Southside Bancshares, Inc. (NASDAQ:SBSI) Q4 2022 Earnings Call Transcript

Southside Bancshares, Inc. (NASDAQ:SBSI) Q4 2022 Earnings Call Transcript January 27, 2023

Operator: Good day and thank you for standing by and welcome to Southside Bancshares, Inc. Fourth Quarter and Year End 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker for today, Lindsey Bailes, Vice President, Investor Relations. Please go ahead.

Lindsey Bailes: Thank you, Justin. Good morning everyone and welcome to Southside Bancshares’ fourth quarter and year end 2022 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’ fourth quarter and year-end earnings call for 2022. This morning, we reported excellent fourth quarter and annual results for 2022. Highlights for the quarter included earnings per share of $0.87, a return on average assets of 1.47%, a return on average tangible common equity of 21.35%, annualized linked quarter loan growth of 8.2%, a linked quarter, four basis point increase in our net interest margin, an efficiency ratio of 30 — excuse me, 46.38%, and continued strong asset quality metrics. During 2022 of loans, net of PPP loans, increased 14.8% or $533.5 million. The net interest margin increased 16 basis points and the efficiency ratio decreased to 47.39%.

I want to thank the entire Southside team for their continued contributions and efforts, which made these results possible. We’re extremely pleased with our continued solid loan growth during the fourth quarter of 2022. Our loan pipeline, while not currently as strong as it was this time last year, remains solid and we are encouraged by the loan growth prospects for 2023. In addition, we are seeing advances in our construction portfolio increasing as loans that closed several quarters ago are now beginning to fund. Given the outlook for the markets we serve, we are budgeting for 9% loan growth during 2023. As previously mentioned, approximately $743 million of our available-for-sale municipal securities are hedged to the call day, with fair value swaps designed to reduce the overall fair value volatility of these securities.

During the fourth quarter, this $743 million of fair value swaps began producing net interest income as the overnight suffer rate we received increased above the average fixed rate we pay. This was largely responsible for the linked quarter 31 basis point increase in the average yield on our tax-exempt municipal securities. In the month of December, we recorded approximately $645,000 of net interest income related to these swaps. During January 2023, we expect the net interest income associated with these swaps will increase to reflect the full effect of the mid-December increase an overnight sulfur, resulting from the increase in the federal funds rate. Should the federal reserve further increase the Fed funds rate we would anticipate a further increase in net interest income from these fair value swaps.

Conversely, should the Federal Reserve at some point decrease the federal funds rate, net interest income associated with these fair value swaps would decline, at which time we would likely unwind some or all of these fair value swaps. The economic conditions in our markets remain solid, bolstered by continued company relocations and existing company expansions combined with population growth a result of continued migration from other states. The combination of increased mortgage rates and high building costs has resulted in reduced housing starts and decreased margins, moving this market closer to pre-pandemic levels. We look forward to successfully executing on our business model and what we consider to be the best state in the country in which to operate.

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 fourth quarter to end a strong year with 2022 net income of $105 million and diluted earnings per common share of $3.26. For the fourth quarter, we reported net income of $27.7 million, an increase of $717,000 on a linked-quarter basis and diluted earnings per common share of $0.87, a $0.03 increase linked quarter. For 2022, we reported organic — record organic loan growth of $533.5 million, excluding PPP loans, a 14.8%increase from 2021. This was driven by our real estate portfolio with increases of $389.5 million in CRE, 11.8 million in construction, and $12.4 million in 1-4 family residential. Additionally, we had a $24 million increase in commercial loans, excluding PPP.

Our loan portfolio increased $84.2 million to $4.15 billion linked quarter. The increase was driven primarily by strong growth within our commercial real estate loan portfolio with an increase of $85.8 million on a linked-quarter basis. The weighted average rate of new loans funded during the quarter was approximately 6.4%. We continue to experience strong asset quality metrics with non-performing assets of $10.9 million or 0.14% of total assets at December 31st, a decrease of $855,000 linked quarter. As of December 31st, our allowance for loan losses as a percentage of total loans was 0.88% compared to0.90% at September 30th. Our allowance for off-balance sheet credit exposures increased to $3.7 million on a linked-quarter basis due to a provision of $1.6 million compared to $200,000 in the last quarter.

As of December 31st, our loans with oil and gas industry exposure were $111.3 million or 2.7% of total assets — of total loans, excuse me. Our securities portfolio increased $50 million or 1.9% on a linked-quarter basis. The increase was driven by a decrease in unrealized losses in the portfolio and to a lesser extent, purchases of securities. During the fourth quarter, we transferred additional available for shelf securities with fair values of $175.8 million to held to maturity. At December 31st, we had a net unrealized loss in the AFS securities portfolio of $88.9 million compared to $168.3 million last quarter, a decrease of $79.5 million. As of December 31st, the unrealized gain on the hedged securities was approximately $21.6 million, partially offsetting the additional unrealized losses in the AFS securities portfolio.

As of December 31, the duration in the entire securities portfolio was 10.7 million years and the duration of the AFS portfolio was 9.3 years. Our mix of loans and securities remained consistent on a linked-quarter basis at 61% and 39%, respectively. Our deposits increased $16.9 million or 0.3% on a linked-quarter basis. The linked quarter increase in deposits was due primarily to an increase in our public fund deposits, partially offset by a decrease in broker deposits. During the fourth quarter, we increased our stock repurchase plan authorization by 1 million shares. We purchased in shares during the fourth quarter at an average price per share of $35.03. Since year-end and through January 24th and 2023 and we have purchased 141,053 shares at an average price of $35.73.

Our tax equivalent net interest margin increased on a linked-quarter basis to 3.40% from 3.36%, driven by the increase in the average yield on loans of 54 basis points and 21 basis points on the securities portfolio, partially offset by an increase in the average yield on interest-bearing liabilities of 56 basis points. The tax equivalent net interest spread decreased for the same period to $2.95 from 3.08%. For the three months ended December 31st, net interest income increased $1.3 million or 2.4% compared to the linked quarter. We also recorded $55,000 in purchased loan accretion this quarter. For the three months ended December 31st, 2022, non-interest income, excluding net loss on the sale of AFS securities increased $398,000 or 3.8% for the linked quarter.

The increase was driven primarily by increases in deposit services income, trust income, and swap fee income included in other non-interest income. For the same three-month period, non-interest expense was $33.6 million, a slight increase from the prior quarter. For 2023, we have budgeted approximately $35.5 million in non-interest expense each quarter. The increase in the budgeted expense is primarily due to increases in salary expense, software expense, and the non-service component of our frozen retirement and restoration plan expense. Our fully taxable equivalent efficiency ratio at December 31st decreased to 46.8% from 47.42% as of September 30th, driven by the increase in net interest income. Income tax expense increased to $4.3 million compared to $3.9 million for the three months ended September 30th.

Our effective tax rate increased to 13.4% for the fourth quarter from 12.6% in the previous quarter. At this time, we estimate an annual effective tax rate of 12.8% 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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Q&A Session

Operator: And thank you. And our first question comes from Will Jones from KBW. Your line is now open.

Will Jones: Hey, great. thanks. Good afternoon.

Lee Gibson: Afternoon. How are you doing?

Will Jones: Hey, we’re doing well. So, Lee, I just wanted to unpack this walk contract you guys have that’s coming on and going to start benefiting you guys. So, the you’re receiving variable but paying fixed. What is the fixed rate that you guys are paying? Or I guess the better question is, what is like the net pickup in yield that you received from this favorable swap contract?

Lee Gibson: When you say the favorable yield increase, it would — okay, I’m not sure I understand that part of the question, but basically, we have probably somewhere between 20 and 30 of these swaps, and they have — how many? Sorry, we have 84. So, we — and they have different — we started putting these on, I think, back in April of 2022 and the last one we put on was in early October. So, each one of them have fixed rates that we’re paying that are different. Obviously, the last ones we put on had the highest fixed rate. And at this point in time, I think almost all of them were in a positive position on. And that’s the reason, basically, during November was the first time we saw it turn positive, where we actually had net interest income and then it jumped to that $645,000 in December.

There was a 50 basis point increase in SOFR corresponded with the increase in Fed funds but that was mid-December. So, we anticipate the rest of that increase in that net interest income will occur in January. And then should the Fed increase 25 basis points or whatever the amount is in February, then we’ll continue to see increases. So, at this point, roughly that amount of our tax-free municipal securities are almost acting like a floating rate security at this point in time. And for the quarter, it had a 31 basis point increase are reflected a31 basis point increase in our yield on our taxable municipal — excuse me, tax-free municipal securities. So, does that —

Will Jones: Yes. No, that very helpful. Yes. No, thank you for walking through that. And I’d imagine just with the majority of those being in a positive position that you would have a relatively sizable gain if you were to sell the swaps?

Lee Gibson: We do have an overall gain in the swaps right now. It’s — I don’t — it was $21 million at year-end. And if changes based on the — what happens with the longer term rates because these are swapped to the call date of the municipal securities. And I can give you the — they handed me the average fixed rate of our coupon that we — that we are paying is a 321.

Will Jones: Okay, great. That’s perfect. Yes, that’s what I was looking forward really. Great. That’s very helpful. Okay. So, then as we think about just the story of the margin as we move into 2023, you still saw a little bit of expansion this quarter. I mean the deposit costs are ticking up a little bit. Do you feel like you still have leverage on the asset pricing side, maybe to some of this accelerated or continuing deposit pressure? So, maybe we see the margin flat out and just hold the line for the remainder of the year. There’s an expansion left. Do you feel like this quarter was a peak, just any commentary around the margin would be great?