Southside Bancshares, Inc. (SBSI) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Southside Bancshares Inc. First Quarter 2017 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Deborah Wilkinson, Executive Vice President, Investor Relations. You may begin.

Thank you, Glenda. Good morning everyone. Thank you for joining Southside Bancshares' first quarter 2017 earnings call. The purpose for this call is to discuss the company's results for the quarter and our outlook for upcoming quarters. 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 made are subject to risks and uncertainties. Factors that could materially change our current forward-looking assumptions are described in our earnings release and in our Form 10-K. Joining me today to review Southside Bancshares' first quarter 2017 results are Lee Gibson, our President and CEO; and Julie Shamburger, EVP and CFO. Our agenda today is as follows; first, you will hear Julie discuss an overview of financial results for the first quarter of 2017, including loan activity, asset quality, oil and gas exposure and our loan portfolio, cost containment and an update on our securities portfolio. Then Lee will share his comments on the quarter. I will now turn the call over to Julie.

Thank you, Deborah. Good morning everyone. Welcome to Southside Bancshares 2017 first quarter earnings call. We reported first quarter net income of $15 million, compared to first quarter 2016 net income of $13.5 million, a 10.9% increase. From sales of securities from both quarters, net income during the first quarter 2017 increased $2.9 million or 23.9% compared to the same period in 2016. Our diluted earnings per share for the first quarter ended March 31, 2017 were $0.52 per share, an increase of $0.01 or 2% compared to $0.51 per share for the same period last year. During the first quarter, our level of payoff outpaced our new loans, resulting in a decrease in total loans of $17.6 million on a linked quarter basis. For the quarter ended March 31, 2017, total loans increased by $95.7 million or 3.9%, when compared to March 31 of 2016. The growth primarily resulted from an increase in our commercial real estate loan portfolio, and to a lesser extent, we increased the municipal loan portfolio. We continue to see roll-off in the indirect consumer portfolio, approximately $8 million during the first quarter of 2017. The indirect portfolio decreased to $27.8 million at the end of the current quarter. As we stated in our earnings release today, our loan pipeline remains healthy and we expect consistent loan growth throughout 2017. At March 31, 2017, our loans with oil and gas industry exposure remain minimal at 1.1% of our total loan portfolio. We recorded loan loss provision expense during the first quarter of 2017, at $1.1 million, a decrease from $2.1 million in the fourth quarter. The higher fourth quarter provision expense was related to loan growth and additional reserve on a few classified loans. Non-performing assets decreased further during the quarter ended March 31, 2017 by $1 million or 6.8% to $14.1 million or 0.25% of total assets, compared to 0.27% of total assets at December 31, 2016 and 0.68% at March 31, 2016. Next, I will give an update on our securities portfolio. At March 31, 2017, we had a net unrealized loss in the securities portfolio of $20.8 million. The duration of the securities portfolio at March 31, 2017 increased slightly to 5.2 years compared to 5.1 years at December 31, 2016. On a linked quarter basis, the size of the securities portfolio decreased $43.3 million during the first quarter. As we experience growth in the loan portfolio, we will gradually adjust the securities portfolio. We expect to continue with the barbell approach for our security purchases, as market conditions dictate, using U.S. agency CMOs for the short end and treasury notes, agencies, commercial mortgage backed and municipal securities for the longer end. During the first quarter, we reported our net interest margin at 3.08% and our net interest spread at 2.93. Increases of five and three basis points respectively on a linked quarter basis. The increase in both the net interest margin and yield were a direct result of the increase in our average loan balance and yield, as well as the increase in the average yield on our securities portfolio. During the three months ended March 31, 2017, our non-interest expense decreased $3.5 million or 12.1% when compared to first quarter of 2016. Primarily, due to cost containment in almost all of our non-interest expense categories. We are also pleased to report, that our non-interest expense decreased slightly from the fourth quarter of 2016, and our efficiency ratio decreased to 51.60 for the first quarter of 2017. We expect our non-interest expense to remain consistent and to further reduce our efficiency ratio in the upcoming quarters of 2017. Thank you. And I will now turn the call to Lee.

Thank you, Julie. The exceptional financial results for the first quarter, provides Southside a tremendous start for 2017. Record first quarter net income, increases in our net interest margin and net interest income on a linked quarter basis, a decrease in the efficiency ratio and solid credit quality are but some of the highlights. We have started our project to resize and further automate our branches, commensurate with the delivery channels our customers utilize with seven branches slated for completion by the end of the summer. Cost containment efforts to automate and streamline processes are continuing. We expect to introduce 20 ITMs over the next 12 months, providing further cost containment opportunities in that area. All three of the markets we serve remain healthy. The DFW and Austin economies continue to perform exceptionally well, fueled primarily by job growth and company relocations. The Tyler economy reflects a slower, but steady growth pattern. While loan payoffs in the first quarter outpaced fundings, our pipeline is healthy and we anticipate loan growth will occur during the balance of 2017. Given our solid capital position, balance sheet, credit quality and currency value, we remain open to attractive opportunities to expand our franchise in selected areas. At this time, we will conclude our prepared remarks and open the lines for your questions.

[Operator Instructions]. And our first question comes from the line of Michael Young from SunTrust. Your line is now open.

Hey, good morning.

Good morning Michael.

Wanted to start on the loan growth, and maybe taking this from a different perspective; you count all the categories where you are getting payoffs and paydowns versus growth. But I am curious, just geographically, is there a pivot that's kind of going on behind the scenes that maybe we are not seeing from one market to another?

I don't know if there is really a pivot in one market to another. We are just seeing certain projects, where they are being sold and people are getting really attractive prices, and they will sell the project and they will pay it off. And you know, like all bankers, we agonize whether the loan is going to pay off when we make it, and then we are upset when it does pay off.

Fair enough. And maybe switching gears to the expense side, obviously good control this quarter there, just keeping the expenses around $26 million. As you move forward with the rebranding efforts, can you maybe just talk about your expectation for expenses as you execute that and where we should come out maybe on the backend of all that?

Sure. On the rebranding, I think most of the major expenses on the rebranding are going to be in the signage. And a lot of that is going to be [capitals] [ph] and will be depreciated over a number of years. So we really don't expect the expenses to move up dramatically, and that will all be capitalized. So while there will be some expense associated with that, we just don't see that that's going to be a major drag on expenses. And with some of the other initiatives we have going on, we feel like that that's going to probably offset that.

Okay. And similarly, with the branches and kind of revamping some of those?

Correct, and revamping those branches, the way we are revamping those, we are actually, in a lot of cases, reducing the size, providing more automation, and through attrition, we are going to be able to run those branches with less people.

Okay. So not a lot of onetime costs necessarily associated with that?

Correct. I mean, ongoing, we should -- costs should be flat to down, associated with that. And then with the rollout of all these ITMs, ultimately, that's going to have a nice reduction in expense there.

Okay. Perfect. Thanks guys.

Thank you. And our next question comes from the line of Brady Gailey from KBW. Your line is now open.

Hey, good morning. This is Mike Belmes on for Brady.

Good morning.

I had a question -- good morning. What was the accretion number this quarter?

The accretion on loans was $480,000 this quarter.

Okay, great. Thanks. And then, kind of revisiting loan growth again, is [indiscernible] kind of a good number for the year still?

I think, we are still budgeting for that -- that 7 -- 9 would be a stretched number. I think we have talked about that being our stretch number. Seven is a number, we are continuing to budget towards.

Got you. Okay. And then I guess, just one last one for me, investors have been kind of focused on deposit costs; are you guys seeing anything, a lot of pressure there? Have things been heating up, or kind of people have been very, how should I say, competing -- correct me, and not overpricing deposits?

We are not -- in terms of retail deposits, we are not seeing a lot of pressure on the retail side. CDs, you always have some pressure, but on the non-maturity deposits, we are just not really seeing much pressure at all there.

Perfect. Great. Thanks for your time.

All right. Thank you.

Thank you. And our next question comes from the line of Brad Milsaps from Sandler O'Neill. Your line is now open.

Hey, good morning Lee.

Good morning Brad. How are you doing?

Good, good. Hey, just wanted to follow-up on the deposit cost question. It did look like some of your interest bearing demand categories are up about 10 basis points linked quarter. I assume, some of that is attributable to public funds, also the short term borrowing costs. Can you kind of give a sense, was all that kind of related stuff that's tied to prime or to Fed funds rather, and kind of what's the sensitivity of that, going forward, as it relates to kind of your outlook for the NIM?

Yeah. A lot of that was related to the public funds and it is -- the public funds are much more interest rate sensitive than the retail deposits. I am sorry, what was the last part of your question?

Yes, more the outlook for your NIM. I know you mentioned -- obviously you feel like the loan growth is going to pick up for you. You plan to fund that out of the bond portfolio. I know we've talked about that a lot over the years and the mix change. You guys continue to grow on the liquidity side, so the bond portfolio can kind of continue to grow as well with the loan. So I'm just kind of curious how that's going to play out this year?

Well, as the loans grow, you know, we will gradually decrease the securities portfolio and probably what we will look for, some of the lower yielding securities. Potentially, we may let some of these higher cost of public funds roll-off and look for different sources of funding and if we don't have the bonds, obviously, we don't need those public funds. So we will -- the NIM with the loans should go up.

Okay. And then just -- go ahead.

And with our models, as the interest rates -- as the Fed moves up, you know, moves the Fed funds right up and prime goes up with the way our loans are priced right now. Most of our loans that go on right now are floating rate loans and most of those are tied to LIBOR at this point in time. Every time the Fed talks about it, LIBOR tends to move long before the Fed actually moves. So we get the benefit of that.

Sure. Yes, I guess I was just kind of thinking bigger picture, looking at your NIM year-over-year you are obviously down a fair amount, lending costs are up. I know a year ago you benefited from interest recovery and higher levels of [purchase] [ph] accounting, but is it your sense you can start to track back towards that number, depending on what the Fed does and with loan growth, or some -- maybe halfway back to that point, is that kind of more what you are thinking?

Yeah. And in our securities portfolio, we are seeing a -- with the higher rates, we are seeing the premium amortization decline quite a bit, and so we are seeing a pretty nice increase with the yields on the mortgage backed securities portfolio, and that's what caused that slight increase in the duration, was the sum of the shorter term CMOs. The yield moved up very nicely on those. So income moved up significantly on those and you know, that's occurring. So all in all, our models show that, as rates move up, we do very nicely.

Sure. And I guess I was under the impression you were buying as many premium CMOs relative to maybe 12 to 24 months ago. Is that still, in fact, the case?

Yes. That is still the case.

Okay. And then just finally, you guys always do a great job on the tax rate. Are you still thinking high teens or is it closer to kind of where -- below 17 where we were this quarter?

We have -- we are actually estimating at 17.4, but we had the new accounting standard. And we realized about $126,000 in a discrete reduction. So that drove our rate down about 0.07. So notwithstanding those discrete items, and there is no way to predict how those are going to roll in throughout the year. I would expect about a 17.5. But again, it reduced it this quarter a little bit. So that's kind of where we are at the moment.

All right. Thank you.

Thank you. [Operator Instructions]. And our next question comes from the line of Kevin Fitzsimmons from Hovde. Your line is now open.

Hey, it's Hovde Group. How are you doing, Lee?

Good Kevin. How are you doing?

I am good. I am good. Just one more follow-up on loan growth. Just your expectation going forward. Is it more that you see the pay downs dissipating or do you see it being more like -- I guess the last few years it has been more backend loaded, the loan growth, do you see it just sort of ramping up that way and transpiring that way this year as well?

We have not been able to explain why the loan growth has occurred in the last half of the year, or the last two years, so I am not expecting that to occur this year, but it may occur again. We have a lot of construction loans that are starting to fund, and we have a lot of things that we have approved, that we are expecting to fund. We have some full funders that we are expecting to fund. You just never know when some of those paydowns are going to come to fruition, they just come out of the blue. So we do expect some to occur. We just don't know when they are going to occur, and what the dollar amounts are going to be. So we do -- we are able to kind of gauge what the construction dollars are going to be that go on the books, and we are able to gauge what those pool funders are going to [indiscernible] [21:08]. The paydowns are what are difficult to gauge. We know we are going to have some. We just don't know how much they are going to be and who they are going to be. So that's the difficulty.

Got it. And one follow-up --

And the good thing is, that's a sign of a very healthy economy in the areas we are in, and that these people are -- they do something, they put it on the ground, and then they are able to sell it at a very nice profit.

Right. Good point. Wanted to just follow-up, you ended the prepared comments just talking about expansion opportunities. Can you give us a sense for what the state is of those conversations or those potential opportunities? Is it getting better or more constructive or is it very quiet? Just any color you could give on that.

I think, we are seeing more opportunities there as -- in the target area we are interested in. There is -- and our target area is East Texas over to Austin, up to Fort Worth and back over to East Texas. So they are just more opportunities that are coming to our attention. So I would say that, the likelihood of something potentially coming to fruition in 2017 is much greater than it was in the last couple of years.

And do you think -- just it seems like the stabilization of the oil prices, we're just hearing less about problems on that front. Do you think that has something to do with it, that it's just -- there is just less concern on that area from the buyer and the seller perspective?

I think so, and I think the rest of the country has been able to see that, Texas is -- well oil and gas is very important to Texas. Texas is no longer a one-trick pony, and the economy is tied to a lot of different things now in Texas, and even with the oil, half of what it was three or four years ago, the economy is going very well and is extremely healthy right now. So I think a lot of the concerns have dissipated for a number of reasons.

Great. Thanks Lee.

All right.

Thank you. And I am showing no further questions at this time. I would like to turn the call back over to Lee Gibson for closing remarks.

All right. Thank you. As you have heard this morning, Southside's first quarter results were outstanding by virtually every measure. We look forward to building on these first quarter results and reporting those results to you at future calls. Thank you for joining us on this call this morning. At this time, we will conclude this call.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.