Southside Bancshares, Inc. (NASDAQ:SBSI) Q1 2024 Earnings Call Transcript April 25, 2024

Southside Bancshares, Inc. misses on earnings expectations. Reported EPS is $0.71 EPS, expectations were $0.75. SBSI isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the Southside Bancshares Fourth Quarter 2024 Earnings Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Lindsey Bailes, Vice President, Investor Relations. Please go ahead.

Lindsey Bailes: Thank you, Marvin. Good morning, everyone, and welcome to Southside Bancshares first 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 in 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: Thank you, Lindsey. Good morning, everyone, and welcome to Southside Bancshares first quarter 2024 earnings call. This morning, we reported first quarter net income of $21.5 million, earnings per share of $0.71, a return on average tangible common equity of 15.07%, and continued strong asset quality metric. Linked quarter, loans increased and annualized 4.7%, just slightly below our projected 5% loan growth for 2024. Our loan pipeline is solid, and the markets we serve remain healthy and continue to grow and perform well. Linked quarter, our net interest margin decreased 13 basis points. During the Q3 of our lower interest rate cash flow swaps, totaling $120 million, matured, and the rate for that funding increased over 4%.

Our BTFP funding renewed at a higher rate for an additional year, and we continue to experience deposit pricing pressures. We do not have any additional swaps maturing during 2024. While we anticipate ongoing deposit pricing pressure in the absence of the Fed cutting interest rates, we believe anticipated loan growth will help partially mitigate any further NIM compression. During the quarter, we implemented several initiatives associated with our new five-year strategic plan. One of the initiatives is to carefully examine additional revenue as well as cost containment opportunities. The retirements, reduction in workforce, and attrition during the first quarter of 2024, we currently anticipate annualized cost savings of approximately $3.5 million, 80% of which should be reflected beginning in the third quarter of this year and 100% in 2025.

During the quarter, we expensed approximately $618,000 associated with these expense reductions. We continue to evaluate expenses as well as revenue opportunities, and we'll update you on any further progress in future quarters. 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, and welcome to our first quarter call. We began the year with first quarter net income of $21.5 million, an increase of $4.2 million, or 24.2%, and diluted earnings per share of $0.71, an increase of 24.6% linked quarter. For the first quarter, we had loan growth of $52.9 million, or 1.2% linked quarter, and 4.7% annualized. The growth was driven primarily by increases of $244.9 million in commercial real estate loans, partially offset by decreases in construction loans of $190.3 million. The interest rate of loans funded during the quarter was on average approximately 7.8%. As of March 31st, our loans with oil and gas industry exposure were $114 million, or 2.5% of total loans.

Our allowance for credit losses decreased by $229,000 for the linked quarter to $46.4 million. Asset quality metrics remained strong, although our non-performing assets increased to $8 million from $4 million, or 0.10% of total assets on March 31st, compared to 0.05% at year end. The increase in non-performing assets was primarily related to two larger relationships, one commercial real estate and one commercial relationship, and not specific to any particular market or industry in our portfolio. Since March 31st, 2024, we have received approximately $1.6 million combined of payments on the commercial loan relationship and the payoff of a larger existing residential real estate loan on non-accrual status. On March 31st, our allowance for loan losses as a percentage of total loans was 0.95%, a slight increase compared to 0.94% on December 31st.

Our securities portfolio increased $108.8 million, or 4.2% on a linked quarter basis, driven by purchases of mortgage-backed securities during the first quarter. There were no transfers of AFS securities during the first quarter, and as of March 31st, we had a net unrealized loss in the AFS securities portfolio of $48.8 million, compared to $36.2 million last quarter. As of March 31st, the unrealized gain on the fair value hedges on municipal securities was approximately $20.4 million, compared to $13.6 million linked quarter. This unrealized gain partially offsets the unrealized losses in the AFS securities portfolio. Our AOCI on March 31st, 2024 was a net loss of $110.9 million, compared to a net loss of $113.5 million on December 31st, 2023.

The net loss was comprised of net losses on our securities and swap derivatives of $92.2 million and $18.7 million related to our retirement plans. As of March 31st, the duration in the securities portfolio was 9.1 years, and the duration of the AFS portfolio was 6.9 years, an increase from 8.4 years and 5.8 years, respectively, on December 31st. At quarter end, our mix of loans and securities changed slightly to 63% and 37%, respectively, compared to 64% and 36% on December 31st. Deposits decreased slightly by 0.06%, or $3.9 million, on a linked quarter basis. Our capital ratios remained strong, with all capital ratios well above the capital adequacy and well-capitalized threshold. Liquidity resources remained solid, with $2.3 billion in liquidity lines available as of March 31st.

Our tax equivalent net interest margin decreased 13 basis points on a linked quarter basis to $286 from $299. The tax equivalent net interest spread decreased for the same period by 10 basis points to 216%, down from 2.26%. For the three months ending March 31st, net interest income decreased by 1.1 million, or 2.1%, compared to the linked quarter. The purchase loan accretion recorded this quarter was $42,000. Non-interest income, excluding the net loss on the sales of AFS securities, decreased 30.1 million, or 24.4%, for the linked quarter, primarily due to the decrease in the linked income of $1.8 million due to a debt benefit realized in the fourth quarter, a loss on sale of loans, a decrease in deposit services income, and a loss in fair value of equity securities.

Non-interest expense increased $1.7 million on a linked quarter basis to $36.9 million, driven by increases in salaries and employee benefits, which included approximately $618,000 associated with future cost reductions. During last quarter's earnings call, I reported our budget of $37.9 million quarterly for non-interest expense in 2024. As a result of the cost containment initiatives, we expect to realize approximately $400,000 of savings in the second quarter and $700,000 to $800,000 in the third and fourth quarters of the year. Our fully taxable equivalent efficiency ratio increased to 55.54% as of March 31st, from 50.86% as of December 31st. We recorded income tax expense of $4.6 million, an increase of $2.4 million compared to the fourth quarter.

The increase in tax expense was driven by a higher tax rate and increase in pre-tax income. Our effective tax rate increased to 17.7% for the first quarter, up from 11.3% in the previous quarter, due to a decrease in tax income as a percentage of pre-tax income. We currently estimate an annual effective tax rate of 17.7% for 2024. I will now turn the call over for questions.

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