Southside Bancshares, Inc. (SBSI) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Southside Bancshares, Inc. Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Senior Vice President and Chief Risk Officer, Suni Davis. Please go ahead.

Thank you, Andrew. Good morning, everyone. And thank you for joining Southside Bancshares' second 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' second quarter 2017 results are Lee Gibson, President and CEO; and Julie Shamburger, Senior EVP and CFO. Our agenda today is as follows; first, you will hear Julie discuss an overview of financial results for the second quarter, including loan activity, asset quality and an update on our securities portfolio. Then Lee will share his comments on the quarter including an update on the merger with Diboll State Bancshares, Inc. I will now turn the call over to Julie.

Thank you, Suni. Good morning everyone. Welcome to Southside Bancshares 2017 second quarter earnings call. We had a strong second quarter with net income of $14.5 million, compared to second quarter 2016 net income of $11.4 million, a 27.1% increase. For the six months ended June 30, 2017, we reported net income of 29.5 million, an increase of $4.6 million or 18.3% when compared 24.9 million for the same period in 2016. Our diluted earnings per share for the second quarter ended June 30, 2017 were $0.49 per share, an increase of $0.07 or 16.7% compared to $0.42 per share for the same period last year. For the six months ended June 2017 diluted earnings per share increased $0.08 or 8.7% to $1 as compared to $0.92 for the same period in 2016. On a late quarter basis, we reported an increase in total loans of 71.3 million or 2.8%. For the six months ended June 30, 2017, total loans increased 53.7 million or 2.1% when compared to December 31, 2016. The growth was a result of increases in our commercial real estate loan portfolio, construction loans and the municipal loan portfolio. The indirect portfolio decreased to 21.5 million at the end of June. We continue to see roll-off in the indirect consumer portfolio, however, the pace of the decline is slowing approximately 14 million year-to-date. As we stated in our earnings release today, most of the loan growth for the second quarter occurred later in June and we expect to see the impact of this growth in interest income in coming quarters. At June 30, 2017, our loans with oil and gas industry exposure remained minimal at 1.1% of our total loan portfolio. We recorded loan loss provision expense during the second quarter of 1.1 million, an increase from 1.1 million in the first quarter which was related to loan growth and additional reserve on a few classified loans. During the six months ended June 30, 2017, the allowance for loan loss increased 1.3 million or 7.4% to 19.2 million or 0.74% at total loans when compared to 0.70% at December 31, 2016. We're pleased to report our non-performing assets decreased during the six months ended June 30, 2017 by $5.9 million or 39.3% to $9.2 million or 0.16% of total assets, compared to 0.27% of total assets at December 31, 2016, primarily due to the pay off of several nonaccrual commercial loans. Next, I will give a brief update on our securities portfolio. At June 30, 2017, we had modest net unrealized gain in the securities portfolio of $0.3 million. The duration of the securities portfolio at June 30, 2017 and December 31, 2016 was approximately 5.1 years. On a linked quarter basis, the size of the securities portfolio decreased to 50.5 million during the second quarter and through the first six months of 2017, the size of the portfolio decreased 93.7 million. As the loan portfolio continues to grow, we will gradually release the securities portfolio. We anticipate continuing to utilize our barbell approach for our security purchases, using U.S. agency CMOs for the short end and treasury notes, agency and commercial mortgage backed securities for the longer end. During the second quarter, our net interest margin decreased 1 basis point to 3.07 and our net interest spread decreased 4 basis points situating on a linked quarter basis. The decrease in both the net interest margin and yield were a direct result of higher funding cost during the second quarter, offset somewhat by the increase in our average yield on our average earning assets. During the three months ended June 30, 2017, our non-interest expense decreased slightly compared to both the first quarter of 2011 and the comparable quarter of 2016. We are pleased to report that our non-interest expense has decreased slightly over the last three-linked quarter and we continue to see improvements in our efficiency ratio down to 50.26% for the second quarter of 2017. We expect our core non-interest expense to remain consistent although we do expect to see additional merger expense in the upcoming quarters of 2017. Thank you. And I will now turn the call to Lee.

Thank you, Julie. We had an extremely productive second quarter that culminated with strong financial results and the announced acquisition of Diboll State Bancshares. We experienced excellent loan growth during the second quarter of $71.3 million. As Julie noted much of this loan growth occurred in June with 14.6 million booked during the last two days of June. The late second quarter loan growth combined with a healthy pipeline bodes well for our third quarter loan revenue prospects. Asset quality ratios remain strong with our non-performing assets to total assets ratio declining to 0.16% from an already strong level of 0.2% at the end of the first quarter. Cost containment and process improvement efforts continue to show results as our efficiency ratio during the second quarter declined to 50.26% very close to our target of 50% for all of 2017. Our pending acquisition of Diboll State Bancshares announced on June 12 is progressing as planned. We are excited about this strategic acquisition given the contiguous markets we will now serve in East Texas, Diboll’s tremendous low cost deposit franchise and the talent they bring into Southside. All of the regulatory applications have been filed and we anticipated finally our preliminary registration statement on Form S-4 with the SEC within the next two weeks. Merger teams from both banks are meeting on a regular basis to ensure a smooth integration following the consummation of the merger and to plan for the subsequent core conversion. The economic conditions in all three of the markets we serve East Texas, Dallas Fort Worth and Austin remained healthy. Austin and Dallas Fort Worth feel primarily by job growth and company relocations continue to perform exceptionally well. We're well position for the future give the dynamic markets we serve our strong balance sheet capital position, credit quality and foremost our outstanding team members. 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 Brady Gailey with KBW. Your line is open.

One on the margin, I just wondered, I think last quarter the discount accretion was around 0.5 million. Was that roughly the same in the second quarter?

Yes, it was Brady, it was flat.

Okay. And then I know in the past we've talked about loan growth is kind of 7% to 9%. If you look at this quarter, you're little over that otherwise 1Q you're little under that. So, is 7% to 9% still kind of the right range to think about for loan growth?

Yes, I think so. I think on balance for the year, we’re still targeting that 7% with distraction to 9% for overall annual loan growth.

And the tax rate I think last quarter we talked about you're around 17.5% is a little top of that this quarter. But, is 17.5% still the right way to think about the tax rate going forward?

Brady, I think year-to-date it's closer to about 18.3. So I really think our tax free income is down some on a linked quarter basis from the prior period. And so, I think we probably are getting in that more in 18.5 range by the end of year, if earnings stay at its pace and that’s our expectation so.

Okay. And then you're funding cost try to continue to move up a little bit each quarter. Why you're Texas peers talked about kind of increase in their rates pretty notably across that were yesterday. Are you all seeing a lot of deposit rate pressure today?

We're seeing some. It's primarily on the CD side and we're also seeing some on the public fund side, but those are really the two areas the non-maturity deposits, that’s not really an issue at this point in time. And we increased very little with the June increase and the non-maturity deposits.

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

Just to follow up on the net interest margin. If the loan growth doesn’t come through, I mean is it kind of locked in this range, I mean it seems like you guys have had and continued to have a tremendous opportunity to remix, but otherwise would you kind of consider -- still consider yourself putting neutral in terms kind of the margins related to higher rates?

Well, I mean the ability to increase the margin is definitely dependent our ability to remix and additional loan growth. So, if we did not have additional loan growth, then yes, I think we'd be locked in to end of this type of margin. But we feel good about the back ended loan growth in the second quarter and so we think that that’s going to be really, a real positive for us to the third quarter. And then with the pipeline and things that have already closed in July, we feel really good about that, that loan revenue stream. So that -- but you are correct, it’s going to be the loan growth that’s going to drive the yield margin.

And based on that, Lee, would you think that the bond portfolio would be sort of at a peak at this point? Obviously, if you get to look in the long end I would be surprised if you guys ask more but do you think you are kind of it would be at a steady state and then lower to the extent the loan growth comes through?

That is correct. We are not looking to add to the securities portfolio with the rates where they are at this point in time.

Great, and then I appreciate the color on the tax rate kind of for the back half of the year. But what happens when you add Diboll into the mix in 2018, I presume, I think they have a higher tax rate than you guys. So I am just kind of curious kind of what the combined company would look like from a tax perspective?

They do have a higher tax rate. We are expecting the close to come later in the year, so at mostly we'd have some impact in the fourth quarter, should we be able to close the deal in fourth quarter. But I think for '18, I would expect it to drive that somewhat because their tax securities I believe are…

They are relatively normal, yes.

And we also have BOLI income that also produces our tax rate significantly. So I do expect an increase for '18 for sure and maybe some depending on when we close in at the end of the year.

Got it. But you are not planning anything, any changes to how their set up from a tax perspective. In other words, it would just be kind of their weighted average tax rate combined with yours and now that would kind of be place to start?

That is correct. Yes, we are planning on them. We are going to bring their loans over and we are not planning on major changes in their securities portfolio in terms of the tax free, tax permits.

And our next question comes from the line of Brian Zabora with Hovde Group. Your line is now open.

Just question on salaries. Was the improvement all or mostly from your kind of seasonal benefits like payroll taxes or there are other factors that for the decrease?

Part of it, were the payroll taxes. Some of it is just traditional reduction in some of our workforce and then some of our retirement expenses actually went down in.

Year-to-date had to do with the early retirements, a lot of it was driven by the early retirement package in January of 16, that was about a 1.7 million expense.

And I don’t know if you're looking this on a linked quarter basis, if you're looking back.

Yes, the bigger decline is on six months..

Yes, they're always looking more at the linked quarter but, so is a fairly good run -- there wasn't really anywhere -- since sounds like, there is any reversal of accruals or anything it sounds like this might be a pretty good run rate going forward. Is that fair?

I think so. I think it's relatively close to what we should expect to say for the next two quarters.

Just question on loan pay downs or pay off. Did that pace change it all from first quarter?

Yes, we had significant number of loan pay downs in the first quarter. We did have loan pay down in the second quarter, but the dollar volume of them was not as high. And then the funding that we had, we're significantly more to offset that. So, there was a combination about the pay offs while the volume they've been the same. The dollar amounts were not quite as high and the funding were just up significantly.

And I am showing no further questions at this time. With that said, I'd like to turn the conference back over to President and CEO, Lee Gibson, for any closing remarks.

Thank you. Our Diboll acquisition, our strong loan growth late in the second quarter, cost containment, near pristine asset quality, a healthy loan pipeline and our success in replacing the securities with higher yielding loans, leaves us feeling good about our second half prospects for 2017. Thank you for being on the call today and we look forward to hosting our next earnings call in October.

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