quarter, we also lost loan opportunities due to our underwriting requiring lower leverage than our competitors. That said, we have no plans to change our time tested credit underwriting standards.

Because of our healthy pipeline, loans we anticipate funding during the second quarter projected construction loan advances and the markets we serve, we are still budgeting for overall loan growth for 2023 in the high-single digits. Increased competition for deposits largely accounted for the 19 basis point decrease in our net interest margin. Pricing competition from both financial institutions and U.S. Treasury Bills required us to adjust our pricing more than originally anticipated. Additionally, as uncertainty in the banking industry unfolded, we implemented measures to further enhance our already very solid liquidity position by maintaining additional cash at Fed at a very small spread and pledging additional securities at Fed increasing availability there.

Solely to enhance our interest rate risk profile, we utilized the Fed's new bank term funding program, and as of yesterday, had obtained $287 million of one-year term funding at an average rate of 4.47% and our discretion can be re-priced or repaid at any time without penalty. We anticipate the net interest margin will continue to be pressured as competition for deposits remains high. Our interest rate swaps and fair value swaps continue to provide a hedge to offset a portion of the potential margin compression. Linked quarter deposits, net of brokered and public fund deposits decreased 3.4% during the quarter, 78% of which occurred prior to the banking industry events in early March. Over half of the decline in our total deposits linked quarter was a result of changing a portion of our swap funding from brokered deposits to lower cost fed borrowings resulting in $192 million reduction in brokered deposits.

Given the recent banking events, I think it's important to point out that as of March 31, 2023, 73.5% of our deposits, our FDIC insured are fully collateralized. In addition, the average balance of our granular deposit account base is only $30,000. While we are keeping a watchful eye on the economy as more economists forecast increasing chances of a recession, we are glad to report that the markets we serve remain healthy and continue to grow. I look forward to answering your questions following Julie's remarks, and I will now turn the call over to Julie.

Julie Shamburger: Thank you, Lee. Good morning, everyone, and welcome to our call today. We are pleased to report a solid start to 2023 with first quarter net income of $26 million and diluted earnings per common share of $0.83, a decrease of $0.04 or 4.6% linked quarter. Net income decreased by $1.6 million or 5.9%, driven by a decrease in net interest income, partially offset by a decrease in provision for credit losses. In light of events occurring in the banking industry since March, we included several additional disclosures in our earnings release, which showed the granularity of our deposit base with an overall average balance of $30,000 well below FDIC insurance levels. We estimate an insured deposits of 26.5% as of March 31 with the exclusion of public funds, which are fully collateralized in Southside owned deposits.

Deposits decreased $359.8 million or 5.8% on a linked quarter basis. Over half of the decrease was due to our brokered deposits of $191.8 million as we transitioned some of our funding of cash flow hedge swaps to more advantageous funding sources. The remaining decrease in deposits was related primarily to customer non-maturity deposits with a large percentage of the outflow occurring prior to March as mentioned in our earnings release. Our loan portfolio remained consistent at $4.15 billion linked quarter, and the weighted average rate of new loans funded during the quarter was approximately 6.97%. We reported strong asset quality metrics this quarter with non-performing assets of $3.2 million or 0.04% of total assets at March 31, a decrease of $7.7 million linked quarter, primarily related to the adoption of an accounting pronouncement around the recognition and measurement of troubled debt restructures.

At March 31, our allowance for loan losses as a percentage of total loans was 0.87%, a slight decrease compared to 0.88% on December 31. Our allowance for credit losses decreased $311,000 for the linked quarter. As of March 31, our loans with oil and gas industry exposure were $109.2 million or 2.6% of total loans. Our securities portfolio increased $119.9 million or 4.6% on a linked quarter basis. The first quarter increase was driven by purchases of three month treasury bills partially offset by sales of AFS securities. The sales of the AFS securities resulted in a net realized loss of $2.1 million, which was more than offset by the sale of equity securities that resulted in a net gain of $2.4 million. There were no transfers of AFS securities during the first quarter.

At March 31, we had a net unrealized loss in the AFS securities portfolio of $61.9 million compared to $88.9 million last quarter, a decrease of $27 million. As of March 31, the unrealized gain on the hedged securities was approximately $9.8 million, partially offsetting the unrealized losses in the AFS securities portfolio. As of March 31, the duration in the entire securities portfolio was 8.9 years, and the duration of the AFS portfolio was 6.6 years. Our mix of loans in securities slightly shifted to 60% and 40%, respectively compared to 61% and 39% at December 31. Our capital ratios remain strong with all capital ratios well above the capital adequacy and well capitalized thresholds. Liquidity resources remain solid with $1.9 billion in liquidity lines available as of March 31.

During the first quarter, we purchased 457,394 shares of our common stock at an average price per share of $34.89. Since quarter end and through April 20, we have purchased 177,406 shares at an average price of $33.02. Our tax equivalent net interest margin decreased on a linked quarter basis to 3.21 from 3.40 driven by the average yield and the average balance on interest-bearing liabilities partially offset by an increase in the average yield on earning assets. The tax equivalent net spread decreased for the same period by 33 basis points to 2.62, down from 2.95. For the three months ended March 31, net interest income decreased $3.5 million or 6.1% compared to the linked quarter. We also recorded $88,000 in purchase loan accretion this quarter.

Non-interest income, excluding the net gain on the sales of the AFS securities and equity securities increased $997,000 or 9.3% for the linked quarter. The increase was driven by BOLI income related to death benefits of $951,000 realized in the first quarter. For the same three-month period, non-interest expense was $34.8 million, an increase from the prior quarter of $1.3 million or 3.8%, primarily related to an increase in salaries and employee benefits. For 2023, we have budgeted approximately $35.5 million in non-interest expense each quarter. Our fully taxable equivalent efficiency ratio increased to 50.99% as of March 31 from 46.38% as of December 31, driven by the decrease in net interest income and increase in non-interest expense. Income tax expense increased to $4.5 million compared with $4.3 million for the three months ended December 31.

Our effective tax rate increased to 14.9% for the first quarter from 13.4% in the previous quarter. At this time, we estimate an annual effective tax rate of 14.9% for 2023. Thank you for joining us today. This concludes our comments and we will open the line for your questions.

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