Southside Bancshares, Inc. (NASDAQ:SBSI) Q3 2023 Earnings Call Transcript

Southside Bancshares, Inc. (NASDAQ:SBSI) Q3 2023 Earnings Call Transcript October 26, 2023

Southside Bancshares, Inc. misses on earnings expectations. Reported EPS is $0.6 EPS, expectations were $0.77.

Operator: Hello, and welcome to Southside Bancshares, Inc. Third 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. [Operator Instructions] I would now like to hand the conference over to Lindsey Bailes, Vice President of Investor Relations. You may begin.

Lindsey Bailes: Thank you, Tawanda. Good morning, everyone, and welcome to Southside Bancshares’ third quarter 2023 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 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.

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Lee Gibson: Thank you, Lindsey. Good morning, everyone, and welcome to Southside Bancshares’ third quarter earnings call. This morning, we reported net income of $18.4 million, earnings per share of $0.60, a return on average tangible common equity of 13.17%, and continued strong asset quality metrics. During the quarter, we recorded a provision for credit losses of $7 million, due primarily to increased concerns reflected in the CECL economic forecast related to the commercial real estate market and repricing risks associated with the overall higher interest rate environment. Linked quarter, we experienced loan growth of $91.6 million and deposit growth of $231.9 million. Our deposit growth was driven by higher-cost public fund deposits of $265.8 million from two of our contractual municipalities.

These higher-cost deposits combined with overall higher funding cost pressure were largely responsible for the 15 basis point decrease in linked quarter in our net interest margin. During October, we swapped an additional $100 million to help mitigate further funding cost pressures. Our current loan pipeline is less robust than earlier this year. However, we still anticipate that we will end the year with high-single-digit loan growth. 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.

Julie Shamburger: Thank you, Lee. Good morning, everyone. Welcome to our call. We reported third quarter net income of $18.4 million, a decrease of $6.4 million on a linked quarter basis, and diluted earnings per common share of $0.60, a decrease of $0.21 or 25.9% linked quarter. We had loan growth of $91.6 million or 2.1% linked quarter, driven by a $63.2 million increase in construction loans and a $17 million increase in commercial real estate loans. The interest rate of loans funded during the quarter was on average approximately 7.6%. As of September 30, our loans with oil and gas industry exposure were $102 million or 2.3% of total loans. Our allowance for credit losses increased by $6.1 million for the linked quarter to $45.6 million.

The increase was driven by our loan loss provision of $6.3 million and a provision for off-balance sheet credit exposures of $0.6 million for the third quarter, and when combined, increased $7.1 million from prior quarter. The increase in provision was driven by the increased economic and repricing concerns forecasted in our CECL model. Asset quality metrics remain strong with non-performing assets of $4.4 million or 0.5% of total assets on September 30. On September 30, our allowance for loan losses as a percentage of total loans was 0.94%, an increase compared to 0.84% at June 30 due to the increased provision. Our securities portfolio decreased $4.8 million or 0.2% on a linked quarter basis. There were no transfers of AFS securities during the third quarter.

On September 30, we had a net unrealized loss in the AFS securities portfolio of $137 million compared to $69.7 million last quarter, an increase of $67.3 million, primarily in the municipal securities portfolio due to higher interest rates. As of September 30, the unrealized gain on the fair value hedges in municipal securities was approximately $42.2 million compared to $27.9 million linked quarter, which partially offset the unrealized losses in the AFS securities portfolio. Our AOCI on September 30, 2023, was a net loss of $155 million compared to a net loss of $115.7 million on June 30, 2023. The net loss on September 30, 2023, was composed of a net loss on our securities and swap derivatives of $135.9 million and a $19.1 million loss related to our retirement plan.

As of September 30, the duration in the total securities portfolio was 9.7 years and the duration of the AFS portfolio was eight years. Our mix of loans and securities shifted slightly to 63% and 37%, respectively, compared to 62% and 38% on June 30. Deposits increased $231.9 million or 3.8% on a linked quarter basis, driven by an increase in public fund deposits of $265.8 million. Our capital ratios remain strong with all capital ratios well above the capital adequacy and well-capitalized thresholds. Liquidity resources remained solid with $2.4 billion in liquidity lines available as of September 30. During the third quarter, we purchased 212,388 shares of common stock at an average price of $29.39 pursuant to our stock repurchase plan. Since quarter-end and through October 24, we have purchased 141,480 shares at an average price of $28.56.

Our tax equivalent net interest margin decreased 15 basis points on a linked quarter basis to 3.02% from 3.17%. The decrease was largely driven by the 55 basis point increase in interest-bearing deposits, more than offsetting the increase in loan yields of 17 basis points. The tax equivalent net interest spread decreased for the same period by 24 basis points to 2.31%, down from 2.55%. For the three months ended September 30, net interest income decreased $643,000 or 1.2% compared to the linked quarter. The purchased loan accretion recorded this quarter was $70,000. Non-interest income, excluding the net loss on the sales of AFS securities and equity securities, decreased $452,000 or 4% for the linked quarter, driven by non-recurring income recorded in the second quarter relating to the gain on the purchase of $5 million of our subordinated debt.

Non-interest expense increased $560,000 on a linked quarter basis to $35.6 million. For the fourth quarter, we have budgeted approximately $35.5 million in non-interest expense. Our fully taxable equivalent efficiency ratio increased to 52.29% as of September 30 from 51.06% as of June 30. Income tax expense decreased $1.4 million to $3.1 million, and our effective tax rate decreased to 14.5% for the third quarter from 15.5% in the previous quarter. We currently 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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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Brady Gailey with KBW. Your line is open.

Brady Gailey: Hi. Thank you. Good morning, guys.

Julie Shamburger: Good morning.

Lee Gibson: Good morning.

Brady Gailey: So the margin is still above 3%, but, you know, it keeps moving down every quarter. How – when do you think we’re going to hit the bottom on the net interest margin? Do you think it dips below 3%?

Lee Gibson: Yes, we are – I mean we did swap another $100 million, so, you know, we think that’ll take a little bit of the pressure off. At this point, any loans we make over $2.5 million are going to be floating or they have to be swapped. And, you know, we’re looking at different funding costs and really our public fund costs to see if we just need to potentially run some of those deposits off to pick up some cheaper funding elsewhere. So I would – and answer to your – it’s a long answer, but in answer to your question, you know, I think there’s still some more margin compression coming. A lot of it probably has to do with, you know, how much we can have in loan growth moving forward, especially in ’24. You know, this quarter, I think, you know, we’ll have decent loan growth, but it’s really going to be dependent on how much loan growth we have next year.

But, you know, I would anticipate that, you know, we’re probably looking at some additional NIM pressure, you know, and I wouldn’t say just slightly below 3%. I’d say, you know, it potentially could get, you know, 25 or so basis points, you know, below 3% at some point.

Brady Gailey: All right. And then – so once the NIM hits that bottom and funding costs have plateaued, you know, there’s some banks talking about asset repricing that could, you know, assuming rates are flat from here, you know, some banks are talking about asset repricing where the NIM could hit that bottom and then assets reprice and the NIM starts to inflect higher at some point next year. Do you think that is a likely scenario for Southside?

Lee Gibson: We will have some loans that reprice next year. It really just depends what the Fed does. You know, if the Fed has another interest rate increase out there, then, you know, not sure there’s enough – there’s a fair amount of assets that will reprice. It’s possible by late next year. I wouldn’t anticipate that’s going to happen in the first six months. It’s possible with all that asset repricing that we could see that later in the year that the NIM would actually go the other direction.

Brady Gailey: Okay. All right. And then, you know, I heard Julie talk about expenses basically being flat next quarter at this $35.5 million level. You know, as we look to 2024, how are we thinking about expense growth next year?

Julie Shamburger: So…

Lee Gibson: We have not put a final budget together, I’ll tell you that. I would anticipate expense growth – you know, we’ll have some expense growth, but we’ll probably try to keep it in the 3% realm, somewhere in that range. You know, we’re going to have some higher wages and things of that nature.

Julie Shamburger: And earlier in the year, in the first couple of quarters, I projected out that our budgeted expense was $35.5 million. I pretty much said that all year. And it just this last quarter has finally hit that amount. And one other thing I would add. You know, we’ve done a lot of the heavy lifting on a lot of the technology that’s already embedded in here in these numbers. So, you know, I’m expecting to see that, you know, maybe not the steep escalation in that as much as we’ve seen this year.

Lee Gibson: I’ll say this, we haven’t – you know, two things. We haven’t put the budget together. We’re having a meeting this afternoon with all the executive management team, and the message Julie and I are going to deliver is, if you want to spend more money next year, explain to us how that’s going to make us money, you know, where the revenue is coming from.

Brady Gailey: Yes. All right. And then finally, for me, you know, you guys have been a pretty consistent repurchaser of your shares over the last, you know, three or so years. Is there any reason to think that that would slow down here, or do you think, hey, the stock is on sale, we’re going to continue to be active in the buyback, you know, as far as the eye can see?

Lee Gibson: You know, I – what I would say is we have a little over 600,000 shares left to repurchase. I don’t – you know, I don’t see us slowing down on repurchasing until that’s used up. And then it’ll – you know, we’ll go to the Board and there’ll be a discussion and we’ll make a decision at that point if there’s going to be additional purchases.

Brady Gailey: All right. Great. Thank you, Lee.

Lee Gibson: Okay. Thank you.

Operator: [Operator Instructions] Our next question comes from the line of Graham Dick with Piper Sandler. Your line is open.

Graham Dick: Hi. Good morning, everyone.

Lee Gibson: Good morning, Graham.

Graham Dick: So I just wanted to circle to the reserve. I know it was CECL-driven this quarter. I just wanted to hear your all’s perspective on the drivers behind that. It sounded like repricing risk and some CRE-related stuff. Do you see repricing risk and CRE risk in your loan book that, you know, this CECL reserve build is effectively capturing? Or is this sort of external to your all’s bank and more of a, you know, factor outside of your control, I guess?

Lee Gibson: You know, we – well, I’ll tell you this. We – every six months we go through and look at all the CRE loans that are going to reprice, whether they’re going to reprice next year or, you know, three years or four years from now, and we determine whether or not we feel like, you know, they’re close or whether or not, you know, they’re fine, if they reprice at current rates and we stress them. There’s a few loans that we put on the watch list, mainly because they’re close. But I will tell you that, you know, I’d like to see all the CRE loans reprice immediately. And because the few loans that are close, it just means they’re close. It doesn’t mean they can’t chin the bar, but they’re close in terms of meeting their debt service coverage ratios.